Amending Article 136 of
the Treaty on the Functioning of the European Union
Introduction
1. The European Council recently proposed to
amend the Treaties governing the European Union to establish a
permanent crisis resolution mechanism for euro area Member States.
The Government will be asking the two Houses of Parliament to
enable them to agree to this amendment by tabling approval motions
for debate in each chamber. This debate will take place in the
House on 21 March.
2. The Economic and Financial Affairs and International
Trade Sub-Committee of the European Union Select Committee has
scrutinised this proposal and lifted the scrutiny reserve on the
proposed Treaty amendment.[1]
This short report aims to inform the House of some of the circumstances
surrounding this proposal, to explain the process by which the
amendment will be made, and to give the Sub-Committee's assessment
of the Government's stance. We make this report to inform the
House for the debate on 21 March; we do not expect a Government
response.
Background
3. In response to the financial crisis in Greece,
two emergency funds were established in May 2010 to provide loans
for Member States experiencing financial difficulties. These were:
- The European Financial Stability Facility (EFSF)—a
€440 billion intergovernmental fund established and financed
by euro area Member States with voluntary contributions from Sweden
and Poland. It was set up with a three-year lifespan and will
expire in June 2013.
- The European Financial Stabilisation Mechanism
(EFSM)—a €60bn facility created by a Council Regulation
and guaranteed by the EU budget. The EFSM is reviewed every six
months to determine whether circumstances still justify its existence.
4. The EFSF is available only to Member States
of the euro area. The UK does not contribute to this fund. The
EFSM, by contrast, is available to all Member States of the EU.
When a decision is reached to activate this mechanism, the Commission
borrows money from the capital markets and lends it to the Member
State receiving assistance. Since these loans are guaranteed by
the EU Budget, all Member States share in the risk that they are
not repaid.
5. The EFSM was established under Article 122(2)
of the Treaty on the Functioning of the European Union (TFEU)[2]
which provides for EU financial assistance to be granted to a
Member State where the state "is in difficulties or is seriously
threatened with severe difficulties caused by natural disasters
or exceptional occurrences beyond its control". The EFSM
was created in the light of "exceptional occurrences"
in the international economic and financial environment, and doubts
have been expressed (notably in Germany) about whether Article
122(2) provides a sound legal basis for this mechanism.
6. We have previously corresponded with the Government
on this issue,[3] and have
questioned whether the use of this Article in this manner conflicts
with the "no bail-out" provisions of Article 125.[4]
The Government's view was that the EFSM provided loans; it did
not "bail-out" countries by assuming responsibility
for their debts. They argued, therefore, that Article 125 had
not been breached. This view was supported by the majority of
witnesses who gave evidence to the Committee for its current inquiry
on the future of economic governance in the EU.[5]
A permanent crisis resolution mechanism
7. In October 2010 the European Council agreed
on "the need for Member States to establish a permanent crisis
mechanism to safeguard the financial stability of the euro area
as a whole". This permanent mechanism would replace both
the EFSM and the EFSF.[6]
It asked the President of the European Council, Herman van Rompuy,
to undertake consultations on a limited Treaty change required
to that effect.
8. At its meeting on 16-17 December 2010 the
European Council agreed that the Treaties should be amended to
allow the establishment of a permanent mechanism, to be called
the European Stability Mechanism (ESM), which would come into
existence on 1 January 2013.[7]
It also agreed that Article 122(2) TFEU (see paragraph 5 above)
would in future no longer be used for the purpose of safeguarding
financial stability.
9. The proposed amendment would add a paragraph
to Article 136 TFEU, as follows:
"The Member States whose currency is the euro
may establish a stability mechanism to be activated if indispensable
to safeguard the stability of the euro area as a whole. The granting
of any required financial assistance under the mechanism will
be made subject to strict conditionality".[8]
10. Article 136 is one of three articles of the
TFEU in a chapter entitled "Provisions specific to Member
States whose currency is the euro". The articles provide
for action by the EU but specify that, when the Council of Ministers
takes decisions, only those states in the euro area may vote.
Amending the Treaties—the process
11. The draft European Council Decision setting
out the Treaty change is based on Article 48(6) of the Treaty
on European Union (TEU) which provides for amendments to be made
to Part III TFEU (which includes Article 136) by the "simplified
revision procedure". This would be the first use of that
procedure, under which:
- a proposed amendment may be agreed by the European
Council, without either an inter-governmental conference or a
convention of national parliaments, governments, the European
Parliament and the Commission;
- the European Council must consult the European
Parliament, the Commission and (because of the subject matter
in this case) the European Central Bank (these consultations are
currently under way); and
- the amendment cannot come into force until it
has been ratified by all the Member States in accordance with
their national constitutions.
12. In the UK, under the law as it currently
stands, parliamentary approval must be obtained before the Government
may vote for an amendment in the European Council under the simplified
revision procedure (section 6 of the European Union (Amendment)
Act 2008). This involves a separate motion in each
House, thus giving each House a veto. Following the adoption of
the Treaty amendment in Council, it must then be ratified by each
Member State in the usual way.
