Bloomberg News

Euro-Area Bailout Fund Survival Faces Final Hurdle at EU Court

November 26, 2012

The euro area’s 500 billion-euro ($648 billion) fund to rescue indebted nations faces its final legal hurdle with the European Union’s highest court set to rule on the validity of the firewall.

The EU Court of Justice is scheduled to rule on an Irish lawmaker’s challenge to the European Stability Mechanism, or ESM, tomorrow. While the Luxembourg-based court has the power to topple the financial backstop by finding fault with the way it was created, it is likely to approve it or seek minor modifications.

“I don’t expect the court to rule that the ESM is in breach of the treaties, that would really be a big surprise,” said Marco Incerti, an analyst at the Centre for European Policy Studies in Brussels. Even if the court upheld some points, it would at most ask for “adjustments to be made, but that would be of little consequence.”

The ESM will replace the temporary European Financial Stability Facility, which has committed 192 billion euros of its 440 billion euros to aid Ireland, Portugal and Greece. The ESM in September survived a legal challenge in Germany, handing a victory to Chancellor Angela Merkel, who championed the facility as vital to save the euro area from a fiscal meltdown.

The EU court has worked on the case under a fast-track procedure for almost 4 months, using all 27 judges to consider the challenge -- the first time this has happened in a case referred by a national tribunal.

EU Role

Thomas Pringle, an independent member of the Irish Parliament, argues in the EU case that the ESM, violates the no- bailout provision under EU law and encroaches on the EU’s role in economic and monetary policy. He challenges a March 2011 decision by EU governments to change a legal provision in a treaty to allow for the ESM’s creation, saying this was done incorrectly.

“The fact that the case was heard by the full court as well as the active involvement of so many member states and EU institutions in the hearing underline its importance,” said Joe Noonan, Pringle’s lawyer. “It is a landmark case in the Union’s constitutional development.”

Even if the court ruled the ESM is valid, it shouldn’t be allowed to function until the treaty change has come into effect on Jan. 1 at the earliest, Pringle claims.

Subversion

“The ESM Treaty was set up deliberately outside the union. Mr. Pringle believes that to be a subversion of the carefully designed and well balanced union architecture,” Noonan said. “The law on which the union is founded is to be respected and not to be circumvented.''

Ireland’s finance ministry declined to comment on the case.

Ireland’s Supreme Court, where Pringle filed his challenge, decided in July to refer three questions to the EU’s top court. In a packed room, the full EU court heard arguments by all sides at an oral hearing in October.

With rulings often taking between one to two years, the EU court decided on Oct. 4 to treat Pringle’s case under an accelerated procedure due to the ‘‘uncertainty as to the validity of that treaty” and “to remove as soon as possible that uncertainty, which adversely affects the objective of the ESM treaty, namely to maintain the financial stability of the euro area.”

The court’s ruling can’t be appealed. The Irish tribunal that referred the case will have to give a decision afterwards on Pringle’s challenge, in line with the EU court’s ruling.

The case is: C-370/12, Thomas Pringle v. Government of Ireland, Ireland and the Attorney General.

To contact the reporter on this story: Stephanie Bodoni in Luxembourg at sbodoni@bloomberg.net

To contact the editor responsible for this story: Anthony Aarons at aaarons@bloomberg.net


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