Estonia

VIII - ESM Treaty

The European Stability Mechanism (ESM) Treaty was signed on July 11 2011. It was later renegotiated and a new ESM Treaty was signed on February 2, 2012. The Treaty provides a permanent emergency fund that is intended to succeed the temporary emergency funds. It entered into force on September 27, 2012 for 16 contracting parties (Estonia completed ratification on October 3). The 17 contracting parties are the member states of the Eurozone, but the ESM Treaty is concluded outside EU law. 
(
http://www.european-council.europa.eu/eurozone-governance/esm-treaty-signature?lang=it and http://www.esm.europa.eu/pdf/FAQ%20ESM%2008102012.pdf)

Negotiation
VIII.1
What political/legal difficulties
did Estonia encounter in the negotiation of the ESM Treaty, in particular in relation to the implications of the treaty for (budgetary) sovereignty, constitutional law, socio-economic fundamental rights, and the budgetary process.

No difficulties were encountered during the negotiations. The Estonian Government supported bringing the entry into force of the ESM forward in time because of the greater operational effectiveness of the ESM compared to the EFSF as well as the more favourable size of commitment for Estonia in the former. Estonia’s primary preference was to establish a ceiling to cumulative loans granted by the ESM and EFSF to 500 billion euro. Following the decisions adopted at the meeting of the Heads of State and Government of the eurozone on 9 December 2011, Estonia was willing to raise the cumulative assets of the EFSF and ESM should this prove essential for maintaining the stability of the eurozone. In exceptional circumstances, Estonia was willing to forgo decision-making by unanimity in the adoption of aid programmes and adopt decisions by qualified majority vote (85%). Similar voting majority is in use in the IMF. Estonia supported the principle by which countries who wish to receive assistance from the ESM have to join the fiscal agreement.[1]

Ratification
VIII.2
How has the ESM Treaty been ratified in Estonia and on what legal basis/argumentation?

Pursuant to § 20 clause 6 of the Foreign Relations Act, a treaty shall be ratified in the Riigikogu if ratification is prescribed in the treaty. Since the acts of ratification and implementation of the ESM Treaty regulate the internal fulfilment of fiscal obligations taken by the state, the ratification act must be adopted by a majority of the membership vote pursuant to § 104 clause 15 of the Constitution.

Pursuant to § 106 of the Constitution, issues regarding the ratification and denunciation of international treaties shall not be submitted to a referendum.

The ESM Treaty was ratified by the Riigikogu on 17 October 2012 with 59 votes in favour, 34 votes against, 1 abstention.

Both the ratification of the ESM Treaty and its implementation are provided in the Act on Ratification and Implementation of Treaty Establishing European Stability Mechanism.

Ratification difficulties   
VIII.3
What political/legal difficulties
did Estonia encounter during the ratification of the ESM Treaty?

On 12 March 2012, the Chancellor of Justice initiated Constitutional Review Procedure at the Supreme Court on the basis of § 6 subsection 1 clause 4 of the Constitutional Review Court Procedure Act with a request to declare Article 4(4) of the signed Treaty providing for a 85 per cent majority for decisions on granting aid from the ESM to be in conflict with the principle of parliamentary democracy arising from § 1(1) and § 10 of the Constitution, and with § 65 10) and § 115 of the Constitution.[2]

In the parliamentary debates, the following issues were touched upon:

          Whether the ESM will solve problems;

          Whether financial centralization can lead to a loss of national sovereignty;

          The role of the plenary of the Riigikogu versus the European Union Affairs Committee of the Riigikogu in the ESM application procedures. The arguments for participation of the membership were related to the question exercising parliamentary control whereas the arguments against highlighted the inflexibility the membership in convening for matters requiring speedy decision-making as well as the lack of necessity of burdening the institution of membership with questions on implementation of an act. A comparison with the procedures relating to the IMF and other international organizations was made.

2301 votes were gathered in support of organising a referendum on the ESM Treaty. The petition however was of marginal importance and the numbers relatively low. In any event, Article 106 of the Constitution prohibits a referendum on this issue (see also question VIII.2).

Case law  
VIII.4
Is there a (constitutional) court judgment on the ESM Treaty?

