A number of member states have received direct financial assistance through balance of payments support (Hungary, Rumania, Latvia), bilateral agreements/IMF (Greece), the temporary emergency funds/IMF (Ireland, Portugal, Greece), and the permanent emergency fund (Spain and Cyprus).
Several member states have (also) indirectly benefited through the Securities Markets Programme (SMP) created in May 2010, a bond-buying programme of the European Central Bank that was replaced in September 2012 by the Outright Monetary Transactions (OMT) programme (Greece, Ireland, Portugal, Italy, Spain).
If relevant, describe the political, economic and legal situation leading up to the moment of the formal request of direct financial assistance.
The economic crisis and recession in Ireland was preceded by two decades of exceptionally high economic growth. Between the years 1987 and 2007 growth rates averaged 6.3%, achieved on the basis of economic and educational policies implemented over the preceding decades, a favourable demographic and labour market situation and a tax policy designed to attract foreign direct investment. In 2007 Ireland on the face of it appeared well placed to face the global economic slowdown with an exceptionally low GDP to debt ratio (25%) and financial reserves in the form of a National Pension Reserve Fund. However the economy was in fact dangerously exposed to underlying structural economic and financial weaknesses. The growth in the 1990’s was export focused and was driven by highly skilled industries financed by foreign direct investment (FDI). From the early 2000s construction and credit related activities became increasingly important to general economic growth and to government revenue in particular. In a related development the Irish banking sector modified its business model and became increasingly reliant on domestic property related investment, activity that was funded by the issuance of bonds to international investors. Macroeconomic stabilisation policies during the economic boom were weak. The tax base was narrowed and became increasingly reliant on construction related revenue. With the onset of an economic slowdown and the effective end of construction as an economic sector, government revenue collapsed and a large fiscal deficit emerged. Ireland recorded a record contraction in the economy of a total of 20% over the period of the crisis.
After the collapse of Lehman brothers in the autumn of 2008 serious concerns amongst international investors materialised and the Irish banking sector faced what was presented as a liquidity crisis in September 2008. On 30 September 2008 the Irish government issued a blanket guarantee of all the liabilities of the domestic banking sector thereby linking the Irish state to the debts of the banking sector. The liabilities of the banking sector, in particular Anglo Irish Bank, proved considerable, especially in relation to the size of the Irish economy. Various policies to deal with the now clearly insolvent industry included the setting up of a ‘bad bank’ to nationalise much of the bad debts of the banks and subsequently recapitalisation of all banks and nationalisation of much of the sector. The resulting ballooning in the national debt to over 100% (from 25% in 2007) and the contraction in the economy lead to fears amongst international investors about the state’s underlying solvency. Ireland risked being shut out of the international debt markets and its banks were already increasingly reliant on ECB liquidity funding. In November of 2010 Ireland entered into a programme of financial assistance with the EU and the IMF.
A coalition Government consisting of Fianna Fáil and the Green Party had been in place since the general election of 2007, continuing a position that Fianna Fáil had occupied since 1997 as the main government party with its leader Bertie Ahern as Taoiseach (Prime Minister). Subsequent to revelations about his personal finances it was generally understood that Bertie Ahern would step down as leader of the party and Taoiseach. He stepped down as leader of the Fianna Fáil party in May of 2008 and was succeeded as leader of Fianna Fáil and as Taoiseach by Brian Cowen, the then Minister for Finance. In the subsequent two years leading to the signing of the Memorandum of Understanding the Government displayed remarkable resilience and discipline in the face of overwhelming unpopularity and ‘even backbenchers did not step away from the sinking ship.’ Nonetheless the Government’s authority was dealt a fatal blow by the Programme for Financial Assistance. Revelations surrounding Brian Cowen’s previous contact with senior bankers initiated a tumultuous few weeks in early January. Amid speculation regarding his leadership Brian Cowen himself put forward a no confidence motion in himself as leader of the Fianna Fáil party and won. Nonetheless a cabinet reshuffle in which the Greens were not consulted lead that party to effectively withdraw from Government. Internally Cowen’s leadership was again questioned and he announced his resignation of Fianna Fáil on 22 January 2011. He continued as Taoiseach until the general election in order to secure passage of the Finance Bill. The main opposition parties, Fine Gael and Labour, after a meeting with the then Minister for Finance Brian Cowen, agreed to drop their no confidence motions in the Government in exchange for an assurance that the Bill would be finalised by the end of February and the Dáil dissolved. In actual fact the Bill was passed early. The Dáil was dissolved on the 1 February 2011 and a general election was held on the 25 February 2011. Fine Gael and Labour won an overwhelming majority. Fianna Fáil suffered their worst electoral defeat and the very survival of the up until then dominant party in Irish politics was questioned.
