P. Craig THE TSCG

LEGAL RESEARCH PAPER SERIES Paper No 47/2012

July 2012

The Stability, Coordination and Governance Treaty: Principle, Politics and Pragmatism PAUL P. CRAIG

(2012) 37 European Law Review 231

The full text of this paper can be downloaded without charge from the Social Science Research Network electronic library at: An index to the working papers in the University of Oxford Legal Research Paper Series is located at:

The Stability, Coordination and Governance Treaty: Principle, Politics and Pragmatism

By

Paul Craig

Reprinted from European Law Review Issue 3, 2012

Sweet & Maxwell 100 Avenue Road Swiss Cottage London NW3 3PF (Law Publishers)

Electronic copy available at: http://ssrn.com/abstract=2115538

The Stability, Coordination and Governance Treaty: Principle, Politics and Pragmatism Paul Craig

*

Professor of English Law, St John’s College and the University of Oxford Competence; Economic and monetary union; EU law; Legitimacy; Stabilisation; Treaties

Abstract The Treaty on Stability, Coordination and Governance (TSCG) was one of many responses by the European Union to the financial crisis and consequential crisis with the euro. It was designed to show that the European Union had the problem under control, even if the TSCG had to be made outside the confines of the Lisbon Treaty. This article examines the political background to the TSCG, and its legal provisions. It also considers the broader issues of principle raised by the TSCG, and the extent to which Member States together with EU institutions can proceed outside the confines of the Lisbon Treaty to attain goals that cannot be achieved therein.

Introduction The financial crisis generated a range of economic, political and legal responses. This article focuses on one such response, the Treaty on Stability, Coordination and Governance (the TSCG), which was signed by 25 contracting states in March 2012.1 The discussion begins with the political background to the TSCG, which is essential in order to understand its legal form and content. This is followed by an outline of its principal provisions. There is then more detailed discussion of the core elements of the TSCG, the “balanced budget” rule and the correction mechanism, in order to determine what they add to the existing rules and assess their efficacy. The focus then shifts to broader issues of principle. The TSCG is of interest not merely for those concerned with economic and monetary union. It raises more fundamental issues of principle concerning the legitimacy of states, together with EU institutions, proceeding outside the confines of the Lisbon Treaty to attain goals that cannot be achieved through normal methods of Treaty amendment. It generates important inquiries concerning the extent to which a Treaty outside the confines of the Lisbon Treaty can confer new powers on EU institutions, and whether existing powers of EU institutions can be used in such a context. It entails significant issues concerning the way in which we interpret provisions of the Lisbon Treaty concerning the European Court of Justice (ECJ) that are directly relevant to the schema of the TSCG. The article concludes by reflecting on some broader legal and political ramifications of the TSCG.

*

I am grateful for comments on an earlier version of this article at seminars in Vienna and Oxford, and from Panos Koutrakos and the referee of this article. 1 Treaty on Stability, Coordination and Governance in the Economic and Monetary Union (March 1–2, 2012), http: //www.european-council.europa.eu/eurozone-governance/treaty-on-stability?lang=en [Accessed May 3, 2012]. (2012) 37 E.L. Rev. June © 2012 Thomson Reuters (Professional) UK Limited and Contributors

Electronic copy available at: http://ssrn.com/abstract=2115538

231

232 European Law Review

TSCG: political imperatives This is not the place for an exegesis on the politics of the financial crisis, but some understanding of the political pressures that led to the TSCG is necessary to understand the resultant Treaty. The financial crisis that began in 2008 and the subsequent euro crisis triggered new or modified EU legislation before the TSCG was conceived. The regulatory apparatus for banking, securities, insurance and occupational pensions was thoroughly overhauled.2 The legislative framework for economic union was amended through the “six-pack” of measures in 2011, which were enacted pursuant to arts 121, 126 and 136 of the Treaty on the Functioning of the European Union (TFEU).3 The euro crisis, precipitated initially by the situation in Greece, was not, however, quelled by such measures, and the bond markets continued to charge ever-increasing rates of interest to service Greek, Italian and Spanish debt. This was the setting for the European Council meeting in December 2011, which was the latest in a series of such meetings designed to show that the European Union had the euro crisis under control. The core proposal in December 2011 was for reform that would further strengthen EU oversight over Member State economic policy, and the new rules were to be incorporated in the primary Lisbon Treaty through amendment requiring unanimity. The decision to effectuate the changes through revision of the Lisbon Treaty was driven by political factors. Germany was the principal paymaster for the bailout of other Member State economies. Chancellor Merkel pressed strongly for inclusion of the new measures in the Lisbon Treaty, in part to reflect their importance, in part to appease domestic political forces, and in part to render less likely legal challenge to German bailouts by the German Federal Constitutional Court. President Sarkozy of France also advocated amendment of the Lisbon Treaty, although French conceptions of the content of the reforms were to diverge from those of Germany. The amendment to the Lisbon Treaty was, however, prevented by the UK veto. Prime Minister Cameron was concerned by the new powers over national economic policy that the embryonic Treaty amendments would give to Brussels. He was, however, also driven by domestic political forces, including the desire to appease the strong euro-sceptic wing of the Tory Party, and the wish to gain something for the United Kingdom, in terms of protection for the City of London from EU financial regulation, as the price of UK support for the proposed changes.4 The other Member States were not, however, willing to accede to UK demands, the United Kingdom refused to back down, and the December 2011 summit ended in acrimony, with dire warnings of the United Kingdom being isolated in the European Union. The majority of Member States nonetheless wished to press forward with the reforms, the result being the TSCG. Politics continued to be an important factor as the TSCG took shape. Significant changes to EU oversight over national economic policy had been promulgated under arts 121, 126 and 136 TFEU. 2 Regulation 1093/2010 establishing a European Supervisory Authority (European Banking Authority) [2010] OJ L331/12; Regulation 1095/2010 establishing a European Supervisory Authority (European Securities and Markets Authority) [2010] OJ L331/84; Regulation 1094/2010 establishing a European Supervisory Authority (European Insurance and Occupational Pensions Authority) [2010] OJ L331/4. 3 Regulation 1175/2011 amending Regulation 1466/97 on the strengthening of the surveillance of budgetary positions and the surveillance and coordination of economic policies [2011] OJ L306/12; Regulation 1177/2011 amending Regulation 1467/97 on speeding up and clarifying the implementation of the excessive deficit procedure [2011] OJ L306/33; Regulation 1173/2011 on the effective enforcement of budgetary surveillance in the euro area [2011] OJ L306/1; Directive 2011/85 on requirements for budgetary frameworks of the Member States [2011] OJ L306/41; Regulation 1176/2011 on the prevention and correction of macroeconomic imbalances [2011] OJ L306/25; Regulation 1174/2011 on enforcement measures to correct macroeconomic imbalances in the euro area [2011] OJ L306/8. 4 The precise nature of the safeguards demanded by the United Kingdom remains unclear, because the UK Government has been unwilling to provide the requisite information. It has also been unwilling to reveal the draft protocol that was rejected by the other Member States at the December Summit in 2011: House of Lords European Scrutiny Committee, The Euro Area Crisis (2012), HL 260, paras 120–125.

(2012) 37 E.L. Rev. June © 2012 Thomson Reuters (Professional) UK Limited and Contributors

Electronic copy available at: http://ssrn.com/abstract=2115538

The Stability, Coordination and Governance Treaty 233

It is arguable that almost everything in the TSCG could have been legally enacted in the same way. This was not, however, politically feasible. Merkel and Sarkozy had committed themselves to change to the primary Lisbon Treaty. They could not be seen to back down in the light of the UK veto and accept change in the form of EU legislation. This explains the insistence on finding some other method of enshrining the desired precepts in “primary law”, even if this had to be a treaty distinct from the Lisbon Treaty. There is a paradox in all this, because if the precepts in the TSCG had been enshrined in EU legislation then they would have partaken of the normal attributes of EU law.

