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(No) Haircut for Hellas?

A Short and Critical Reply to Armin Steinbach, ‘The “Haircut” of Public Creditors under EU Law’, 13 EuConst (2016) p. 223

Published online by Cambridge University Press:  07 November 2016

Alexander Thiele
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Abstract

Smouldering European debt crisis: overall public debt ratio as problem – Haircut as possible solution – Greece’s current creditors: public institutions (Member States and European Central Bank) – Insuring a sound budgetary policy as main goal of Article 125 TFEU – Consequences for a haircut by the Member States – The mandate of the European Central Bank and the prohibition of direct purchases of Member State bonds – Consequences for a haircut by the European Central Bank – Haircut as political question open for democratic debate

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Debate
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European Constitutional Law Review , Volume 12 , Issue 3 , December 2016 , pp. 520 - 537
Copyright
Copyright © The Authors 2016 

The Smouldering Crisis

Even though the media in Europe have recently been preoccupied with the refugee crisis, the terror attacks in various European cities and, above all, the consequences of the British people’s vote in favour of BrexitFootnote 1 , the European debt crisisFootnote 2 remains far from being resolved. It has been smouldering in the background since the mid-2015 agreement on a third rescue package for Greece and will surely stay in the media’s limelight for the remainder of 2016. The situation can be described as anything but positive – not only, but especially, in Greece. Even though a direct financial bankruptcy seems to have been averted, and creditors appear to be more or less content with the economic reforms agreed upon, going forward it may be the overall public debt ratio that hinders the success of the various rescue efforts undertaken in the last six years. Contrary to what one might suppose, the overall public debt ratio has not fallen significantly since reform measures commenced in 2010. The financial cutbacks initiated by the Greek government in order to comply with the austerity measures demanded by the credit granting Member StatesFootnote 3 severely lowered the gross domestic productFootnote 4 and thereby prevented a substantial reduction of the overall public debt ratio – despite a ‘voluntary’ haircut of private creditors in 2012.Footnote 5 Although economists disagree on the point at which overall public debt ratio needs to be viewed as a problem,Footnote 6 there is strong consensus that a debt ratio of approximately 190% of the gross domestic product including a high level of foreign debt – as is the case with Greece – is clearly not sustainable in the long run and will lead to the respective state’s default at some point in the (near) future. The existing debt burden in Greece could therefore jeopardise the success of all financial rescue attempts – despite the massive economic reform efforts Greece and its people have undertaken since 2010.

Under these conditions it is thus hardly surprising that financial debt relief in the form of a further haircut is increasingly becoming a subject of discussion. Although the comprehensive proposals for the restructuring of Greece’s debts, as presented by the International Monetary Fund in May 2016, do not explicitly specify such a haircut,Footnote 7 the recommended measures would have nearly the same effect – and it bears mentioning at the very least that the Fund has, in the past, mentioned the possibility of a haircut.Footnote 8

Yet, while economistsFootnote 9 and politicians currently debate the economic expediency of such a (final) step in resolving the European debt crisis, Armin Steinbach recently argued in this Review that European law – namely Articles 125, 127 and 123 TFEU – would prohibit a ‘Haircut for Hellas’ at least as far as public creditors were concerned.Footnote 10 In this short reply to Steinbach’s article I would like to point out why I believe that European law would actually not bar such a step (although obviously without prejudice to the issue of economic expediency). Before making my point in detail, however, I would like to call to mind how public institutions – namely the Member States and the European Central Bank – became Greece’s creditors in the first place, and whether they gained their creditor-status in accordance with European law. The article ends with a short conclusion and an outlook.

Retrospection: Who are Greece’s Creditors?

Up until 2010, the lion’s share of credit granted to Greece came from private investors, not the least of whom were practically every major European bank. This dominance has continuously and significantly lessened since financial rescue measures began in 2010. As of today, Greece’s creditors are essentially public – mainly (directly or indirectly) the other Member States and the European Central Bank: of the approximately €320 billion of total public debt only about €65 billion is currently (still) held by private market players. Yet another haircut for these private creditors (no matter how extensive) would therefore hardly lead Greece out of its financial calamity. Or, in other words: if a haircut is to be at all effective, it will of necessity also have to extend to (all) public creditors. Anything else would be practically useless with respect to securing Greece’s financial solvency.

In 2010, the euro area Member States agreed, as part of the first rescue package, to grant Greece direct bilateral credits.Footnote 11 The Member States provided for the administration of further credits – at first temporarily (European Financial Stability Facility, 2010)Footnote 12 and then permanently (European Stability Mechanism, 2012)Footnote 13 – by public legal entities based in Luxembourg Footnote 14 These entities issued bonds which were guaranteed by the founding Member States. In neither variation did euro area Member States directly assume debt that Greece had previously accumulated. Instead, they created new debt in the form of new credits. Greece used these newly-acquired financial resources for the most part to satisfy its creditors, who at the time were mainly private, in particular the previously-mentioned European banks.Footnote 15 Greece, however, needed to agree to implement the binding economic stipulations attached to new credits granted by euro area Member States, Footnote 16 and adherence to those conditions increasingly led to difficulties in following years.

Some have alleged that these proceedings violated Article 125 section 1 TFEU, the so called ‘no-bail-out clause’ – a point espoused in particular by German scholars.Footnote 17 That provision even enjoyed the rare privilege of being quoted on the front page of the main German tabloid ‘BILD’.Footnote 18 However, in the Pringle case, the European Court of Justice ruled (conclusively) that Article 125 TFEU does not prohibit every kind of financial aid, but merely the direct assumption of Greece’s debts by the aid-granting Member StatesFootnote 19 – ergo, the assumption of existing debt is illegal, but the creation of new debt is not. And this is also true even if the Member State uses the extended credit to clear existing debt owed to other creditors.Footnote 20 Drawing this distinction may seem to be splitting hairs, and at first glance does not convince. However, assuming existing debt and giving new credit to clear existing debt do indeed differ in one (crucial) aspect – the creditor Member States may impose conditions upon the granting of new credit.Footnote 21 They are also free to defer payment until certain intermediate objectives have been fulfilled. The euro area Member States thus possess full credit autarchy when granting the credit and can thereby ensure that granting financial aid creates no incentive for the indebted Member State to follow unsound budgetary policy. This would be different if Member States were to simply assume existing debt – the assuming Member State would then not only take over the nominal debt but also the conditions regarding repayment previously agreed upon by the creditor and the indebted Member State. When the debt falls due, the assuming Member State is obliged to pay. A repayment in tranches, for instance, will usually not be possible. And why would the private creditor in question suddenly agree to make repayment by its new debtor (the assuming Member State) conditional upon certain economic goals to be met by its former debtor (the indebted Member State)? Given these essential differences it therefore appears hardly credible to assume that a strictly conditional and autarkic granting of new credits would encourage other Member States to run up excessive debt: certainly, no Member State would currently like to be in Greece’s shoes.

