Appunti esame International and European Economic and Financial Law, prof. Saravalle

International and European, Economic and Financial Law

Prof. Alberto Saravalle (Second Semester)

“Additional data on the syllabus which can be found on the previous folder”

Introduction to the course

Normally the course should be run in two classes weekly, this is not possible at this time so we will adapt the classes through Moodle. This will not be a direct course. We will hold periodically public chat where it is possible to discuss the materials and direct questions to the professor. Usually, this course is run through the Socratic Method, a very constructive and useful way of teaching, usually there would have been frontal lessons and later queries to the students directly in class. All the documents in the syllabus are available for free on the internet, as they are public. Since we will not be able to implement active classes, for the time being, we will continue with frontal classes.

The exam

Usually, the exam consisted of a paper of 10 pages on a relevant topic, but this is not possible this year; everyone must prepare shorter papers on certain topics. At the end of the course, there will be an oral exam. There will be a book made available by the professor with everything you need to know, probably through autumn. The materials are all available on the internet, so do not worry.

The course

In general, the professor does not have any requirement on previous courses, but some things will be taken for granted (TFUE, Treaty of Lisbon, Treaty of Maastricht, etc). For those who are unfamiliar, it might be difficult. The course in substance is focused on the European monetary union and it deals with different standpoints: a historical perspective and the steps taken up until the enlargement of the eurozone, the stability and growth pact (Everyone must understand it and, at the end, it will be possible to understand and discuss it). We will also see what other mechanisms come into force when there is a crisis (Historical references to a previous crisis), at the end coming to the fiscal compact. How has the BCE helped the union's states and what is quantitative easing? Later on, we will deal with what exactly happened during those crises and what were the conditions. We will deal with Greece, Portugal, Ireland, Spain, Cyprus, and later Italy.

We will conclude with an in-depth review of the austerity measures and how they have affected fundamental rights, thus how the others perceived it and how those measures can be changed.

Historical notions

• EEC (Created with the Treaty of Rome 1957) lasted up until 1992 with the Maastricht Treaty → CE (Lasted from 1992 to 2006 with the Treaty of Lisbon)
• UE (From 2006 to today)

During the European Economic Community (EEC), there were three political institutions which held executive and legislative power, plus one judicial institution and a fifth body created in 1975. These institutions (Except for the auditors) were created in 1957 by the EEC:

• The Council: Represents governments;
• The Parliament: Represents citizens;
• The Commission: Represents European interests;

Essentially, the Council, Parliament or another party places a request for legislation to the Commission. The Commission then drafts it and presents it to the Council for approval and to the Parliament for an opinion (In some cases it had veto power). The Commission’s duty is to ensure it is implemented by dealing with the day-to-day running of the Union and taking others to the court if they fail to comply. After the Maastricht treaty in 1993, these institutions became those of the European Union, though limited in some areas due to the pillar structure. Despite this, Parliament has gained more power over legislation and security of the Commission. The Court was the highest authority in law, setting legal disputes in the Community, while the Auditors had no power but to investigate.

Lesson 2: The first steps towards monetary union

We will begin this course with the history and the conditions that led to the creation of the UEM and, as such, the first reference of the UEM can be found in the 70s, when the European Economic Community’s transitional period in becoming the European Union was coming to an end. It was a challenging time, especially because of the Bretton Wood System’s crisis. Europe was passing through some economic turbulence, especially Germany and France; at that time the vice president of the European Commission drafted a memorandum on the coordination of the economic policies and monetary cooperation within the community and submitted it to the Council of ministers in February 1969, more than 50 years ago. The report made some key recommendations, especially on the coordination of the state's short-time economic policies and the convergence of the member states' medium terms policies, with the aim to create sooner or later a Machinery for monetary cooperation. This report possessed key elements we will find in the future UEM, more than 50 years later. The plans were approved by the council in July 1969 but were object of deep discussion by the end of the same solar year, thus it was deemed necessary to create a new goal for the European Union through integration. The goal consisted in the creation of a phased plan to achieve, step by step, an economic and monetary union. Back in 1970, contrary to many speculations, there was already concrete plans and intents on creating such convergence, mostly blocked by De Gaulle’s interference.