Estonian Supreme Court judgment of July 12, 2012

1.      Name of the Court

Supreme Court of Estonia

2.      Parties

Chancellor of Justice, the Government of the Republic

3.      Type of action/procedure

Constitutional review procedure, regulated by the Constitutional Review Court Procedure Act. Pursuant to the Act, the Supreme Court adjudicates, i.a. requests to verify the constitutionality of legislative act or refusal to issue a legislative act, and of international agreements. The Court can do so on the basis of a reasoned request, court judgment or court ruling. Requests to the Supreme Court can be submitted by the President of the Republic, the Chancellor of Justice, a local government council or the Riigikogu. The procedure can take place both prior and after the entry into force of the legislative act in question.  

4.      Admissibility issues

The Supreme Court en banc held the request of the Chancellor of Justice to be admissible.

5.      Legally relevant factual situation

Excerpt from the Judgment:

“At a meeting of the European Council on 16–17 December 2010 the European Union (EU) Member States agreed about the need to establish for EU Member States where the single currency euro is in use a permanent stability mechanism for ensuring the financial stability (of the euro area). At the same meeting the EU Member States also agreed on amendment of Article 136 of the Treaty on the Functioning of the European Union (TFEU) in such a manner that the euro area Member States would have a clear authorisation to establish a stability mechanism. On 11 July 2011 the Minister of Finance signed the Treaty establishing the European Stability Mechanism (ESM) (the Treaty). On 9 December 2011 at a meeting of the European Council the Heads of Government of the euro area Member States agreed on the amendment of the Treaty.

On 26 January 2012 the Chancellor of Justice addressed the Minister of Finance with a memorandum concerning the amendments to the Treaty. The Minister of Finance replied to the Chancellor of Justice on 1 February 2012.

On 2 February 2012 the Government of the Republic adopted an order no. 60 “Approval of the Draft Treaty establishing the European Stability Mechanism and grant of authorisation”. By the order the Draft Treaty was approved and the permanent representative of Estonia to the EU was authorised to sign it. On 2 February 2012 the representative of Estonia in Brussels signed the amended Treaty which the Member States are required to ratify.

On 12 March 2012 the Chancellor of Justice had recourse to the Supreme Court, relying on § 6(1)4) of the Constitutional Review Court Procedure Act (CRCPA), with a request to declare Article 4(4) of the signed Treaty to be in conflict with the principle of parliamentary democracy arising from § 1(1) and § 10 of the Constitution, and with § 65 10) and § 115 of the Constitution.

By a ruling of 22 March 2012 the Constitutional Review Chamber of the Supreme Court referred the case to the Supreme Court en banc. The Supreme Court en banc asked the opinion of experts on the constitutionality of Article 4(4) of the Treaty. Opinions were submitted to the Supreme Court en banc by Dr Anneli Albi, the Department of Economics of the Estonian Business School, the Tallinn University Law School, the Faculty of Social Sciences of the Tallinn University of Technology and the Faculty of Law of the University of Tartu.”[3]

6.      Legal questions

Is Article 4(4) of the ESM Treaty in conflict with the principle of parliamentary democracy arising from § 1(1) and § 10 of the Constitution, and with § 65 10) and § 115 of the Constitution?

7.      Arguments of the parties

Chancellor of Justice:

The main claim of the Chancellor of Justice is that Article 4(4) of the Treaty interferes with the principles of parliamentary democracy and reservation by the parliament, and the budgetary powers of the Riigikogu. The nominal value of the capital stock to be subscribed by Estonia in the Treaty – about 8.5% of the GDP – is an extremely vast proprietary obligation, which significantly reduces the discretionary powers of the Riigikogu in making choices about the state budget – one of the most central elements of parliamentary organisation. The Chancellor of Justice does not consider the declarative condition that the ESM will exercise its right to grant financial assistance on strict and appropriate conditionality to suffice in legitimising all subsequent decisions of the ESM. This is particularly so because of Article 4(4) of the Treaty, which enables the ESM to approve financial assistance by a qualified majority of 85% of the votes cast and, thus, potentially only on consent of the six largest Member States. Since the benefit accompanying Article 4(4) of the Treaty to the financial stability of the euro area does not outweigh the interference with the principles of parliamentary democracy and reservation by the parliament, and the budgetary powers of the Riigikogu, the Chancellor of Justice considers the provision to be in conflict with the Constitution.[4]

