Cause and Effect in European Politics and Law

A Euro Member State at Risk May be Forced to Ask for Bailout

Ralitsa Kovacheva, November 24, 2011

To ask for bailouts will now cost the eurozone countries their budget powers and voting rights in the Council. This is envisaged in the new European Commission proposals, aimed at strengthening the economic governance of the euro area and which complement and build on the EU economic governance package. The first proposal aims to strengthen surveillance on budgetary policies in the euro area and requires member states to introduce debt brakes in their constitutions, to make their budget plans based on independent forecasts and to send them to Brussels by 15 October each year to be assessed by the Commission. If necessary, the Commission may require the preparation of a new budget plan.

Each country will receive an assessment from the EU's executive, which will be presented to its national parliament upon a request. After assessing all budgetary plans, the Commission will make an overall assessment of the situation in the euro area as a whole. Together with the national budgets, the overall assessment will be discussed by the Eurogroup (the finance ministers of the euro area). It is interesting to note that the paper specifically states that at each stage of preparation and evaluation of the budgetary plans the information must be public. Enhanced supervision is provided for countries in excessive deficit procedure. According to the changes adopted in the ‘6 pack’, the eurozone countries will be subject to financial sanctions at an earlier stage of the procedure, which will be adopted by the Council through the so-called reversed majority.

However, the real novelties are in the proposal to strengthen the economic and budgetary surveillance in countries “experiencing or threatened by serious difficulties with respect to their financial stability in the euro area”. Unlike before, now the Commission will not wait for a country at risk to ask for help but will decide alone whether a country should be placed in a special regime of enhanced surveillance. For instance, Italy has been placed in such a regime.

"Under the new rules, the Commission will have greater surveillance powers, so that we do not face again the situation where failings in one country endanger the stability of the euro area as a whole," Commission President Jose Manuel Barroso said.

Based on the Commission's assessment, if the financial situation of a country affects the euro area as a whole, the Council may decide (by a qualified majority) to recommend the country to request financial assistance and to prepare an adjustment programme. Moreover, the voice of the country concerned will not be taken into account. This effectively means that the remaining 16 member states can force it to request a bailout.

Another innovation is that once having received financial assistance a member state will remain under increased surveillance until at least 75% of its bailout loan is paid back. The post-programme monitoring can be extended by a Council decision.

European Commission President Jose Manuel Barroso explained that national parliaments would still have the final say on the budgets as before. What is new is that the Commission will have the right to review budget plans and may require changes, Barroso tried to present things in a softer light. He even found a piece of good news, saying that "National Parliaments will for the first time have the full information on all other countries in the euro area." As in his speech in Berlin on 9 November, the Commission president once again urged national democracy not to be opposed to European democracy because the two should be complementary to each other. "Otherwise, we will hand over material sovereignty, the real sovereignty, to markets and financial speculators, who are not subject to any kind of democratic scrutiny."

However, he was under heavy pressure from journalists who asked whether the Commission had a legitimate and even moral right to impose certain fiscal and economic policies on member states. Mr Barroso was visibly annoyed by these questions and repeated twice, adding that he was carefully measuring his words: "Without a strong governance in the euro area it will be difficult, if not impossible, to maintain the common currency."

But as the Commission president said, "greater budgetary discipline – and responsibility – should also open the way to greater financial stability." Therefore, the Commission presented a Green Paper on options for the introduction of Eurobonds, which the European Commission has called "Stability bonds”. euinside's detailed analysis of the topic is coming soon.