As an independent institution,Footnote 22 the European Central Bank was neither affected by, nor did it at any time directly participate in, any of these euro area Member States’ financial aid programmes. Yet, beginning in 2010 it started to become active on the secondary markets, purchasing bonds of certain indebted Member States as part of its Securities Market ProgrammeFootnote 23 , including Greek bonds.Footnote 24 In 2012 the Securities Market Programme was replaced by the highly controversial Outright Monetary Transaction Programme that, however, has so far not led to a single bond purchase (and probably will not do so in the future). Yet, in March 2015 the European Central Bank again expanded its bond purchase programmeFootnote 25 and has since purchased Member State bonds on a monthly basis, and will continue to do so at least until the beginning of 2017 (‘quantitative easing programme’). By virtue of all of these confirmed bond purchases, the European Central Bank thus became a ‘regular’ and public creditor, and not exclusively of Greece.

Various violations of European law were soon alleged because of these purchases, once again mainly by German scholarsFootnote 26 and politicians. In the case of the Outright Monetary Transaction Programme, the German Constitutional Court (Bundesverfassungsgericht), when confronted, denied a monetary foundation.Footnote 27 In addition, the Bundesverfassungsgericht claimed a violation of Article 123 TFEU, which prohibits the direct purchase of state bonds by the European Central Bank on the primary market – an article often (and incorrectly) reduced to a simple ‘prohibition of state financing’.Footnote 28 In its Gauweiler case the European Court of Justice once again ruled differentlyFootnote 29 and, as we by now know, the Bundesverfassungsgericht (though remaining doubtful) was all in all once again persuaded by this, in substance, convincing judgment.Footnote 30 According to the European Court of Justice, the Outright Monetary Transaction Programme secured the monetary transmission process and was therefore part of monetary policy – a fact that is hardly disputed for the quantitative easing programme. Furthermore, and this is also true for all the other purchases by the European Central Bank, Article 123 TFEU never prevented the outright secondary market purchase of Member States’ bonds by the Bank as long as the prohibition was not circumvented.Footnote 31 According to the European Court of Justice, however, this was not the case as regards the Outright Monetary Transaction ProgrammeFootnote 32 and it seems very unlikely that the European Court of Justice would decide otherwise for the other ongoing purchase programmes.

The Legal Permissibility of Debt Relief in the form of a Haircut

So far, so good. But what does this mean for a potential haircut of public creditors? Can the Member States and the European Central Bank waive partial or full repayment of Greek bonds without violating European law? To begin with, we need to recall what a haircut actually represents, insofar as it needs to be distinguished from other measures of debt relief, often referred to as mere ‘debt restructuring measures’. Such debt restructuring measures include, for instance, agreements on the deferment of payments, or interest rate reductions.Footnote 33 As mentioned previously, similar proposals for Greece have now also been submitted by the International Monetary Fund.

A haircut goes beyond such measures, as it nominally reduces the sum of repayment. Such a form of debt relief generally requires an individual agreement between the debtor and the creditor. ‘Involuntary’ haircuts are not completely impossible, but need to be agreed to before debt formation. In 2012, Greece introduced bonds including a retroactive collective action clause in that sense in reaction to the ‘voluntary’ haircut of private creditors. The clause specified that if a majority threshold of 66.67% of creditors agreeing to any form of debt restructuring (including a haircut) was met, it would be legally binding on all holders of the respective bond.Footnote 34 The European Central Bank was excluded from the haircut given to private creditors in 2012, but some likelihood that the Bank may be involved in an involuntary haircut in the coming years does remain.Footnote 35 However, the current debate only refers to potential voluntary debt relief in the form of a haircut given to euro area Member States, the Bank, or both: and this is the reason why this article also only addresses that specific problem.

A haircut for the member states

Let us first take a look at the credit-granting Member States. Could they – partially or fully – voluntary forfeit their position as creditors through such a haircut? As there is no specific treaty provision dealing with this question, it is once again Article 125 paragraph 1 TFEU and its ‘no-bailout-clause’ that comes into play.

The core of Article 125 paragraph 1 TFEU

According to Article 125 paragraph 1 TFEU, the Member States bear no liability for each other’s debts and do not assume such financial obligations. It is therefore easy to understand why there was such controversy and debate on how Article 125 TFEU should be interpreted, once the euro area Member States had agreed to grant Greece its first financial aid in 2010.Footnote 36 However, as Armin Steinbach himself concedes, at least at first sight ‘Article 125 paragraph 1 TFEU does not appear to be pertinent in a case of debt relief’.Footnote 37 Yet, according to Steinbach, this first impression is misleading. He delivers four arguments in all to prove his point:

  1. (i). First, in its Pringle case, the European Court of Justice explicitly stated that the granting of credits was lawful, as it created new debt in the form of a bilateral commitment between the recipient country and the donor countries. According to Steinbach the creation of new debt is thus a sine qua non for the donor state not being liable in the sense of Article 125 paragraph 1 TFEU. In the case of debt relief or a haircut, this (obligatory) debt would expire (at least partially). However, according to Steinbach it should make no difference whether credit is extended right away, or at some later point.Footnote 38