The possibility of an UEM was real and it was prompted by a group of experts (The basic procedure of the EU), chaired by Luxembourg’s PM (Werner Plan), as he was asked to draw up a report on the realization of such project. The Group, composed of representatives of the 6 member states, came to a halt on the course of actions needed for the fulfillment of the project (There were two opposing factions):

• One believed that monetary unification needed a gradual process, reducing fluctuations in ex. rates;
• The other believed that first was imperative to create convergence in monetary policies;

The group predicted a 10-year window, after that the Community should have been able to achieve full and irreversible convertibility and a monetary union with fixed exchange rates, this final objective needed to be achieved through different steps, encompassing:

• Liberalization of movements and capital (Some say this criterium was already present on the paper concerning the creation of the EU but achieved only in 1989) as the plan gave a time margin of 10 years, such provision would have been adopted earlier;
• Integration of the financial market, to create a single financial market;
• Eliminating the margin of fluctuation in the European community between the currencies of the members;

At the end of the day, if we compare these provisions with the Delore report (1989), we will find many similarities with the stages highlighted in the above-mentioned memorandum. The Werner plan did not envision the adoption of a single currency, neither the creation of the BCE but the Delore report went further. What was debated into the Werner Plan, came into fruition, as a test case, into the Delore Plan so we can safely assume the discussion of the Delore plan took place 20 years before its fruition.

Nevertheless, the UEM was not exempt from criticism, probably coming from the late implementation of the Werner provisions and the possibility to remove the states’ ability to leverage on monetary policies (To solve such criticisms there must be no divergence between member states). If the policies and the good practice of cooperating are not followed correctly there might be a domino effect, undermining the system’s core. Back in the 70s the council approved the Werner Report and passed a resolution enacting the short-term measures to be applied to successfully implement the plan, out of those provisions two stood out:

• The progressive convergence of currencies’ fluctuation;
• The creation of European monetary cooperation funds;

This first steps towards convergence were soon put into test a few years later; we might remember the 1971 financial crisis that led Nixon to discontinue the Bretton Woods system, thus suspending the convertibility of dollars into gold. There was a fair amount of negotiations and in 1972 the council adopted the resolution where it limited the margin of fluctuation between member countries at ±2.25%. The Paris meeting marked the beginning of what will be later called the Snake in the Tunnel. The idea was to restrict the limit of fluctuation, forcing the central banks to carry out the margins of intervention through dollars. It was a first shot at monetary cooperation, but it did not work out so well; currency markets were extremely volatile, and the Snake in the Tunnel was not able to contain currency speculations. This is precisely why during that time, the Snake System lost most of its members but for sure it was an interesting experience. Contrary of all disbelief, the possibility of a monetary union did not lose much steam but was hit hard, especially during the oil crisis of 1979, terrorism, embargoes and political turmoil (With Italy part of the Snake in the Tunnel system it faced great turmoil as its economy was inflation based, leading to its opting out and requesting financial aid through IMF). Reports and resolutions on the topic of Monetary Union were still relevant (1975- Timmerman report) and finally, in 1977 the newly appointed president of the European Commission, re-launched the idea of an economic and monetary union. The adoption of the European Monetary System (EMS) came into fruition the next year thanks to the European council, leading to the establishment of the new system in 1979.

Lesson 3: The EMS, completing the internal market: The single European act and the Delors report

Until now we analysed the first steps towards monetary union and European monetary integration up until 1978 with the EMS. The EMS contemplated 6 different exchange rates and fluctuation bands allowed between different currencies; every time one currency would have gone outside of the allowed band, the European Central Bank would intervene by selling currency (±2.25% for normal countries and Italy ±6%).

Italy’s band was put into place with the idea that it would be a provisional measure leading up to harmonization later on. The system was based on the general European Currency Unit, known for its acronym ECU, which was an accounting unit made up of an average value between Europe's different currencies (It would be different from the Euro itself). The EMS for quite some time worked quite well and created greater coordination among central banks and European institutions as it provided more control over currencies’ volatility, simmering down inflation and deflation spikes. This was a key step toward greater European monetary integration but was kept outside the EEC institutional framework (It was not part of the European Union it was simply something the governments were pursuing, and the central banks were implementing).

Just to be clear, the timing of this integration was controversial, especially in Italy there were several parliamentary debates, echoing some of the criticisms still debated in today's political scenario. The monetary union was feared as a system made to prejudice Italy as it would have tied down her possibility to intervene in the real economy. Criticism were proven otherwise, and the EMS proved to be quite efficient and useful. Moving forward the beginning of the 80s we have a change in the European prospective over EMS and Europe, something like a breeze of fresh air for trust into the European projects and union itself, much different than the Eurosceptic 70s (It is the decade of Eurocommunism). It all started with the new presidency of the European Commission by Jacque Delores which launched an ambitious project: Aiming for internal market completion by 1982. Delores proposed to adopt a certain number of directives to abolish all Physical, technical and fiscal barriers from the commerce of goods, thus creating a real internal market.

