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 Latvia 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.

Latvia supported the conclusion of the ESM Treaty and an establishment of a permanent ESM because “it would ensure the stability of the finances of the Eurozone in general.”[1] Latvia’s position emphasized that it was pleased with the opportunity to participate in the discussions concerning the mechanism because at the time of negotiations was planning its accession to the Eurozone.[2]

The general position was that primarily the work should be done to strengthen the economic governance in the EU in order to avoid actual use of the ESM and in order for it to be available just as a precautionary measure. A very important issue for Latvia was the calculation of payments and a fair and simple formula for calculation. According to the Informative Report from March 2011, this formula should not create essential disparities in the Member State payments in comparison with their GDP. The receivement of financial assistance should be based on strict rules to avoid malicious use of this mechanism when states hope to receive free financial resources without giving a strong political commitment to stabilize the situation in the country and divert the consequences upon other Member States.[3]

According to the minutes of the meeting by the Parliamentary Committee for European Affairs (PCEA) on 23 March 2011 regarding the position of Latvia for the European Council meeting on 24-25 March 2011 Latvia’s national position was to support the strengthening of the ESM, especially the increase in flexibility for interest payments. Latvia negatively looked at the diversification of funding tools (e.g. unconditional credit-line creation). Latvia supported the agreement on the ESM and considered that primarily the economic governance in the EU has to be strengthened in order to avoid the necessity to use the ESM and, thus, it could operate mainly as a precautionary measure.[4]

From the PCEA meeting of 14 March 2011 it follows that Latvia participated in the extended meetings of Eurozone countries concerning the creation of the ESM and its main characteristics. This was considered to be very important because after joining the Eurozone in 2014 Latvia will have to take part in all the new commitments of the ESM.[5] If a Eurozone state will not be able to repay the financial aid, this could have an influence also on the budget of Latvia. Provisionally the Latvian payment in the capital was estimated to be approximately 140-280 million EUR.[6]

In general Latvia’s position was to support the independent creation of the ESM because it will ensure the stability of Eurozone finances in general. Latvia believed that the ESM should primarily operate only as a precautionary measure. Very important was the issue about the calculation of the paid-in capital and it was stressed that it cannot create essential differences among Member State payments in comparison to their GDP. The receipt of means from the ESM has to be based on stringent conditions in order to avoid abuse of the mechanism. Latvia supported the efforts of smaller Member States to achieve the establishment of fairer contribution key. [7]

The discussions in the PCEA concerned the German suggestions on the contribution key (the equality of rules concerning big and small Member States – how to use such indicators as population and GDP to calculate the contributions). One MP (R. Kārkliņa, coalition, Vienotība) suggested that the Slovenian formulation that “the rich one should pay more” should be used in the position. The position was approved.[8]

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

Before 2014 Latvia was not a party to the ESM Treaty and not part of the Eurozone. However, since Latvia will join the Eurozone in 2014, the Cabinet of Ministers on 22 August 2013 issued an order (No 393) “For Latvian Accession to the ESM”[9] . This order commands to the Ministry of Finance to provide in the long-term funding commitments under the Ministry of Finance’s sub-programme 41.03.00 „Contributions to International Organizations” contributions in the amount of 201 900 000 euro for the ESM. This includes contributions in the amount of 40 380 000 euro in 2014, 2015 and 2016 and contributions in the amount of 80 760 000 euro in the following period until 2018.[10]

The Draft Law „On the Treaty on the Establishment of the European Stability Mechanism” was approved by the Government on 12 November 2013[11] and submitted to the Parliament on 21 November 2013. The annotation of the Draft Law states that Latvia will be a Eurozone member starting in 2014 and that all Eurozone Member States have to be members of the ESM. In accordance with Article 2 ESM joining the ESM is possible for a Member State as soon as an ECOFIN decision is taken on abrogation of the derogation from adopting the euro. Therefore, the accession to the ESM for Latvia could start on 6 August 2013. The Ratification is necessary in order for Latvia to become a member of the ESM. In addition, the ratification law will provide the authorization order for Latvian representatives in the ESM Board of directors and Board of governors.[12]

