FT Alphaville " Burying a banking licence Would you like three long, dense paragraphs of German legal rumination on a idea that's already DOA? That'd be the ESM funding itself through European Central Bank liquidity. Of course you would (and if not, you can always skip to the analysis below): (3) Contrary to the allegations made by the first and second applicants, the objection that the European Stability Mechanism can become the vehicle of unconstitutional state financing by the European Central Bank cannot be raised against the Treaty establishing the European Stability Mechanism. The ban on monetary financing as an important element for safeguarding the constitutional requirements of the precept of democracy under European Union law (see above B.III.1.a) dd)) is not affected by the Treaty establishing the European Stability Mechanism. In the applicable primary legislation, the ban on monetary financing is expressed in Article 123 TFEU. It contains the prohibition of overdraft facilities or any other type of credit facility with the European Central Bank or with the central banks of the Member States in favour of Union institutions, bodies, offices or agencies, central governments, regional, local or other public authorities, other bodies governed by public law, or public undertakings of Member States, and the ban on purchasing debt instruments directly from them by the European Central Bank or national central banks. It can be left open whether the European Stability Mechanism's taking up of loans with the European Central Bank is already precluded by Article 21 (1) TESM, which merely provides for borrowing "on the capital markets." As an internal agreement between European Union Member States, the Treaty establishing the European Stability Mechanism must at any rate be interpreted in conformity with European Union law (see Court of Justice of the European Communities, Case C-235/87, Matteucci, ECR 1988, p. 5589, marginal no. 19; Kube, WM 2012, p. 245 <246 ff.>; Bundestag printed papers 17/9045, p. 4; on the reference of the TESM to European Union law see Rathke, DÖV 2011, p. 753 <759-260>; Calliess, NVwZ 2012, p. As borrowing by the European Stability Mechanism from the European Central Bank, alone or in connection with the depositing of government bonds, would be incompatible with European Union law, the Treaty can only be taken to mean that it does not permit such borrowing operations. As a financial institution belonging to the public sector within the meaning of Article 3 of Council Regulation (EC) No 3603/93 of 13 December 1993 (OJ L 332 of 31 December 1993, p. 1), the European Stability Mechanism is one of the institutions specified in Article 123 (1) TFEU to which no loans may be granted. Due to its objectives, it is not covered by the exemption from the prohibition of monetary financing set out in Article 123 (2) TFEU. According to this provision, Article 123 (1) TFEU does not apply to publicly owned credit institutions. However, Article 123 (2) TFEU does not apply to institutions whose funds directly benefit European Union Member States because this would circumvent the prohibition set out in Article 123 (1) TFEU. This would be the case with the European Stability Mechanism. According to Article 3 (1) TESM, the purpose of the European Stability Mechanism is to provide stability support under strict conditionality to the benefit of ESM Members. It uses the funds at its disposal for direct financial stabilisation of its members, which the European Central Bank is prevented from doing by Article 123 (1) TFEU. Accordingly, in its opinion of 17 March 2011 (CON/2011/24, OJ C 140 of 11 May 2011, p. 8, observation 9), the European Central Bank assumes that Article 123 TFEU would not allow the European Stability Mechanism to become a counterparty of the Eurosystem under Article 18 of the Statute of the ESCB. A depositing of government bonds by the European Stability Mechanism with the European Central Bank as a security for loans would also infringe the ban on the direct acquisition of debt instruments of public entities. Here, it can remain open whether this would constitute a direct acquisition of debt instruments of state issuers on the primary market or whether after their intermediate acquisition by the European Stability Mechanism, it would be tantamount to an acquisition on the secondary market. For an acquisition of government bonds on the secondary market by the European Central Bank aiming at financing the Members" budgets independently of the capital markets is prohibited as well, as it would circumvent the prohibition of monetary financing (see also Recital 7 of Council Regulation (EC) No 3603/93 of 13 December 1993 (OJ L 332 of 31 December 1993, p. This is taken account of by the Treaty establishing the European Stability Mechanism, whose Recital 4 calls for strict observance of the European Union framework, the integrated macroeconomic surveillance, in particular the Stability and Growth Pact, the macroeconomic imbalances framework and the economic governance rules of the European Union. Article 123 TFEU is one of these rules. It's an interesting tangent. It shows how the German court ruling on the ESM contains a bit more nuance and ambiguity - and wider interpretation of Europe's cluttered bailout framework - than the "ja, aber" getting sprayed over the headlines. The funny thing of course is that the foray into ECB financing of the ESM isn't really earth-shattering stuff. The issue's already dying in policy-land. The central bank itself has iced the banking licence - note how the court cites the ECB's own legal advice. Then again the court adds more legal flesh to the argument against the ESM tapping the ECB - interestingly through delving into the ESM treaty text itself. Most interestingly of all, it does so in a way that suggests the treaty really is badly drafted ambiguous to interpet on key points. The court suggests a provision allowing the ESM to borrow from "capital markets" shouldn't be read as already including borrowings from the ECB, for example. There's a great deal of nuance elsewhere in the court's judgment... which for the most part elegantly argues the ESM treaty's compatibility with the Bundestag's powers of the purse under Germany's Basic Law. In particular there are the parts which note that the treaty sets limits to the "authorised capital stock" (capital base) of the ESM, that the Bundestag would have control over the release of capital to the ESM, and that "the Federal Republic of Germany's liability in the framework of the European Stability Mechanism cannot be increased beyond EUR 190 024 800 000 without the consent of the Bundestag" (para 222 of the ruling). But the court also has to navigate a tricky bit of the ESM treaty, Article 25, which mandates "revised increased" capital calls on the other members, should any one member fail to provide capital to the bailout fund. The court rides over the ambiguity of whether that might exceed the capital stock limits pretty cleanly, arguing that this "may only be interpreted or applied in such a way that no higher payment obligations are established for the Federal Republic of Germany." That could be pretty important in the months to come, if the ESM ever did make losses. The court also suggests the Bundestag deserves fairly far-reaching oversight of investments made by the ESM as buffers against potential loss, for example. At other times the court seems to respond to unclear parts of the ESM's workings by interpreting the Bundestag's powers of involvement broadly - which is also really a recognition of the political reality: very few changes to the ESM are going to get past the German legislature now. Here, for instance, we don't think the court is calling for the Bundestag to vote on every bailout action to be taken by the ESM, but it does seem to call for strong oversight of Germany's (considerable) representation on the bailout fund's board... ...every single stability support measure taken according to Article 13 (2) TESM, as well as the signing of the respective Memorandum of Understanding according to Article 13 (4) TESM, require a decision by mutual agreement of the Board of Governors and can be, and actually are, made contingent on the approval by the German Bundestag. As the Bundestag can exercise the constitutionally required influence through its approval of stability support and can participate in the decision on the amount, on the terms and conditions and on the duration of stability support in favour of Members seeking help, the Bundestag itself lays the most important foundation of possible capital calls according to Article 9 (2) TESM. Related link: Gavyn Davies" take on the ruling - FT This entry was posted by Joseph Cotterill on Wednesday, September 12th, 2012 at 14:42 and is filed under Uncategorised. Tagged with ecb, ESM, eurozone, germany.