  2. (ii). Second, debt relief called into question the European Court of Justice’s criterion that, according to Article 125 paragraph 1 TFEU, Member States incur no liability for the debts a recipient state has towards its creditors. If the debt-relieving countries waived repayment, they would assume liability for the loans owed to them, thus constructing a prohibited triangular constellation in the sense of Article 125 paragraph 1 TFEU.Footnote 39

  3. (iii). Third, the European Court of Justice ruling in the Pringle case emanated from the assumption that the strict conditions for a granting of credits by the euro area Member States are virtually a substitution for the otherwise existing harshness of the market. This harshness creates the essential incentive for the other Member States to implement sound budgetary management. Depending on the kind of debt relief, Steinbach argues, it becomes increasingly difficult to maintain that conditionality-based financial aid represents the functional equivalent of market based refinancing. In the case of (partial) nominal debt reduction, the incentive effect could even lead to heightened moral hazard. While the state, in the worst-case scenario, could count on financial aid from the Member States, it could even then be tempted to speculate on full debt remission, which would likely reduce the incentive to consolidate its budget.Footnote 40

  4. (iv). Fourth and finally, (public) creditor involvement cannot be justified by the necessity of ‘safeguarding of the stability of the euro area’, as was the case with financial aid under the European Stability Mechanism. Debt relief in the form of a haircut would not serve to ensure short-term solvency, but rather rest on the long-term forecast of whether the prospective growth path of a country will allow for repayment of its debts. It would thus be difficult to see how debt relief could be as indispensable to the stability of the euro area as short-term and conditional financial aid.Footnote 41

These arguments might at first appear solid, yet a closer look at the relevant provision itself reveals why they are ultimately not convincing. Since Article 125 paragraph 1 TFEU does not literally cover the instrument of debt relief, it can prohibit such a step taken by the Member States only insofar as a prohibition in this sense is necessary to achieve its regulatory goals.Footnote 42 It is, first of all, necessary to understand that Article 125 paragraph 1 TFEU by no means prohibits all forms of direct financial assistance to an indebted Member State.Footnote 43 Such an interpretation might be suggested by the mistaken and frequently used term ‘no-bail-out-clause’.Footnote 44 And it might even be reasonable from an economic perspective. Yet the legislator is free to enact economically dubious regulations. Economic unsoundness is thus not, on its own, a valid normative argument capable of discouraging the Member States from taking such (possibly unsound) measures.

From a legal perspective, a literal interpretation of Article 125 paragraph 1 TFEU suggests that the norm first of all blocks the direct assumption of a Member State’s existing debt by another Member State, but does not preclude other forms of financial aid. As pointed out previously, the reason for making this distinction lies within the idea of credit autarchy, making it possible to discourage indebted Member States from following unsound budgetary policy despite being granted financial aid – the main goal of Article 125 TFEU. In the event of direct assumption, the assuming Member State has no influence on the structure of the existing debt it is about to assume, neither in regard to its amount nor to the exact conditions of its repayment. As shown above, this is completely distinct from the case of financial aid granted in the form of a new credit – even if the credit is subsequently used to repay existing debt. In the Pringle case, the European Court of Justice, as Steinbach correctly points out, indeed focused on the fact that the conditionally granted financial aid agreement concluded between two Member States constituted new debt.Footnote 45 However, this was true not due to the debt as such, but because the credit autarchy of the aid-granting Member States prevented the diminishment ‘of the incentive of the recipient Member State to conduct a sound budgetary policy’ – the main goal of Article 125 TFEU.Footnote 46 As the granting Member States retained control over disbursements, they were thus in a position allowing them to amend the terms and conditions at any time and were able to stop payment if conditions were not met.Footnote 47 The events in Greece clearly demonstrate the consequences of strictly conditional credits and their payment in tranches for the indebted aid-receiving Member StateFootnote 48 – no incentive for an unsound budgetary policy was created (not for Greece and not for any other Member State). This specific and crucial credit autarchy maintained by the aid-granting Member States thus ensures, primarily, that an indebted Member State can neither accurately predict whether any financial aid will be forthcoming, nor which conditions may apply. The indebted Member State can exert little or no influence on the behaviour of the other Member States. This persistent uncertainty, combined with the lack of influence, significantly reduces any danger of moral hazard encouraging an indebted Member State to engage in unsound budgetary policy. Why would any Member State take such a risk in the first place? Above this, credit autarchy provides the other Member States the opportunity (but not the obligation) to preserve the financial stability of the euro area through the allocation of (new) credit by using their credit autarchy in a calculating manner.Footnote 49 Read this way, Article 125 paragraph 1 TFEU thus secures the necessary political capital for the entire euro area to spring into action without creating harmful incentives – anything less would be intolerable considering the scope of the decisions needed to be taken in times of crisis.

These thoughts help to explain why the granting of new conditional credit in such a way is clearly not in violation of Article 125 TFEU. They could, however, also serve to explain why the creation of new debt, or the exclusion of any form of debt relief – Steinbach’s first argument – is by no means a mandatory requirement for (retroactively) concluding that Article 125 paragraph 1 TFEU has been violated. Preserving existing debt is certainly not the only way to avoid creating an incentive for unsound budget policy. Or, in other words, a haircut does not necessarily create such an incentive and – contrary to Steinbach – it therefore makes quite a difference whether credit is extended right away, or at some later point.

First of all, even in the case of a (voluntary) haircut, the Member States always maintain control over their individual claims. Whether or not to accept a haircut, and under which conditions, is their autarkic decision – a decision that, again, cannot be influenced by the indebted Member State. Steinbach therefore also misses a crucial point with his second argument. In effect, only the aid-granting and the aid-receiving Member States are involved in the haircut, so that the necessary credit autarchy is secured at all times - there is no functional similarity to the problematical triangular constellation prohibited by Article 125 TFEU. As the Member States were the only creditors of the debt concerned, they were in no danger of ‘assuming’ debt which they had been unable to influence when accepting the haircut – as mentioned previously, this would be completely different if the Member States were to assume the previously existing debt held by other creditors. And it is these same Member States that are able to decide upon the conditions and extent of a possible haircut. Considering these significant differences, there is thus no – forbidden – assumption of external debt in the sense of Article 125 paragraph 1 TFEU in the event of a haircut.