13. Under the provisions of the European Union
Bill, currently passing through the House of Commons, the Government
would not need to obtain parliamentary approval before voting
for a Treaty amendment in the European Council. However, the following
requirements would apply following a Council Decision to amend
a Treaty:
- a Minister must lay before Parliament a statement
whether, in his opinion, the amendment involves the kind of change
which, under Clause 4 of the Bill, should attract a referendum
because it would involve a transfer of competence or other powers
to the EU; and
- the Decision to amend the Treaty must be approved
by Act of Parliament.
14. While the European Union Bill provides for
a referendum to be held in most cases where Treaty amendment is
proposed, it is expected that no referendum would be required
in relation to the amendment to Article 136 on the grounds that
it does not fall within Clause 4. In that case, the Act approving
the amendment must state that Clause 4 does not apply.
The Government's view
15. The Government state in their Explanatory
Memorandum[9] that, while
financial problems within the euro area should be primarily resolved
by euro area Member States, it is in the interests of all Member
States to support a stable euro area.
16. They note that the ESM will not apply to
non-euro area Member States, and will not create any liability
on the EU Budget or on Member States outside the euro.
17. Finally, they refer to the Coalition Agreement
which promised that there would be no Treaty change which transfers
competence or powers from the UK to the EU during this Parliament.
They emphasise that this amendment to the Treaty does not involve
any increase of the EU's competences, adding that the Treaties
specifically forbid the use of the simplified revision procedure
if it would "increase the competences conferred on the Union
in the Treaties", and that as the ESM will not apply to the
UK it cannot involve a transfer of powers from the UK.
The Committee's assessment and conclusions
THE USE OF THE SIMPLIFIED REVISION PROCEDURE
18. Article 48(6) TEU restricts the use of the
simplified revision procedure to amendments to Part III of the
TFEU which do not increase the competences of the EU. Article
136 TFEU is within Part III. Indeed, the amendment does not refer
to the Union; it provides for action by the Member States in the
euro area.
19. By the same token, the amendment does not
appear to us to fall within the classes of amendment which, under
Clause 4 of the European Union Bill, would trigger a requirement
for a referendum. Clause 4 applies (broadly speaking) where an
amendment would add to EU competences or remove Treaty safeguards
for Member States.
THE MECHANISM
20. The new paragraph (see paragraph 9 above)
to be added to Article 136 TFEU would provide a legal basis for
the proposed permanent mechanism to be established for the euro
area by its members. The mechanism itself would be set up by agreement
among the euro area states, not by the EU. The wording of the
new paragraph might be seen as granting a necessary permission
to the euro area states to set up the new mechanism. However,
it appears to us that the text is only intended to express a power
for the states concerned without any suggestion that the EU Treaty
would otherwise prevent the establishment of the mechanism. It
is commonly assumed that the German government was anxious to
have a clear Treaty basis for action in order to forestall any
adverse judgment of the German Constitutional Court.[10]
21. The second sentence of the new provision
is not expressed in what, in English law, would be regarded as
mandatory terms but the intention of the European Council is that
the new mechanism will contain "strict conditionality"
in return for assistance to a euro area state.
IMPACT ON THE UK
22. The Explanatory Memorandum notes that the
Government intend to participate in the work of designing the
new mechanism, though the UK will not be part of it and will not,
therefore, have any financial exposure in relation to the operation
of the mechanism, either directly or through the EU budget.
23. We agree with the Government's view that
it is in the UK's interests to support a stable and prosperous
euro area. The UK will not be part of the new permanent crisis
resolution mechanism. We note, however, that participating Member
States have decided that such a mechanism is necessary to safeguard
the stability of the euro area.
24. The proposed Treaty amendment will not
transfer any powers from the UK to the EU, or result in any financial
implications for the UK. We therefore support the Government's
intention to vote in favour of this amendment in the European
Council.
1 The scrutiny reserve was lifted on 1 February 2011
in a letter from Lord Roper, Chairman of the EU Select Committee,
to David Lidington MP, Minister for Europe. This letter is printed
in Appendix 3. Back
2
The EU is founded on two core Treaties: the Treaty on European
Union (TEU) and the Treaty on the Functioning of the European
Union (TFEU). Back
3
Correspondence with Ministers May 2010-December 2010 (http://www.parliament.uk/documents/lords-committees/eu-sub-com-a/CWM/CwMSubAMay-Oct10.pdf). Back
4
Article 125 states that "The Union shall not be liable for
or assume the commitments of central governments, regional, local
or other public authorities, other bodies governed by public law,
or public undertakings of any Member State". It goes on to
state that no Member State shall do so either. Back
5
The report from the European Union Select Committee, The Future
of Economic Governance in the European Union, will be published
in late March 2011. Back
6
European Council, 28-29 October 2010 Conclusions (EUCO
25/1/10). Back
7
European Council, 16-17 December 2010 Conclusions (EUCO
30/10). Back
8
European Council, 16-17 December 2010 Conclusions (EUCO
30/10), Annex 1. Back
9
Explanatory Memorandum EUCO 33/10 on a Draft European Council
Decision amending Article 136 of the Treaty on the Functioning
of the European Union with regard to a stability mechanism for
Member States whose currency is the euro, 10 January 2011.
This document is printed in Appendix 2. Back
10
See, for example: Financial Times, An EU Treaty change is necessary
but hazardous, Wolfgang Münchau, 31 October 2010; and,
EuropeanVoice.com, Merkel garners support for Treaty change,
Simon Taylor, 4 November 2010. Back
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