TSCG: the legal provisions The TSCG was concluded in March 2012, with 25 signatories, the Czech Republic joining the United Kingdom as the other non-signatory. It would be a mistake to think that the TSCG’s passage was smooth. The December 2011 summit laid the foundations for the strengthened fiscal compact,5 but was light on detail. What became the TSCG went through six revisions before the text was finally agreed between the signatories. The amendments during its passage varied, but the dominant theme was a weakening of the precepts established in December 2011 and in the original version of the TSCG. The treaty-making process proved once again that the devil is always in the detail: the fact that 25 states agreed in principle to strengthened control over national economic policy did not mean that they would agree on the precise form or degree of that control. This section analyses the final version of the TSCG. The impact of the more important amendments will be considered in the subsequent analysis. The TSCG must be ratified by the contracting parties in accord with their constitutional requirements. It enters into force on January 1, 2013, provided that 12 contracting states whose currency is the euro have ratified the TSCG, or on the first day of the month following deposit of the 12th instrument of ratification by a contracting state whose currency is the euro, whichever is the earlier.6 The contracting parties hope to incorporate the substance of the TSCG into the Lisbon Treaty within five years.7 Article 1 TSCG provides that the contracting parties agree, as Member States of the European Union, to strengthen the pillar of economic and monetary union by adopting rules to foster budgetary discipline through a fiscal compact, to strengthen the co-ordination of their economic policies and to improve the governance of the euro area. Article 2 TSCG deals with the relationship between the TSCG and the Lisbon Treaty. Article 2(1) provides that the TSCG is to be applied and interpreted in conformity with the EU Treaties, in particular art.4(3) of the Treaty of the European Union (TEU), and with EU law, including procedural law when adoption of secondary legislation is required.8Article 2(2) further stipulates that the TSCG applies insofar as it is compatible with the EU Treaties and EU law, and that the TSCG shall not encroach on the competence of the Union to act in the area of the economic union. Articles 3–8 TSCG specify the provisions about fiscal compact. Article 3(1) TSCG contains the “balanced budget” rule9 and is the heart of the new Treaty. The budgets of the contracting parties must be balanced 5

European Council, December 9, 2011. Article 14(1) TSCG. 7 Article 16 TSCG. 8 The meaning of the latter part of this sentence is not clear. Article 2(1) TSCG appears to contemplate EU legislation being made to service the needs of the TSCG. It is axiomatic that EU legislation must comply with the requirements for its making laid down in the Lisbon Treaty, but that cannot in itself validate use of EU legislation that is in effect serving as a secondary measure in the context of some other treaty, such as the TSCG. It is one thing to suggest that states can proceed outside the confines of the Lisbon Treaty to attain goals that cannot be achieved therein. It is quite another to suggest that those same states can promulgate EU legislation to serve as a secondary measure pursuant to the non-EU treaty. 9 The rules in art.3 TSCG are without prejudice to obligations under EU law. 6

(2012) 37 E.L. Rev. June © 2012 Thomson Reuters (Professional) UK Limited and Contributors

234 European Law Review or in surplus.10 This is deemed to be respected if the annual structural balance of the general government is at its country-specific medium-term objective, as defined in the revised Stability and Growth Pact, with a lower limit of a structural deficit of 0.5 per cent of gross domestic product at market prices.11 The contracting parties must ensure rapid convergence towards their respective medium-term objective. The time-frame for such convergence is proposed by the Commission taking into consideration country-specific sustainability risks. Progress towards, and respect of, the medium-term objective is evaluated on the basis of an overall assessment with the structural balance as a reference in accord with the revised Stability and Growth Pact. Temporary deviation from these precepts is allowed only in exceptional circumstances.12 Significant deviations from the medium-term objective or the adjustment path towards it trigger an automatic correction mechanism.13 The automatic correction mechanism is specified in art.3(2) TSCG. It provides that the rules in art.3(1) TSCG shall take effect in national law of the contracting parties at the latest one year after entry into force of the TSCG through provisions of binding force and permanent character, preferably constitutional, or otherwise guaranteed to be fully respected and adhered to throughout the national budgetary processes. This provision was weakened during the passage of the TSCG in the manner explained below. The national correction mechanism is to be based on common principles proposed by the Commission, concerning the nature, size and time-frame of the corrective action to be undertaken, and in the case of exceptional circumstances, the role and independence of the national institutions responsible for monitoring compliance with the rules in art.3(1). The correction mechanism must fully respect the prerogatives of national parliaments. Article 8 TSCG provides for judicial enforcement of art.3(2) through recourse to the ECJ via art.273 TFEU. Article 8 TSCG is complex, and was amended on a number of occasions. It is examined in detail below. Article 4 TSCG stipulates that when the ratio of debt to gross domestic product exceeds the 60 per cent reference value in art.1 of Protocol 12 of the Lisbon Treaty, the contracting party must reduce it at an average rate of one-twentieth per year as a benchmark, as provided for in art.2 of Regulation 1467/97 as amended.14 The existence of an excessive deficit due to breach of the debt criterion is decided by the procedure in art.126 TFEU. Article 5 TSCG imposes an obligation on contracting states subject to an excessive deficit procedure under the Lisbon Treaty to put in place correction mechanisms. Article 7 TSCG in effect embodies a reverse qualified majority voting rule: contracting states whose currency is the euro commit to supporting Commission proposals where it considers that a state whose currency is the euro is in breach of the deficit criterion in the framework of an excessive deficit procedure, subject to the qualification that this obligation does not apply if a qualified majority of such states oppose the proposed decision. More general issues of economic co-ordination are dealt with in arts 9–11 TSCG. Thus art.9 TSCG contains an undertaking by contracting states to work jointly towards an economic policy that fosters the proper functioning of economic and monetary union (EMU) and economic growth through enhanced convergence and competitiveness. Article 10 TSCG states that the contracting parties “stand ready” to make active use of art.136 TFEU, and enhanced co-operation—as provided for in art.20 TEU and arts 326 to 334 TFEU on matters that are essential for the proper functioning of the euro area—without

10

Article 3(1)(a) TSCG. Article 3(1)(b) TSCG. This is qualified by art.3(1)(d) TSCG: where the ratio of the general government debt to gross domestic product at market prices is significantly below 60% and where risks in terms of long-term sustainability of public finances are low, the lower limit of the medium-term objective in art.3(1)(b) TSCG can reach a structural deficit of at most 1.0 % of the gross domestic product at market prices. 12 Articles 3(1)(b) and 3(3)(b) TSCG. 13 Article 3(1)(e) TSCG. 14 Council Regulation 1177/2011. 11

(2012) 37 E.L. Rev. June © 2012 Thomson Reuters (Professional) UK Limited and Contributors

The Stability, Coordination and Governance Treaty 235

undermining the internal market. Article 11 TSCG provides for benchmarking of economic policy reforms so that contracting parties can take advantage of best practice. Governance of the euro area is dealt with in art.12 TSCG, which provides for informal meetings of heads of state of contracting parties whose currency is the euro at Euro Summit meetings, together with the Commission President.15 The President of the European and Central Bank is invited to such meetings.16 Euro Summit meetings take place when necessary, and at least twice a year, to discuss questions relating to specific responsibilities shared by contracting parties whose currency is the euro with regard to the single currency, as well as other issues concerning governance of the euro area. Heads of state of contracting parties other than those whose currency is the euro participate in Euro Summit meetings for certain issues.17

