ORIGINAL PUBLISHED ON EU LAW ANALYSIS
by Alicia Hinarejos, Downing College, University of Cambridge; author of The Euro Area Crisis in Constitutional Perspective
One of the features of the response to the euro area crisis has been the resort to intergovernmental arrangements that largely avoid judicial and parliamentary control at the EU level. The paradigmatic example has been the European Stability Mechanism(ESM), created by the euro area countries in order to provide financial assistance to countries in difficulties, subject to conditionality. The ESM was created through the adoption of an international agreement, the ESM Treaty; it is an intergovernmental mechanism created outside the framework of the EU, but with significant links to it. Most importantly, the ESM ‘borrows’ two EU institutions, namely the Commission and the European Central Bank (ECB), in order to carry out its functions. (Those two bodies, along with the International Monetary Fund, constitute the so-called ‘Troika’ which oversees the controversial bail-out processes).
The nature of the ESM and the way it operates raises important questions regarding judicial protection. As mentioned above, ESM financial assistance is granted after strict conditions have been negotiated and agreed in a Memorandum of Understanding. These conditions typically require the Member State in receipt of assistance to adopt ‘austerity’ reforms that have an impact on its citizens—understandably, these citizens may wish to challenge the validity of these conditions, often questioning their compliance with the EU Charter of Fundamental Rights.
In Pringle, the Court stated that Member States were not within the scope of application of the Charter of Fundamental Rights when creating the ESM, or presumably when acting within its framework. This meant that their actions could not be reviewed for accordance with the Charter (although they can still be reviewed in national courts for compliance with purely national law, or in the European Court of Human Rights for compliance with that treaty). This, however, left open the question of whether, or in what form, the Charter applied to the EU institutions—the Commission and the ECB—when operating under the ESM. This is the question that the Court of Justice had to answer in the Cyprus bailout cases (Ledra Advertising and Mallis).
Cyprus wrote to the Eurogroup in 2012 to request financial assistance, and it was in receipt of ESM assistance from 2013 until 2016. The country had to recapitalize its biggest bank and wind down its second. The Memorandum of Understanding stipulated that bondholders and depositors would bear part of the cost. As a result, the applicants suffered substantial financial losses and turned to the EU courts: first to the General Court, and then on appeal to the Court of Justice. They were challenging the validity of the Memorandum of Understanding (Ledra Advertising), as well as a Eurogroup statement that referred to the conditions attached to the bailout (Mallis); they also asked for damages. In their view, the involvement of EU institutions—the Commission and the ECB—in the adoption of these measures meant that it should be possible for individuals to challenge their validity at the EU level; they also argued that these institutions’ involvement should trigger the EU’s non-contractual liability.
The General Court dismissed all complaints as inadmissible. It decided that neither the Memorandum of Understanding nor the Eurogroup statement could be the subject of an action for annulment; the former because it is not a measure adopted by an EU institution, the latter because it is not intended to produce legal effects with respect to third parties. It considered that the involvement of the Commission and the ECB in the adoption of these measures was not enough to attribute authorship to them, or to trigger the non-contractual liability of the Union.
The Court of Justice agreed, in part, with the General Court: neither the Eurogroup statement (Mallis) nor the Memorandum of Understanding (Ledra Advertising) can be the object of an action for annulment. The Court insisted again on its finding in Pringlethat ESM acts fall outside the scope of EU law; the involvement of the Commission and the ECB does not change this, and is not enough to attribute authorship of these acts to them for the purposes of judicial review.
Yet the Court goes on to reveal a twist in Ledra Advertising: even if they are not its authors, the involvement of the Commission and the ECB in the adoption of an ESM Memorandum of Understanding may be unlawful, and thus able to trigger the non-contractual (damages) liability of the EU. The Commission, in particular, retains its role as ‘guardian of the Treaties’ when acting within the ESM framework. As a result, the Commission should not sign an ESM act if it has any suspicions as to its accordance with EU law, including the Charter.
The Court repeated the usual rules for the EU institutions to incur non-contractual liability: (a) they must have acted unlawfully, (b) damage must have occurred, and (c) there must be a causal link between the unlawful act and the damage. Not just any unlawful act gives rise to damages liability: there must be ‘a sufficiently serious breach of a rule of law intended to confer rights on individuals’. While the right to property enshrined in the Charter was a ‘rule of law intended to confer rights on individuals’, that right is not absolute: Article 52 of the Charter allows interference with some Charter rights. Applying that provision, the Court came to the conclusion that the measures contained in the Memorandum did not constitute a disproportionate and intolerable interference with the substance of the applicants’ right to property, given ‘the objective of ensuring the stability of the banking system in the euro area, and having regard to the imminent risk of [greater] financial losses’.
So individuals can challenge the EU institutions’ bailout actions by means of an action for damages (non-contractual liability), but not by means of an annulment action. It is useful to remember that the rules on access to the EU courts as regards those two types of remedy are quite different. The standing rules are more liberal for damages actions: it’s sufficient to allege that damages have been suffered as a result of an unlawful act by the EU, whereas it’s much harder to obtain standing to bring annulment actions. The time limits are more liberal too: individuals have five years to bring damages cases, but only two months to bring actions for annulment. On the other hand, the threshold to win cases is much higher for damages cases: any unlawfulness by the EU institutions leads to annulment of their actions, but only particularly serious illegality gives rise to damages liability.
In any case, we know from the Court’s ruling that breaches of at least some Charter provisions within the ESM framework could potentially give rise to damages liability. In the anti-austerity context, it should be noted that social security and many social welfare claims fall within the scope of the right to property, according to the case law of the European Court of Human Rights. In the case at stake, the Court did not discuss the proportionality of the interference with the applicant’s rights at much—or any—length, but it is clear that future applicants will face an uphill struggle.
On the whole, Ledra Advertising is a welcome change from other cases concerning measures adopted as a result of a bailout, where the Court’s approach had been to deny the existence of any link to EU law. Indeed, it seems unavoidable that the EU should bear the appropriate degree of responsibility when allowing its EU institutions to operate within the ESM framework. This is not to say that it will be easy for individuals to be awarded damages; as this case illustrates, the threshold is extremely high. Moreover, while a significant aspect of the role of the EU institutions within the ESM has been clarified, questions remain concerning the judicial and democratic accountability of this mechanism. Overall, however, Ledra Advertising is a step in the right direction.