Describe the public and political debate during the negotiations on the financial assistance instruments, notably the Memorandum of Understanding (MoU) and Financial Assistance Facility Agreement, in particular in relation to the implications for (budgetary) sovereignty, constitutional law,socio-economic fundamental rights, and the budgetary process.
After the introduction of a guarantee of bank deposits in 2008 pressures on Ireland abated temporarily. Soon afterwards however the financial and budgetary situation continued to deteriorate. A number of estimates of likely bank losses were made in the period leading up to the bail out, all of which contained upwards revisions on the extent of bank losses, and the corresponding need for injection of government funds. At the same time the budgetary situation also continued to deteriorate despite the introduction of significant spending cuts and tax increases in the period through regular and supplementary budgets. After the grant of financial assistance to Greece in May of 2010, and comments by Chancellor Merkel and President Sarkozy in Deauville, the yields on Irish government bonds climbed steadily. In further response to this situation the Government announced a 4 year economic plan in November 2010 to run from 2011 to 2014, the National Recovery Plan, containing various targets for budgetary adjustments and structural economic reforms.
At this stage it was becoming increasingly clear amongst various actors that Ireland’s funding situation was unsustainable and that a financial assistance package would have to be provided. The European Central Bank was at that point severely exposed to the Irish banking sector through the provision of emergency liquidity assistance and pushed strongly for a programme to be provided. The exact role of the ECB is still unclear but there are indications that it pressed the Irish government directly to move towards such a programme and made interventions through the media to apply public pressure. Nonetheless, with mounting media speculation, the government refused to publically announce it had entered into negotiations, despite having sent a large delegation of officials to Brussels to discuss a possible agreement. There was widespread public confusion surrounding a possible agreement that extended to senior Ministers. Eventually, on 18 November 2010, the Governor of the Central Bank, Patrick Honohan announced through a radio interview from Frankfurt that representatives of the IMF, the European Commission and the ECB would shortly be arriving in Ireland to negotiate a package. Subsequently he justified his decision to make such the intervention through a desire to minimise further uncertainty and damage to the Irish financial sector. Negotiations on the package proceeded swiftly and a deal was announced ahead of schedule. The ease with which the negotiations were completed has been attributed to the existing National Recovery Plan, that provided a base for conditions attached to any aid and the prior familiarity between relevant officials.
While not legally required, a motion to approve the Memorandum of Understanding (MoU) between the Irish government and its institutional creditors was placed before the Dáil on 15 December 2010. Respecting the Irish parliamentary process, the IMF agreed to delay putting the agreement to its board until after approval by the Irish Parliament. A number of motives were advanced for the Government’s decision to hold the debate. Sinn Féin argued that it was due to a threat of legal action on its part while a number of Fine Gael TDs (members of the Dáil [lower house of parliament]) argued that it was a political tactic of the Government to force opposition parties to offer an alternative to the Programme. Finally one member of the senior coalition party, Fianna Fáil argued that it was he and a colleague that had proposed it at an internal meeting of the Fianna Fáil party apparently moved by the belief that ‘the Dáil should remain at the centre of Irish politics.’
