A Legal Analysis of the Euro Zone Crisis
Hofmann, Christian, Fordham Journal of Corporate & Financial Law
While the sovereign debt crisis of the Euro zone raises numerous economic issues that are broadly discussed in public, it also involves a large number of legal questions that are, in contrast, rarely talked about. This is surprising, as the relevant legal implications may predetermine the outcome of the economic discussions by precluding certain options. The seventeen member states of the Euro zone and the European Central Bank are struggling to stabilize the financial situation of the currency union's highly indebted members. Legal challenges result from the fact that the Euro zone is not identical to the European Union, which is comprised of ten more members than the Euro zone. Additionally, Euro zone members do not constitute an institution with legal competencies that would enable them to enforce emergency measures, as is the case with the European Union. Instead, the Euro zone's only modus operandi is intergovernmental cooperation. However, the European Union's legal framework draws limits on cooperation that could conflict with the rescue funds established by Euro zone members. Furthermore, the European Central Bank has gradually become the main provider of emergency assistance to indebted countries. It has enacted a number of non-standard measures whose volume has constantly been growing. Thus, the increasingly drastic nature of the European Central Bank's actions raises the question of whether these emergency measures infringe upon the Bank's own mandate. Finally, the restructuring of Greek sovereign debt in early 2012 has raised a number of legal issues. The focus of this analysis will be the legal challenges posed by retroactive Collective Action Clauses, in particular those presented by the Bilateral Investment Treaties that Greece has previously signed.
I. UNIQUE SOVEREIGN DEBT CRISIS
A. A CRISIS OF TRUST
The Euro currency union ("Euro zone") crisis is one of sovereign debt. It implicates the members of the currency union, seventeen out of twenty-seven European Union ("EU" or "Union") member states, though it is not a currency crisis as of yet. Since its introduction, the Euro has been a rather stable currency. In the course of the last three years, however, its exchange rate to other major currencies has depreciated, though not drastically enough to amount to a currency crisis. In addition, the inflation rate surpassed the target set by the European Central Bank ("ECB") of "below, but close to, 2%" in 2012 and has dropped below it in the first half of 2013. '
This crisis is a result of enormous amounts of debt that have been accumulated by a number of currency union member states. Investors question the sustainability of these states' debt and suspect default, and as a result require high-risk yields or abstain altogether from investing in sovereign bonds from those countries. A number of countries have been cut off from market financing due to this issue. It started with Greece in May 2010, followed by Ireland later that year and then Portugal in early 201 1.2 More recently, Cyprus has joined the group of recipients of financial aid, and Spain has requested help for its financial sector.3 Italy is still able to receive market funding but risk premiums have gone up significantly, prompting the ECB to intervene heavily in the sovereign bond markets.4
B. THE UNIQUENESS OF THE ISSUE
The current crisis is unique in several respects. For the first time in post-war history, highly developed countries are on the verge of defaulting. In addition, this crisis affects an entire region comprised of several countries whose future prospects could hardly diverge more. Four of the currency union members have kept their top ratings (Germany, Netherlands, Finland and Luxembourg), but the sovereign debts of the other members have been downgraded, some so significantly that their sovereign bonds have been referred to as "junk bonds."5
In the post-war era, the rules of the Paris and London Club were sufficient to find solutions for the effects of unsustainable debt and sovereign defaults on underdeveloped or emerging economies. …