Κώστας Β. Mποτόπουλος

The Greek “support mechanism”:  putting pressure under pressure
On March 25, 2010 the agreement of the Eurogroup (the Council of Ministers of member states that share the euro as currency) for financial aid to Greece was rendered public. Officially, the help was deemed to be pre-emptive and potential: in the conclusions of the text it was said that “the Greek government had not asked for any financial aid” (this would take place on April 23rd with Prime Minister George Papandreou’s “proclamation” of Kastelorizo”, after constant denials up to the last minute). The especially designed for Greece mechanism bore obvious signs of improvisation and took the form of a general confirmation of the shared responsibility of all member states to comply with the rules of budgetary discipline (1st paragraph of the resolution); it also took pains to reward the Greek effort already undertaken to recover the “lost confidence of markets” (2nd paragraph). However, the main characteristics of the mechanism – which were to be consolidated, since one can find them in both the “general” and the “permanent” mechanisms that followed – were the active contribution of the IMF, the providing of help in form of bilateral loans, the imposition of strict political terms by the lenders to the borrowing country, as well as the start of the process shaping some kind of “economic governance”.
More specifically:
-The original plan had foreseen a bilateral funding on behalf of certain countries (those willing to contribute), at a 60% percentage of the whole “package”, and lending by the IMF at a 40% percentage. The decision for the bilateral funding had to be taken unanimously by the Eurogroup and –according to the least clear provision of the agreement -  funding was not meant to be effected “in the average rate of interests in the eurozone” but it would provide “incentives to return to market financing as soon as possible” ( in practice this would prove to mean that the interest rate would not be negotiated by the borrowing country, while specific measures to quickly “return to normality” would be asked).
- There was an explicit commitment “to a strong coordination of the financial policies in the Eurozone”, through the provision that “the European Council should become the financial government of the EU” and the requirement to increase the role of the European Council in the “financial supervision” and the “determination of strategic growth of the Union”. Two more specific institutional reforms were also pre-announced: of the existing procedure of excessive deficit (Article 126 of the Treaty on the Functioning of the Union and Protocol no 12) and the creation of a “robust framework for crisis resolution”.
- The loans would not be automatically granted. Greece had to make a formal request and then it was planned (as it truly did happen) that the European Commission, in cooperation with the European Central Bank, would have to submit a proposal to the Eurogroup, which would decide by unanimity (but without the participation of the requesting country). Then, each one of the 16 Eurogroup countries had to “ratify” the collective decision, according to its own rules (government decision in many countries, voting by the Parliament in other countries, including Germany, France, Finland). In strict legal terms a potential “non ratification” even by one country would have meant rejection of the agreement by all. What really happened, following a deeply entrenched EU practice, was that the political commitment of the countries in the Council also covered a “guarantee for the internal process”. Even thus, problems were not to be entirely avoided, as testified by the initial non-approval of the support mechanism by the new government of Slovakia, and later by the “objections” of the German Bundestag, as well as threats from Finland.
- It was mentioned that the mechanism would only be activated when it became “ultima ratio”- a measure of “last resort”, objectively inevitable. Whether the conditions of extreme necessity were met, this was something the applicant itself would have to decide, since this would constitute the essential reason for appealing for help- as seen, in the Greek case this was the role played by the “proclamation of Kastelorizo”. The EU retained, in theory,  the right to judge if the ”ultima ratio’’ indeed existed , but the main importance of the provision was to establish the rules of “exceptionality” (help only in extreme cases) and “painfulness” (help granted under very strict terms), which would  also be present in the two following mechanisms.
