The European Stability Mechanism (ESM) is the new EuroZone bailout fund which was supposed to come into effect this month, but developments at both ends of the EuroZone economic spectrum threaten to delay and possibly de-rail the new fund.
In Germanythis Tuesday, 10th July 2012, the special constitutional court is to commence its examination of complaints that the ESM fund may offendGermany’s famous constitution.
The scope of the ESM seems to be changing from week to week, but at its core, it was supposed to provide a centrally managed fund with up to €700bn available for EuroZone countries that got into financial difficulty. The original plan last year, was that the ESM would provide bailouts to countries in return for countries agreeing to take corrective action to restore their finances. But now it seems it is intended that the ESM will buy stakes in banks and may buy sovereign bonds without imposing conditions on countries. That’s this week, of course, next week the scope of the ESM might be different.
In Germany, there are concerns that Germanywill end up on the financial hook for wayward EuroZone countries which may borrow using Germany’s good credit standing, but then fail to implement reforms or repay the borrowing, leaving the German taxpayer nursing a loss.
What is expected this week in Germany is a decision whether or not to grant an injunction preventing the ratification of the ESM treaty in Germany until the constitutional court has fully examined all the issues. The ESM commits Germany to providing 27% of the ESM’s capital.
Near the other end of the spectrum, the ESM commits Ireland to providing 1.5% of the ESM’s capital and indeed we are supposed to start handing over that capital from this month, the initial contribution is €1.27bn and we were supposed to start handing that over in five €250m tranches over the next year and a half.Ireland’s maximum contribution is currently capped at €11bn should the ESM lose money or need more “firepower”.
But tomorrow at 10.30am in the High Court, those plans may also be de-railed, as Donegal South-West independent TD, Thomas Pringle is set to hear whether his challenge to the ESM treaty has been successful.
Deputy Pringle has argued that the ESM creates such a significant liability for this State that it should be subject to a referendum. “A referendum!” I hear you ask, didn’t we have one of those in May on this? No, what we voted on then was the Fiscal Compact, that Irelandwould agree to certain economic rules.
The ESM treaty is different.
If Deputy Pringle is successful, then we may have an “emergency” referendum. But the betting is that, regardless of who wins tomorrow morning – the Government or Deputy Pringle – the matter will be appealed to a higher court. If Deputy Pringle wins, then that means the ESM treaty will be put on hold in Ireland until any appeal is considered. If the Government wins, the betting is that there is a strong chance of an injunction being sought to prevent the ratification of the ESM treaty pending the outcome of any appeal.
Deputy Pringle’s action has already prevented the Government delivering on its promise to ratify the ESM treaty “immediately” after the Fiscal Compact vote on 31st May, 2012. If he is successful tomorrow morning, the consequences could be colossal for Ireland with the prospect of a second referendum amid a EuroZone context in which Spain and Italy are at what the late Brian Lenihan referred to, in Ireland’s context, as the Gates of Hell with borrowing rates at the end of last week unsustainable for both.
UPDATE (1): 9th July, 2012. Ms Justice Mary Laffoy has rejected Donegal South West independent TD’s challenge to the ESM treaty and she has ruled Ireland can ratify ESM treaty. The full judgment will be published at a later date. An appeal of the decision by Deputy Pringle is expected, and there may be an application for an injunction to stop the Government ratifying the ESM treaty pending the outcome of any appeal.
UPDATE (2): 9th July, 2012. RTE reports that the High Court is to refer an issue raised in the application to the European Court of Justice, which means that this case continues to have legs. The High Court has rejected an application for an injunction by Deputy Pringle, but that decision may be appealed to the Supreme Court. The Government has indicated that it will ratify the ESM treaty today. The judge’s decision is to be published at 2pm today, and it is hoped to publish a copy here. Deputy Pringle is reported to have said that the matter was “only at the halfway stage”
UPDATE: 10th July, 2012. Deputy Thomas Pringle has now posted the summary judgment on his website. I understand that an appeal to the Supreme Court has been made and the hearing is set to commence on 23rd July, 2012.
UPDATE: 10th July, 2012. It is understood that the Government will NOT now ratify the ESM until the German constitutional court has ruled on challenges there. Should the Government seek to ratify the ESM treaty before the Supreme Court has dealt with Deputy Pringle’s appeal, it is understood that an injunction will be sought by Deputy Pringle, presumably via an urgent appeal to the Supreme Court as the High Court has refused an injunction. Meanwhile in Germany, the ESM challenge is still being heard.