This post first appeared on the new SLSA Blog, it is reproduced here in full:
As the troubles of Deutsche Bank remind us of the heady days leading to the collapse of Lehman, we have a good opportunity to reflect on financial rescues and resistance to the austerity that resulted, at least in Europe. While on the systemic level resistance to bailouts, and rescues with their associated conditionality may sound counter-intuitive (if there had been no rescues our economies and lives would look very different now), there is significant impetus to resist on the personal level.
A pensioner who as suffered repeated reductions in payments due to financial consolidation mandated by rescue conditionality; a judge who has seen incomes slashed; employees made redundant; depositors bailed-in; investors subject to haircuts; and many more have strong personal incentives to resist. Add to these financial market players who object to QE and ECB “helicopter money” and you have a strong constituency for action, despite the fact that no one would have preferred policy makers to let the market ‘creatively destroy’ itself in a Europe-wide experiment in Schumpeter’s gale.
The obvious vehicle for resistance is the law. How can the law then be used to protect personal interests in a hope to reverse austerity, or at least protest in individual cases?
The first question to ask is what to complain about?
Rescue programmes, usually in the form of MoUs between European institutions and countries in difficulty have required fiscal discipline and the reduction of budget deficits, including action on state debt levels. This led to what is widely perceived as a one-size-fits-all austerity recipe imposed on countries receiving assistance (Ireland, Portugal, Cyprus, Greece). The consequence of the implementation of these MoUs has been an uneasy mix with domestic legal provisions. In a number of cases, mandated measures have been judged unconstitutional, especially when they involved lay-offs, changes to labour laws and reductions in salaries, or increases in pension contributions. Claimants have sought to invalidate these decisions both in their implementation phase (in national courts) and at their origin (in European courts). Other claims are directed to the European Court of Human Rights in Strasbourg.
Many cases have been about violations of property rights. For example as a result of the Cypriot bailout, the island’s two main banks had to be restructured. The terms of the rescue required a bail-in of investors and depositors during the re-organisation. Those who saw part of their investment disappear have complained about deprivation of possession in national and European courts. In Greece too have expropriation type claims surfaced, mostly centered on losses incurred during Greece’s debt haircut, another instance of bailout mandated cuts. Claimants in this case have taken their arguments both to national courts and international investment tribunals.
The second question is who to complain about?
Here things get more problematic. The structure of Eurozone rescue programmes had European institutions negotiate with member states agreements, which were then signed and monitored by consortia involving, or led by, international institutions (like the IMF and the ESM). The problem with this arrangement is that while one can sue their government in national courts, European institutions in European Courts, and both in human rights courts, it is more difficult to challenge the actions of international institutions. A technical jurisdictional barrier therefore has served to shield the administrators of bailouts and MoUs from the bulk of claimants. This all however recently changed.
The European Court of Justice recently offered judgment on a case involving Cypriot claimants against European Union institutions for losses suffered due to the forced bank restructure mentioned earlier. Because actions related to the Cyprus bailout were handled by the ESM, so far there was an irremovable jurisdictional barrier to anyone who wanted to complain in a legal action about the involvement of the EU. The ECJ, for the first time however said that the tasks allocated to the Commission by the ESM Treaty oblige it to ensure that MoUs concluded by the ESM are consistent with EU law. The consequence is that the European Commission should refrain from signing MoUs whose consistency with EU law is in doubt. Suddenly the jurisdictional barrier disappeared.
Shall everyone run to the courts then?
Not quite yet. The court did not decide that the Cypriot MoU was illegal and ordered no compensation for Cypriot investors. The measures taken in Cyprus were judged as necessary and proportionate in the circumstances. Nonetheless, recent jurisprudence is significant as it breaks down the barrier between European institutions and international-treaty based structures that have sprang up to deal with the needs of euro-area crisis response. This opens the door to legal challenges to the bailout programmes of the EFSF/ESM offering an avenue to a plethora of claimants to unpick the questionable legal underpinnings of conditionality and austerity policies. There are a lot more claims challenging austerity and its consequences over and beyond property deprivation. Lawyers all over the European South are open for business.