Editorial of October 2016

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by Sophie Perez Fernandes, Junior Editor

Engaging EU liability within the European Stability Mechanism framework

Last September 20th, the European Court of Justice (ECJ) delivered two judgments regarding the role of the European Commission and, to a lesser extent, the European Central Bank, in the negotiation and signing of the Memorandum of Understanding concluded between the Republic of Cyprus and the European Stability Mechanism (ESM) during the 2012-2013 financial crisis, and, in particular, in the restructuring of the banking sector in Cyprus imposed as a condition for the grant of financial assistance.

In Mallis and Malli (Joined Cases C-105/15 P to C-109/15 P), actions were brought against the European Commission and the European Central Bank for the annulment of the Eurogroup’s statement of 25 March 2013 concerning, inter alia, the restructuring of the banking sector in Cyprus. In turn, in Ledra Advertising (Joined Cases C-8/15 P to C-10/15 P), depositors of two large Cypriot banks brought actions against the European Commission and the European Central Bank for the partial annulment of the Memorandum of Understanding of 26 April 2013 adopted jointly by the ESM and the Republic of Cyprus and also for compensation for damages allegedly suffered following the request for financial assistance and the ensuing restructuring of the two banks in question.

The ECJ had already been called upon to rule on judicial protection questions raised by the ESM framework. Created in order to provide, where needed, financial assistance to the Member States whose currency is the euro, the ESM was instituted through an international agreement between euro area Member States – the Treaty establishing the ESM, concluded in Brussels the 2th February 2012, in force since the 27th September 2012. Thus, the ESM Treaty is not part of the EU legal order, as confirmed by the ECJ in the famous Pringle judgment (C-370/12). As a consequence, when creating the ESM, or acting within its framework, Member States do not act within the scope of application of EU law for the purposes, in particular, of Article 51(1) CFREU. Individuals seeking to challenge Member States’ measures adopted pursuant the conditions laid down in a Memorandum of Understanding would not, therefore, find in the preliminary ruling mechanism an indirect means of access to the ECJ in order to assess their compliance with EU law and, in particular, the CFREU as the former was not in question and the latter was hence out of reach.

What the above mentioned judgments, and especially Ledra Advertising, emphasize is the link nonetheless existing between the ESM framework and the EU legal order. Quoting Alicia Hinarejos (EU Law Analysis), in order to carry out its functions, the ESM “borrows” two EU institutions, the European Commission and the European Central Bank, two thirds of the infamously known Troika. The question is whether (and, if so, when) EU institutions’ actions within the ESM framework might be reviewed and, when harmful, give rise to compensation under EU law and, in particular, in light of the CFREU.


Those were the questions raised before the ECJ. The applicants challenged before the General Court and, on appeal, the ECJ the validity of an Eurogroup’s statement (mentioning the agreement reached with the Cypriot authorities on the key elements of a future adjustment programme, welcoming, in addition, the plans for the restructuring of the financial sector) (Mallis and Malli) and of the Memorandum of Understanding concluded between Cyprus and the ESM (Ledra Advertising); they also argued that the European Commission’s involvement in the adoption of the latter should give rise to compensation for the damages caused in violation of Article 17(1) CFREU (Ledra Advertising).

The actions for annulment were unsuccessful. Both judgments reiterate the finding in Pringle: ESM acts fall outside the scope of EU law for the purposes of judicial review. Thus, neither the Eurogroup statement (Mallis and Malli) nor the Memorandum of Understanding (Ledra Advertising) can be the subject of an action for annulment: i) the duties conferred on the European Commission and the European Central Bank within the ESM Treaty, important as they are, do not entail any power to make decisions of their own; ii) the activities pursued by those two institutions within the ESM Treaty commit the ESM alone; and iii) the role played by one or more EU institutions within the ESM framework does not alter the nature of ESM acts of falling outside the EU legal order. In addition, as regards the Eurogroup statement (Mallis and Malli) in particular, the ECJ also aknowledged its purely informative nature: the statement was intended to inform the general public of the existence of a political agreement between the Eurogroup and the Cypriot authorities reflecting a common intention to pursue the negotiations in accordance with the statement’s terms; furthermore, nothing in the statement reflected a decision of the European Commission and the European Central Bank to create a legal obligation on the Member State concerned to implement the measures which it contained.

Regarding the claim for compensation raised in Ledra Advertising, the ECJ denied any link between its finding in relation to the conditions governing the admissibility of an action for annulment under Article 263 TFEU and the admissibility of an action for compensation under Articles 268 and 340 TFEU. The involvement of the European Commission and the European Central Bank in the adoption of an ESM Memorandum of Understanding does not alter the “essential character” of the powers conferred on those institutions by the EU Treaties. As for the European Commission, in particular, even within the framework of the ESM Treaty, it retains its role of “guardian of the Treaties” (Article 17(1) TEU). As a consequence, the ECJ infers, the European Commission should refrain from signing a Memorandum of Understanding whose consistency with EU law it doubts.

The ECJ then proceeded examining the claim for compensation for the damage allegedly suffered by the applicants as a result of the role played by the European Commission in the context of the adoption of the Memorandum of Understanding adopted by the ESM and Cyprus. The ECJ first recalled its settled case-law relating to non-contractual liability of the EU. Accordingly, the EU may incur non-contractual liability if the following conditions are fulfilled: i) unlawfulness of the conduct alleged against the EU institution (for which sufficiently serious breach of a rule of law intended to confer rights on individuals must be established); ii) damage; and iii) causal link between the conduct of the EU institution and the damage complained of.

Only the first condition for liability was examined. The claim for compensation was based on Article 17(1) CFREU: the applicants argued that, in the context of the adoption of the Memorandum of Understanding, the European Commission had not ensured its compliance with the fundamental right to property as guaranteed by the CFREU. According to Article 51(1) CFREU, the CFREU is addressed to the EU institutions without any condition, including, therefore, when they act outside the EU legal framework – this, contrary to Member States, that are not bound by the CFREU when acting outside the scope of EU law. Thus, when acting in the context of the ESM Treaty, in particular, the EU institutions, maxime the European Commission, must comply with the CFREU, whilst the Member States do not. Consequently, the ECJ examined whether the European Commission had contributed to a sufficiently serious breach of the applicants’ right to property, within the meaning of Article 17(1) CFREU, in the context of the adoption of the Memorandum of Understanding.

The right to property as guaranteed by Article 17(1) CFREU is not absolute: its exercise may be subject to restrictions under Article 52(1) CFREU. Applying this provision, the ECJ concluded that, “in the view of the objective of ensuring the stability of the banking system in the euro area, and having regard to the imminent risk of financial losses to which depositors with the two banks concerned would have been exposed if the latter had failed”, the disputed measures contained in the Memorandum of Understanding did not constitute a disproportionate and intolerable interference impairing the very substance of the applicants’ right to property. As a consequence, the European Commission could not be considered to have contributed to a breach of the applicants’ right to property guaranteed by Article 17(1) CFREU and, thus, the EU non-contractual liability could not be engaged on that basis.

Despite this negative outcome for the applicants, Leda Advertising is a positive ruling regarding the judicial protection within the ESM framework and, in particular, concerning the protection of fundamental rights often affected by austerity measures in a crisis context. Acknowledging a subsisting link with EU law, and despite the difficulties inherent to the compensation route, a way was disclosed – not a highway, but still a path…

Picture credits: Eurogroup meeting (…)  by EU Council Eurozone.

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