Government of the Republic:

The Government of the Republic considers the request of the Chancellor of Justice to be inadmissible. Should the Court consider the application admissible, it is the opinion of the Government that Article 4(4) of the ESM Treaty is formally and substantively in conformity with the Constitution. Moreover, the Government perceives Article 4(4) of the Treaty to sufficiently secure the control function of the Riigikogu. This is particularly so because of the possibility to require, in the act ratifying the ESM Treaty, the representative of Estonia to act according to the guidelines provided by the Parliament when adopting decisions in the ESM.[5]  

8.      Answer by the Court to the legal questions and legal reasoning of the Court

Summary of the opinions of the Supreme Court en banc (excerpt from the Judgment):

“204. The Supreme Court en banc addressed the Treaty and obligations arising therefrom for Estonia. First, the Supreme Court en banc came to the conclusion that with the contribution key the Treaty determines the upper limit of the obligations of the Member States. Estonia undertakes to contribute 0.1860% of the authorised capital stock of the ESM and Estonia’s contribution amounts to 1 302 million euros. The Treaty sets out when and how the capital to be paid in must be paid in – for Estonia it is 148.8 million euros within five years. The Treaty determines the conditions as to how the ESM can make a call for callable capital to a Member State which for Estonia is 1 153.2 million euros.

205. The Supreme Court en banc held that the request of the Chancellor of Justice is admissible. The Treaty is an international agreement which the Chancellor of Justice is competent to challenge based on § 123(1) of the Constitution and § 6(1)4) of the CRCPA. The Supreme Court en banc was of the opinion that the Treaty is not part of the primary or the secondary law of the European Union. The Chancellor of Justice is not challenging in his request the constitutionality of the entire Treaty, but merely the constitutionality of Article 4(4) of the Treaty. Therefore, the Supreme Court en banc is in this case competent to review said provision only.

206. The Supreme Court en banc found that Article 4(4) of the Treaty interferes with the financial competence of the Riigikogu provided for in § 65 6) of the Constitution in conjunction with § 115(1) of the Constitution and in § 65 10) of the Constitution in conjunction with § 121 4) of the Constitution, and is related to the principle of a democratic state subject to the rule of law. By ratifying the Treaty the Riigikogu exercises the right arising from its financial competence and assumes financial obligations for Estonia. The Riigikogu’s possibility to make political choices is thereby restricted, because the choices already made have decreased the state’s financial resources. It also interferes with the financial sovereignty of the state of Estonia arising from the preamble to and § 1 of the Constitution, because the people’s right of discretion is thereby indirectly restricted. Article 4(4) of the Treaty interferes with the financial competence of the Riigikogu, as well as the state’s financial sovereignty related thereto and the principle of a democratic state subject to the rule of law due to the possibility that at the request of the ESM the callable capital must be paid in the future (up to 1 153.2 million euros).

207. In order to assess the constitutionality of the contested provision, the Supreme Court en banc weighed up the interference with principles and its objectives. The Supreme Court en banc is of the opinion that the purpose of Article 4(4) of the Treaty is to guarantee for the ESM in an emergency the efficiency of the decision-making mechanism to eliminate a threat to the economic and financial sustainability of the euro area. The Supreme Court en banc held that this objective is legitimate for interfering with the financial competence of the Riigikogu arising from § 65 6) of the Constitution in conjunction with § 115(1) of the Constitution and from § 65 10) of the Constitution in conjunction with § 121 4) of the Constitution, with the principle of a democratic state subject to the rule of law arising from § 10 of the Constitution, and with the principle of sovereignty arising from § 1 of the Constitution.

208. The purpose of Article 4(4) of the Treaty is related to the purpose of the Treaty to safeguard the financial stability of the euro area. The financial instability and closely related economic instability of the euro area also endanger the financial and economic stability of the state of Estonia, because Estonia is a part of the euro area. Economic and financial stability is necessary in order for Estonia to be able to fulfil its obligations arising from the Constitution. Consequently, the interference arising from Article 4(4) of the Treaty is justified by substantial constitutional values – the need arising from the preamble to and § 14 of the Constitution to guarantee the protection of fundamental rights and freedoms.

