Policy Research in Macroeconomics

The Euro Summit – farewell to ordoliberalism and the rule of law

We have read a lot in recent years about the German economic philosophy of Ordoliberalism, which – as a reaction to the illegalities of the Nazi period – emphasizes (as the Economist put it) that “capitalism requires a strong government to create a framework of rules which provide the order (ordo in Latin) that free markets need to function most efficiently.”  But at the Euro Summit yesterday, the EU and Eurozone legal processes were tossed out of the window by the assembled heads of state – raw politics and power triumphed over ordoliberal principle.

The Euro Summit statement, adopted this morning (13 July) at the end of the marathon session, is a verbally brutal document.  It eschews any diplomatic language or approach (or even any recognition of the hardships suffered by the Greek people). Instead, it falls back on the language of naked economic power and force majeure. In the process, the Heads of Government have trampled on the legal rules and processes that they had agreed only 3 years ago, consigning the rule of law – a supposed cornerstone of the EU – to the dustbin.  

Greece’s application for ESM support

To recall, in 2012 the Eurozone member states agreed the European Stability Mechanism Treaty, which enables financial support to be given to member states in difficulty, on the basis of the procedures set out.  The ESM Treaty was required because the EU Treaties contained no such power (indeed, appeared to preclude any kind of support).

On 8th July the Greek government wrote to the Chairperson and Managing Director of the European Stability Mechanism (ESM) requesting 

stability support within the meaning of Articles 12 and 16 of the ESM Treaty given the risk to the financial stability of Greece as a member state and of the euro area as a whole.

Specifically, Greece seeks from the ESM a loan facility (“Loan” or “Programme”) with an availability period for three years…The Loan will be used to meet Greece’s debt obligations and to ensure stability of the financial system.

On the same day, and in full accord with the ESM Treaty, the Chairperson of the ESM Board of Governors, Jeroen Dijsselbloem, wrote to the EU Commissioner for Economic and Financial Affairs, and to the President of the European Central Bank, asking the European Commission, in liaison with the European Central Bank:

(a) to assess the existence of a risk to the financial stability of the euro area as a whole or of its Member States; 
(b) to assess, together with the International Monetary Fund, whether public debt of the Hellenic Republic is sustainable; and 
(c) to assess the actual or potential financing needs of the Hellenic Republic.

So far, so legally correct.

He continued,

In line with Article 13(2) of the ESM Treaty, these assessments, together with the aforementioned request and the proposal by the ESM Managing Director pursuant to Article 2 of the ESM Guideline on Loans, will form the basis for the ESM Board of Governors’ decision whether to grant, in principle, stability support to the Hellenic Republic in the form of a loan.

The ESM procedure

On 9th July, the ESM published its Procedure for approval of new ESM financial assistance programme, which follows the legal requirements, including the following:

On the basis of the above assessments, the ESM Managing Director prepares a proposal whether to grant, in principle, stability support. The ESM convenes a Board of Governors meeting. The ESM Board of Governors decides,on the basis of the above assessments and the ESM Managing Director’s proposal, whether to grant, in principle, stability support.  (My emphasis)

It appears that a “First Assessment” was rapidly produced by the three Institutions, and according to the  European Council’s website (there is nothing on the ESM’s to date), the discussion of the Eurogroup on 12th July

…was based on the first assessment of the Greek proposals by the three institutions – the European Commission, the European Central Bank and the International Monetary Fund. The institutions also evaluated risk to the financial stability in the euro area, Greece’s financing needs and its debt sustainability. The assessment was sent to the Eurogroup President on the eve of the meeting. 
“It is still very difficult, but work is still in progress”, said Eurogroup President Jeroen Dijsselbloem after the meeting.

We have not seen this “first assessment”, but we can be sure (a) that it requires much more work to be done to complete the assessment, and (b) that the time for adequate consideration of it, even if it gave enough information to reach sensible and sufficient conclusions, was negligible and inadequate. 

It seems, however, that no meeting of the ESM Board of Governors was convened to consider the first assessment, but that it went to the Eurogroup – which has no legal powers –  before being shunted  on to the Heads of State, who also have no  formal legal powers or status in ESM matters. 

The Eurogroup, we note, does have a formal existence, by virtue of Protocol 14 (“On the Euro Group”) annexed to the EU Treaties – but it has absolutely no powers to decide anything.  Article 1 of the Protocol states:

The Ministers of the Member States whose currency is the euro shall meet informally. Such meetings shall take place, when necessary, to discuss questions related to the specific responsibilities they share with regard to the single currency. (My emphasis).

To discuss questions…nothing more.  Thus, on 11th and 12th July, there was no meeting that had the power in law to take any decision.

