Paul Mortimer-Lee, global head, market economics, BNP Paribas
Opinion: A tangled Euro web
9 January 2012
29 April 2014
10 March 2014
22 May 2014
17 February 2014
29 July 2014
The European crisis interweaves the worlds of politics, economics and the law
The eurozone crisis has raised important issues involving politics and economics, but also several legal questions. For example, one issue regarding Greek debt restructuring is whether the bonds exchanged for existing Greek-law bonds should be under Greek or UK law. Bondholders prefer the second option because they would then be on a par with official holders of Greek paper, such as the European Central Bank (ECB), whereas under Greek law the ECB could be a preferred creditor.
There are also recurring issues as to what is allowable under the treaty when it comes to dealing with the crisis. The leaders of France and Germany raised the possibility of Greece having to leave the European Monetary Union (EMU). Yet no provision exists in the treaty for this to happen without leaving the EU.
There have been multibillion-euro bailouts of several countries despite the treaty’s ’no-bailout’ clause. Whether or not this is allowable under German law is an issue for that country’s constitutional court.
The ECB has criticised governments for trying to circumvent the ’no monetary financing of governments’ treaty provision by channelling ECB funds through the International Monetary Fund. Yet the ECB has provided monetary financing for governments by buying the bonds of troubled peripheral states through its Securities and Markets Programme (SMP). It is happy to extend three-year term money to banks, with which they can purchase peripheral government bonds. Economically speaking, it makes little difference whether the ECB buys the bonds itself or lends the money to banks for them to buy the bonds. The interpretation of treaty provisions is thus flexible - too flexible for some.
Underlying much of the current fiscal stress is bad or slack past behaviour by a variety of governments: they failed to leave enough headroom to cope with a severe downturn. To limit the scope for a repeat of the crisis Germany wanted treaty change to lay down legally binding rules and to have more or less automatic penalties for breaking them. Without such provisions, Germany fears that market-stabilising bailouts today will encourage free-riding and moral hazard tomorrow, making future crises more likely. Its history makes Germany keen to constrain legally the freedom of politicians. Politicians elsewhere, including in the UK, may not want to accept such constraints on fiscal sovereignty.
The UK rejected treaty amendment, leaving the remaining 26 EU members to draw up a treaty to achieve greater fiscal coordination. Will this allow Germany the degree of legal enforcement it wants? Some question this because the European Commission and European Court of Justice were set up to cope with pan-EU issues, whereas the new treaty will not include all EU states.
Will the UK suffer for blocking EU treaty amendment? Time will tell, but a financial transactions tax, that would disproportionately affect the City, and a requirement for euro-based financial instrument clearing facilities to be in the euro area have already been suggested.
Such threats mean we are likely to continue to see politics, economics and the law remain intertwined.