Second, and against this background, potential debt relief in the form of a haircut does also not logically result in a complete retreat from, or even a reduction in, future budgetary discipline – Steinbach’s third (moral hazard) argument. The haircut itself by no means needs to take place unconditionally, but may, and usually will be, given gradually and (just as the financial aid before) under strict conditions. It can hardly be argued that such a conditional haircut, with its massive implications for domestic affairs, would be able to encourage undisciplined budgetary management by other Member States – just as this was not the case with the conditional credits granted previously.Footnote 50 All Member State governments know that any form of financial aid – including debt relief in the form of a haircut – will not only lead to a significant decrease in economic prosperity but will also most certainly have consequences for their own future.Footnote 51 As long as haircuts are held to strict conditions, there is no significant danger of creating prohibited incentives for unsound budgetary policy.

Moreover, and thirdly, a haircut is – at least as far as Greece is concerned – not an individual measure but rather the last part of an extensive and complex (financial) aid programme that, all in all, aims to enable Greece to once again resist the competitive pressures within the euro area. Article 125 paragraph 1 TFEU would only exclude debt relief in the form of a haircut if it either immediately followed upon a more or less unconditional granting of credits, or was itself completely unconditional. Such proceedings could indeed discourage budgetary discipline in other Member States, much like a direct assumption of existing debt, and would therefore have to be considered to be prohibited by Article 125 paragraph 1 TFEU. This, however, is out of the question in the case of Greece.

Finally, Steinbach’s fourth argument against the legitimacy of a haircut is also unconvincing. Debt relief in the form of a haircut may indeed concern the long-term (future) sustainability of Member States’ debts, but it can nonetheless have a massive effect on the topical granting of short-term credits, and thereby challenge the effectiveness of the entire financial aid programme. This applies more than ever if the design of the whole aid programme virtually and unavoidably leads to an increase of the Member State’s overall debt ratio, as in the case of Greece. It would obviously be hardly desirable if the granting of credits, while triggering the necessary economic reforms, was unable to prevent the insolvency of the respective Member State due to an excessive overall debt ratio, thus threatening the financial stability of the euro area as a whole. The overall debt ratio therefore needs to be kept in mind throughout the entire financial aid programme, which itself aims to restore the ‘marketability’ of the respective Member State.

To summarise, and in opposition to Steinbach, it is argued here that there are no concerns from a European law perspective regarding debt relief in the form of a voluntary haircut by the Member States as a (final) step in resolving the European debt crisis, as long as it is part of a financial aid programme that does not create any incentive for future unsound budgetary policy by linking the financial aid granted to the necessary economic reforms and possibly further conditions.

A haircut for the European Central Bank

As Article 125 paragraph 1 TFEU is directed at the Member States and European Institutions other than the European Central Bank,Footnote 52 these conclusions do not apply to the Bank. Article 127 and Article 123 TFEU are, in fact, crucial with respect to actions taken by the Bank (including potential debt relief in the form of a haircut).

The European Central Bank’s (whole) mandate, Article 127 TFEU

The European Central Bank is a European institution and therefore – unlike the Member States – bound by the principle of conferral.Footnote 53 Each of its actions thus needs to be based upon an explicit legal foundation. This specific requirement also applies to any involvement in potential debt relief in the form of a haircut. The starting point for the possible prohibition of such a haircut is thus the European Central Bank’s (whole) mandate, laid down in Article 127 TFEU. Can this mandate be interpreted in such a way that it covers debt relief in the form of a haircut?

According to Article 127 paragraph 2 TFEU, the main task of the European Central Bank is to determine and execute the European Union’s monetary policy, whereby the Bank is primarily obliged to ensure price stability under the terms of Article 127 paragraph 2 TFEU.Footnote 54 However, active and voluntary debt relief in the form of a haircut hardly proves to be part of monetary policy in this sense. Although it is true that the European Court of Justice made a distinction between measures as being either monetary or economic in nature in its Gauweiler case, and rightly refers to the objective pursued by the respective measure,Footnote 55 it would be inaccurate to imply that the Court did not demand some sort of objectively determinable correlation between the asserted objective and the measures taken. The European Central Bank therefore could not simply claim a monetary objective when participating in a haircut, but would at the same time need to provide at least one acceptable and objective justification as to how such a haircut might contribute to safeguarding price stability. With respect to the Outright Monetary Transaction Programme, the European Central Bank had (justifiably) referred to the protection of the monetary transmission process being impaired by the irrational surcharges on Greece’s bonds due to the ongoing speculation against Greece and other indebted Member States.Footnote 56

However, in the case of debt relief in the form of a haircut such a reference to the monetary transmission process would hardly be feasible. Due to the debt burden’s lack of long-term sustainability, the general increase in interest rates on Greek bonds could not be seen as irrational and would thus not constitute a disturbance of the monetary transmission process, therefore allowing the European Central Bank to act. If the European Central Bank were nonetheless able to revert to this argument, it would enable the Bank to take practically any measure at any time, thereby undermining the principle of conferral. A closer look at the history of central banks confirms that haircuts as a form of debt relief do not – unlike the outright purchase of government bonds – constitute a traditional monetary instrument. As Steinbach rightly points out, a haircut could therefore not be based on the European Central Bank’s monetary mandate as long as the Bank is not able to come up with other (yet hardly perceptible) acceptable justifications.Footnote 57

However, and contrary to Steinbach’s implications, this is not the end of the story for the European Central Bank. Its mandate is by no means limited to safeguarding price stability. According to Article 127 paragraph 1 subsection 2 TFEU, the European Central Bank’s specific task is to support economic policy within the European Union, provided that the prior goal of safeguarding price stability is not impaired.Footnote 58 This economic part of the Bank’s mandate is often obscured or at least underplayed as to its relevance for the legality of measures taken by the BankFootnote 59 although – from a legal perspective – it is of no lesser value than the monetary mandate: the European Central Bank is obliged to support economic policy in the EU as long as price stability is not impaired. This part of the mandate therefore may be subsidiary but is equally binding for the European Central Bank. In its referral, the German Constitutional Court nonetheless tried to delimit such (legally necessary) economic support measures to insignificant actions that do not require independent economic assessments.Footnote 60 However, the Bank – due to its independent status – can and must employ its own assessments in this respect; its independent status encompasses the entire mandate.Footnote 61 Who else would be in a position to make the relevant assessments if not the European Central Bank itself? And, Article 127 paragraph 1 TFEU does not contain any explicit quantitative limitations as regards these support measures – such quantitative limitations are indeed unnecessary as long as price stability is not endangered by the respective (supporting) measures.

