Amending Article 136 of the Treaty on the Functioning of the European Union - European Union Committee Contents


APPENDIX 2: DRAFT EUROPEAN COUNCIL DECISION AMENDING ARTICLE 136: EXPLANATORY MEMORANDUM


Explanatory Memorandum on the draft European Council Decision amending Article 136 of the Treaty on the Functioning of the European Union (Document EUCO 33/10)

Submitted by the Foreign and Commonwealth Office on 10 January 2011

Subject matter

This draft European Council decision seeks to amend, using the simplified revision procedure, Article 136 of the Treaty on the Functioning of the European Union (TFEU) to enable Member States in the euro area to set up a permanent mechanism—the European Stability Mechanism or ESM—to safeguard the financial and economic stability of the euro area as a whole.

At its meeting on 16-17 December 2010 the European Council discussed the proposed text of a draft decision to amend the Treaty (attached). The European Council agreed that the Treaty should be amended using the simplified revision procedure (SRP) provided for in Article 48(6) of the Treaty of the European Union (TEU) and decided to immediately launch that procedure. This is the first time that a change to the EU Treaties has been proposed using the SRP.

The European Council agreed that since the ESM is designed to safeguard the financial stability of the euro area as a whole, Article 122(2) TFEU will no longer be needed for such purposes. The Heads of State or Government of the Member States of the European Council also agreed that it should therefore not be used for such purposes.

The draft decision to introduce the Treaty change includes the proposed text to be added to Article 136 of the TFEU. The Recitals attached to the draft decision state that the amendment to the Treaty may not increase the competences conferred on the European Union through the Treaties, that the granting of financial assistance under the new mechanism will be subject to strict conditionality, and that the emergency mechanism provided for by Article 122(2) of the TFEU will no longer be needed or used to safeguard the financial stability of the euro area as a whole.

The Council Conclusions of the December European Council also set out the anticipated timeline for this Treaty change. The EU institutions concerned (the European Parliament, Commission and European Central Bank) will be consulted on the draft decision, with the aim of the decision being formally adopted at the Spring European Council in March 2011. After adoption by the European Council, the decision will be subject to approval by the Member States in accordance with their respective constitutional procedures before it can enter into force. The target date for the decision to enter into force is 1 January 2013.

Scrutiny history

This is the first Explanatory Memorandum submitted to Parliament about this proposed change to the EU Treaty to establish the ESM. To date, the subject has been discussed on the Floor of the House on the occasion of the Prime Minister's statements after both the October and December European Councils on 1 November and 20 December 2010 respectively. It has also been discussed on the occasion of the Chancellor's statements on financial assistance to Ireland on 22 and 29 November 2010, and of the approval of the Loans to Ireland Bill. The issue has also been addressed in Committee on 21 December 2010 when the Minister for Europe appeared as a witness before the House of Lords' Select Committee on the European Union during the Evidence Session covering both the October and December European Council meetings.

Explanatory Memorandum 9606/10 on the Council Regulation establishing a European Financial Stabilisation Mechanism was submitted by HM Treasury for Parliamentary Scrutiny on 15 July 2010. This document was subject to an override of scrutiny on 9 May 2010. Related Explanatory Memorandum 17211/10 on the Council Implementing Decision on granting Union financial assistance to Ireland was submitted by HM Treasury for Parliamentary Scrutiny on 20 December 2010, it has yet to be considered in either House.

Ministerial responsibility

The Secretary of State for Foreign and Commonwealth Affairs with the Minister for Europe have overall responsibility for UK policy on EU Treaty change. The Chancellor of the Exchequer has responsibility for the content and technical aspects of the proposed European Stability Mechanism which will be established through this limited change to the Treaty.

Interest of the devolved administrations

The UK's Foreign Affairs policy is a reserved matter under the UK's devolution settlements and no devolved administration interests arise. The devolved administrations have therefore not been consulted in the preparation of this EM.

Policy implications

Our primary policy objective is to help ensure a stable and prosperous euro area. The Government believes that financial problems within the euro area should be primarily resolved by euro area Member States. However, it is in the interests of all Member States to support a stable and fully functioning euro area.

At the European Council of 28-29 October 2010, Heads of State or Government 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. And at the European Council of 16-17 December 2010, it was agreed that the Treaty should be amended in order to allow euro area Member States to establish this permanent mechanism (the ESM). The European Council Conclusions of 17 December 2010 outlined proposed language for this Treaty amendment.

The ESM will provide euro area countries with increased certainty and stability. We therefore support this draft proposal to amend the Treaty to make clear that the euro area Member States can establish a permanent ESM. The UK will directly benefit from increased stability of the euro area brought about by the ESM, without being part of the new mechanism or having any obligations under it.

The European Council Conclusions, draft decision and recitals meet the following Government policy objectives:

  • The existing European Financial Stability Facility (EFSF) and European Financial Stabilisation Mechanism (EFSM) will be replaced by the European Stability Mechanism (ESM);
  • Article 122(2) will no longer be used to safeguard the financial stability of the euro area as a whole;
  • The establishment of the ESM does not result in any transfer of power or competence to the EU from the UK.

EFSF and EFSM

These two emergency instruments were set up in May 2010 in response to the Greek financial crisis. The EFSF is an intergovernmental decision by euro area Member States to establish a temporary facility among euro area Member States to provide loans to euro area Member States in difficulty. It is a limited fund with a 3 year lifespan and is due to end in June 2013.

