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.
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What political/legal difficulties
did Finland 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.

The Finnish Government informed the Parliament about the Treaty negotiations on 11 April 2011(E 190/2010 vp, memorandum about the negotiations and the contents of new Treaty). The memorandum was considered by the Parliament and for example the Constitutional Law Committee discussed the issue during this process. The Government argued that a new permanent mechanism is of a major importance. However, according to the Government, the Treaty proposal required clarification. During the negotiations for the Government it was important that the Treaty would include private sector involvement and that the mechanism would have preferred creditor status.

The core challenges in the negotiations related to the size of lending capacity, provisions on private sector involvement, the inclusion of Collective Action Clauses (CACs) in operative articles and the provisions on decision-making, which in the Finnish view presumed unanimity. The question of collaterals was not a fundamental problem, since the question relating to preferred creditor status was settled rather early (December 2010). The question relating to the position of the ESM loans was settled by para 13 of the preamble to the ESM Treaty, stating that the “Heads of State or Government have stated that the ESM loans will enjoy preferred creditor status in a similar fashion to those of the IMF, while accepting preferred creditor status of the IMF over the ESM. This status will be effective as of the date of entry into force of this Treaty. In the event of ESM financial assistance in the form of ESM loans following a European financial assistance programme existing at the time of the signature of this Treaty, the ESM will enjoy the same seniority as all other loans and obligations of the beneficiary ESM Member, with the exception of the IMF loans.” While there was clearly a preference for an operative article, this preambular paragraph was deemed to offer satisfactory guidance for the interpretation of the Treaty.

The government interpreted its own program in the way that collaterals would be necessary as regards the ESM in case the latter had no preferred creditor status. Based on the preamble, when ESM financial assistance in the form of ESM loans followed a European financial assistance programme existing at the time of the signature of the ESM Treaty, the ESM enjoys the same seniority as all other loans and obligations of the beneficiary ESM Member. As regards the Cypriot ESM program there was no need to require a collateral, since the ESM enjoyed preferred creditor status.

After the initial memorandum the Government informed the Parliament about the Treaty negotiation in several memoranda, the most important ones being memoranda of 12 May 2011 (E 13/2011 vp) and 20 May 2011 (U 6/2011 vp), discussing the requirements and limits Finland would have for participation in the forthcoming Treaty. These negotiations took place after the general elections, but before the appointment of Prime Minister Katainen’s Government.

The memorandum of 20 May 2011 was handled in the Constitutional Law Committee too. In its statement (PeVL 1/2011 vp), the Committee underlined that the new Treaty would require the approval of the Parliament under Section 94.1 of the Constitution (see also question VIII.2). According to the Committee, the Treaty impinged upon the legislative and budgetary powers of the Parliament and thus the approval by the Parliament was required. The Committee also required that in the Finnish system the preparation of the national positions considering the ESM Treaty would fall under the competence of the Council of State/Government (not the President) as being a matter which is to be juxtaposed with the European Union affairs, yet formally being outside the Union system, thus simultaneously giving the Parliament itself an exceptionally strong position in the preparation of the Treaty (which as to its form constitutes an international agreement) based on Sections 96 and 97 of the Constitution which concern the rights of participation and information of the Parliament.

Renegotiation ESM Treaty

Later, the Prime Minister informed the Parliament (20 July 2011 and 2 August 2011) about the preparations for the Treaty. Subsequently, a new set of memoranda was sent for the Parliament on 25 August 2011 (U 27/2011 vp, memorandum concerning the new Treaty on ESM). When discussing the Treaty under preparation the Constitutional law Committee (PeVL 22/2011 vp) re-assessed the Treaty, establishing that the Finnish liabilities based on the Treaty could increase under the emergency voting procedure by the envisaged qualified majority decision making against the will of Finnish member, which would be against the principle of sovereignty and contrary to the Parliament’s budgetary powers. If the Treaty in its final form would include this kind of possibility, it had to be approved according to the Sections 94.2 and 95.2 of Constitution, contrary to what the Committee had previously established.

At the time, there might not have been the required qualified majority in the Parliament in favour of the ratification of such a Treaty. During the following negotiations the Government underlined the need of unanimous decision making within the Mechanism and further clarifications and limits for the so called emergency decision making in the Mechanism, since they enabled a lighter national procedure in the Finnish Parliament.

How has the ESM Treaty been ratified in Finland and on what legal basis/argumentation?