209. The Supreme Court en banc assessed the constitutionality of the interference arising from Article 4(4) of the Treaty by way of review of proportionality, and found that Article 4(4) of the Treaty provides for an appropriate, necessary and reasonable measure for the achievement of the objective. In weighing up reasonableness the Supreme Court en banc deemed it necessary to distinguish the interference occurring on the ratification of the Treaty and the interference which may occur later in implementing the Treaty when, at the request of the ESM, the callable capital must be paid. The Supreme Court en banc held that the interference occurring on ratification is not in itself very serious; however, the interference is based on weighty constitutional values – the need to guarantee the protection of fundamental rights and freedoms. On the basis of the aforesaid, the Supreme Court en banc assumed the position that Article 4(4) of the Treaty does interfere with the financial competence of the Riigikogu and thereby also the principle of the financial sovereignty of the state and of a democratic state subject to the rule of law, but the objectives justifying the interference are sufficiently significant.

210. In keeping with the aforesaid, the Supreme Court en banc found that Article 4(4) of the Treaty is not in conflict with the Constitution, and dismissed the request of the Chancellor of Justice.”

Ten judges submitted five dissenting opinions.

9.      Legal effects of the judgment/decision

The request of the Chancellor of Justice to declare Article 4(4) of the ESM Treaty in conflict with the Constitution was dismissed.

For a discussion of this case, see: Carri Ginter, ‘Constitutionality of the European Stability Mechanism in Estonia: Applying Proportionality to Sovereignty’, 9 European Constitutional Law Review (2013) p. 335-354.

10.  Shortly describe the main outcome of the judgment/decision and its broader political implications.

The ESM Treaty was ratified by the Riigikogu.

Capital payment         
VIII.5
What is the role of Parliament in the payment of the (first instalment of) paid-in capital required by the ESM Treaty (article 36 ESM Treaty)? What relevant debates have arisen in relation to this payment?      

The Parliament approved the payment by § 2 subsection 1 of the Act on Ratification and Implementation of Treaty Establishing European Stability Mechanism. No separate debates took place.

Pursuant to § 3 subsections 1 and 2 of the Act on Ratification and Implementation, the representative of the Republic of Estonia in the Board of Governors and the Board of Directors of the ESM requires a prior resolution of the Riigikogu in order to participate in a vote and to vote on changes in the ESM authorised capital stock on the basis of Article 10(1) of the Treaty, maximum lending volume and financial assistance instruments on the basis of Article 19 of the Treaty. If amendments to the Treaty arise from decisions to change the maximum lending volume or financial assistance instruments, or the ESM authorised capital stock is increased, the Government of the Republic shall submit the amendments to the Treaty to the Riigikogu for ratification.

Application & Parliament       
VIII.6
What is the role of Parliament in the application of the ESM Treaty, for example with regard to decisions to grant financial assistance and the disbursement of tranches, which both require unanimous adoption by the Board of Governors composed of the national Finance Ministers.

The national proceedings regarding draft decision specified in Article 13(2) of Treaty on Act on Ratification and Implementation of Treaty Establishing European Stability Mechanism are regulated by § 4 subsections 1-4:

          The Government of the Republic shall, pursuant to subsection 1521 (2) of the Riigikogu Rules of Procedure and Internal Rules Act, submit to the European Union Affairs Committee of the Riigikogu for an opinion a draft decision of principle on grant of financial assistance specified in Article 13(2) of the Treaty. The representative of the Republic of Estonia is required to adhere to the opinion of the Committee upon voting on a decision of principle on grant of financial assistance.

          Proprietary obligations shall not be assumed with regard to the Republic of Estonia and the representative of the Republic of Estonia shall not be authorised to define the conditions of the financial obligation by the forming of an opinion specified in subsection (1) of this section.

          The European Union Affairs Committee may decide that, in order to participate in a vote and to vote on a decision of principle on grant of financial assistance, the representative of the Republic of Estonia requires a prior resolution of the Riigikogu. In such case the Government of the Republic shall submit the corresponding draft resolution of the Riigikogu.

          The Government of the Republic shall submit a decision of principle on grant of financial assistance to the Committee for an opinion at the earliest opportunity after receipt of the agenda and materials of the meeting of the Board of Governors and the Board of Directors of the ESM where the specified issue is discussed.