TSCG: obligation to balance the budget The obligation to balance the national budget is the core of the TSCG. This is contained in art.3(1)(a), and must be read with art.3(1)(b), which defines its substance. The consequences are, however, less significant than when the TSCG was initially proposed in December 2011. The extent of what might have been achieved under the existing Treaty rules was not fully tested. It is arguable, as noted above, that almost everything in the TSCG might have been done under the existing Lisbon Treaty provisions, including those on enhanced co-operation. It is in any event generally acknowledged that the TSCG does not advance matters very much from the obligations contained in the EU Treaty and accompanying legislation. It is true that art.126(1) TFEU is framed in terms of an obligation on Member States to avoid excessive deficits, which is different from an obligation to balance the budget contained in art.3(1)(a) TSCG. The difference is, however, significantly reduced when the Lisbon Treaty provisions are read together with the changes made by the six-pack of EU legislation enacted in 2011. Thus art.3(1)(b) TSCG, which gives substance to the notion of balanced budget, specifies that the “balanced budget” rule is deemed to be respected if the annual structural balance of the general government is at its country-specific medium-term objective, as defined in the revised Stability and Growth Pact, with a lower limit of a structural deficit of 0.5 per cent of the gross domestic product at market prices. There is much commonality between art.3(1)(b) and Regulation 1466/97 as amended in 2011.18 The deficit rule of 0.5 per cent in art.3(1)(b) is not very different from that in revised Regulation 1466/97, where it is 1 per cent. The obligation to balance the budget in art.3(1)(a) TSCG is further qualified by the fact that art.3(1)(b) TSCG is expressed as an obligation on contracting states to ensure rapid convergence towards the medium-term economic objective, in accord with a time-frame proposed by the Commission.

TSCG: correction mechanism If the “balanced budget” rule in art.3(1) TSCG is central to the TSCG, so too is the correction mechanism in art.3(2) TSCG, more especially because it is enforceable through the ECJ via art.8 TSCG considered below. Article 3(2) TSCG contains two related obligations. There is a general obligation for contracting states to ensure that the rules in art.3(1) take effect in national law through provisions of binding force and 15 The President of the Euro Summit is appointed by heads of state of contracting parties whose currency is the euro by simple majority at the same time as the European Council elects its President and for the same term of office: art.12(1) TSCG. 16 The President of the European Parliament may be invited to be heard. The President of the Euro Summit reports to the European Parliament after each Euro Summit meeting: art.12(5) TSCG. 17 Article 12(3) TSCG. 18 Regulation 1175/2011 art.2a.

(2012) 37 E.L. Rev. June © 2012 Thomson Reuters (Professional) UK Limited and Contributors

236 European Law Review

permanent character, preferably constitutional, or otherwise guaranteed to be fully respected and adhered to throughout the national budgetary processes. There is in addition an obligation on contracting states to put in place a correction mechanism of the kind referred to in art.3(1)(e) TSCG in the event of deviation from the balanced budget criteria in art.3(1). There are two points to note about art.3(2) TSCG, which relate to its novelty and efficacy. In terms of novelty, it should be noted that existing EU legislation contains analogous rules. The substance of art.3(2) TSCG is addressed in arts 5–7 of Directive 2011/85, although this does not apply to the United Kingdom because of art.8.19 These rules provide that each Member State should have in place numerical fiscal rules which are specific to it and which effectively promote compliance with its obligations derived from the TFEU in the area of budgetary policy over a multi-annual horizon for the general government as a whole. Such rules shall promote in particular: compliance with the reference values on deficit and debt set in accordance with the TFEU; and the adoption of a multi-annual fiscal planning horizon, including adherence to the Member State’s medium-term budgetary objective. These country-specific numerical fiscal rules must contain specifications as to the following elements: the target definition and scope of the rules; the effective and timely monitoring of compliance with the rules, based on reliable and independent analysis carried out by independent bodies or bodies endowed with functional autonomy vis-à-vis the fiscal authorities of the Member States; and the consequences in the event of non-compliance. If the numerical fiscal rules contain escape clauses, they must be tightly drawn and there must be stringent procedures to determine when they can be applied. The difference between the TSCG and the existing Treaty rules will be further reduced if and when a proposed regulation on ensuring correction of excessive deficits becomes law.20Article 4 of this draft regulation provides that Member States shall have in place numerical fiscal rules on the budget balance that implement in the national budgetary processes their medium-term budgetary objective as defined in art.2a of Regulation 1466/97. Such rules must cover the general government as a whole and be of binding, preferably constitutional, nature. In terms of efficacy, art.3(2) TSCG was weakened through successive amendments. The fate of this provision is an object lesson as to how tough talk at the outset can be watered down through successive changes to its wording. The December 2011 version was framed in terms of a mandatory obligation to comply with the principles in art.3(1) by enshrining this obligation in national binding provisions of a “constitutional or equivalent nature”. The correction mechanism was to be “triggered automatically” in the event of significant deviations from the reference values or adjustment path towards it. This was reinforced by the fact that art.8 TSCG mandated national courts to check that contracting states had put in place rules to comply with art.3(2) TSCG. The wording of art.3(2) TSCG became weaker in the version of January 10, 2012: the rules in art.3(1) were to be enforced through provisions of binding force and permanent character, preferably constitutional, that are guaranteed to be respected throughout the national budgetary process, and the national courts’ role of monitoring compliance with the rules was removed. Article 3(2) was further weakened by the version available on January 19, 2012, which was itself modified by the current wording of the TSCG. The automatic triggering obligation is still present, albeit in art.3(1)(e) TSCG. However art.3(2) TSCG now provides that the rules in art.3(1) must take effect in

19

Council Directive 2011/85 on requirements for budgetary frameworks of the Member States [2011] OJ L306/41. Proposal for a Regulation of the European Parliament and of the Council on common provisions for monitoring and assessing draft budgetary plans and ensuring the correction of excessive deficit of the Member States in the euro area COM(2011) 821 final. 20

(2012) 37 E.L. Rev. June © 2012 Thomson Reuters (Professional) UK Limited and Contributors

The Stability, Coordination and Governance Treaty 237

national law “through provisions of binding force and permanent character, preferably constitutional, or otherwise guaranteed to be fully respected and adhered to throughout the national budgetary processes”.21 The shift from the earlier version is significant. The January 10 version was conjunctive: the national rules had to be enshrined in binding provisions, preferably constitutional, which were then guaranteed in the budgetary process. The final version is disjunctive: the national rules must be contained in binding provisions, preferably constitutional, or otherwise guaranteed in budgetary processes. A contracting state under the TSCG can therefore argue that its ordinary budget process meets the demands of art.3(1). It can claim that the precepts in art.3(1) have taken effect in national law even if they are not to be found in a statute or constitutional norm. It suffices in this respect that they take effect in ordinary budgetary processes, which may not be defined in statute at all.