The legal obstacles deriving from the TFEU in the way of such kind of assistance are mainly to be found in articles 123,124,125. The last, and most important, constitutes the so-called “no bail-out clause”: the Union as a whole, as well as each Member State separately, is prohibited from assuming “the commitments of central governments, regional, local or other public authorities, other bodies governed by public law, or public undertakings of any member State” . Article 123 prohibits “any type of credit facility” emanating from the European Central bank or national central banks on behalf of both Union institutions and national governments, whereas article 124 prohibits “privileged access” to financial institutions. Above obstacles were surmounted, or deemed to have been surmounted, by, one the one hand, the explicit refusal to mention or provide for any kind of “subsidy” and to present the aid provided as one-off and exceptional and, on the other hand, by portraying the de facto bail-out as a multilateral lending by each of the members of the Eurozone separately and according to their communal contribution (i.e. according to their GDP) and not on behalf of the EU or its institutions. The fact that all above TFEU articles do not establish “absolute prohibitions”  (article 125 by explicitly exempting “mutual financial guarantees for the joint execution of a specific project”, articles 123 and 124 by virtue of a direct reference in the second paragraph of article 125) has been exploited to the full by political organs searching for urgent practical solutions. The contrast, however, between political decision and the “philosophy” of the Treaty, was immediately felt and led, as we will see, in much more open revision and re-interpretation.
This initial framework-agreement was to be rendered more specific for Greece on May 2nd, after not only the “proclamation of Kastelorizo” but also the signing of the “Memorandum” between the Greek Republic and its lenders, i.e the European Commission –EC-, the European Central Bank –ECB- and the International Monetary Fund –IMF . Another indirect breach of rules: although the member-states lent, it was the EU, through the Commission, that dictated the political rules of such lending.  Voting of the “Memorandum” by the Greek Parliament would follow 5 days later, with the use of article 28 paragraph 3 and not 2 of the Greek Constitution (as if it were not a “transfer of national competences” to be approved by 2/3 of the members of Parliament, but “limitation to national sovereignty” needing a vote by the absolute majority of the members): this could be considered as another case of “reshaping” or “political interpretation” of the fundamental legal framework , this time at national level.
The agreement of May 2nd was to prove a different agreement from the one of March 25th. An agreement of different amount and different distribution of funds: a total of 110 billion euros (the largest amount of financial help ever provided to a country during peacetime), not the “30 billion and we’ll see” of the first agreement; divided in participations of 80 billion by the Eurozone states and 30 billion by the IMF (and not 60%-40%, as originally planned); under different terms: the disbursement of loans (both by the European countries and the IMF) was finally planned to be gradual (per quarter and for  12 doses) with “proof” that each time the essential measures would have been taken, based on quarterly “reviews” and “positive evaluation of progress”, with the possibility of constant changing of the terms and requesting more measures by the “troika” of lenders. Ultimately, an agreement of a different kind: an agreement of governance and not simply of financial help, since the Memorandum signed between the Greek government and the troika immediately turned out to be a real and binding new government program with non-negotiable as much as hardly achievable results.

The “European Financial Stability Facility “(EFSF): for the salvation of the euro
The night from the 9th to the 10th of May 2010 has gone down in history as the night in which “the euro almost died” . The deterioration of the Greek crisis, despite the bail-out, and the continuous procrastination on taking comprehensive measures almost caused a systemic disaster. As a last minute response, the Union established and announced a ”general support mechanism”, modeled on the Greek mechanism but also with some original characteristics.
-The  European plan involved 5 (co-)participants of different level, speed and logic: a)the European Commission, which was allowed, by absolute exception, to borrow 60 billion euros (from the Community budget) in order to lend the countries which might face problems in the near future, b) all the Eurozone countries, which guaranteed they would create some kind of Stability Fund –which was to be called EFSF: European Financial Stability Facility- by contributing (national) resources up to 440 billion euros, c)the IMF, which agreed to participate with loans amounting to half of the contribution of member-states, i.e. resources up to 250 billion euros, d) the European Central Bank, which against its principles, its statutes and statements of its then president Mr.  Trichet only 3 days before the finalization of the agreement, pledged to buy from the European banks the bonds of “fragile” countries, thus ensuring their re-financing, regardless of rating, e)the Central Banks of countries outside the Eurozone, which have agreed to move quickly towards exchange and mutual support of currencies in order to stabilize the global financial system.
