Talking point
EFSF: Potential for parliamentary obstruction and political risks (with country table)

October 28, 2011

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Even following the adoption of a reformed EFSF some issues are still unresolved. The fact that the national parliaments of the eurozone members have differing co-decision powers holds considerable potential for parliamentary obstruction. But does this also result in higher political risk?

The new EFSF Framework Agreement has been ratified – albeit not without turmoil. In Austria and the Netherlands the ratification process caused major disagreements, while in Germany “no” votes in the ruling coalition’s camp and tactical manoeuvring by the opposition parties also fuelled uncertainties. In Slovakia, the ratification process did not go smoothly – it passed only at the second attempt.

These difficulties are often considered to reflect the pronounced political risk that arises from the requirement of unanimity on EU decisions. The same procedure that applies to the latest reform of the EFSF Agreement does also apply to future sovereign aid packages and tranches within the packages: Guarantors must give their consent unanimously. Critics say the potential consequences are not only time-consuming voting rounds but also deliberate delays being used by members to intensify pressure on their peers.

Such thinking has been a reason for investors to start focusing more on political risks of late. These risks often seem more difficult to keep in check than systemic risks. This holds especially when the legislative arm has co-decision powers. Germany and Slovakia are cases in point: unity at the finance minister level is not the same as the backing of the national parliaments.

Two questions arise in this context.

1. Where is there potential for parliamentary obstruction?
2. Where does the potential for parliamentary obstruction turn into political risk?

1. Where is there potential for parliamentary obstruction?

The recent ratification round for the EFSF reform was taken as an opportunity to more closely define the national parliaments’ co-decision powers. Even after the EFSF reform there are still major differences between the powers of the legislation and its prerogatives. The countries can be divided into three categories according to how they can participate.

  • Category 1: No participation of parliament. In these countries the government alone takes decisions on the approval of new aid packages. Parliament is not involved – there is no special reporting obligation or accountability requirement. Within the eurozone this is only the case in Spain and Cyprus.
  • Category 2: Government obligation to report to parliament. In these countries, the government is the sole entity empowered to take decisions, but at the same time it is required to provide information to parliament. This is the most widespread form of participation, and is to be found in Austria, Belgium, France, Ireland, Luxembourg, the Netherlands and Slovakia. France and Austria are particularly interesting cases: in these countries the finance committee also has to be kept informed of developments, with reports to be submitted on all EFSF activities (France: every 6 months; Austria: quarterly).
  • Category 3: Voting on aid packages. The national parliaments in these countries have very differing powers as regards the approval of aid packages. The legislation of Estonia, Finland and Germany requires that a parliamentary vote be held. While Germany requires a simple majority, in Estonia and Finland the resolution has to be passed by an absolute majority. Italy is another interesting case as a new sovereign aid package is confirmed by government decree but subsequently needs to be ratified within 60 days by both parliament and the senate.

Ireland (Category 2) as well as Greece and Portugal (both Category 3) also provide for parliamentary co-decision rights in their legislation. However, since these three countries are themselves the recipients of an aid package, they are deemed stepping-out guarantors – their EFSF representatives are barred from voting on loans. Therefore no vote is held in parliament.

Our Country table EFSF: Where do national parliaments have a say in the EMU? explains the differences again in detail.

2. Where does the potential for parliamentary obstruction turn into political risk?

The potential for parliamentary obstruction is not the same as political risk. The parliamentary approval requirement turns into a market risk where the potential for obstruction meets political sentiment – and where it is used as a weapon in infighting between parliamentary factions.

Political risks in Category 3 are to be found at most in Estonia, Finland and Germany. However, aid packages are approved there by absolute majority (Germany: simple majority). Therefore, there is no reason even in future for heated parliamentary debates to spook nervous investors lacking a deeper knowledge of the respective national constitution. The very example of Finland shows that the legislative arm is willing to come around if certain concessions are made. True, the approval of European aid hung in the balance as eurosceptics blocked its passage when a new government was being formed. However, Finland’s current government enjoys a broad majority in the deciding committee – thanks not least to the compromise hammered out.

It remains to be seen to what extent these considerations will apply to the second Greece package. Following the cautious judgment of the “troika” the package will be renegotiated in the coming weeks. Even if the participation of the financial sector on the restructuring of the Greek debt is larger now, the volume of official and international aid will still be considerable over the next years. The implementation of the second aid package via the EFSF is still the main option. Therefore it will also be the first test of whether the EFSF will remain an effective anti-crisis instrument despite far-reaching parliamentary co-decision powers.

Country table EFSF: Where do national parliaments have a say in the EMU?



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