TSCG: the interrelation between article 3(1), article 3(2) and article 8 The preceding discussion has been concerned with points relating to art.3(1) and art.3(2), the latter of which is enforceable through the ECJ via art.8. It is, however, important to note the difficulties, adjudicative and otherwise, presented by the interrelation of these provisions. It is art.3(2) that is enforceable via art.8, but breach of art.3(2) is itself dependent on breach of art.3(1). The reality is that it will often be difficult to determine with certainty whether the conditions for breach of art.3(2) are met, and these difficulties will be especially marked within the constraints of the classic adjudicative setting. It is naive to imagine that a contracting party accused of non-compliance with art.3(2) leading to a legal action before the ECJ will simply accept the finding in the Commission’s report made pursuant to art.8 that it has violated art.3(2) and hence art.3(1). The wording of art.3(1) leaves ample room for disagreement in this respect. Article 3(1)(b) is framed in terms of the contracting state ensuring “rapid convergence” towards its medium objective, which provides fertile ground for argument as to whether it has met this criterion, and this is so notwithstanding the fact that the Commission proposes the time-frame for such convergence. This time-frame must take account of “country-specific sustainability risks”, which may provide further opportunity for dispute as to whether this criterion was correctly assessed in relation to the particular contracting state. The difficulties of assessment and adjudication are exacerbated by the wording of art.3(1)(e), which requires the correction mechanism in art.3(2) to be triggered automatically, but only where there are “significant observed deviations from the medium-term objective or the adjustment path towards it”. The state taken to court pursuant to art.8 may moreover contend that its failure to meet its medium-term objective was due to “exceptional circumstances”, as defined in art.3(1)(c) and art.3(3)(b) and that the Commission report has not taken this adequately into account. The preceding discussion has focused on the difficulties encountered in finding whether there has been a breach of art.3(2). There are, however, further problems with the interrelation of art.3(1), art.3(2) and art.8 if such a breach is indeed proven to the satisfaction of the ECJ. The logic of art.8(1) is that the offending state has not put in place the correction mechanism as demanded by art.3(2), and that it must therefore do so. The demands thereby placed on the contracting state nonetheless remain unclear. The assumption underlying art.3(2) and art.8(1) is that if the contracting state has not put in place the correction mechanism its existing national budget will not comply with art.3(1). Article 8(2) tells us moreover that a fine can be imposed if a contracting state has not taken the “necessary measures” to comply with the ECJ’s judgment. It is not, however, possible to overturn a national budget in the manner that one might invalidate a law for violation of a constitutional right. The “necessary measures” to comply with the judgment would have to constitute movement by the contracting state towards adjustment of its national

21

Emphasis added. (2012) 37 E.L. Rev. June © 2012 Thomson Reuters (Professional) UK Limited and Contributors

238 European Law Review

budget in accord with the demands of a correction mechanism that complied with art.3(2). Whether it had done this would of course be contestable and might well be contested by the particular contracting state.

Treaty change: legality and legitimacy The fact that the form and content of the TSCG were influenced by political factors is scarcely surprising. The TSCG nonetheless also raises important issues of principle,22 including the legality and legitimacy of change in the European Union. It might be argued that no such issue arises, because the TSCG did not formally amend the Lisbon Treaty and art.2 TSCG makes clear that the TSCG is subordinate to EU law. This is true, but it does not obviate the present inquiry for the following reason. The Lisbon Treaty provides clear rules on amendment in art.48 TEU, with unanimity being required for change. There are in addition detailed Treaty provisions concerning enhanced co-operation in art.20 TEU and arts 326–334 TFEU, specifying the applicable rules if some but not all states wish to do certain things under the Lisbon Treaty. No attempt was made to use the rules on enhanced co-operation to attain the ends contained in the TSCG.23 The EU Summit in December 2011 attempted to change the Lisbon Treaty, but failed because of the UK veto. The Lisbon Treaty therefore embodies requirements before change can take place, namely the ordinary and the simplified revision procedure. These provisions enshrine the proposition that the rules of the game should not be altered unless all agree. They also contain criteria as to what should happen when all do not agree, by offering the possibility for enhanced co-operation. These amendment provisions might be different. They are not the only imaginable set of rules that could be devised for alteration of an international treaty, but it is common for such criteria to be applied and they are the criteria in the Lisbon Treaty. The assumption underlying the TSCG is that even though it has not been possible to attain unanimity, and even though the rules on enhanced co-operation have not been used, it is legitimate to attain the desired ends by a different route and EU institutions can be integral to such a project. This assumption must, however, be examined, not merely accepted as if it were uncontroversial. We need to tread carefully here. It is perfectly possible for all Member States to agree to a Treaty amendment, which then only applies to some of them. This is in effect what occurred when, for example, the Schengen Agreement was integrated into the EU Treaty. This is in accord with the principle of unanimity, since all Member States agree to an amendment, the substance of which will henceforward only apply to some of them. This was not, however, the situation with the TSCG. There was no amendment to the Lisbon Treaty authorising what became the TSCG for those who wished to become a party thereto. A necessary condition for the legitimacy and legality of the TSCG is therefore that Member States retain inherent power under public international law to make international agreements that are consistent with the Lisbon Treaty. This principle can be readily acknowledged,24 although its application can be complex in the post-Lisbon world, because the extent of any such inherent Member State power will be bounded by, inter alia, the competence provisions of the Lisbon Treaty. Thus the TSCG had to be carefully 22

See also, K. Armstrong, “Stability, Coordination and Governance: Was a Treaty such a Good Idea?” (March 8, 2012), http://eutopialaw.com/2012/03/08/stability-coordination-and-governance-was-a-treaty-such-a-good-idea/; K. Armstrong, “Responding to the Economic Crisis: Public Law in a Post-Lisbon Age” (February 21, 2012), http:/ /eutopialaw.com/2012/02/21/responding-to-the-economic-crisis-public-law-in-a-post-lisbon-age/ [Both accessed May 3, 2012]; M. Ruffert, “The European Debt Crisis and European Union Law’’ (2011) 48 C.M.L. Rev. 1777; R. D'Sa, “The Legal and Constitutional Nature of the New International Treaties on Economic and Monetary Union from the Perspective of EU Law” (2012) E.C.L. xi. 23 Article 10 TSCG provides that the contracting states “stand ready” to use the rules on enhanced co-operation, but this does not alter the point made in the text: the contracting parties did not attempt to use the rules on enhanced co-operation in order to attain their overall objectives under the Lisbon Treaty, rather than conclude a separate Treaty. 24 J.-C. Piris, The Future of Europe, Towards a Two-Speed EU? (Cambridge: Cambridge University Press, 2012), pp.138–139. (2012) 37 E.L. Rev. June © 2012 Thomson Reuters (Professional) UK Limited and Contributors

The Stability, Coordination and Governance Treaty 239 structured to apply to economic and not monetary union.25 This is because art.3 TFEU stipulates that the EU has exclusive competence over monetary policy for Member States whose currency is the euro, with the consequences that flow from art.2(1) TFEU: only the European Union may legislate and adopt legally binding acts, the Member States being able to do so only if empowered by the European Union or for the implementation of EU acts. The TSCG entails legal obligations for the signatory states, and the European Union did not formally empower the making of the TSCG. The TSCG would therefore be incompatible with arts 2 and 3 TFEU if it attempted to regulate monetary policy. The shared competence provisions of the Lisbon Treaty will also constrain the capacity of Member States to conclude agreements outside its framework. This is because art.2(2) TFEU stipulates that in areas covered by shared competence Member States can exercise their competence only to the extent that the European Union has not done so. Let us nonetheless accept for the sake of argument that the principle at the beginning of this paragraph, which is a necessary condition for the legitimacy and legality of the TSCG, is met here. The principle is not however a sufficient condition in this respect. It provides the foundation for Member States proceeding outside the Lisbon Treaties when development therein has been blocked by the veto. It provides no justification for EU institutions partaking in such a treaty, where there has been no agreement among the 27 Member States that the institutions should be able to do so. The passage of the TSCG prompted parliamentary inquiries in the United Kingdom as to what exactly the effect of the UK veto had been. It can be acknowledged that these inquiries were politically motivated and the simple answer would be that the veto prevented amendment of the Lisbon Treaty. There is nonetheless a serious dimension to this inquiry that is not addressed by the preceding answer. If Member States use the veto and hence prevent change to the Lisbon Treaty in accord with the rules of the game embodied therein, it is unclear why an institution that only exists as a creation of that very Treaty should be able to decide to pursue the vetoed objectives via a different treaty.26 The TSCG therefore raises the following question of principle: if the Member States fail to attain unanimity for amendment, and do not seek or fail to attain their ends through enhanced co-operation, does it mean that 12, 15, 21, etc. Member States can make a treaty to achieve the desired ends and the EU institutions can play a role therein,27 where the 27 Member States have not agreed to make use of the EU institutions, and where the treaty thus made deals with subject-matter covered directly by the existing Lisbon Treaty?28 This is the principle that underlies the TSCG, and can for ease be referred to as P1. It might be argued that the TSCG is only authority for a more limited principle, let us call it P1A, which embodies what might be termed the “Schmittian” exception.29 On this view the TSCG stands for the 25