-  Though the plan predetermined a total unprecedented amount (750 bn euros), it consisted mainly of virtual money- agreements that such a sum would be found, if necessary and  after review-but not direct loans, as in the case of the Greek mechanism. This is why the debate that started and is still ongoing relates, on one hand, to the financial backing of the total amount (750bn. euros started to seem not enough after the accession of Ireland and Portugal to the mechanism and the threat of forced entry of big countries like Spain or Italy), and, on the other hand, to the increase of “hot”, i.e readily available, money. The plan was again “open”, because it had a limited time horizon (3 years), but with indications from the beginning (Oli Ren’s statements immediately after the adoption) that it was intended to acquire permanent characteristics.
-   Unlike the Greek case, article 122 (par. 2) of the Treaty -providing for exceptional financial assistance to countries of the Union encountering  “severe difficulties” or “exceptional circumstances beyond their control”- and also article 136 on the economic-not just financial- coordination of the Eurozone countries, mapping out common guidelines and their mandatory compliance, were used as legal bases. Again one might be tempted to wonder why both provisions were not used in the Greek case, where they would have been more suitable: article 122 para 2 is meant to be applied for a particular case, and country, and not as support to a general mechanism, whereas the need for “economic governance” should have been made evident from the outset of the crisis. The project was, once again, accompanied by immediate political announcements: a kind of “co-shaping” the national budgets, stricter monitoring/supervision on the implementation of rules on deficit and debt under threat of suspending Community funds, tackling the “competitiveness gap” between  the countries, announcement of the establishment of a permanent mechanism for crisis management EU level- all of them would dominate the debate inside Europe for the next months and would inspire to a large extent the decisions on the “permanent mechanism”
- The immediate and direct “purchase of debt” by the ECB was equivalent in practice to the until now abhorrent “monetarisation of debt”, no matter how the head of the ECB has tried to justify such breach of orthodoxy: as in the case of Greece, the ECB played the role of guarantor of the mechanism’s liquidity, as it would soon do for the actual rescue of the countries entering the mechanism under duress
- The plan was inextricably linked to the announcement of “stabilization projects” (not unlike the Greek one but without the “Memorandum” imposed to the Greek government) by several European governments, which interpreted, correctly, the new mechanism’s creation as a warning sign and not as the end of the alarm. After Ireland -the first to act in 2009- and Greece, the catalyst of developments, austerity plans were imposed, in Spain and Portugal, immediately and hurriedly, in Romania, quite dramatically, in Italy and France, indirectly but clearly, by the new British government, pre-emptively. Institutionalization of the equation “help=austerity” has thus been realized at this stage, by words and deeds. The fact that some of these countries could not escape resorting to the mechanism, although they took the prescribed medicine as soon as it became available, reveals the gap between institutional forecasts and political reality, the distance separating the “good student syndrome” from market desires and realities.

The “European Stability Mechanism” (ESM): the permanence of the future
The Summit of March 25th 2011 “locked” the permanent stability mechanism, which is supposed to succeed the EFSF after 2013. Experiences were drawn by the management of the Greek, Irish and Portuguese cases, without changing, however, the basic philosophy of the system: lessons in Europe tend to turn very slowly into lessons learned.
- The “actual lending capacity” of the ESM (money not readily available, but considered to be collectable at any time) was fixed at 500 bn. euros: it was in fact determined that during the transition from EFSF to ESM, i.e. from 2011 to 2013, the total sum would not be more than 500 bn. - a political retreat in favor of those countries, led by Germany, fearing that the decision on the ESM would become a backdoor to also increase the EFSF and also not wanting to cumulate EFSF and ESM resources. Nevertheless, a review of the “lending capacity” (implying the possibility of readjustment) has been scheduled to take place at least every 5 years. The possibility of voluntary contribution to the ESM by countries outside the Eurozone was also present from the beginning (though not immediately used as would be the case of the “Euro-Pact”).