In the Dáil the Government and in particular the then Minister for Finance, Brian Lenihan, stressed the fact that the Programme represented a central element of Ireland’s recovery and was essential for the funding of public services and the functioning of the banking system. He pointed out that the MoU built upon the Government’s own National Programme of Recovery, adopted in October 2010 stating that ‘the programme builds on the bank-rescue policies that have been implemented by the Government over the past two and a half years and on the national recovery plan announced in November, 2010. It lays out a detailed timetable for the implementation of the measures contained in the national recovery plan. In other words, the national recovery plan is effectively embedded in the programme. This is a key point that needs to be emphasised, as some have suggested that control has been taken out of the Government’s hands. This is not the case.’ Opposition parties generally accepted the need for financing, with Fine Gael in particular accepting the overall target of deficit reductions, but argued that the assumptions on which the programme was based, in particular GDP growth assumptions, were ill-founded and that there should be a greater emphasis on a strategy for growth and job creation. One point of contention between Government and opposition parties was the appropriateness or otherwise of continuing to pay in full holders of bank bonds that were now covered by the Government guarantee. The Government underlined the need to avoid any form of default while the opposition parties sought a ‘bail-in.’
What is the status of the financial assistance instruments in the national legal order (political agreement, international treaty, etc.)?
The financial assistance instrument, the MoU, is a political agreement and does not constitute a treaty either under public international law or under domestic Irish law.
Transposition national legal order
Considering the status of the financial assistance instruments, what procedure does the constitution prescribe for their adoption/transposition into the national legal order?
As the MoU is not an international agreement it does not require authorisation by the Dáil per Article 29.5.2 of Bunracht na hÉireann (the Irish Constitution) providing that ‘[t]he State shall not be bound by any international agreement involving a charge upon public funds unless the terms of the agreement shall have been approved by Dáil Éireann [the lower house of parliament]’. This appeared to be the view of the Government. Sinn Féin contested this conclusion but never outlined in detail the grounds for that opinion. Nonetheless, the Government decided to hold a debate on the MoU in the Dáil (see answer to question X.2). A motion approving the MoU was approved by the Dáil by 81 votes to 75. This would not appear to have a legally binding effect.
What is the actual role of Parliament with regard to the adoption/transposition into the national legal order of the financial assistance instruments?
Describe the relevant content of the financial assistance instruments.
The Memorandum of Understanding containing the broad outline of the package was published on 1 December 2010 and a revised version published on 16 December 2010. The assistance was formally approved by a decision of the Council of Ministers on the 7th of December. The total package was worth €85 billion of which €45 billion was to be provided by the European Union, €22.5 billion by the IMF and €17.5 billion from Ireland’s own financial resources (principally the National Pension Reserve Fund). The stated goal of the program was to restore growth and financial health to the Irish economy and consisted of four elements: the downsizing and reorganisation of the banking sector, an ambitious plan of fiscal consolidation, reforms designed to facilitate renewed growth, and the use of substantial external financial assistance to support these policy objectives.
The EU element of the package of €45 billion consisted of funds drawn from the European Financial Stability Facility (EFSF), the European Financial Stability Mechanism (EFSM), and a series of bilateral loans between the Irish state and the United Kingdom, Sweden and Denmark.
The main documents of the programme consist of the Memorandum of Understanding (MoU) outlining a timetable of achieving certain policy goals and measures and a Memorandum of Economic and Financial Policies (MEFP), outlining the general policy goals. The Programme Documents to a large extent reflects policy goals already contained in the ‘National Recovery Plan’ announced by the Irish government on 3 November 2010 which contains a more complete picture of proposed policy and legislative measures.
The National Recovery Plan 2011 – 2014 underlines the importance of the export sector for the envisaged return to growth for the Irish economy. Its general approach in relation to economic and budgetary issues is ‘pro-enterprise’, an approach that colours the plan’s treatment of social and employment matters. It envisages amendments of labour market regulations ‘especially in sectors where unemployment among younger and less-skilled workers is more prevalent’ (p.10) and calls for welfare reforms to provide a ‘pathway’ to employment (p. 10). It calls for a reduction in the minimum wage and reform of the welfare system to incentivise work and eliminate unemployment traps’ (see p.10). Expenditure reductions, which are intended to account for two thirds of the adjustment, also include a reformed pension scheme for new entrants to the public service and a reduction in pay of 10%.
