Pandemic Crisis Support Credit by the ESM - just cheap money that no one wants or an infringement of EU law?
15 June, 2021
The COVID-19 pandemic is responsible for many revolutionary developments. With the need to adapt quickly to our rapidly changing environment, ideas suddenly surfaced that were politically unthinkable in a pre-pandemic world. One of the ideas that particularly stands out is the introduction of Coronabonds by the European Commission, which has been already discussed by my fellow colleagues (https://pathforeurope.eu/italy-coronabonds-and-a-dilemma-that-wasnt-one/, https://pathforeurope.eu/coronabonds-a-european-dilemma/). As this topic somewhat overshines other European attempts to tackle the economic fallout of the pandemic, it is my aim to highlight those attempts that have until now flown under the radar.
Roughly a year ago, the European Stability Mechanism (ESM) introduced the Pandemic Crisis Support credit line amounting to 2% of members’ GDP, which corresponds to around €240 billion for all 19 euro countries. The credit line can be activated upon request and is conditional only to the requirement “to use the money to pay for direct and indirect healthcare, cure, and prevention-related costs in this crisis”. The aim is to provide a reliable and affordable source of revenue to bridge the time until money from the Recovery and Resilience Fund will start to flow, likely by the end of 2021. According to the ESM, borrowing from its credit line is actually cheaper for most Member States than repaying national bonds.
However, as confirmed by a spokesperson of the ESM, no Member State has applied for the Pandemic Crisis Support (yet). This does not come as a surprise, especially for southern Member States with vivid memories of the “men in black” from the Troika, who dictated economic and social reforms during the aftermath of the financial crisis. Therefore, they are not very politically inclined to borrow money from the ESM. This public distrust of the institution is probably one of the reasons why so many official ESM publications stress that there is no stigma associated with the credit.
Besides the political concerns associated with the credit line, I believe there is a reasonable argument against the credit line from the perspective of European law as well. One could argue that the credit line does not fully comply with the criteria set out by the European Court of Justice (ECJ) in its Pringle judgment (C-370/12) with regard to Art. 125 TFEU.
A little bit of background
The ESM was founded during the financial crisis by Member States of the eurozone. Strangely, it operates outside of the scope of European law, despite the entanglement of EU institutions like the European Commission and the European Central Bank in the decision making processes of the ESM.
The mechanism aims to grant financial assistance to struggling Member States and is subject to stringent conditions. Pursuant to Art. 12(1) ESM Treaty, such conditionality may range from a macro-economic adjustment programme to continuous respect of pre-established eligibility conditions. Translated into real world policy that means inter alia raising the retirement age, cutting salaries and pensions, or shrinking the public health sector. Hence, politically unpopular fiscal decisions with distributive effects were put into effect, which typically should have been introduced by a national parliament. Although, many still maintain – possibly rightfully – that those policies were necessary to avert state bankruptcy. However, my criticism refers to the lack of democratic legitimacy and not to the measures as such.
The offer now on the table obviously differs drastically to former loans with strict conditions attached. As mentioned above, the two conditions for applying are 1) states must be a member of the eurozone and 2) the money needs to be invested directly or indirectly into the health sector. Without understatement, this is a broad criteria.
Legality by Judgment: Recalling Pringle
In the (in)famous Pringle judgment the ECJ ultimately concluded that the establishment of the ESM does not violate EU law. The assessment included the question, whether the establishment of the ESM may constitute an infringement of Art. 125 TFEU. The Court found that the overarching aim of the provision was the insurance “that the Member States remain subject to the logic of the market when they enter into debt, since that ought to prompt them to maintain budgetary discipline. Compliance with such discipline contributes at Union level to the attainment of a higher objective, namely maintaining the financial stability of the monetary union” (C-370/12 para. 135). As a result, neither the EU nor Member States may grant financial assistance to another Member State if the assistance may lead the recipient to abolish sound budgetary policy. Consequently, providing financial assistance through an institution like the ESM does indeed infringe Art. 125 TFEU, if the financial assistance is not subject to strict conditions.
The ESM provides its financial assistance through a credit line and as such does not necessarily assume the financial commitment of a borrowing Member State but instead creates new debt, which is to be repaid. The Court generally draws from this arrangement that the recipient must still follow sound budgetary policy (C-370/12 para 139). However, even the Court acknowledges that on top of the accountability for its debt, the ESM may have to add strict conditions, appropriate to the financial assistance instrument chosen pursuant to Art. 12 of the ESM Treaty in order to ensure budgetary discipline.