The Draft Law was considered to be „urgent” by the responsible Parliamentary Committee and by the Parliament majority before the first reading and will be approved in two readings with a simple majority. Two instead of three readings is an exception provided for inter alia international treaties according to the Art 114(2)(3) of The Rules of Procedure of the Saeima.[13] A qualified majority procedure in accordance with Article 68 Constitution (in cases where international treaties which delegate part of the state competences to international institutions are ratified a qualified majority is needed – two-thirds of the votes of the present MPs with at least two-thirds of all the MPs being present at the sitting) is not applied in this case – it is not considered that the Treaty would delegate state competences to international institutions. So far the Draft Law has been approved without any debates in the first reading (56 in favour, 1 – against and 26 abstained).[14]

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

Latvia has not yet finished ratification of the ESM (the Draft Law ratifying the ESM Treaty was adopted in the first reading in the Parliament (Please see Question VIII.2). During the first reading the Draft Law ratifying the ESM Treaty was adopted without any discussions.[15]

However, there have been some discussions, since Latvia is to join the ESM in 2014. On 13 Aug 2013 it was reported that Latvia will borrow the means for payments in the ESM.[16] A representative from the Ministry of Finance has argued that these 40.4 million euro which Latvia will have to contribute to the ESM are not expenses but rather a capital investment. According to him, Latvia will borrow this money and will pay interest for this loan. In this way the contributions to the ESM will not increase the budget deficit and will not reduce the fiscal room for next year’s budgetary expenses.[17]

It has been argued that, if the EU countries are disciplined and do not get into new financial troubles, the expenses of Latvia will be small – above 300 million euro; and they will serve as a payment for security that in case of negative economic scenario, Latvia will receive help. However, in case of problems, the ESM might require from Latvia an almost five times bigger amount of financial means and there is a risk of loosing this money. Latvia does not foresee such a scenario but economic experts have argued that it is very real.[18]

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

Latvia has not yet finished ratification of the ESM Treaty. So far there has not been any information concerning potential litigation before the Constitutional Court regarding this Treaty.

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?     

Latvia is not yet a party to the ESM Treaty (the ratifying Law is pending befor the Parliament). Since Latvia is in the process of adopting the ESM ratifying law and accompanying laws, it could be considered that the Parliament has a direct say concerning the first payment of the paid-in capital required from Latvia by the ESM Treaty.

The Annotation of the Draft Law ratifying the ESM Treaty provides that depending on the type of decision the Latvian Representative on the ESM Board sometimes needs agreement of the Parliament, its Budget and Finance (Taxation) Committee or the agreement of the Cabinet of Ministers. The criteria for determining in what kind of decisions the Parliament should be involved are two:

a.                            The Parliament adopts a decision in cases where the content of Treaty provisions are being changed. The decision from Parliament is not necessary, only if some numerical value in the Treaty is changed automatically in accordance with a mechanism determined in other provisions of this Treaty (e.g. accession of a new member to the ESM)

b.                            Agreement from the Budget and Finance (Taxation) Committee of the Parliament is necessary in cases where Parliament’s decision is not necessary but there are changes regarding contributions by Latvia. The agreement is not necessary only if such changes clearly result from already established Treaty provisions.[19]

In the Draft Law On State Budget 2014, which has been submitted to the Parliament by the Government on 1 October 2013[20] an article concerning the commitments of the Republic of Latvia regarding the ESM was included (please refer as well to question VIII.3).

According to the annotation of the Draft Law On State Budget 2014:

        The 7th recital of the preamble to the ESM Treaty provides that all Eurozone countries become member states of the ESM.

        Article 11(1) ESM Treaty provides that the contribution key for subscribing to ESM authorised capital stock shall be based on the key for subscription, by the national central banks of ESM Members. However, in order for the Treaty not to create too great financial burden for less well-off member states, it provides a flexible solution in respect of the way contributions are made (transitional period for 12 years). Latvia qualifies for these lighter provisions.

        The contributions to the ESM do not create negative consequences to the state budget balance and do not influence the budget deficit.[21]

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.

