The Rule of Law and the Eurozone Crisis

The rule of law is a foundation principle of the European Union, yet the banking and sovereign debt crises of recent years threaten to undermine it. By Sophie Thurner

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The rule of law is a widely accepted principle; it is seen essential to the smooth functioning of any political system. In times of crisis, it can act as a tool of guidance for institutions or individuals in order to set clear limits to the use of power. Nevertheless, responses to crisis must be fairly quick and flexibly and thus sometimes disregard and erode this crucial principle.

There exists an intrinsic link between the rule of law and the European legal order, yet what is of particular interest is how these concepts are managed with regards to economic turbulence within the Eurozone monetary union.

The rule of law defined

It is merely impossible to give a “one-size-fits-all” definition of the rule of law. This is not just because there is no universally-agreed definition but also because its interpretation varies across the globe. In Germany, for example, the notion of the rule of law is interpreted by the concept of the Rechtsstaat, whereas in France, it is interpreted under the L’Etat de Droit. The concept of the rule of law is therefore anything but well defined, despite its wide acceptance and application. This might indicate that it is easier to explain the concepts in terms of its ends than its means. The rule of law establishes a relationship between rulers and the ruled, similar to the notion of the social contract theories developed by philosophers such as Hobbes and Locke.

An important feature, which should apply to all forms of the rule of law, is the fact that law must be applied consistently and everyone must be equal before it. This is the basis of establishing trust. Furthermore, it gives the law certainty and encourages its publicity. The ability of the law to be seen to guide human conduct is particularly essential and enhances the idea that people ought to be governed by law.

Another point, which is of crucial importance and a by-product when exercising the rule of law rightly, is the notion of stability. As Hayek notes: “The rule of law is both popular and vague [. . .] but any exercise of power should be subject to the law” (Hayek, 1994). His ideas thus emphasis the thesis that there is no single definition of the rule of law but rather a plurality of impressions. Furthermore, what recurring notions in many philosophical writings about the rule of law have in common is the crucial importance of separation of power and consistent enforcement of law in order to prevent its abuse.

The legal order and the European Union

The Union’s legal order rests on several principles that are constitutional in nature and have been developed by the European Court of Justice (ECJ) over a period of time. These constitutional principles include key themes, which are also outlined by the rule of law and are therefore directly reinforced by it. These establish the autonomous legal order of the EU, which has been made very explicit in the Costa v ENEL case. In this case the court reinforced the fact that in contrast to international treaties, the EEC Treaty has created its own legal system, to which member-states are bound to subscribe. In addition it is important to note that the Union’s legal order is given substance only through European law, making the EU a legal reality as it is created by law and based on law. Thus the institution is not only a creation of law but also pursues its objective purely by the means of law.

Especially after the Second World War, the rule of law gained importance on an international level. In the milestone judgement Les Verts v. Parliament, the ECJ referred to the European Community as a community based on the rule of law. This notion was made into EU law in the Maastricht Treaty and included the rule of law as one of the fundamental criteria, which a country must meet before accession to the EU. The rule of law was chosen, as a key principle because, even though its interpretations vary, its common denominator of the legal base was thought to foster mutual trust. It sometimes it is even interpreted as the backbone of the EU. As the current Justice Commissioner, Reding in a recent speech notes, “The Union is a unique construction as it is not bound together by force, by a common army or a common policy force, but only by the strength of the rule of law ” (Reding, 2013).

As previously outlined, the rule of law is a complex and multi- layered concept. Many treaties affecting the EU promote this concept; at the same time however, these treaties are silent on the substance of the concept. Consequently it is clear that the rule of law is one of the driving forces behind the legitimacy and effective working of the EU’s legal order. Therefore one can come to the conclusion that any erosion of the rule of law would negatively impact on the EU’s legal order. Ultimately this might lead to significant violations of one of the Union’s core aims.

The rule of law and the Eurozone crisis

Europe has recently been haunted by two, related crisis: a banking crisis, and a sovereign debt crisis which was exacerbated and induced by severe economic downturn in 2007. Excessive public borrowing prior and during the financial crisis, has led to macroeconomic imbalances and the unsustainable accumulation of public debt. Thus the EU monetary union struggled to preserve the stability of its common currency. The consequences of these problems are severe, such as an increase in long-term unemployment, yielding an ever-higher rise in poverty levels and potential social marginalisation. The crisis has hit the Eurozone hard, in particular countries such as Greece, Ireland and Portugal.

The countries hit worse by the economic crisis had to obtain assistance from various institutions such as the EU, the ECB and the IMF. This support attempted to induce stability by reducing the sovereign debt burden. An important actor in the management of the Eurozone problems is the ECB. It purchased more than €200 million of bonds via OMTs from EU member-states on the secondary market. This helped to prevent a significant drop of the bond price, which would have been detrimental for the Eurozone’s economy. Yet this programme can be criticised for being not compatible with Article 123.1 of the Treaty of the Foundation of the European Union (TFEU), which prohibits the ECB from purchasing debt instruments from its member-states. It is therefore questionable if these policies, which give greater power and competences to the ECB and to international agreements, are within the limits given to them by the EU legal order, both TFEU and the Treaty of the European Union.

Nonetheless, an alignment with these treaties is crucial, as they uphold the balance of power and therefore ensure that actions are taken with regards to the rule of law.  Furthermore, one might suggest that the changes in EU law have led to a constitutional disorder of the Eurozone. This is underlined by the fact that the power within the Eurozone is now concentrated in the hands of creditor countries and unelected bureaucracies such as the ECB, the European Commission and the IMF. Such a disparity implies that there is a separation between accountability and power, two concepts, which according to the rule of law, should go hand in hand.

Therefore, it is of crucial importance that any further measurements are in accordance with the rule of law; these include the ECB as a single regulator, as well as the potential of a future banking or even fiscal union. A union based on a federal system, as put forward by PDU, could solve many of the issues addressed above. It would not only give the ECB legitimacy but also more effective powers to successfully manage economic turbulences in accordance with the rule of law.

To conclude, it can be said that even though the rule of law lacks a specific definition it is a vital factor underpinning the legitimacy of the EU. The most recent financial crisis and its repercussions on Europe, in particular the Eurozone, have led to radical actions by the EU. Such measures have reshaped the nature and future of the institution. In order to avoid slipping from an economic crisis into a constitutional one, the EU must ensure that its future actions will be beholden to the rule of law. This would be most easily achieved by a federal Europe.


Bibliography

Costa v. ENEL (1964). ECR 585 (6/64). (Online). Available at: http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:61964CJ0006:EN:PDF

Hayek, F. (1994). The Road to Selfdom. Chicago: The University of Chicago Press.

Les Verts v. Parliament (1986). ECR 1339 C- 294/83. (Online). Available at: http://eurlex.europa.eu/smartapi/cgi/sga_doc?smartapi!celexplus!prod!CELEXnumdoc&lg=en&numdoc=61983J0294

Reding, V. (2013). The EU and the Rule of Law. European Commission Speech, 13/677. (Online). Available at: http://ec.europa.eu/commission_2010-2014/reding/index_en.htm

The Treaty on European Union (1992). (Online). Available at: http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:C:2010:083:0013:0046:en:PDF

The Treaty on the Functioning of the European Union (1958). (Online). Available at:http://eurlex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:C:2008:115:0047:0199:en:PDF

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