Furthermore, the ECJ held that, pursuant to Art. 12 of the ESM Treaty, the ESM will not simply grant financial assistance to Member States if they experience difficulties obtaining capital on the market, but only if indispensable to safeguard the financial stability of the euro area as a whole (C-370/12 para 142). Basically, this ensures that the ESM will not provide cheaper capital than the market even if the recipient may not be eligible for that. This would decrease the incentive to recapitalise through the market and therefore decrease the incentive for budgetary discipline.
Putting the credit line up to the test
Notably, the Pandemic Crisis Support credit line is a loan and not a grant. As such, funds received from the credit line must be repaid. Therefore, the principle of budgetary discipline is not entirely disregarded, and the most basic requirement of Pringle is met. However, it must be critically observed that there are next to no further conditions attached to the credit line. Indeed, the ECJ has identified conditions as an important element, alongside the repayment obligation, in order to ensure budgetary discipline. The logic behind this is clear. A loan could provide money so cheaply that a Member State would not have to recapitalise itself through the market. Additional conditions ensure in those cases the receiving Member State does not
excessively overspend money on unaffordable policies. Hence, a lack of conditionality places more focus on the lending terms of the credit line and raises the question if it sufficiently incentivises budgetary restraint. Admittedly, there are conditions to the credit line. Albeit the condition to invest the financial assistance directly or indirectly into the health sector does not incentive budgetary discipline, and therefore does not seem to constitute a strict condition as imagined by the ECJ, nor pursuant to Art. 12 of the ESM Treaty.
Furthermore, whilst acknowledging that the current situation is indeed a challenging time, it is not clear that the financial stability of the euro area as a whole is in jeopardy. The fact that no Member State has yet applied for the credit line may conversely prove that the financial stability of the euro area is intact, as all Member States can still recapitalise through the market. Of course, there may be other reasons as to why no Member State has applied, as I predicted above. But it is safe to assume, that if the crisis had become so severe that the euro area had become unstable, political reasons would have been casted aside in order to ensure stability. This indicates that the requirement of Art. 12 of the ESM Treaty is not (yet) fulfilled. Nevertheless, this is necessary in order to grant stability support in accordance with the following articles. On top of that, the ECJ finds the concept of crisis also necessary for the ESM to comply with EU law, as the ESM was not designed to be a regular creditor, but an emergency mechanism for the stability of the euro. Consequently, it should only be used as such. With that in mind, I would argue that an understanding of “indispensable to safeguard the financial stability of the euro area as a whole and its Member States” as meaning “any recession” constitutes a violation of Art. 12 of the ESM Treaty. A literal interpretation of the text cannot allow such a broad understanding. Paired with the remarks of the ECJ, it is evident that Art. 12 of the ESM Treaty shall only be evoked in exceptional cases of crisis. Again, whilst COVID-19 does undoubtedly constitute an exceptional crisis in many public and private areas, it does not seem to impose a crisis of financial stability of the euro area as a whole.
The ESM itself has calculated that its credit line is cheaper than recapitalising via the market for most Member States. Paired with both observations above 1) the loose conditions attached to the financial assistance and 2) the possibility that the requirement of financial instability of the euro area as a whole is not fulfilled, it appears as if the Pandemic Crisis Support credit line actually offers cheaper capital than the market without sensible safeguards in form of conditions to ensure budgetary discipline. Hence, the credit line might create an incentive to recapitalise through the ESM and not through markets. That essentially means that debt is shared throughout the eurozone, which is contrary to Art. 125 TFEU based on the arguments brought forward by the Court in its Pringle judgment.
Why does it matter?
Now you may ask yourself, why does this all matter? Indeed, at first glance it seems that this analysis only contributes to a theoretical legal discourse, particularly as no Member State has accessed the credit line. Yet, I do believe that it does matter in a broader context. My brief analysis reveals that the ESM is testing the boundaries of what it is allowed to do and when it is allowed to act. Even if that means that it may infringes EU law. If we continuously allow European institutions to interpret their competences in an expansive way, even and especially the ones acting outside the scope of EU law, the democratic legitimacy of those intuitions suffers. The consequences of which are, in my opinion, worse than the negative economic effects of the pandemic, which the ESM is trying to prevent. This leaves the EU with the need to be mindful of the actions of the ESM. It has the power to spark a lot of disgruntlement, therefore decision makers need to make sure that it only acts when the criteria of Art. 12 of the ESM Treaty are met.
 Craig, P. (2013). Pringle and Use of EU Institutions outside the EU Legal Framework: Foundations, Procedure and Substance. European Constitutional Law Review, 9(2), 263-284.