The Financial Crisis in the European Union

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• Creation of Banking Union

• Banking union creates a single rulebook for national banks to follow instead of national central banks regulating themselves.

• Because countries shared the euro and were very interdependent on each other, a deeper integration of the banking system was needed.

• ECB always had a role in regulating solvency of the banks but now Banking Union also oversees governance of banks and can investigate them.

• It’s for the members of the monetary union and anyone else who wants to opt into it.

• Budgetary targets were issued to states.

• States which have received bailouts have greater levels of requirement to comply with regulations set out for the semester.

• Outright Monetary Transaction Scheme was introduced to solve the bond issuing problems.

• ECB cannot act directly as a lender of last resort but can now buy bonds on the secondary market.

• ECB gave guarantee that if countries couldn’t repay their bonds, the ECB would.

• Also said that if the country complied with the strict regulation imposed on it, the ECB would buy their bonds.

• Questions over level of independence of ECB being far too high?

Case in Germany (Bundesbank ) challenging OMTS.

• Claimed ECB was acting as a lender of last resort even though this is expressly prohibited.

• ECB said it didn’t breach Treaty because in order for ECB to buy bonds, you have to have had a bailout from the European Stability Mechanism which then required the state to follow strict conditions.

• State had to be fully complying with decisions before ECB could purchase bonds.

• OMTS not acting as lender of last resort because they were buying bonds from third parties and there were strict controls already in place as to when they could buy bonds.

ESM (Bailouts)

• Before the crisis the European Financial stabilisation Mechanism - EFSM (a small loan facility and is temporary - up to 60bn) and European Financial Stability Facility - EFSF (larger long term loan facility which was owned by MS and could lend up to 400bn) were set up to bail countries out under limited conditions.

• These were replaced by The European Stability Mechanism Treaty which can offer 500bn in financial assistance but will only provide funding if certain conditions are met.

• Creation of ESM offers a more permanent fund as opposed to the EFSM and the EFSF as it has obligations for states to contribute.

• Provide bailout facilities.

• Art 122 TFEU (page 51) states that when member states are in difficulty because of natural disasters or due to issues they couldn’t control, the EU will help them out.

• However, this was not the case for Ireland and Greece so there are question marks over how far the bailouts can extend.

• Art 136.3 TFEU – The Member stattes whose currency is the Euro may establish stability mechanism which can be activated to safeguard the stability of the Euro as a whole.

• The granting of any financial assistance under the mechanism will require strict regulating.

• This is done through the European Stability Mechanism.

• Creation of ESM was legal as was established in the Pringle decision.

• Pringle case - Irish TD brought a case challenging the European Stability Mechanism saying that the EU can’t be a lender of last resort.