In the 80s we had the first real amendment on the treaties of the EEC, in the form of the Single European Act (1986, through Andreotti’s and Craxi’s request for giving more power to the parliament but ended up with the Luxembourg summit, giving more power to the Commission), which enforced, on the preamble, the need for an European Monetary Union, to be achieved with the help of the EMS to reach full monetary cooperation. Interesting was article 102.A of the Single European Act that required member states to cooperate, following “to achieve the balance of payments, maintaining confidence in the currency and assuring a high level of employment and stability of prices”.

We have in the Single European Act, for the first time, an actual acknowledgment on the importance of Monetary union, something that should be pursued by the states. It is true, however, that the measures to be followed were to be adopted with an intergovernmental system. Being intergovernmental it has always remained outside of the normal EEC cooperation method because it left the final decision in the hands of the single states, whereas the community method leaves the decision making in the hands of the European institutions (which can adopt with majority or unanimity as required by the treaties). For the time being, we must mention that the Monetary union’s future was in the hand of every single state but, ultimately the convergence of the European common monetary policies was considered essential to further the growth of the European community. As the decision making was in the hand of intergovernmental procedures, any changes in this respect had to be carried out by the means of an intergovernmental conference, with the approval of every relevant actor involved. Nevertheless, this was an important step forward and created some kind of enthusiasm for the idea of monetary union and completion of the internal market; abolishing the pre-existing barriers of commerce, capitals and work would be further facilitated by those ideas converged into the Monetary union, ultimately reaching the single currency (Euro). The idea to move forward in this respect was viewed positively, ultimately to reach the monetary union dreamed by the founding fathers of the EMS. Aided by this positive momentum, the European Council met in 1988, recalling the member state's past objectives to further the route towards monetary union (Adoption of the single European act) and appointed a commission to carry out the studies on how this project would be achieved. The committee was chaired by Jacques Delores and each member state appointed a commissioner from the National Central Bank. The commission was expected to show the result of the think tank by 1989 as the Delores Report. It was published in April 1989. There was some sort of correlation between the Delores Report (1989) and the Werner Report (1970s) which we previously talked about.

The realization of the Monetary union would require the following three conditions:

• Irreversible convertibility of currencies;
• Total liberalization of capital transactions and complete integration of banking and financial markets;
• The liberalization of goods, persons and capitals was contemplated since the 50s but the latter was always considered a background objective, not to be achieved with utmost priority. Capital mobility was allowed only when deemed necessary in achieving the other three objectives;
• During crisis, member states adopted restrictions of such provisions like the Italian counterpart of (Leggi Valutarie);
• The free circulation of capital was not fully implemented up until the late 80s when we had this liberalization.
• Fixed Margins of fluctuation between the currencies, thus locking the EX rates mechanism.

Delores thought those criteria would be fully implemented in a short time, maybe he was too optimistic because they were never fully adopted. From the Commission’s prospective, the goal was to focus on the third point, thus locking the exchange rates, nevertheless, the process of monetary unification was to be completed by also adopting a single currency (Difference from the Werner Report) as parity was obviously not enough. That would have led to the creation of an ad hoc monetary institute (BCE) who could have applied monetary policies instead of the states. What was one of the most important domestic competence would be administered by European institutions. But we are talking about ECONOMIC and monetary union… we have yet to discuss the founding pillars of full economic union:

• Internal market;
• Competition policies (Antitrust for example);
• Common policies aimed at structural reforms and regional development;
• Macroeconomic policy coordination which involved binding rules for common budgetary policies;

If on one hand, we want monetary cooperation and union, on the other we must achieve economic integration, following common economic policies… the will to carry forward this project needed coordinated efforts.

Materials: Delores report (16th to 66th paragraph)

Lesson 4: The Delors report, the Maastricht treaty

The Delors report contemplates certain steps to achieve monetary and economic union, as well as tips and procedures for full convergence of prices, exchange rates, and margins. In doing so, the report creates some sort of balance between economic and monetary policies as they cannot operate alone (Both intergovernmental and European cooperation, as well as common adoption of the rules). In a nutshell, the report envisages certain steps to achieve monetary union, a gradual path that will lead to the creation of an independent, central European bank (BCE), implying the imposition of certain constraints.

The first stage was supposed to be carried out in the years spanning from 1990 and 1994, that span of time would have led to the completion of the internal market and the removal of all barriers and tariffs. During this phase, all financial instruments would be able to circulate freely within the internal market, as well as ins...