Article 1(1) TSCG. It might be argued that the EU institutions have some “autonomous capacity” to participate in such ventures, provided only that they are not incompatible with EU law. The foundation of this autonomous capacity is, however, unclear. It could in any event only provide justification for institutional participation in the TSCG if the following proposition is also accepted: the autonomous capacity enables the EU institution to proceed in this manner even where some Member States have vetoed amendment to the Lisbon Treaty, and there is no formal agreement by all Member States that EU institutions can be used outside its remit. There is no justification for according the concept of “autonomous capacity” if it exists this degree of “normative force”, and very good reasons for not doing so. 27 There were some indications that the UK Prime Minister’s approach to use of EU institutions softened, and that the United Kingdom would not object to use of EU institutions: House of Lords, European Union Committee, The Euro Area Crisis (2012), para.89. There is, however, no evidence of formal consent to use of EU institutions, and there is evidence that government ministers continued to express reservations about use of the EU institutions, although they did not always speak with exactly the same voice: House of Commons European Scrutiny Committee, Treaty on Stability, Coordination and Governance: impact on the eurozone and the rule of law (2012), HC 1817, paras 13–24. 28 It will be seen below that there are further problems even if the powers are analogous to those in the existing Treaties. 29 C. Schmidt, Political Theology: Four Chapters on Sovereignty [1922] (trans. G. Schwab, MIT Press, 1988). 26

(2012) 37 E.L. Rev. June © 2012 Thomson Reuters (Professional) UK Limited and Contributors

240 European Law Review

following proposition: if the Member States fail to attain unanimity for amendment, and do not seek or fail to attain their ends through enhanced co-operation, the 12, 15, 21, etc. Member States can make a treaty to achieve the desired ends and the EU institutions can play a role therein, even where there is no consent to this by all Member States, but only where the issue is so important that the very survival of the European Union, or an important element thereof such as the euro, is at stake. There was no express attempt to legitimate the TSCG in such terms, but that does not in itself preclude such an ex post rationalisation. The argument must, however, be sustained, not merely stated. It would have to be shown that the conclusion of a treaty which would not come into effect for approximately one year played a vital role in the calming of bond markets that were reacting to European events on an hour-by-hour, day-by-day basis. It would have moreover to be shown that the TSCG had this impact, given that it added very little to what was contained in the Lisbon Treaty, plus the six-pack of accompanying regulations, made or revised in late 2011.30 It is important in evaluating P1 to consider the case law that the EU institutions can assist the Member States in attaining their collective goals outside the strict confines of EU law. Thus in European Parliament v Council and Commission, which was concerned with aid to Bangladesh, the ECJ held that the fourth indent of art.155 EEC did not prevent the Member States from entrusting the Commission with the task of co-ordinating a collective action undertaken by them on the basis of an act of their representatives meeting in the Council.31 A.G. Jacobs framed the principle as follows: in cases where Member States decided to act individually or collectively in a field within their competence, there was nothing to prevent them from conferring on the Commission the task of ensuring co-ordination of such action. It was for the Commission to decide whether to accept such a mission, provided that it did so in a way compatible with its duties under the EC Treaty.32 Similarly in European Parliament v Council dealing with the Lomé Convention, the ECJ stated that no provision of the Treaty prevented Member States from using, outside its framework, procedural steps drawing on the rules applicable to Community expenditure and from associating the Community institutions with the procedure thus set up.33 The precise reach of these authorities is unclear, and they are distinguishable in several respects from the TSCG. Thus the preceding cases were dealing with limited use of Community institutions to act primarily as agents to co-ordinate the respective schemes and organise payment of money thereunder. This was done with the assent of the Member States. It would be a significant extension of the reasoning therein to apply it to the TSCG, in order to justify EU institutional involvement in a detailed regulatory regime for the signatory states, in circumstances where inclusion of such obligations in the Lisbon Treaty was precluded by use of the veto. The TSCG was not simply about using an EU institution as a conduit for payment of funds, nor was it an agreement of all Member States reached within the Council, in the manner of Bangladesh aid. If the ECJ’s reasoning is extended in this manner it means acceptance of P1 and acceptance also of the implications that P1 has for the way in which the European Union broadly conceived develops. It would sanction EU institutional involvement in a treaty made by some Member States, covering subject-matter dealt with in the Lisbon Treaty in circumstances where amendment to the Lisbon Treaty had been rejected by certain states, where there was no formal agreement of all states within the confines of the Lisbon

30

The markets might react badly if the TSCG were now to be undermined, even if the TSCG had no effect thus far on contracting state behaviour because it was not yet in force. Insofar as this might occur it does not undermine the point made in the text, but rather indicates something paradoxical about the “logic” of markets. 31 European Parliament v Council and Commission (C-181 and 248/91) [1993] E.C.R. I-368; [1994] 3 C.M.L.R. 317 at [20]. 32 Opinion of A.G. Jacobs in Parliament v Council and Commission (C-181 and 248/91) [1993] E.C.R. I-3685 at [29]. 33 European Parliament v Council (C-316/91) [1993] E.C.R. I-653; [1994] 3 C.M.L.R. 149 at [41]. (2012) 37 E.L. Rev. June © 2012 Thomson Reuters (Professional) UK Limited and Contributors

The Stability, Coordination and Governance Treaty 241 Treaty allowing for such EU institutional involvement,34 no attempt to pursue the desired outcome through enhanced co-operation, and hence no imperative to comply with the protective conditions for use of this co-operation built into the Lisbon Treaty. The non-EU treaty thus made could nonetheless markedly affect the way in which a subject-matter area covered by the Lisbon Treaty is regulated, indeed that might be its very purpose, as is the case with the TSCG. There are in any event further issues to be considered, concerning the powers of the EU institutions under any such non-EU Treaty. It is to these that we now turn.

EU institutions and the TSCG: conferral of new functions The TSCG raises important issues of principle concerning the functions of EU institutions operating outside the confines of the Lisbon Treaty. It will be argued that it is contrary to the Lisbon Treaty and to legal principle for new functions to be conferred on an EU institution by a treaty such as the TSCG. The contrary conclusion would entail the following proposition, let us call it P2: it is open to a group of Member States outside the confines of the existing Treaties to decide in agreement with an EU institution that it should be empowered or mandated to perform certain tasks not specified in the existing EU Treaties. Article 13 TEU stipulates that each EU institution must act within the limits of the powers conferred on it by the EU Treaties and in conformity with the procedures, conditions and objectives set out therein. This is reinforced by art.5(2) TEU, which provides that the European Union must act within the limits of its competence, and that competence not conferred on the European Union remains with the Member States. It would be wrong if a Treaty other than the Lisbon Treaty could confer new powers or functions on the EU institutions, even if those functions are exercised outside the Lisbon Treaty. This conclusion is reinforced from the broader perspective of legal principle. P2 is not tenable, and that is so irrespective of whether the relevant states are willing to pay for the new function from their own budgets, and irrespective of whether the EU institution agrees with the new power/duty. It cannot suffice to validate such a conferral that it relates in some way to existing institutional powers and duties under the Lisbon Treaty. Nor can it suffice in this respect that the Lisbon Treaty is accorded formal superiority over the other agreement. There are procedural and substantive reasons why the grant of new powers or functions in this way is unacceptable. In procedural terms, the powers and functions of EU institutions are specified in the formal Treaties after considerable deliberation, as attested to by the decade-long discourse on Treaty reform in which debate over institutional power was centre stage. The desirability of any addition to the functions of any EU institution is something on which all other EU institutions and all states might have a view, irrespective of whether a particular EU institution or state is party to a treaty made outside the formal confines of the Lisbon Treaty. There is no guarantee whatsoever that there will be opportunity for this deliberation when new powers are granted to an EU institution in a treaty made outside the confines of the Lisbon Treaty. It may indeed not be apparent that this has occurred until the ink is dry on the final version of the treaty, and may be not for some time thereafter. In substantive terms, the EU institutions and states might differ both between and among themselves as to whether they believe that an additional function is compatible with current powers and functions, and they might differ also as to whether they believe that the new function can be “hermetically sealed” from those functions performed by the institution within the Lisbon Treaty. The very meaning of compatibility is itself under-theorised in this context. This is not the place for a general exegesis on this concept. Suffice it to say that a narrow conception of compatibility would unduly attenuate the substantive inquiry. It must also embrace the objection voiced by the EU institution or state that is not party to an 34