The Government proposal relating to the ratification of the ESM Treaty (No 34/2012 vp, Euroopan vakausmekanismin (EVM) perustamisesta tehdyn sopimuksen hyväksymisestä ja laiksi sen lainsäädännön alaan kuuluvien määräysten voimaansaattamisesta) was presented to the Parliament on 26 April 2012. It was announced in the Parliament on 27 April 2012 and sent to the Committees of the Parliament on 3 May 2012. After Committee consideration it was returned to the Plenary following the relevant procedures, and was discussed there on 13, 19 and 21 June 2012. The relevant Act was approved on 21 June 2012 (aye 104 – no 71). The President signed the law (No 402/2012) on 29 June 2012 and it entered into force on 4 October 2012 based on a Decree of the Government (No 534/2012).

The Treaty was approved by the Parliament according to Section 94.1 of the Constitution of Finland. (Sec. 94.1, first sentence: “The acceptance of the Parliament is required for such treaties and other international obligations that contain provisions of a legislative nature, are otherwise significant, or otherwise require approval by the Parliament under this Constitution.) The provisions of the Treaty, in so far as they were considered to be of a legislative nature, were brought into force following the general practice through an Act (No 402/2012) and the remainder through a Government Decree (No 534/2012).

This procedure is based on the findings of the Constitutional Law Committee of the Parliament when assessing the relationship of the Treaty with the Constitution. The Constitutional Law Committee issued a statement on the new Treaty (PeVL 13/2012 vp). Like when considering the EFSF Treaty earlier, the Constitutional Law Committee assessed the amount of Finnish capital investment in the ESM and the risks related to it against the so-called Constitution-based obligations of the state. It required the financial liabilities and investments in the various parallel mechanisms to be calculated in toto. In the ESM, the Finnish part of the paid-in capital (EUR 1.4 billion) and callable capital (EUR 11 billion) were found extensive by the Constitutional Law Committee for example, when compared for example with the annual State budget. In order to establish the applicable procedure for approval and bringing the Treaty into force, the Committee considered the total amount of public debt and risks to the investment.

Of major importance for its conclusion was the interpretation that the Parliament has, due to the participation and information rights based on Sections 96 and 97 of the Constitution, possibilities to genuinely control and influence the Finnish member of the ESM Board of Governors, where for example decisions on the capital payments are made unanimously. According to the Constitutional Law Committee, the State’s current liabilities did not even in this case endanger its possibilities to take responsibility for its Constitution-based duties. When evaluating the possible risks to the investments made, operations within the ESM provided greatly improved possibilities for risk management when compared with the previous situation.

Especially the emergency decision procedure (Art. 4 and 5(6) of ESM Treaty) was discussed in the Committee statement – both ex ante and ex post its conclusion -, in particular as regards the scope of decision-making by qualified majority in the ESM Board of Governors. As said above, in the ex ante scrutiny, based on the draft agreement, it seemed that the financial liabilities of Finland could also grow by a qualified majority decision of the Board of Governors over the maximum limit defined in the agreement, even if Finland opposed such a decision. This possibility was considered to affect national sovereignty and the budgetary competence of the Finnish Parliament, and led to demands concerning a need to specify the agreement in this respect. When Finland ultimately approved the agreement, this matter was no longer problematic, as it had been solved through changes to the agreement during negotiations, for example as regards the situations in which the emergency voting procedure could be used and by limiting the relevant liabilities. Also the insertion in Article 4(4) – “Where the emergency procedure referred to in the first subparagraph is used, a transfer from the reserve fund and/or the paid-in capital to an emergency reserve fund is made in order to constitute a dedicated buffer to cover the risks arising from the financial support granted under that emergency procedure. The Board of Governors may decide to cancel the emergency reserve fund and transfer its content back to the reserve fund and/or paid-in capital.” – was relevant for this consideration.

The transfer of powers to the ESM was not considered significant with regard to Finnish sovereignty. Thus the instrument was accepted in the Parliament and brought into force nationally in accordance with the ordinary legislative procedure pertaining to an Act of Parliament.

Ratification difficulties
What political/legal difficulties
did Finland encounter during the ratification of the ESM Treaty?

The drafts of the ESM Treaty were repeatedly scrutinized ex ante by the Parliament according to the Sections 96 and 97 of the Constitution. Thus the Constitutional Law Committee had the possibility to discuss the constitutionality of the new Treaty before it was submitted to the Parliament for final approval, and various amendments were successfully proposed by the Government following its findings during the negotiations (see also question VIII.2).