The Article 13 ESM Treaty provisions

To cite the precise words of Article 13(2) of the ESM Treaty, 

On the basis of the request of the ESM Member and the assessment referred to in paragraph 1, the Board of Governors may decide to grant, in principle, stability support to the ESM Member concerned in the form of a financial assistance facility.

Note that (a) this procedure must be followed, and (b) the decision must be taken ON THE BASIS of the application and the Commission’s report, which implies to the exclusion of other factors, such as public opinion back home.

If the Board of Governors agrees to go ahead, under Article 13(3)

[It] shall entrust the European Commission – in liaison with the ECB and, wherever possible, together with the IMF – with the task of negotiating, with the ESM Member concerned, a memorandum of understanding (an “MoU”) detailing the conditionality attached to the financial assistance facility. 

The content of the MoU shall reflect the severity of the weaknesses to be addressed and the financial assistance instrument chosen. 

In parallel, the Managing Director of the ESM shall prepare a proposal for a financial assistance facility agreement, including the financial terms and conditions and the choice of instruments, to be adopted by the Board of Governors…

All of this means that the final terms to be offered can be very tough, but the legal procedure is explicit and mandatory.

Summit Statement

Now back to the weekend’s work.  The final agreed document does not mention that Greece has already applied for financial support under the ESM Treaty, nor that Mr Dijsellbloem had (correctly) asked for the various debt sustainability and other assessments from the Commission under Article 13(1).

The Statement starts with a recital of legislative steps the Greek government has undertaken to take. Then, at page 2 of the Summit Statement, we read:

Immediately, and only subsequent to legal implementation of the first four above-mentioned measures as well as endorsement of all the commitments included in this document by the Greek Parliament, verified by the Institutions and the Eurogroup, may a decision to mandate the Institutions to negotiate a Memorandum of Understanding (MoU) be taken.

This decision would be taken subject to national procedures having been completed and if the preconditions of Article 13 of the ESM Treaty are met on the basis of the assessment referred to in Article 13.1.”

This formula is repeated almost verbatim at page 7:

Provided that all the necessary conditions contained in this document are fulfilled, the Eurogroup and ESM Board of Governors may, in accordance with Article 13.2 of the ESM Treaty, mandate the Institutions to negotiate a new ESM programme, if the preconditions of Article 13 of the ESM Treaty are met on the basis of the assessment referred to in Article 13.1.”

This is entirely wrong.  The Heads of Government have no legal powers to make decisions; they should at minimum make any “recommendations” on the basis of the Commission’s assessment and the ESM Board of Governors’ decisions; and certainly not interfere with the lawful discretion of the Commission through the imposition of prior conditions – especially a package of such scale and detailed interference in the self-determination of an “equal” Member State.  A decision to mandate the Institutions (sic) to negotiate a MoU can only be taken by the Board of Governors (largely the same as the Eurogroup finance ministers but wearing a different legal hat and with quite different legal duties).  And this decision has to be made by it after considering the finalised sustainability assessment etc. from the Commission.

A minor but indicative point – the Summit Statement refers to “mandate the Institutions” to negotiate a MoU. In fact there is only a singular Institution that is legally to do so – the European Commission.  The Commission must do so “in liaison with” the ECB, but to liaise with someone does not make the other (the ECB) in law a co-negotiator.  True, if the IMF is involved it would be a negotiating body, but no organ within the EU can “mandate” the IMF to negotiate – only the IMF’s members can do so!  This is all evidence of sloppy ordeliberate failure to follow the correct procedure.


It is important to note that the Summit Statement also “stresses that nominal haircuts on the debt cannot be undertaken.”  Though the reference to no nominal cuts on debt expressly allows certain other forms of debt easing, this again pre-empts the legal process to be undertaken.  After all, it would be perfectly natural for an honest, impartial debt sustainability assessment to conclude that a debt haircut is indeed an essential or desirable requirement for future sustainability – and the ESM Board of Governors would be bound to consider this in good faith, on its merits rather than having it ruled out a priori.

The rule of law 

I could go on with the legal parsing of the Summit Statement, but the above surely suffices!  All that remains is that we have seen, if not an actual “coup” (as per the “ThisIsACoup” hashtag that swept across the Twitterverse last night), at the very least an exercise in the unlawful abuse of power, in the deliberate refusal to follow the legal rules and procedures laid down in the Treaties – and thus a breach of the overarching values laid down in Article 2 of the Treaty on European Union:

The Union is founded on the values of respect for human dignity, freedom, democracy, equality, the rule of law and respect for human rights, including the rights of persons belonging to minorities. These values are common to the Member States in a society in which pluralism, non-discrimination, tolerance, justice, solidarity and equality between women and men prevail.

So farewell, ordoliberalism and the rule of law!

N.b. This article was slightly amended at 20.00h on 13th July, in particular to set out the legal status of the Eurogroup.

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