The national proceedings regarding the memorandum are regulated by § 5 subsections 1-3 of the Act on Ratification and Implementation:

          In order to participate in a vote and to vote on a draft memorandum, the representative of the Republic of Estonia requires a prior resolution of the Riigikogu.

          The Government of the Republic may submit a draft memorandum, except a draft memorandum specified in Article 14(2), Article 16(2) and Article 17(2) of the Treaty, to the Committee for an opinion instead of the Riigikogu pursuant to subsection 1521 (2) of the Riigikogu Rules of Procedure and Internal Rules Act if the publication of the draft memorandum may threaten the purpose of the provision of stability support by the ESM. The Government of the Republic shall justify the submission of the draft memorandum to the Committee.

          The provisions of the second sentence of subsection 4 (1) and subsections (3) and (4) of this Act on apply to the proceedings regarding the draft memorandum:

o   The representative of the Republic of Estonia is required to adhere to the opinion of the Committee upon voting on a draft memorandum;

o   The European Union Affairs Committee may decide that, in order to participate in a vote and to vote on a draft memorandum, the representative of the Republic of Estonia requires a prior resolution of the Riigikogu. In such case the Government of the Republic shall submit the corresponding draft memorandum of the Riigikogu;

o   The Government of the Republic shall submit a draft memorandum to the Committee for an opinion at the earliest opportunity after receipt of the agenda and materials of the meeting of the Board of Governors and the Board of Directors of the ESM where the specified issue is discussed.

The national proceedings regarding amendments to memorandum are specified in § 6 of the Act on Ratification and Implementation:

          In order to participate in a vote and to vote on amendments to the memorandum, the representative of the Republic of Estonia requires a prior resolution of the Riigikogu.

          The Government of the Republic may submit draft amendments to the memorandum specified in subsection (1) of this section to the Committee for an opinion instead of the Riigikogu pursuant to subsection 1521 (2) of the Riigikogu Rules of Procedure and Internal Rules Act if:1) publication of the draft amendments to the memorandum, except to the memorandum specified in Article 14(2), Article 16(2) and Article 17(2) of the Treaty, may threaten the purpose of the provision of stability support by the ESM, or2) the memorandum is amended to an insignificant extent and the amendments are not related to increasing the amount of stability support.

          The Government of the Republic shall justify the submission of draft amendments to the memorandum specified in subsection (2) of this section to the Committee.

          The provisions of the second sentence of subsection 4 (1) and subsections (3) and (4) of this Act apply to the proceedings regarding draft amendments to the memorandum:

o   The representative of the Republic of Estonia is required to adhere to the opinion of the Committee upon voting on a draft amendment;

o   The European Union Affairs Committee may decide that, in order to participate in a vote and to vote on a draft amendment, the representative of the Republic of Estonia requires a prior resolution of the Riigikogu. In such case the Government of the Republic shall submit the corresponding draft amendment of the Riigikogu;

o   The Government of the Republic shall submit a draft amendment to the Committee for an opinion at the earliest opportunity after receipt of the agenda and materials of the meeting of the Board of Governors and the Board of Directors of the ESM where the specified issue is discussed.

Application difficulties     
VIII.7
What political/legal difficulties
did Estonia encounter in the application of the ESM?

No particular difficulties in the application.

During the debates on the Draft memorandum of Cyprus the following issues prevailed:

          whether it is realistic for Cyprus to be able to implement the reform programme;

          whether Cyprus is transparent and trustworthy partner;

          interest rate on the aid package.

The Resolution approving the draft MoU to be entered into between the Commission and Cyprus was adopted by the Riigikogu on 18 April 2013 by 54 votes in favour, 21 against, no abstentions.

Implementation
VIII.8

Have there been any relevant changes in national legislation in order to implement or to comply with requirements set by the ESM-Treaty?

No.

Miscellaneous
VIII.9
What other information is relevant with regard to Estonia and the ESM Treaty?

Not applicable.

[1] White book, supra note 6, p. 14.

[2] Estonian Supreme Court Judgment of 12.07.2012 No. 3-4-1-6-12, para. 4.

[3] Ibid., paras. 1-5.

[4] Ibid., paras. 9-16.

[5] Ibid., paras. 17-22.