The EFSM was established by EU Regulation based on Article 122(2) of the TFEU which states that the Council may grant EU assistance to Member States "in difficulties or is seriously threatened with severe difficulties caused by natural disasters or exceptional occurrences beyond its control". The EFSM is available to any Member State and will remain in place until it is judged that the exceptional circumstances no longer exist (this is to be reviewed after 6 months, and every six months thereafter where appropriate). Under this mechanism EU borrowing to provide assistance is backed by the EU budget. Council approval for assistance is based on Qualified Majority Voting (QMV).

Paragraph 1 of the December European Council Conclusions (also referred to in the recitals to the draft decision) confirms that the ESM "will replace" both the EFSF and the EFSM, which will remain in force until June 2013.

Future use of Article 122(2)

Both the Council Conclusions and the recitals to the draft decision that introduces the Treaty change confirm that, once the ESM mechanism is established to safeguard the financial stability of the euro area as a whole, Article 122(2) will no longer be needed for such purposes, and Heads of States or Government agreed that it should not be used for such purposes.

Future use of Article 136

The text of the draft amendment to Article 136 of the TFEU states that "The Member States whose currency is the euro may establish a stability mechanism". The ESM will not apply to non-euro area Member States. It will be an intergovernmental body among euro area Member States (more akin to the EFSF than the EFSM) which does not create any liability on the EU budget or on non-euro Member States. Paragraph 3 of the December Council Conclusions calls for Finance Ministers of the euro area and the Commission to "finalise work on the intergovernmental arrangement setting up the future mechanism by March 2011".

Paragraph 4 of the Council Conclusions (also referred to in the recitals of the draft decision) states that "Member States whose currency is not the euro will, if they so wish, be involved in this work. They may decide to participate in operations conducted by the mechanism on an ad hoc basis." This means that that non-euro countries may, if they so wish, work with euro area countries on the design of the ESM. There are good, practical reasons for doing so, in order to ensure the ESM is as effective as possible. But this would be on an entirely voluntary basis. The Chancellor will write to the President of the Eurogroup, Jean-Claude Juncker, to confirm that the UK would like to participate in this work on the design of the ESM.

Transfer of competence and power

The Coalition Agreement promised that there would be no Treaty change which transfers competence or power from the UK to the EU during this Parliament. And under the terms of the recently introduced EU Bill any future proposed transfer of competence or power to the EU would be subject to public approval in a national referendum.

The proposed, limited Treaty change set out in the draft decision to establish the ESM does not involve any transfer of competence from the UK to the EU. The simplified revision procedure could not be used to amend the Treaty if it were to involve an increase in EU competence. Article 48(6) of the TEU states that SRP "shall not increase the competences conferred on the Union in the Treaties". Paragraph 6 of the recitals to the draft decision explicitly sets out that the amendment "does not increase the competences conferred on the Union in the Treaties". It is clear in the Council Conclusions and the draft decision to amend the Treaty that this will be a "stability mechanism for Member States whose currency is the euro", established by euro area countries for euro area countries. The UK will not be part of the new mechanism. As the new mechanism only applies to euro area countries, it could not transfer any power away from the UK.

Subsidiarity

The draft decision under consideration is a proposal to amend the TFEU. This objective can only be achieved at the EU level. The European Council therefore agreed to launch the simplified revision procedure provided for in Article 48(6) of the TEU to bring about this Treaty change.

Establishment of the ESM through Treaty change will provide the necessary clarity to put the mechanism on a legal sustainable footing.

Legal and procedural issues

Legal Basis: Simplified Revision Procedure provided for in Article 48(6) of the Treaty on European Union

Voting Procedures: Unanimity

Impact on UK Law: Adoption of the draft decision at the European Council has no impact on UK Law. In terms of Parliamentary procedure Section 6 of the EU (Amendment) Act 2008 requires that a motion must be introduced and passed by both Houses of Parliament without amendment before the Government can signal agreement to the adoption of the European Council draft decision.

Once the decision has been adopted, under the terms of the EU Bill an Act of Parliament must be passed before the draft Decision can enter force.

Application to Gibraltar: Yes.

Fundamental rights analysis: No fundamental rights issues apply.

Application to the European Economic Area

None.

Regulatory impact assessment

Not applicable.

Financial implications

The ESM established by the proposed Treaty change will be set up by euro area countries for euro area countries with no financial liability on non-euro area Member States or the EU budget. There are therefore no direct financial implications associated with agreeing the draft decision to amend the TFEU to establish the ESM. Once in place, the ESM will potentially save the UK money as i) there will be no financial obligations on non-euro area Member States so no effect on UK contributions; ii) the EU budget, to which the UK contributes, will no longer be used to guarantee loans (as is the case with the existing EFSM); and iii) the ESM aims to boost the economies of euro area Member States which will indirectly help the British economy.

Timetable

The Council Conclusions of 17 December 2010 propose the adoption of the draft decision at the Spring European Council of 24/25 March 2011.

Before the draft decision can be adopted the European Council must consult the EU institutions concerned, the European Parliament, the European Commission and the European Central Bank, on the proposal.

Member States will consult nationally and gain approval in line with their own requirements. For the UK, under the current requirements in the EU (Amendment) Act 2008, this involves introduction of a motion for debate and a positive vote in both Houses.

Once the draft decision is adopted by the European Council, Article 48(6) requires that it must then be approved by each Member State in accordance with their own constitutional requirements before it can enter force. The anticipated date for the decision to enter force is 1 January 2013. In line with the provisions of the EU Bill this will involve primary legislation to enable the UK to approve the decision after it has been adopted by the European Council.

Other observations

The European Council is currently consulting the EU institutions on this draft decision. The opinions of the European Parliament, the European Commission and the European Central Bank will be deposited with Parliament once received, in line with normal scrutiny procedures.

David Lidington MP

Minister for Europe

Foreign and Commonwealth Office


 
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