Alicia Hinarejos, Downing College, University of Cambridge; author of The Euro Area Crisis in Constitutional Perspective

A key aspect of the euro area crisis response has been the use of intergovernmental agreements that minimize judicial and parliamentary oversight at the EU level. A prime example is the European Stability Mechanism (ESM), established by euro area nations to offer conditional financial aid to struggling countries. The ESM, formed outside the EU framework through an international agreement (the ESM Treaty), relies on existing EU institutions. Notably, it “borrows” the Commission and the European Central Bank (ECB) to execute its functions. These two entities, alongside the International Monetary Fund, form the “Troika,” which oversees the often-criticized bailout programs.

The ESM’s structure and operations raise significant concerns about legal safeguards. Financial assistance hinges on strict conditions outlined in a Memorandum of Understanding, often demanding “austerity” measures with substantial citizen impact. Understandably, these citizens may question the legitimacy of such conditions, particularly their alignment with the EU Charter of Fundamental Rights, and seek legal recourse.

In the Pringle case, the Court determined that the Charter of Fundamental Rights did not apply to Member States during the ESM’s creation or operation. Consequently, their actions within this framework couldn’t be evaluated against the Charter, although they remained subject to national law review in domestic courts or under the European Court of Human Rights. This ruling left unclear whether and how the Charter applied to EU institutions, specifically the Commission and ECB, working within the ESM. This question was central to the Cyprus bailout cases (Ledra Advertising and Mallis).

In 2012, Cyprus requested financial assistance from the Eurogroup and received ESM aid from 2013 to 2016. The country was required to recapitalize its largest bank and wind down its second-largest. The Memorandum of Understanding stipulated that bondholders and depositors would share the cost, resulting in significant financial losses for individuals who then sought redress through the EU courts. Their complaints, first brought before the General Court and later appealed to the Court of Justice, challenged the validity of both the Memorandum of Understanding (Ledra Advertising) and a Eurogroup statement outlining bailout conditions (Mallis). They argued that the involvement of EU institutions (the Commission and ECB) should allow for legal challenges within the EU system and potentially trigger the EU’s non-contractual liability for damages.

The General Court dismissed all claims, deeming them inadmissible. It held that neither the Memorandum of Understanding nor the Eurogroup statement qualified for annulment proceedings. The former was not an act of an EU institution, while the latter wasn’t intended to directly affect third parties. The court found that the Commission and ECB’s involvement wasn’t sufficient to establish their authorship or trigger the EU’s non-contractual liability.

The Court of Justice partly agreed with the General Court’s decision: neither the Eurogroup statement (Mallis) nor the Memorandum of Understanding (Ledra Advertising) could be challenged through an annulment action. Reaffirming its stance in Pringle, the Court maintained that ESM actions fall outside the scope of EU law. The participation of the Commission and the ECB did not alter this and was insufficient to establish their authorship for the purpose of judicial review.

However, the Court introduced a significant caveat in Ledra Advertising: although not considered authors, the Commission and the ECB’s involvement in crafting an ESM Memorandum of Understanding could be deemed unlawful, potentially triggering the EU’s non-contractual liability for damages. It emphasized that the Commission retains its duty as “guardian of the Treaties,” even within the ESM framework. Therefore, the Commission should refrain from endorsing any ESM act that raises concerns about its compatibility with EU law, including the Charter.

The Court reiterated the established criteria for establishing the EU institutions’ non-contractual liability: (a) the presence of unlawful action, (b) demonstrable damage, and (c) a direct causal link between the unlawful act and the resulting damage. Not all unlawful acts automatically lead to liability for damages; the breach must be a “sufficiently serious breach of a rule of law intended to confer rights on individuals.” While the right to property under the Charter qualifies as a “rule of law intended to confer rights on individuals,” it is not absolute. Article 52 of the Charter permits limitations on certain Charter rights. Applying this provision, the Court concluded that, considering the goal of stabilizing the euro area banking system and the imminent risk of even greater financial losses, the Memorandum’s measures did not disproportionately or intolerably infringe on the applicants’ right to property.

This means individuals can challenge EU institution actions during bailouts through damages claims (non-contractual liability) but not through annulment actions. It’s crucial to note the differing requirements for accessing the EU courts for these remedies. Damages actions have more lenient standing rules; alleging harm due to an unlawful EU act is sufficient. In contrast, obtaining standing for annulment actions is considerably harder. Time limits are also more flexible for damages cases (five years) compared to annulment cases (two months). However, the threshold for winning damages cases is much higher: any unlawful action by EU institutions leads to annulment, while only exceptionally serious illegality results in damages liability.

The Court’s ruling confirms that violations of certain Charter provisions within the ESM framework could potentially lead to damages liability. It is important to note that, based on the European Court of Human Rights case law, social security and many social welfare claims fall under the right to property. In this specific case, the Court did not delve deeply into the proportionality of the interference with the applicant’s rights. It is evident, however, that future applicants will face an uphill battle.

Overall, Ledra Advertising represents a positive shift from previous cases concerning bailout measures. In those instances, the Court largely denied any connection to EU law. Given the EU institutions’ involvement within the ESM framework, it seems only right that the EU should bear a commensurate degree of responsibility. This is not to suggest that obtaining damages will be easy for individuals; as this case demonstrates, the bar is set very high. And while the ruling provides some clarity regarding the EU institutions’ role within the ESM, questions persist regarding the mechanism’s judicial and democratic accountability. Despite these challenges, Ledra Advertising signifies a step in the right direction.

Barnard and Peers: chapter 19, chapter 8

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