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

See in general about the absence of a constitutional court in Finland and about the ex ante consideration of crisis measures by the Constitutional Law Committee of parliament, question IV.5. For the Constitutional Law Committee’s findings on the ESM Treaty, see questions VIII.1 and VIII.2.

Capital payment 
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?

Funds for this purpose were included in the second supplementary budget in 2012, which presumed the participation of the Parliament in its adoption process. Subsequently the Government decided on 4 October 2012 to subscript the shares.[1]

Application & Parliament     
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 Constitutional Law Committee and the Audit Committee of the Parliament have set demands on the participation and information rights of the Parliament when decisions are made in the ESM. Part of the argumentation at the time when the Treaty was approved was based on the possibilities of the Parliament via its participation and information rights based on Sections 96 and 97 of the Constitution, to control and influence the Finnish member of the ESM Board of Governors, when for example decisions on the capital payments are made unanimously. Thus the Government has to keep the Parliament informed about the decisions to be taken under the Mechanism and to consult the Parliament before the decisions are taken. The Audit Committee of the Parliament, one of the Parliament’s specialist committees further insisted on being informed under Section 97 of the Constitution about the annual reports of both the ESM and the ESM audit committee, and about the EFSF, in order to enable a discussion of the risks involved.[2]

The Parliament is involved in the functioning of the mechanisms. As regards decision-making within the ESM, the Parliament has based the requirement concerning its participation in national decision-making on Sections 96 and 97 of the Constitution. The arrangements made in the context of the ESM rely on the need to safeguard the Parliament’s central role in the exercise of budgetary and financial powers. Decisions relating to the granting of loans are as to their nature and their financial implications considered to be so significant that they require the provision of relevant information by the responsible Cabinet minister prior to decision-making within the ESM in order to safeguard the prerogatives of the Parliament. The Constitutional Law Committee has required that these constitutional aspects for participation of national parliaments through the national representative have to be reflected in its decision-making rules, arrangements and practices within the mechanism (PeVL 13/2012).

In case the ESM Treaty is to be amended in order to raise the ESM capital, the matter would – since it involves an amendment of an international agreement – need to be approved by the Parliament on the basis of Section 94 of the Constitution.

Application difficulties   

What political/legal difficulties
did Finland encounter in the application of the ESM Treaty?

Direct recapitalisation

The discussion concerning the additions to the list of ESM financial tools (Article 14 of the ESM Treaty) with the perspective of enabling direct recapitalisation of financial institutions through the ESM has been somewhat problematic. Additions to the list have presumed unanimous decision in the Governing Board, but the Constitutional Law Committee has in general considered that enabling direct recapitalization operations should be made by amending the ESM Treaty and not based on Article 19 (PeVL 3/2013 vp, PeVP 108/2013 vp, PeVP 18/2014 vp). This is linked to a need to control the overall amount of commitments and the rights of information and participation of the Parliament under Sections 96 and 97 of the Constitution. Even in the case the addition of direct recapitalization were approved, these considerations should be taken fully into account.  Therefore the use of this tool should be limited, and be possible to use only after bail-in and national back-stops. Direct recapitalization of financial institutions through the ESM should come into the picture as the last instance, after all the other ESM instruments have been exhausted.


A different matter that is traditionally of interest for the Finnish Government and Parliament is the transparency regime, and the Finnish footprint can be found in Article 17(1) of the By-Laws, which states the following:

Article 17 Disclosure of Documents

1. This Article 17 sets forth the conditions under which the ESM may communicate documents drawn up or held by the ESM to other persons or entities or otherwise disclose such documents externally.

This Article 17 does not concern:

(a) the flow of information within the ESM, including to the Board of Governors, the Board of Directors, the Board of Auditors or the external auditors;

(b) the flow of information within and between the national governments and parliaments of ESM Members, it being understood that this Article 17 is without prejudice to applicable legal provisions governing such information exchanges.

The key issue from the Finnish point of view has been to ensure that the ESM arrangements do not prevent the Government or Finnish members in the ESM Governing Bodies from sharing information with the Parliament, or from applying the national access to documents regime, which is more generous than the European one.


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


What other information is relevant with regard to Finland and the ESM Treaty?

Not applicable.

[1] The Government took the decision in its plenary session on 4 October 2012. For further details, see

[2] Report of the Audit Committee 2/2013 vp.