Latvia is currently in the process of ratifying the ESM Treaty. The Draft Law is currently pending before the Parliament and the rules on the role of the Parliament can still change. Please refer to Questions VIII.3 and VIII.5 (especially to VIII.5 concerning the Parliament’s role).

In general, since the Draft Budget Law 2014 contained an article concerning Latvia’s commitments under the ESM Treaty starting with 2014, the Parliament voted on this matter together with the proposed budget for 2014. Further the Parliament’s role will be determined in accordance with the Laws accompanying the ESM Treaty ratification; so far for the Government’s proposal concerning the provisions regulating the role of the Parliament in these matters please refer to Question VIII.5.

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

So far there have not been any real debates on this matter, since Latvia joined Eurozone only very recently – 2014.


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

Latvia is currently in the process of ratifying the ESM Treaty. Please see Questions VIII.3-6 for details.

According to the Annotation of the Draft Law on the ratification of the ESM following changes and amendments to national law will be necessary:

1)      Amendments to the Law on Budget and Financial Management: Article 9(14) to give the Finance Minister the right to increase the yearly appropriation determined by the yearly state budget law for contributions to the ESM, by not increasing the total amount of liabilities determined by the budget law. It is necessary because the actual payment of paid capital each year can differ from the one determined by the yearly budget law. This results from Article 41 ESM Treaty.

2)      Changes in the Regulations of the Cabinet of Ministers (5 March 2013, No 120) in order to ensure fulfilment of Article 12(3) ESM Treaty (Collective action clauses shall be included, as of 1 January 2013, in all new euro area government securities, with maturity above one year, in a way which ensures that their legal impact is identical).

3)     Changes in the Order of the Cabinet of Ministers from 20 December 2006 (No 991) to include the ESM there and to ensure proper records of shareholding of Latvia

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

There have been debates concerning the fact that after joining the Eurozone Latvia will be required to contribute to the ESM. This has been used as well as one of the arguments against joining the Eurozone in 2014.

Latvia will have to pay 186 million euro in five instalments (each amounting to about 37.2 million euro). After the first 12 years during which Latvia will be under the favourable conditions it will have to contribute the remaining 138 million euro. The requested capital will be 1.3 billion euro.[22] It has been argued that this system is unfair considering that e.g. Greece – which was the main beneficiary from crisis funds – has a GDP of 15.900 euro per person, while the GDP in Estonia was only 9.100 euro and in Latvia 6.400 euro.[23]

In a speech given concerning the Euro Implementation law[24] the Prime Minister (Valdis Dombrovskis) on 31 January 2013 emphasized as well the arguments in favour of the ESM:

“The EU and especially Eurozone states are connected with each other and instability in one can lead to instability in others and negatively influence the economy of the whole Eurozone. Therefore contributions to the ESM should be seen not as saving particular Member States but as a contribution to the common stability. It has been as well reminded that a couple of years ago Latvia itself received financial aid and that the mechanism could be compared to that of the IMF”.[25]

He argued that solidarity is one of the founding principles of Europe:

“Neither politically nor economically is our country completely self-sufficient, therefore the contributions can be seen as insurance payments which can be useful for us.”[26]

[1] Art. 50 of the Constitution of Cyprus provides that the President and the Vice-President of the Republic of Cyprus, separately or conjointly, shall have the right of final veto on any law or decision of the House of Representatives or any part thereof concerning, among other issues relating to ‘foreign affairs’, the conclusion of international treaties, conventions and agreements. Art. 57 (3) of the Constitution of Cyprus provides the deadline for the exercise of this veto which is within four days of the date when the decision has been transmitted to the President’s and Vice-President’s respective offices.

[2] Free translation of Article 169 of the Constitution of the Republic of Cyprus.

[4] AKEL is a ‘left-wing’ party that at the time was in government. It was succeeded in government after the presidential elections of 2013 by the ‘Dimokratikos Synagermos’ (Democratic Rally) party. The presidential election in Cyprus leads to a new government, as the President appoints and dismisses the members of the Ministry of Councils of the Republic (see also Question I.1) .