The Programme for Financial Assistance, consisting of two letters of intent, a Memorandum of Understanding (MOU) and a Memorandum of Economic and Financial Policies (MFEP), envisages structural reforms to reform the minimum wage and sectoral wage agreements and to enlarge the scope of the ‘inability to pay clause’ in relation to these wage measures (p. 10), a gradual increase in the pension age from 65 to 68 by 2028 (p.13). It also stipulates that the unemployment benefit system should be reformed to ‘incentivise early exit’ by the introduction of ‘activation’ policies and making eligibility for benefits conditional on participation in such activation policies (see p. 10 ff). Additionally a general reduction in the social transfer payments is envisaged (p. 29, MFEP para 22). Other measures include a lowering of tax bands and credits, in effect lowering the threshold at which tax is paid and bringing more individuals into the taxation system (p. 30, MFEP para 23).
What legal changes, if any, had to be made to accommodate ‘troika’ review missions, post-programme surveillance missions, etc?
No known legal changes have been made to accommodate the ‘Troika’ review missions. These missions have generally been noted by the media and been reported as symbolic of a loss of sovereignty but have engendered no debate regarding their detailed implications for sovereignty, constitutional law etc beyond general statements surrounding the bailout.
Case law international instruments
Have there been direct or indirect legal challenges against the financial assistance instruments before a national (constitutional) court?
Case law implementing measures
Is there a (constitutional) court judgment on national policy measures adopted in relation to the Memoranda of Understanding?
There is no court judgment on policy measures that raise an issue regarding the MoU itself. There have been judgements surrounding the legal status of the ‘Croke Park’ agreement on public sector pay and wages (see question I.1) and the National Asset Management Agency.
Bond purchases ECB
Describe the political, economic and legal situation leading up to the moment where the European Central Banks started buying government bonds on the secondary market (through the Securities Markets Programme, SMP).
The ECB had intervened in the bond markets to purchase Irish government bonds during 2010, in the immediate aftermath of the first Greek financial assistance package, presumably in an effort to slow or halt the rise in interest rates on Irish bonds. This was taking place in the context of a general deterioration of the Irish financial position (see response to question X.II). There was correspondence between the Minister for Finance Brian Lenihan and the President Trichet of the ECB in October and November of 2011. They have yet to be made publically available but it is believed that they refer to concerns the ECB had regarding the position of Irish banks.
Conditionality bond purchases ECB
What national policy measures have been requested by the ECB in exchange for the acquisition of government bonds on the secondary market? How have these requests been subject to debate in light of their implications for (budgetary) sovereignty, constitutional law and the budgetary process?
No information has been found relating to any measures the ECB may have requested in exchange for its purchase of Irish government debts. Having said that given the IMF/EU programme was developed subsequent to the commencement of such purchases, and that ECB officials were involved in the negotiations, it is presumed that any such policy measures were included in the final Programme.
What other information is relevant with regard to Ireland and financial support?
In November of 2011 a draft budget was leaked after the document was circulated to the German Bundestag’s Finance Committee in accordance with German constitutional requirements on parliamentary approval for any release of funds under the bailout programme. The affair was deeply embarrassing for the Government and lead to allegations that Irish policy was being dictated from Berlin. It also was said to reveal the weakness of the Irish Parliament in the budgetary process..The general view however was that it simply made transparent the loss of sovereignty inherent in the bailout process and presaged future budgetary coordination in the context of reformed European economic governance. The Government responded that in the context of the bailout numerous documents were produced and distributed to a variety of actors and that in such a situation there was a real possibility that leaks could occur. It insisted that the document was simply a draft and that its adoption had yet to be finalised. Finally, it complained to the European Commission, who in turn pointed out that responsibility for the leak lay with the national authorities in receipt of such documents.