The question that needs to be answered is therefore: Could voluntary European Central Bank participation in a haircut be regarded as such an economic support measure? This would obviously not be the case as long as the Member States had explicitly excluded such haircuts for bonds they themselves held. A haircut for the European Central Bank alone in such a situation would undermine an explicit decision by the Member States, and could thus not be interpreted as supporting their economic policy. But even if the Member States had at least agreed upon certain other forms of debt relief, a haircut for the European Central Bank would probably have to be regarded as going above and beyond mere support measures. However, things would change as soon as the Member States went ahead and accepted a haircut in order to ensure economic recovery in Greece, and financial stability in the euro area as a whole. According to its mandate, the European Central Bank would now be obliged to support these specific measures as being part of EU economic policy. That does not mean that the Bank would necessarily have to participate in such a Member State haircut: it would be free to take other support measures. And it would have to refrain from such participation if it even only slightly endangered price stability. However, as long as price stability was not impaired, the European Central Bank would be free to participate in such a haircut on its own conditions. Such participation might be unwise from a political or economic view as it might lead to a loss of trust in the independence of the European Central Bank – a thought the Bank would have to consider. From a legal perspective, however, participation under these conditions could be founded upon the economic element of the Bank’s mandate.

Prohibited measures according to Article 123 TFEU

It needs to be taken into account that the European Central Bank’s mandate is further restricted by a fixed set of explicitly prohibited measures.Footnote 62 Article 123 TFEU, which explicitly prohibits the direct acquisition of government bonds, and is yet – as mentioned above – regularly (and misleadingly) quoted as generally prohibiting the monetary financing of Member States, is particularly pertinent to the question at hand. And, in the face of positive effects on the Greek budget, Steinbach indeed believes that debt relief in the form of a haircut must be regarded as such a ‘forbidden monetary financing of governments’.Footnote 63

However, as this norm does not explicitly prohibit debt relief in the form of a haircut, it is once more necessary to take a closer look at its actual purpose.Footnote 64 From this perspective, Article 123 TFEU can in fact not be read as a general prohibition on positively influencing the financial situation of one or more Member States. In purely economic terms, such a prohibition could not be enforced anyway – any (clearly legal) reduction of the base lending rate would have positive effects in this sense. Article 123 TFEU therefore aims for something different: To prevent a potential circumvention of market forces in regard to the financing of the Member States and thus to again ensure a sound budgetary policy.Footnote 65 Yet, an indirect purchase of bonds by the European Central Bank, for instance, does not lead to such a circumvention as long as the Bank did not at any time guarantee unconditionally that it would purchase the bonds at the original market price before they were emitted.Footnote 66 As the Bank has not given any such guarantee with respect to its purchases so far, they in fact did not violate Article 123 TFEU.Footnote 67

As regards the legality of debt relief in the form of a haircut, one would have to assert such a circumvention of market forces if, at the time the purchase was made, the European Central Bank had already taken the possibility of a haircut into account, and gone public with both its intentions and the potential scope of the debt relief it was considering.Footnote 68 Such a guaranteed and more or less inevitable haircut for the Bank would at least make it easier for the Member State concerned to finance itself on the primary financial markets – at least as long as the Bank continued to purchase that Member State’s bonds on the secondary market. Private market investors could then buy those same bonds more or less risk-free on the primary market, and pass them on to the European Central Bank whenever they wanted to, with the Bank initiating the previously announced haircut as soon as the overall debt-level appeared too high – repeat ad libitum. As for Greece, however, the European Central Bank has disclosed no such intentions to continue purchasing Greek bonds ‘forever’ nor, in the worst case, to initiate a haircut. Moreover, it has always emphasised publicly that it would not partake in any form of haircut – and there is no reason to believe that the Bank, behind closed doors, actually intended otherwise.Footnote 69 In the event of debt relief in the form of a haircut, market forces would therefore affect indebted Member States including Greece marginally if at all, certainly not enough to encourage the Member State concerned to embark upon unsound budgetary policy, thus avoiding circumvention of Article 123 TFEU.

By (legally) purchasing the bonds, the European Central Bank in actual fact now holds them as would any normal creditor. The Bank therefore needs to assess its potential future development before the actual purchase takes place – as do private investors. One risk component is inevitably the potential national bankruptcy of a Member State including a complete default on its bonds. If overall risk is deemed too high, the European Central Bank must refrain from purchasing such bonds in the first place. Such assessments, however, never bring absolute certainty: risk remains inevitable. Although once the transaction has been completed actual further (economic) development is out of the Bank’s hands, it still needs to be able to react to such developments. Blind insistence on repayment in full hardly seems realistic. What would be gained if the Bank, while steadfastly insisting upon complete repayment, ended up getting nothing due to the Member State’s bankruptcy, risking the complete collapse of the euro area in the process? One possible reaction to such a worst case would thus also be (voluntary and) active participation in extending debt relief in the form of a haircut. Indeed, this would also lead to the financial discharge of the debtor state. But such an effect cannot, on its own, be seen as a circumvention of Article 123 TFEU since such a discharge is not generally excluded by Article 123 TFEU. And any bond-holder – whether private or public – would have to decide whether, in order to secure at least partial repayment of its financial claims, it would agree to accept such a haircut if accumulated debt appeared unsustainable. And finally, such a step would bear no substantial consequences for the financing of other indebted Member States and would therefore not significantly lessen their ‘impetus to follow a sound budgetary policy’.Footnote 70 Neither private market investors nor the Member States could safely count on the European Central Bank repeating such measures with respect to other Member States at any point in the future. The risk taken by private market investors when purchasing the respective bonds could potentially be somewhat (if at all) affected, but clearly not to the degree leading to a relevant circumvention of Article 123 TFEU. No Member State would be encouraged to engage in unsound budgetary policy since no private market investor would be found willing to significantly reduce its interest rates merely because, several years on, the European Central Bank might possibly buy up the respective bonds and subsequently accept a haircut. The purchase of bonds thus may, and must, therefore be considered separately from their subsequent handling, as long as the two are not factually connected, as mentioned previously, by any public European Central Bank announcement. If subsequent developments eventually require debt relief in the form of a haircut, Article 123 TFEU will not stand in the way.