- The ESM would have a total capital of 700 bn. euros, distributed as follows: 80 bn. prepaid contribution by the members of the Eurozone (in 5 installments according to their GDP ratio) and 620 bn. in guarantees by the Eurozone countries. Capital contribution by the IMF was not explicitly provided for; only (potential, but in fact predetermined) contribution to the lending of each applicant country- and to the determination of the political terms for its concession.
- The aid payment was to be directly dependent upon the agreement and compliance to a specific in each case “macroeconomic adjustment plan” (in the form of a Memorandum) with contribution of the private sector. The plan is meant to be shaped by the board of directors of the ESM after proposal by the European Commission and in consultation with the Council. A request by a member state shall not mean immediate acceptance neither pre-arranged terms. Even the lending rate, according to an explicit reference, might vary in each case. Monitoring compliance of the Plan (hence also of payment of the loan) will be carried out by the Commission, in cooperation with the ECB and the IMF –the troika is thus institutionalized.
- On the purely institutional level, the ESM has been agreed to take form within two international treaties: the “Treaty of Lisbon” shall be revised (with an addition in article 136 of the TFEU, already agreed by the European Council, explicitly providing for the permanent mechanism: “the member States whose currency is the euro may establish a stability mechanism to be activated if it is deemed indispensable in order to ensure the stability of the Eurozone as a whole”); a special treaty shall also be enacted between the Eurozone countries, under which a quasi “intergovernmental organization” will be created according to International Law, and based in Luxemburg. The payment of each requested aid installment under the mechanism is subject to “strict conditionality”. It is obvious that the formulation is as general as possible: the substantial points will be added to the special treaty. It is also obvious that this new provision is meant to be interpreted as complementary rather than conflicting with the prohibitions of article 125 («no bail out») and secondarily articles 123-124: a special “exception” to the no bail-out rule is being introduced (new para of article 136), whereas the core rule (article 125) remains officially unchanged, albeit it has been rendered more than clear that the crisis has all but transformed its meaning and its practice.
- The “political” at the expense of the “technocratic” option has been selected regarding the administration of the ESM: it shall be managed by a board consisting of the Finance Ministers of the Eurozone countries and not of independent personalities, selected on merit. It remains to be seen what this shall mean for the nature and the boldness of decisions taken, as well as for the impact of certain countries upon these decisions.
- The involvement of this new organization in the bond market is clarified: on the one hand, exceptionally and subject to unanimous decision of its Board (no blocking by abstentions is allowed), the ESM will be able, in addition to the loans provided to a country under difficulty, to support it by intervening in the primary markets; on the other hand it is foreseen that the ESM may purchase state bonds traded in the primary markets, always within the frame of providing support to that particular state and with the obvious possibility for it to buy back later its bonds from the ESM at a better price. In this plan there was no provision for possible action in the secondary bond market (something that would change with the July 21st agreement).
- One of the relatively grey areas of the ESM concerns IMF financial participation, especially in the light of the Greco-Irish precedent, where the IMF has played a more than prominent role. Although it is provided that the IMF will work in close cooperation with the ESM, the exact terms of the cooperation are not determined, leaving much room for both institutional and political interpretation.
- Under the ESM, aiding a country would mean contribution of the private sector involving restructuring of its debt. It is in fact provided that, in case the macroeconomic analysis of the evolution of a country’s debt determines that such debt is not in a “manageable orbit” (which would be happening by definition, since the diagnosis of a non - manageable debt should have constituted the initial reason for a country requesting ESM aid), the negotiations of the requesting country with its private creditors (i.e. private banks) would become obligatory and this would lead to “their direct involvement in formulating the manageability terms of its debt”; in simpler words to “restructuring”. For a moment –for this idea was to be abandoned in the subsequent European Union crisis-tackling decisions- the Germano-French idea of permanent involvement of the private sector in state support mechanisms was on its way to institutionalization. However, the mere announcement of this rule in March had a very important political-systemic impact: markets, and especially banks, interpreted it as meaning that by participating in a salvage operation of a EU State they would not be fully repaid by the new mechanism (not only a “haircut” implies by definition a loss, but once the ESM would be implemented private creditors would be third in line for the repayment of their loans after the IMF and the ESM); thus they spearheaded additional pressures upon the “weak links” (mainly Greece, but also Portugal, Spain, Italy, later even France), mostly through increase of spreads and deteriorating assessments by international rating agencies; thus they rendered not only restructuring more risky but also salvation more difficult. This can be perceived as a classic case of theoretically “fair” measures creating more and more direct “injustices”; or simply as another demonstration that institutional planning without political strategy is doomed to produce the opposite results from the ones hoped for.   

