Monkey See, Monkey Do: The European Union and the Financial Crisis

As the United States lurches toward a "solution" to its financial crises, it merits a moment to remember that the crisis is beginning to affect Europe as well. Like the Americans, the Europeans appear prepared to throw money at the problem--that is to throw money at those responsible for the problem, in the hoes that they might fill the rest of us with the confidence to forget and forgive the incompetence and miscalculation of those who helped bring this crisis about. Jean Quatremer, Europe: Un Plan de Sauvetage à 300 Milliards?, Liberation, France, Oct. 2, 2008. The European plan, concocted between France, The United Kingdom, Italy and Germany, is meant to target banks to avoid their collapse is meant to provide a $300 billion fund to reassure states that EU banks would be protected against failure. "Chiffrée à 300 milliards d’euros ! L’idée aurait été émise par la France, qui aurait prévu de l’officialiser lors de la rencontre organisée samedi à Paris par Nicolas Sarkozy avec les trois autres chefs d’Etat européens du G8 (Allemagne, Italie, Grande-Bretagne)." Id.

By European standards, the amounts suggested are huge. "Les 300 milliards font sursauter à Bruxelles : une telle somme serait équivalente à presque trois fois le montant du budget européen!" Id. ("The 300 billion would startle in Brussels: such a sum would be equivalent to almost three times the amount the EU budget!") But as in the United States, there is a sense of the great risk of pouring such huge amounts into failed or potentially failed enterprises, along with the fear that such infusions opf cash are necessary given the actual state of the markets to be protected. "Dans une autre capitale, on estime cette proposition un rien suicidaire. Elle revient à dire aux marchés que les gouvernements craignent que d’autres banques fassent défaut." Id. ("In another capital, it was suggested that this proposal was a bit suicidal. It means that governments fear that other banks in this market will collapse."). And the size of the potential problem coupled with the pace of resolution and its form might have promted a large decline in th value of the Euro against the dollar, down from its high of about $1.60 per Euro to about $1.37 today.

As in the United States, news of the plan elicited both angry denials and all of the earmarks of a deal already struck at the Community level. "Le ministère français de l’Economie a contesté «catégoriquement» un tel montant, tandis qu’une source gouvernementale française accusait les Néerlandais d’en être à l’origine… Information démentie à son tour par La Haye, qui a affirmé «ne rien savoir»… Mais Paris admet bien avoir imaginé un tel plan. Dans une interview aujourd’hui au quotidien allemand Handelsblatt, Christine Lagarde plaide cependant en faveur d’un fonds européen destiné à prévenir les défaillances bancaires." Id. ("The French finance Ministry denied "categorically" the amount [of the proposed bailout], while a French government source blamed the Dutch for informaiton leak ... which was in turn denied by The Hague, who affirmed that they "knew nothing about it"... But Paris admits to have floated such a plan. In an interview today in German newspaper Handelsblatt, Christine Lagarde, calls for a European fund intended to prevent bank failures.").

The European response, while similar to that in the United States, would have to pass certain legal hurdles unique to the European Union. It is not clear yet how the Europeans might mean to create and operate this bailout fund. On the one hand, the fund may be created by agreement of European states to pool state funds for coordinated state rescue activity. On the other hand, E.U. Member States may commit themselves to fund the bailout collectively through an institution of the European Union--most like the European Central bank. However, successful implementation may hinge on the application of prohibitions in the European Union Treaties and in the cope of authority vested in the institutions of the E.U. What follows is a first swipe at fleshing out the problems of response to the crisis within the E.U. legal order.

The E.C. Treaty imposes strict prohibitions on impediments to the free movement of capital (E.C. Treaty Art. 56) and on the provision of state aids to enterprises (E.C. Treaty Arts. 87-92).

Article 56 imposes a general prohibition on state interference with the movement of capital. "The free movement of capital may lawfully be restricted only by measures which, without being discriminatory on grounds of nationality, are a response to overriding requirements relating to the general interest and are suitable and proportionate to the objective which they pursue. Such measures, which must be adopted ex post facto, must be based on objective criteria which are known in advance to those concerned, to whom a legal remedy must be available." Joined Cases C-463/00, Comm’n v. Spain & Case C-98/01, Comm’n v. United Kingdom, 2003 E.C.R. I-4584, I-4593 (Opinion of Advocate General Ruiz-Jarabo Colomer). What is clear in the juroisprudence of the European Court of Justice is that breaches of Art. 56 can be triggered not merely by national discrimination but by any measure that has the effect of impeding movements of capital. Commission v. Portugal, Case C-367/98 [2002] ECR I-4731 (at Paragraphs 44-46) and Commission v. Italy, Case C-174/04 [2005] ECR I-4933 (Paragraph 12).