Conclusion and Outlook

The question as to whether a potential haircut of public creditors is economically expedient remains controversial and will, in the long run, demand a political answer. Contrary to the opinion of Armin Steinbach, European law does not oppose this option. Articles 125, 127 and 123 TFEU do not bar the way to such an approach as a (final) attempt to resolve the European debt crisis. Once again, this is good news, as it suggests that the question remains open to lively, democratic debate.Footnote 71

Footnotes

*

Substitute Professor for Public Law at the Free University of Berlin, Germany. Email: alexander.thiele@jura.uni-goettingen.de. The author would like to thank Jan Mertens as well as the anonymous reviewers for very helpful comments.

References

1 See, for a legal analysis, Thiele, A., ‘Der Austritt aus der EU. Hintergründe und rechtliche Rahmenbedingungen eines Brexit’, 51 Europarecht (2016) p. 281 Google Scholar ff.

2 See on the reasons for the European debt crisis Thiele, A., Das Mandat der EZB und die Krise des Euro (Mohr Siebeck 2013) p. 1-11 Google Scholar with further references.

3 For a broad critique on austerity-measures in general see especially Blyth, M., Austerity (Oxford University Press 2013)Google Scholar. For an analysis of under which conditions austerity can work see Batini, N. et al., ‘Successful Austerity in the United States, Europe and Japan’, 12 IMF Working Paper 190 (2012)Google Scholar. On the effects of austerity for soft public investment see Streeck, W. and Mertens, D., ‘Fiscal Austerity and Public Investment. Is the Possible the Enemy of the Necessary?’, 11 MPlfG Discussion Paper 12 (2011)Google Scholar.

4 See Thiele, A., Geisterfahrer Tsipras, oder: Ist der Euro noch zu retten? 2nd edn. (Amazon Distribution 2015) p. 77 Google Scholar.

5 Piketty, T., Das Kapital im 21. Jahrhundert (C.H. Beck 2015) p. 740 Google Scholar.

6 What level of public debt is sustainable (60%, 70% or 80% of gross domestic product?) in the long run is highly disputed. The 90%-rule, established by Carmen Reinhart and Kenneth Rogoff, which played an important role on the political level (see Reinhart, C. and Rogoff, K., ‘Growth in a time of debt’, 100 American Economic Review (2010) p. 573-578 CrossRefGoogle Scholar), has been put into question, see especially Herndon, T. et al., ‘Does High Public Debt Consistently Stifle Economic Growth? A Critique of Reinhart and Rogoff, 322 PERI Working Paper (April 2013)Google Scholar.

7 IMF, Greece, IMF Country Report No. 16/30, May 2016.

8 Steinbach, A., ‘The “Haircut” of Public Creditors under EU Law’, 12 EuConst (2016) p. 223 Google Scholar at p. 224.

9 Sceptical in general regarding haircuts to reduce public debt for instance: Piketty, supra n. 5, p. 740-742.

10 Steinbach, supra n. 8, p. 224, p. 238-239.

11 See Calliess, C., ‘Perspektiven des Euro zwischen Solidarität und Recht – Eine rechtliche Analyse der Griechenlandhilfe und des Rettungsschirms’, 14 Zeitschrift für europarechtliche Studien (2011) p. 213 Google Scholar at p. 218-219; Preunkert, J., ‘Der Staat und seine Gläubiger – Entwicklungen in der Eurozone’, 14 Zeitschrift für Staats- und Europawissenschaften (2016) p. 240 CrossRefGoogle Scholar at p. 255; Häde, U., ‘Die Europawährung in der Finanzkrise’, in N. Witzleb et al. (eds.), Festschrift für Dieter Martiny zum 70. Geburtstag (Mohr Siebeck 2014) p. 891 Google Scholar at p. 892; Pilz, S. Der Europäische Stabilitätsmechanismus (Mohr Siebeck 2016) p. 27-28 Google Scholar.

12 For an overview see Wenz-Temming, A., ‘Intergouvernementalisierung europäischer Verschuldungsinstrumente? Eine Positionierung der Eurorettungspolitik innerhalb der EU-Finanzstrukturen’, 14 Zeitschrift für Staats- und Europawissenschaften (2016) p. 261 CrossRefGoogle Scholar at p. 273-275; Pilz, supra n. 11, p. 30-31.

13 For an overview see Herrmann, C., ‘Wirtschaftsverfassung und Wirtschaftsregierung in der Europäischen Union’, in T. Giegerich (ed.), Herausforderungen und Perspektiven der EU (Duncker & Humblot 2012) p. 51 Google Scholar at p. 67-69; Manger-Nestler, C., ‘Ménage à trois? – Zur gewandelten Rolle der EZB im Spannungsfeld zwischen Geldpolitik, Finanzaufsicht und Fiskalpolitik’, 49 Europarecht (2014) p. 621 Google Scholar at p. 632-634; Häde, U., ‘Rechtliche Bewertung der Maßnahmen im Hinblick auf eine “Fiskalunion”’, in C. Calliess (ed.), Europäische Solidarität und nationale Identität (Mohr Siebeck 2013) p. 193 Google Scholar at p. 201-205; Wenz-Temming, supra n. 12, p. 275-277. For details see Pilz, supra n. 11 passim.

14 Häde, U., ‘Article 119 AEUV’, in C. Calliess and M. Ruffert (eds.), EUV/AEUV (C.H. Beck 2016) p. 1572 Google Scholar at p. 1577; Calliess, supra n. 11, p. 219-220; A. Thiele, supra n. 2, p. 10-11; Preunkert, supra n. 11, p. 255-256.