See also Piris, The Future of Europe (2012), p.127, to the effect that agreement of all Member States to use of the EU institutions in a non-EU Treaty would be necessary. (2012) 37 E.L. Rev. June © 2012 Thomson Reuters (Professional) UK Limited and Contributors

242 European Law Review

agreement outside the Lisbon Treaty, which believes that conferral of a new power on an EU institution might deleteriously affect the operation of the European Union itself, by embroiling that institution in issues for which it was ill suited, with negative consequences for its role under the Lisbon Treaty, and more generally for the European Union. The determination of the powers/functions of an EU institution has always been crucially dependent on calculations as to the advisability of according it such authority. This is an inherently political issue, which cannot be resolved by purely legal analysis. It would be wrong if the grant of a new function to an EU institution by a non-EU Treaty was judged by less demanding criteria. Consider in this respect two brief examples. A treaty made outside the Lisbon Treaty is the foundation for involvement with a non-EU state. The initiative could not be undertaken within the European Union because certain states objected. An EU institution is willing to take part and is given new functions. The non-signatories object because they believe that the EU institution is ill-equipped to take on the new function and that in doing so its role within the European Union will be deleteriously affected. Consider a further example drawn from the TSCG. Let us assume that it has accorded new or extended functions to an EU institution. Non-signatory states might plausibly feel that this is unwise, irrespective of whether it is formally compatible with the Lisbon Treaty, and could have negative consequences on the European Union. The TSCG strategy is to toughen oversight over national economic policy, to ratchet up the controls over national budgets. It may, however, be felt with justification that this will increase tensions between the Commission and signatory states, and that the Commission lacks the political authority to undertake such oversight effectively. The consequence might then be national resistance to EU institutional oversight over economic policy, even within the framework of the rules that apply under the Lisbon Treaty. The preceding discussion leaves open the issue as to whether the TSGC has conferred new functions/powers on the EU institutions. It may be contestable whether a function conferred by the TSCG constitutes a new task or function for an EU institution. This is more especially so because institutional functions can be specified either in the Lisbon Treaty or in EU legislation made pursuant thereto. This can be exemplified by considering art.3(2) TSCG, which provides that the contracting parties must put in place, at national level, the correction mechanism mentioned in art.3(1)(e) on the basis of common principles to be proposed by the European Commission, concerning in particular the nature, the size and the time frame of the corrective action to be undertaken and the role and independence of the institutions responsible at national level for monitoring the observance of the rules. There are, however, obligations akin to those in art.3(2) in existing EU legislation. Thus Directive 2011/85,35 in arts 5–7, contains obligations on all Member States, except the United Kingdom, to have numerical rules in place in their national law to promote compliance with its obligations deriving from the TFEU in the area of budgetary policy over a multi-annual horizon. These rules should promote compliance with reference values on deficit and debt set in accordance with the TFEU. Member States must comply with the Directive by the end of 2013.

EU institutions and the TSCG: use of existing powers The preceding analysis leaves open the issue as to whether there is any legal difficulty in EU institutions using their existing powers under the Lisbon Treaty and EU legislation in the context of a treaty such as the TSCG. This is important, given that the TSCG does allow EU institutions, notably the Commission, to use powers that it has under the Lisbon Treaty or EU legislation in the context of the TSCG. Commentary on the TSCG during its passage was often predicated on the assumption that this was not legally problematic. Thus, provided that the TSCG did not entail grant of new functions/powers to EU institutions then it was unproblematic. This cannot be correct, for the reasons explained below. It is important at the outset to

35

Directive 2011/85 on requirements for budgetary frameworks of Member States [2011] OJ L306/41. (2012) 37 E.L. Rev. June © 2012 Thomson Reuters (Professional) UK Limited and Contributors

The Stability, Coordination and Governance Treaty 243

specify what we mean by the EU institutions exercising “existing powers” within the confines of the TSCG. This can bear three different meanings.

Taking cognisance in the TSCG of powers in the Lisbon Treaty or EU legislation It could mean that the TSCG simply takes cognisance of powers in the Lisbon Treaty or legislation made there under. Thus, for example, art.10 TSCG provides that the contracting states whose currency is the euro stand ready to use art.136 TFEU, and that all contracting states should be willing to use the rules on enhanced co-operation in art.20 TEU and arts 326–334 TFEU. This is not problematic in terms of legal principle.36 There is nothing wrong with a treaty making reference to existing provisions of the Lisbon Treaty, and indicating that the contracting parties intend to use such provisions in accordance with the relevant conditions.

Use of a specific power in the TSCG from the Lisbon Treaty or EU legislation A second meaning of “existing power” is that an EU institution such as the Commission uses a specific power or function that it possesses under the Lisbon Treaty or EU legislation in the context of the TSCG. This is exemplified by art.4 TSCG, which is framed expressly in terms of the relevant provisions of the Stability and Growth Pact and art.126 TFEU.37 This is legally problematic for the following reason. The fact that a power is recognised in the Lisbon Treaty or EU legislation does not per se legitimate recognition and use of the same power in a different treaty context. The TSCG cannot in itself legitimate use of a power given under the Lisbon Treaty or EU legislation. The TSCG cannot pull itself up by its own legal bootstraps. If this were possible it would mean subscribing to the following proposition, let us call it P3: a treaty could be made outside the confines of the Lisbon Treaty and the framers of the former could decide that institutional powers accorded under the Lisbon Treaty or EU legislation could apply within the new treaty ordering. P3 is clearly untenable. Thus the statement in the Preamble to the TSCG that when reviewing and monitoring budgetary commitments under the TSCG, the Commission will act within the framework of its powers as provided by arts 121, 126, 136 TFEU, cannot in itself determine the issue of whether those articles of the TFEU are indeed capable of being used in this way in the TSCG. Whether the same power can be used in a different institutional context must as a matter of principle depend on interpretation of the Lisbon Treaty or EU legislation. It would have to be argued that the proper interpretation of the relevant provisions of the Lisbon Treaty was such that the Treaty powers, and those in EU legislation, could also be used by the institutions pursuant to a different treaty, which was not ratified by all Member States. It might be possible to reach this conclusion, but it is not self-evident or automatic. This is because the natural interpretation of EU legislation is that the institutional powers and duties contained therein apply in the legal context that is the European Union. The Lisbon Treaty or EU legislation might of course empower an EU institution to take action outside the physical and legal confines of the European Union. This does not alter the point made here, since in such circumstances the legal authority for an EU institution to act in this manner flows from the Lisbon Treaty provision or EU legislation. The default assumption is that EU legislation and the powers accorded to the institutions apply and are intended to apply within 36 There are difficulties concerning the specification in art.10 TSCG of the conditions for enhanced co-operation, which do not cohere with those in art.20 TEU and arts 326–334 TFEU. This is, however, a separate issue. If the contracting states wish to make use of enhanced co-operation they have to comply with all the conditions in the Lisbon Treaty. 37 See also, for example, art.3(1)(b) TSCG: progress towards the medium term objective is to be decided “in line” with the provisions of the revised Stability and Growth Pact; art.8(2) TSCG using criteria under art.260 TFEU to determine penalties for non-compliance with an ECJ judgment under art.273 TFEU.