The July, October, December 2011 “mechanisms plus”: retracing the steps
The March decisions were supposed to be definitive, but the evolution and the globalization of the crisis (further deterioration of the Greek situation, market “attacks” against Spain and Italy, terrible earthquake with big financial implications in Japan, budget deadlock and almost bankruptcy in the USA) decided otherwise. Three new “salvation plans”, each one supplementing and in fact changing the previous one, and all trying to render effective the support mechanisms already in place, were discussed and agreed upon in consecutive summits, without, however, being put into effect.
On July the 21st, the first “final” solution, both to the Greek problem and to the European situation, was devised and announced. Concerning Greece it provided for “full cover of the government financing needs” by way of: a new financial aid of 109 billion euros (63 billion being “new money”, while the remaining 45 were in the form of outstanding payments from the first “package” of 110 billion); extension of the debt repayment period to at least 15 years (instead of the 7,5 initially agreed); downsizing the rate of the new loans to 3,5%; guaranteeing the re-capitalization of the banking system in case it were needed; proposing a EU “growth aid” (immediately baptized by the Greek press as a “new Marshall Plan”) by mobilizing community funds and know-how in order to boost the Greek economy; most importantly, and, as was soon to be seen, most riskily, establishing, albeit on an “exceptional” (only once and only for Greece) basis, the “voluntary” participation, up to 37 billion euros of the private banking sector in the restructuring of the Greek public debt(how can a “voluntary” participation have a pre-determined end result is a question that reveals the real nature of the decision). The “exceptionality” invoked should not deter from the fact that Greece’ s salvation, or bail out, becomes both more extended in time and more general in scope (“full cover”), thus, in fact, generalizing the very open interpretation of prohibitive Treaty provisions.
Concerning the whole of the Eurozone, the July decision complements the existing mechanisms with general provisions/directions on the “flexibility” of the EFSF and the ESM (mainly through the possibility to participate in the secondary market); the extension of the new interest rates agreed for Greece to Ireland and Portugal; the cutting back of public deficit in all countries, with the exceptions of those under “special programs”, to at least 3% to be achieved at the latest in 2013; the limitation of “economic governance” measures to an introduction of “national budgetary frameworks” within 2012 and the vague promise to “restrict the influence of external rating procedures” and prepare a plan for better crisis management in the Eurozone. It is obvious that budgetary discipline becomes the sole priority and thus the potential of article 136 TFEU on economic governance is interpreted in a very restrictive way.
The 26-27 October 2011 Summit added to above additions (which did not have time to be put in practice), regarding Greece, a strengthening of the mechanisms for monitoring of the implementation of the program agreed, through the setting up of a “monitoring capacity on the ground” (i.e a “troika task-force” based in Athens); a deepening of both the Private Sector Involvement (PSI) –albeit it remains an “exceptional and unique solution”- and EU-members contribution rendering the whole “official sector” financing (including recapitalization of Greek banks) to up to 100 bn by 2014. Concerning the EFSF, leveraging of its resources was agreed and two options (credit enhancement to new debt issued by member states or maximization of the funding arrangements with the use of Special Purpose Vehicles) were put on the table (and were to remain there). A “banking package” was also agreed, whereas fresh and, this time, more concrete proposals for strengthening the economic governance included regular Euro Summit meetings, the creation of the official post of the President of the Euro Summit and of Eurogroup Working Group entrusted with preparatory work and chaired by a full-time Brussels-based President. On the other hand, neither new common tools (for ex. Eurobonds or a European rating agency) nor institutional arrangements for closer and wider cooperation in the macro-economic field and in setting up of common economic policies were proposed.