15 As a consequence, Greece’s creditors continuously shifted from private to public.

16 See Pilz, supra n. 11, p. 28. The conditions themselves were laid down in the ‘Loan Facility Agreement’, agreed upon between Greece and the euro area Member States.

17 See, for instance, Siekmann, H., ‘Missachtung rechtlicher Vorgaben des AEUV durch die Mitgliedstaaten und die EZB in der Schuldenkrise’, Institute for Monetary and Financial Stability, Working Paper Series No. 65 (2012)Google Scholar; Ruffert, M., ‘Der rechtliche Rahmen für die gegenseitige Nothilfe innerhalb des Euroraums’, Berliner Online Beiträge zum Europarecht Nr. 64, p. 4-10 Google Scholar; Kube, H. and Reimer, E., ‘Grenzen des Europäischen Stabilisierungsmechanismus’ 63 Neue Juristische Wochenschrift (2010) p. 1911 Google Scholar at p. 1912-1913; Streinz, R., ‘Europarecht (C.F. Müller 2016) p. 453-454 Google Scholar; Kempen, B., ‘Art. 125 AEUV’, in R. Streinz (ed.), EUV/AEUV 2nd edn. (C.H. Beck 2012) p. 1524 Google Scholar at p. 1525. Häde, supra n. 13, p. 204-205, however, sees no violation of Art. 125 TFEU. For a full discussion with further references see Heun, W. and Thiele, A., ‘Verfassungs- und europarechtliche Zulässigkeit von Eurobonds’, 67 Juristenzeitung (2012) p. 973 CrossRefGoogle Scholar at p. 978-980 and Pilz, supra n. 11, p. 37-39.

18 This at first glance rather strange quotation – Art. 125 TFEU is a norm very complex and not easy to understand – obviously intended to show how ‘openly’ European law was breached by the euro area Member States and thus to support upcoming public outrage due to the alleged severe burdens of the ‘German tax payer’ connected to the aid programs. And this strategy was not unsuccessful. Until today a clear majority of the German population believes that the aid programs violated the ‘no-bail-out-clause’. That the ECJ decided otherwise in 2012 is more or less ignored completely or simply unknown.

19 ECJ 27 November 2012, Case C-370/12 Pringle v Ireland (henceforth: Pringle case), para. 130.

20 In such a case the overall debt ratio of the indebted member state remains unchanged.

21 See Heun and Thiele, supra n. 17, p. 979.

22 See Arts. 130 and 282 para. 3 TFEU and Manger-Nestler, supra n. 13, p. 625; C. Ohler, Bankenaufsicht und Geldpolitik in der Währungsunion (C.H. Beck 2015) p. 51-55. For the economic and legal background of this independent status of the European Central Bank see Thiele, A., ‘Die Unabhängigkeit der EZB. Gründe, Grenzen und Gefährdungen’, in M. Kröger and A. Pilniok (eds.), Unabhängiges Verwalten in der Europäischen Union (Mohr Siebeck 2016) p. 195-219 Google Scholar with further references.

23 For an overview see Pilz, supra n. 11, p. 35-36.

24 Preunkert, supra n. 11 at p. 256.

25 Dunne, P. et al., ‘The expanded Asset Purchase Programme – What, Why and How of the Euro Area QE, 7 Quarterly Bulletin Articles (2015) p. 61-71 Google Scholar.

26 Ruffert, supra n. 17, p. 11; Siekmann, supra n. 17, p. 37-39; Streeck, W., Gekaufte Zeit. Die vertagte Krise des demokratischen Kapitalismus’ (Suhrkamp 2013) p. 227 Google Scholar; Kerber/S. Städter, M. C., ‘Ein Beitrag zum Individualrechtsschutz gegen Rechtsverstöße der EZB’, 22 Europäische Zeitschrift für Wirtschaftsrecht (2011) p. 536 Google Scholar at p. 537-538; Frenz, W. and Ehlers, C., ‘Europäische Wirtschaftspolitik nach Lissabon’, 56 Gewerbe Archiv (2010) p. 329 Google Scholar at p. 334; Frenz, W., ‘Anmerkung zu BVerfG, 2. Senat, Beschluss vom 14.1.2014’, 129 Deutsches Verwaltungsblatt (2014) p. 451 Google Scholar at p. 452. See also Pilz, supra n. 11, p. 39-42.

27 BVerfGE 134, 366 (398-411). For a critical discussion of this decision see Thiele, A., ‘Friendly or Unfriendly Act? The “Historic” Referral of the Constitutional Court to the ECJ Regarding the ECB’s OMT-Program’, 15 German Law Journal (2014) p. 241-264 Google Scholar and Heun, W., ‘Eine verfassungswidrige Verfassungsgerichtsentscheidung – der Vorlagebeschluss des BVerfG vom 14.1.2014’, 69 Juristenzeitung (2014) p. 331-337 CrossRefGoogle Scholar.

28 BVerfGE 134, 366 (411-415).

29 ECJ 16 June 2015, Case C-62/14, Gauweiler and Others v Deutscher Bundestag (henceforth: Gauweiler case). Not agreeing with this decision, however, Pilz, supra n. 11, p. 39-42.

30 BVerfG, 21 June 2016, 2 BvR 2728/13.

31 See Gauweiler case, paras. 97, 101.

32 See Gauweiler case, para. 103 ff.

33 Several kinds of such debt relief measures are currently being debated with respect to Greece, see Steinbach, supra n. 8, p. 225.

34 See Steinbach, supra n. 8, p. 237.

35 See Steinbach, supra n. 8, p. 237.

36 See Louis, J.-V., ‘Guest Editorial: The no-bailout clause and rescue package’, 47 CMLRev (2010) p. 971 Google Scholar; Palmstofer, R., ‘To Bail Out or Not to Bail Out? The Current Framework of Financial Assistance for Euro Area Member States Measured against the Requirements of EU Primary Law’, 37 ELRev (2012) p. 771 Google Scholar; Steinbach, A., ‘The compatibility of the ECB’s sovereign bond purchases with EU law and German constitutional law’, 39 Yale Journal of International Law Online (2013) p. 15 Google Scholar; Heun and Thiele, supra n. 17, p. 979; Häde, supra n. 14, p. 1598-1599.