(2012) 37 E.L. Rev. June © 2012 Thomson Reuters (Professional) UK Limited and Contributors

244 European Law Review

the legal entity that is the European Union. It would therefore have to be argued that an institutional power given under, for example, the Stability and Growth Pact could be interpreted to apply outside the legal entity that is the European Union and be used in the context of the TSCG. It may be possible to sustain such a conclusion, but the justificatory exercise must be undertaken. To reject the preceding argument would mean subscribing to P3: institutional powers granted under the Lisbon Treaty or EU legislation could be used, “cut and pasted”, to a different treaty by the authors of the non-EU treaty, which had not been ratified by all Member States. This proposition is not legally or politically tenable. Whether any particular power granted to an institution under the Lisbon Treaty or EU legislation can be used in a different treaty context must depend on interpretation of the relevant Lisbon Treaty provision or EU legislation to sustain the conclusion that it can be used in this manner. In deciding this interpretive issue there is moreover no reason why the signatories to a treaty such as the TSCG should have any privileged status as compared with non-signatories.

Use of a power in the TSCG that is analogous to that under the Lisbon Treaty or EU legislation There is a third meaning of the phrase “existing power”, which must be disaggregated from the second. It captures the idea that an EU institution such as the Commission exercises a power under the TSCG that is analogous to one it possesses under the Lisbon Treaty or EU legislation. This is exemplified by art.3(2) TSCG, which is framed in terms of the Commission devising principles concerning corrective action that may be analogous to those in EU legislation, but art.3(2) does not directly seek to use such powers, and thus “existing power” carries this third connotation. Article 7 TSCG is of the same genre. It imposes a reverse qualified majority voting requirement, whereby contracting states prima facie commit to abide by the Commission’s decision, but can decide not to do so by qualified majority. There are circumstances where reverse qualified majority voting applies in EU legislation,38 but art.7 TSCG is not expressly based on such provisions, nor would this have been straightforward in legal terms. Thus insofar as art.7 can be regarded as use of “existing power”, it carries this third interpretation: the TSCG contains an institutional power that is analogous to that in the existing Lisbon Treaty or EU legislation. This is also legally problematic. The fact that an EU institution has power pursuant to the Lisbon Treaty or EU legislation to do certain things, cannot per se legitimate use of an analogous power pursuant to a different treaty. Thus to take an example, the fact that arts 5–7 of Directive 2011/8539 contain obligations on all Member States (except the United Kingdom) from 2013 to have numerical rules in place in their national law to promote compliance with obligations from the TFEU in the area of budgetary policy over a multi-annual horizon does not in itself legitimate use by the Commission of analogous powers pursuant to art.3(2) TSCG Treaty. The fact that a power under the TSCG is analogous to a power that is exercised under EU legislation is just that, a fact. It cannot in itself cloak with legal legitimacy the exercise of an analogous power under the TSCG. The legal legitimacy of such power can only be provided in the following manner, let us call this P4. It would have to be argued that an EU institution should be allowed to exercise powers in a non-EU context that are closely analogous to those that it exercises under the Lisbon Treaty or EU legislation. This argument might be sustained, but it is not self-evident. P4 is moreover certainly too broad to be sustainable in its present formulation, since it would on its face legitimate in a non-EU context use of any institutional power that was analogous in some way to an existing power under the Lisbon Treaty or EU

38 See e.g. Regulation 1174/2011 on enforcement measures to correct macroeconomic imbalances in the euro area art.3(3) [2011] OJ L306/8. 39 Directive 2011/85 on requirements for budgetary frameworks of the Member States [2011] OJ L306/41.

(2012) 37 E.L. Rev. June © 2012 Thomson Reuters (Professional) UK Limited and Contributors

The Stability, Coordination and Governance Treaty 245

legislation. It is however not easy to narrow P4 down, while retaining something that could still be regarded as a meaningful principle.

EU institutions and the TSCG: ECJ The framers of the TSCG were eager for there to be some legal mechanism to enforce the balanced budget obligation in art.3 TSCG. This is provided in art.8 TSCG, which applies in the event of breach of the corrective mechanism in art.3(2) TSCG. The limits of art.3(2) charted above should be firmly borne in mind when reading the material in this section. Those limits mean that it will be more difficult to prove a violation of art.3(2) in its final formulation than it would have been if the tougher, earlier formulations had found their way into the final TSCG. Article 8(1) TSCG provides40 for recourse to the ECJ via art.273 TFEU, which accords the ECJ jurisdiction in any dispute between Member States which relates to the subject-matter of the EU Treaties if the dispute is submitted to it under a special agreement between the parties. Article 8(2) TSCG provides for a further action before the ECJ leading to a penalty if a contracting state has been found not to have complied with the original judgment under art.273 TFEU. Article 8(1) TSCG is framed as follows: “The European Commission is invited to present in due time to the Contracting Parties a report on the provisions adopted by each of them in compliance with Article 3(2). If the European Commission, after having given the Contracting Party concerned the opportunity to submit its observations, concludes in its report that such Contracting Party has failed to comply with Article 3(2), the matter will be brought to the Court of Justice of the European Union by one or more Contracting Parties. Where a Contracting Party considers, independently of the Commission’s report, that another Contracting Party has failed to comply with Article 3(2), it may also bring the matter to the Court of Justice. In both cases, the judgment of the Court of Justice shall be binding on the parties to the proceedings, which shall take the necessary measures to comply with the judgment within a period to be decided by the Court of Justice.”

Legitimacy of use of article 273 TFEU The initial issue is whether art.273 TFEU can be used in such circumstances. This is a matter of EU law to be decided by the ECJ. The Council Legal Service produced a paper defending the legitimacy of recourse to art.273 TFEU.41 This is surely correct insofar as inter-state actions are concerned. The rationale underlying art.273 TFEU is that it obviates Member States using a settlement mechanism, such as arbitration, outside the European Union, where a dispute might involve issues related to EU law. Access to the ECJ in such instances thereby protects the unity of EU law and its interpretation. The requirement for a special agreement dealing with a defined species of case is satisfied because recourse to the ECJ is limited to the circumstances of breach of art.3(2) TSCG. The requirement that the dispute relates to the subject-matter of the EU Treaties is also met, because there is a proximate connection between the TSCG and the Lisbon Treaty: the former deals with aspects of economic union and art.3 TSCG is closely related to the provisions of the Stability and Growth Pact.

Legitimacy of the Commission’s role in article 8 TSCG and article 273 TFEU The preceding analysis legitimates recourse to art.273 TFEU pursuant to art.8 TSCG insofar as inter-state actions are concerned. This still leaves open the legitimacy and legality of the Commission’s role under 40 41

Article 8(3) TSCG. Council of the European Union 5788/12 (Brussels, January 26, 2012). (2012) 37 E.L. Rev. June © 2012 Thomson Reuters (Professional) UK Limited and Contributors