It is not clear that Member Staes are free to set up national systems of intervention in financial markets to bailout certain enterprises without violating their obligations under Article 56 E.C. However E.C: directives and older caselaw suggests that the European Court of Justice might be forgiving under an implied national securtity exceotion to Member State action where it can be shown that the actions responded to a grave crisis. See, e.g., Council Directive 88/361/EEC of 24 June 1988 for the implementation of Article 67 of the Treaty Official Journal L 178 , 08/07/1988 P. 0005 - 0018 (including non exhaustive list of actions that might constitute a prohibited restriction). See also , e.g., Criminal Proceedings Against Bodesa and Others, C ase C-358 and 416/93 [1995] ECR I-361 (suggesting a public policy and public security exception to prohibitions on restrictions). Though the Member States would have the burden of proving the necessaity of derogaiton and satisfying the court that the response was proportionate to the danger, neither would be difficult to accompish here.

There also appears to be a legal basis to assert a power to respond to crises. at the Community level. Article 59 EC (ex Article 73f) provides that

"Where, in exceptional circumstances, movements of capital to or from third countries cause, or threaten to cause, serious difficulties for the operation of economic and monetary union, the Council, acting by a qualified majority on a proposal from the Commission and after consulting the ECB, may take safeguard measures with regard to third countries for a period not exceeding six months if such measures are strictly necessary."

But the process appears combersome. It is possible, though, that given sufficient severeity, quick action of the type contemplated by Art. 59 can be the basis for the creaiton of a power in the European Central Bank to oversee a bailout similar to that contemplated by the Americans withourt violating Article 56's prohibitions. But the trick will be to tie the actions ot the American financial crisis. Moreover there may be a power in the European Central Bank to act. (Arts. 108, 110 E.C.). The system of coordination implemented in the implementation of the Euro regime might be used as a legal basis for a bailout overseen at the Community level--even one implemented in consultation or coordinaiton with the Member States. But here we are treading on uncharted territory.

In addition, the rules relating to state aids may be relevant. Articles 87-92 severely restrict the freedom of Member States to intervene in the operation and financing of domestic enterprises and establishes an elaborate system of oversight and approvals for limited intervention overseen by the European Commission. The Commission has historically taken a broad view of the meaning of state aids with the acquiescence of ther European Court of Justice. State aids include the conferral of anadvantage on a recipient by or through an Member State that might distort competition and affect inter state trade. As a standard English language hornbook of E.C. law summarizes:

The Commission has provided a full list of the types of aid. These include direct subsidies, tax exemptions, exemptions from parafiscal charges, preferential interest rates, fovourable loan guarantees the provision of land or buildings on special terms, indemnities against losses, preferential terms for public orderings, the deferment of the collection of fiscal or social contributions, and dividend guarantees. Paul Craig & Gráinne de Burca, EU Law: Text, Cases, and Materials 1087 (Oxford: Oxford University Press, 4th ed., 2008).

This list would certainly cover the sorts of measures contenplated in any European bank bailout. However Art. 87(2)(b) would appear to legitimate aid to make good damage caused by exceptional circumstances. Again, even where the Member States would have the burden of proving such circumstances and the proportionality of the measures adopted, it might be possible to prevail against an action brought on the basis of violaiton of the state aids rules. Moreover Articvle 87(3)(e) provides the Council, acting by qualified majority on a Commission proposal, with a certain flexibility in broadening the applicability of derogations from the state aids prohoibitions. But any derogation analysis would also have to ensure that it might also meet the requirements of other limitations on Member State regulatory activity, for example under the free movement of goods provisions (Art. 28 E.C.) or in this case, the free movement of capital (Art. 56 E.C.) or perhaps services (Art. 49 E.C.).

Thus, from a legal perspective, there is a certain ciurcularity in the application of free movement rules and the rules on state aid. At the same time, there appears ot be enough flexibility to permit either Member States or the institutions of the E.U. to undertake a bailout withoput breaching obligations under the Treaties.