Finally, the 9 December Summit, failing to find a consensus for a Treaty change incorporating those of above ideas directly linked to budgetary discipline at EU level, came up with an agreement (of all member states except Great Britain) to prepare a “Budgetary Pact”, i. e an intergovernmental Treaty to be put into effect in parallel with the Lisbon Treaty. Big legal questions loom as to the feasibility and the scope of such an endeavor, although judgment should be retained till we have the official details. What is sure is after two years of “mechanism-creation” nothing is solved and a new puzzle is put before decision makers and institution-interpreters.    
By way of conclusion: neither the “country-specific” (for Greece) nor the “general support” (EFSF, ESM) mechanism were provided for, or intended by, the Treaties; the same applies especially for the participation of the IMF, essential in the whole scheme; the fact that above mechanisms were created within the existing framework demonstrates that the Treaties were made to allow for new situations on the basis of old provisions; Treaty provisions that were by nature prohibitive (most importantly the “no bail out clause”, Art. 125 TFEU) were interpreted as allowing for state support not so much on the basis of exceptional circumstances (Art. 122 TFEU was invoked at a later stage and not in direct relation to Art. 125) but on the basis of a technical scheme whereby voluntary multi-lateral loans were granted under strict political conditions; in parallel, important questions of “constitutional” EU level arose without being solved: most importantly, the extent of limitation of state sovereignty as a “guarantee” for providing support to a member state, the possibilities inherent in Art. 136 TFEU for the creation of a true field of “economic governance”, the eventuality, or possibility, of a member State to “leave” the Eurozone or to default  and, following the December decision, the co-existence of the (community) Treaties with a specific (intergovernmental) “Budget Treaty” covering common legal and technical fields and involving community organs, most originally the Court of Justice. Does all this mean that the Treaties should not have been stretched and the mechanisms not created? Absolutely not: Treaties should always (be able to) adhere to reality and not the other way round. Were the crisis-solutions procedures and methods chosen and imposed the best possible ones within the existing legal framework? Probably not, but action under extreme pressure and decision-making under Union rules must also be accounted for. Do we need deeper changes at Treaty level for the continuation and the best effect of the support mechanisms? Certainly - and not necessarily in the direction so far chosen, as much from necessity as from lack of imagination or courage.

1- Costas Botopoulos, Guide to Lisbon, ed. A. Sakkoulas, 2010 (in Greek)
2- For a very good analysis of both the provision and its implications, see J. V. Louis, “The no-bail out clause and rescue packages”, in Common Market Law review, 2010, p. 971-977.
3- For a thorough examination of the issue, see Phoebus Athanassiou, “Of past measures and future plans for Europe’s exit from the Sovereign Debt Crisis: what is legally possible (and what is not)”, in European Law Review, 2011, no 4, p. 558-575.
4- There is ample Greek literature on the Greek Memorandum, both from a politico-institutional (cf. C. Botopoulos, The institutional aspects of the crisis, Neda eds, 2010) and from a purely legal point of view (cf. Antonis Manitakis, “The constitutional aspects of the Memorandum”, in www.constitutionalism.gr). For a very good paper in English see Nikos Frangakis, “A State’ s exceptional economic measures under the European Convention of Human Rights. The case of the Greek Memorandum”, in Melanges en honneur de Christos Rozakis, Bruylant eds, 2011, p. 181-198.
5-This was the title of the newspaper Le Monde dated 11 May, 2010.
6-On that particular point, see Gilles de Margerie and Hubert de Vauplane, “Les defauts du defaut: Quelques clefs pour comprendre la crise de la dette souveraine”, November 2011, in les Cahiers de En Temps Reel.