37 See Steinbach, supra n. 8, p. 225.

38 See Steinbach, supra n. 8, p. 226, 232.

39 See Steinbach, supra n. 8, p. 231 ff.

40 See Steinbach, supra n. 8, p. 231.

41 See Steinbach, supra n. 8, p. 232.

42 See also Pringle case, para. 133: ‘Accordingly, in order to determine which forms of financial assistance are compatible with Article 125 TFEU, it is necessary to have regard to the objective pursued by that article’.

43 Pringle case, para. 130: ‘It must be stated (…) that that article is not intended to prohibit either the Union or the Member States from granting any form of financial assistance whatever to another Member State’. See also Pilz, supra n. 11, p. 39; Heun and Thiele, supra n. 17, p. 979.

44 See Heun and Thiele, supra n. 17, p. 978.

45 Pringle case, para. 139.

46 Pringle case, para. 136.

47 Heun and Thiele, supra n. 17, p. 979. See also Pilz, supra n. 11, p. 39.

48 See Thiele, supra n. 4, p. 76 ff.

49 That is, by linking the financial aid to effective and implementable conditions.

50 See Heun and Thiele, supra n. 17, p. 980.

51 See Altmaier, P., ‘Die Ergänzung der Währungsunion durch die sogenannte “Fiskalunion”: Europapolitischer Irrweg oder europäische Notwendigkeit’, in Calliess, supra n. 13, p. 174 Google Scholar.

52 Häde, supra n. 36, p. 1596 at p. 1597.

53 For an overview see A. Thiele, Europarecht 13th edn. (Niederle Media 2016) p. 143-145.

54 See Thiele, supra n. 2, p. 24-33; Häde, supra n. 14, p. 1623-1624; Ohler, supra n. 22, p. 61-66.

55 Gauweiler case, para. 46: ‘The Court has held that in order to determine whether a measure falls in the area of monetary policy it is appropriate to refer principally to the objectives of that measure’. See also Sauer, H., ‘Doubtful it stood…: Competence and Power in European Monetary and Constitutional Law in the Aftermath of the ECJ’s OMT decision’, 16 German Law Journal (2015) p. 971 Google Scholar at p. 978-979; Thiele, supra n. 2, p. 66-72; Thiele, A., ‘Die EZB vor Gericht’, 27 Zeitschrift für Bankrecht und Bankwirtschaft (2015) p. 295 CrossRefGoogle Scholar at p. 303; Thiele, A., ‘Die EZB als fiskal- und wirtschaftspolitischer Akteur’, 25 Europäische Zeitschrift für Wirtschaftsrecht (2014) p. 694 Google Scholar at p. 694-696. Critical Klement, J. H., ‘Der geldpolitische Kompetenzmechanismus. Sind die Outright-Geschäfte der EZB zugleich rechtmäßig und rechtswidrig? – Zum Urteil des EuGH vom 16.6.2015’, 70 Juristenzeitung (2015) p. 754 CrossRefGoogle Scholar at p. 759-760.

56 Gauweiler case, paras. 49 ff, 55. See also Thiele 2014, supra n. 55, p. 694-696.

57 See Steinbach, supra n. 8, p. 236.

58 See Manger-Nestler, supra n. 13, p. 623; Thiele, supra n. 2, p. 33-36; Ohler, supra n. 22, p. 66-68; Simon, S., ‘Direct Cooperation Has Begun: Some Remarks on the Judgment of the ECJ on the OMT Decision of the ECB in Response to the German Federal Constitutional Court’s First Request for a Preliminary Ruling’, 16 German Law Journal (2015) p. 1026 Google Scholar at p. 1029.

59 See for instance Siekmann, supra n. 17, p. 39 ff. and Ruffert, M., ‘The European Debt Crisis and European Union Law’, 48 Common Market Law Review (2011) p. 1777 Google Scholar at p. 1788.

60 BVerfGE 134, 266 (404-405). For a generally critical discussion of this decision see Thiele, supra n. 27, and Heun, supra n. 27.

61 Thiele 2015, supra n. 55, p. 302.

62 Simon, supra n. 58, p. 1033; Thiele, supra n. 2, p. 44-45.

63 See Steinbach, supra n. 8, p. 236.

64 See also Thiele, supra n. 2, p. 45.

65 Gauweiler case, para. 100 ff. See also Simon, supra n. 58, p. 1034.

66 See Gauweiler case, para. 104: Secondary market interventions could ‘have an effect equivalent to that of a direct purchase of government bonds (…), if the potential purchasers of government bonds on the primary market knew for certain that the ESCB was going to purchase those bonds within a certain period and under conditions allowing those market operators to act, de facto, as intermediaries for the ESCB for the direct purchase of those bonds from the public authorities and bodies of the Member State concerned.’ This is nothing less than the above-mentioned purchase guarantee. See also Sauer, supra n. 55, p. 981 ff and Simon, supra n. 58, p. 1035-1038.

67 Gauweiler case, para. 106: ‘In this respect, the draft decision and draft guidelines produced by the ECB in these proceedings indicate that the Governing Council is to be responsible for deciding in the scope, the start, the continuation and the suspension of the intervention on the secondary market envisaged by such a programme.’ Market participant could thus not be sure whether the ECB would purchase bonds at all, under which conditions and to what extent. See in detail Thiele, supra n. 2, p. 63-67. See also Sauer, supra n. 55, p. 981 ff.

68 As long as such intentions are not made public they would have no influence on the behavior of private market investors and would thus have no effect on the Member States’ budgetary policy.

69 Such a statement, of course, is not the equivalent of a legal ban on participation. Or, in other words: A haircut could not be deemed illegal simply because of such a statement.

70 Gauweiler case, para. 109.

71 For the reasons why such a public debate is essential for pluralistic democratic entities see Thiele, A., Verlustdemokratie. Die drei Verlustebenen der Demokratie (Mohr Siebeck 2016) p. 45-47 Google Scholar and p. 106-109.