246 European Law Review

art.8 TSCG. The rationale for this role is immediately apparent. Member States are very reluctant to sue each other. If this were the only method of getting a case before the ECJ then such adjudication would remain in practical terms a dead letter. The problem was, however, that art.273 TFEU could not be read so as to allow the Commission to bring an action in its own name, in the manner akin to an infringement action, and such an action would moreover have been problematic in the light of art.126(10) TFEU, which precludes recourse to arts 258 and 259 TFEU in relation to art.126(1)–(9) TFEU. This was the rationale for the “solution” adopted in art.8 TSCG. The Commission is “invited” to present a report on contracting parties’ compliance with art.3(2) TSCG. If the Commission then concludes that a contracting party has failed to comply with art.3(2) TSCG, the matter “will” be brought to the ECJ by one or more of the contracting parties. The Council Legal Service defended the legality of this strategy.42 It acknowledged that the Commission’s report would play a decisive role in the subsequent litigation, but denied that this made the Commission the initiator of the legal action or a party thereto. The Council Legal Service argued moreover that it was the choice of the contracting party or parties as to whether to bring an action, and that this was so notwithstanding the fact that they had no discretion, in the sense that they had to do so following the Commission’s negative report: “an act of a Member State taken in a situation of ‘tied competence’ remains an act of this Member State”.43 I respect this reasoning, but do not agree with it or the conclusion drawn from it. It is of course true that the Commission is not in a formal sense a party to the legal action. This cannot conceal the substantive reality, which is that art.8 TSCG is seeking to do by the back door what it cannot do by the front. Article 8 TSCG gives the Commission the “trigger” as to whether a legal action should be brought. Commission oversight of the balancing of budgets is central to the TSCG schema and hence the requirement of an “invitation” is purely formal, a sense which is heightened by the very fact that art.8 TSCG is framed in terms of a collective invitation. More important is the fact that if the Commission produces a negative report on a contracting state, this triggers a mandatory obligation on another contracting party to bring the recalcitrant state to the ECJ. This is clear from the wording of art.8 TSCG, which states that the contracting state “will” bring such an action. This wording connotes a clear obligation, as accepted by the Council Legal Service.44 This conclusion is moreover reinforced by the contrast between the first and second parts of art.8(1) TSCG: if there is a negative Commission report a contracting state “will” bring an action, whereas in the absence of Commission intervention a contracting state “may” sue another state for non-compliance with art.3(2) TSCG. The former clearly connotes a legal obligation since otherwise the distinction between the first and second parts of art.8(1) TSCG falls away. This interpretation gains added force by the Annex to the TSCG concerning the arrangements as to which state will bring the action under art.8 TSCG.45 The Annex provides that the applicant contracting states “will be” the states that hold the Presidency of the Council in accord with art.1(4) of the Council Rules of Procedure, and that the application under art.273 TFEU “will be” lodged by such states in the ECJ registry within three months of receipt of the Commission report that a contracting state has not complied with art.3(2) TSCG. Thus the wording of art.8 TSCG, read together with the Annex, leads inexorably to the conclusion that the relevant contracting states are obliged to bring an action based on a negative Commission report, and that this very report will be the basis of the action.46 42

Council of the European Union 5788/12 (Brussels, January 26, 2012). Council of the European Union 5788/12 (Brussels, January 26, 2012), p.5. 44 Council of the European Union 5788/12 (Brussels, January 26, 2012), pp.4, 5. 45 Minutes of the Signing of the Treaty of Stability, Coordination and Governance in the Economic and Monetary Union (March 2, 2012), Annex. 46 It was argued by the Foreign and Commonwealth Office in the United Kingdom (HC 1817–111, February 23, 2012) that the contracting states were not obliged to bring a legal action, because the language of art.8 TSCG was framed in terms of “will” not “shall”. I do not believe that this is correct for the following reasons. First, the argument 43

(2012) 37 E.L. Rev. June © 2012 Thomson Reuters (Professional) UK Limited and Contributors

The Stability, Coordination and Governance Treaty 247

The Council Legal Service’s argument is ultimately based on formalism: provided that the Commission is not a formal party to the action then art.273 TFEU can be used in the manner envisaged by art.8 TSCG. This formalism does injustice to the wording and structure of art.8 TSCG for the reasons given above, but there is a deeper problem with such formalism. Let us imagine that a Member State attempted to structure its relations so as to avoid clear obligations under EU law. Let us make the analogy tighter. The Member State seeks to avoid its obligations by using other players, even though they have a duty to act when directed by the Member State, and in accord with its findings. The ECJ, the EU institutional legal services and the great majority of academics would rightly conclude that we should look to the substance and not the form when considering the legality of such practices. They would properly condemn such recourse to formalism. The same principle should apply in relation to powers of the EU institutions. If art.273 TFEU cannot accommodate enforcement actions brought by the Commission, we should not allow this injunction to be circumvented by devices that render a contracting state the “formal plaintiff”, when the imperative to bring the action and the substance of the argument to be made are determined by the Commission. The stakes concerning the legality of the Commission’s role in art.8 TSCG are therefore higher than might be initially thought. It is the integrity and equality of legal reasoning within the EU legal order that is at stake. If the legality of art.8 TSCG is upheld on the formalistic reasoning of the Council Legal Service it is then incumbent on those who support such reasoning to explain why such formalism can be used to the advantage of the EU institutions when it would be rejected in relation to Member States.

Conclusion There will be no attempt to summarise the preceding arguments. There are nonetheless certain legal and political implications of the TSCG not touched on by the preceding analysis that should be briefly mentioned here.

Legal: transparency and complexity of legal provisions The TSCG will exacerbate problems of transparency and complexity that already beset this area, even for those skilled at navigating this complex terrain. There were, prior to the TSCG, three layers of legal rules pertinent to control over national economic policy: provisions of the Lisbon Treaty, EU legislation and the broad economic policy guidelines. These rules were complex and created difficulties in terms of transparency, because they were spread across primary Treaty provisions, complex EU legislation and high level soft law. The TSCG adds a fourth layer to the existing schema, thereby exacerbating difficulties of complexity and transparency, more especially because, as seen above, there is very significant overlap between detailed obligations incumbent on states through the six-pack of EU legislation, and the obligations in the TSCG.

advanced in the text above. Secondly, it is clear as a matter of first principle that the word “will” is fully capable of connoting an obligation, and is very commonly used in that manner, as exemplified by the common formulation: “if you supply me with 50 tons of wheat, I will pay you £1,000.” Thirdly, the fact that a duty or obligation is dependent on acceptance by the person so obliged is no barrier to the existence of the obligation. Thus the fact that the contracting states have consented to the obligation incumbent on them under art.8 TSCG is no barrier to the recognition that the bringing of an action pursuant to a negative Commission report on a particular state is obligatory for the other contracting states. (2012) 37 E.L. Rev. June © 2012 Thomson Reuters (Professional) UK Limited and Contributors

248 European Law Review

Political: a divided union There was much talk at the time of the UK veto in December 2011 that it would lead to a radical division within the European Union, with the United Kingdom and the Czech Republic on the fringes and excluded de facto if not de jure from important policy discussion. The jury is still out on this issue. It may happen. It may prove to be the case that the 25 signatories of the TSCG forge a closer inner circle, in which they discuss not only issues directly pertinent to the economic union, but use the Euro Summits to broker deals about single market policy from which the United Kingdom and the Czech Republic are effectively excluded. There are nonetheless reasons to be more cautious about this picture of a radically divided European Union 25/2. The TSCG was weakened during its passage and contains far less that goes over and beyond the obligations already contained in the Lisbon Treaty plus EU legislation than was initially thought after the December Summit. The image of a divided EU, split 25/2, is predicated moreover on the assumption that the 25 will share a common vision that is distinct from the United Kingdom and Czech Republic. This is unlikely to be borne out in reality. If the precepts contained in the TSCG are taken seriously it will lead to increased EU oversight over domestic economic affairs and to inter-state legal actions through art.8 TSCG. This is unlikely to generate inter-state harmony between the 25 signatories. It is one thing to subscribe to the principles in the TSCG, it is another to have them applied within one’s own domestic polity, and yet another to have them applied against one’s own state via legal means. It should perhaps not be forgotten in this respect that it was France and Germany that violated the rules of the Stability and Growth Pact as they existed in 2003–2004, which ended up in legal action before the EU courts.

(2012) 37 E.L. Rev. June © 2012 Thomson Reuters (Professional) UK Limited and Contributors