Will the UK pay for future Eurozone bailouts?
22nd Jun 2016
“The eurozone is being strangled by stagnation, unemployment and a lack of growth, it could explode at any time and we will be forced to bail it out”
Boris Johnson, 6 June 2016
“The Leave campaign is simply wrong to claim we will have to bailout Eurozone countries”
David Cameron, 6 June 2016
The UK can be asked for financial support for Eurozone countries but is guaranteed its money back
The UK contributes to a fund which could be used to channel emergency funding to Eurozone countries, but an EU law made in 2015 ensures that the UK would be “immediately and fully compensated” for any losses caused by a Eurozone member.
This protection was reasserted in the UK government’s EU renegotiation deal in February 2016, which also states that the UK will be reimbursed if the EU’s general budget is used to support emergency funding for Eurozone members.
The British government may still choose to offer support to Eurozone countries in future if it believes it is in the UK’s own interests, as it did with Ireland in 2010. The UK is also indirectly liable for emergency support to Eurozone countries offered by the International Monetary Fund, an obligation which is separate from the UK’s membership of the EU.
The UK is not liable through existing emergency funding schemes
The EU can answer new requests for emergency support by Eurozone countries using two permanent funds in future, confusingly named the European Stability Mechanism and the European Financial Stabilisation Mechanism.
The European Stability Mechanism is funded by Eurozone countries only, so the UK has nothing to do with it.
The UK does contribute to the European Financial Stabilisation Mechanism, which can be used to support all EU countries.
This doesn’t require the UK to lend directly to other countries. Instead, the fund borrows money on the open market and lends it to EU members requesting emergency financial assistance, using the EU budget as collateral. If the country that receives the loans can’t repay them itself, then they’re repaid out of the EU budget.
This creates a shortfall in funding for regular projects, so it is filled by extra contributions from other EU members. The UK would contribute 13% of this extra funding, in proportion to its share of regular contributions to the EU budget.
The European Financial Stabilisation Mechanism can be, and has been, used to fund emergency support for Eurozone countries. The UK can’t veto this from happening because funding is allocated through a qualified majority vote.
This happened with Greece in July 2015, even though European leaders had agreed that this fund shouldn’t be used to bail out Eurozone countries in future.
However, the UK was protected from bearing any costs if Greece defaulted on the loan. The law setting up the European Financial Stabilisation Mechanism was then changed to make this the case for any future loans:
“Where the beneficiary Member State is a Member State whose currency is the euro, the granting of Union financial assistance shall be conditional upon the enactment of legally binding provisions, with a dedicated arrangement for that purpose having been put in place prior to disbursement, guaranteeing that the Member States whose currency is not the euro are immediately and fully compensated for any liability they may incur as a result of any failure by the beneficiary Member State to repay the financial assistance in accordance with its terms.”
Counncil Regulation Amendment, 4 August 2015
In other words, the UK will not have to pay the costs of any Eurozone bailout funding provided through the European Financial Stabilisation Mechanism.
The UK government’s negotiations in February 2016 also stipulated that the UK would be reimbursed for any additional costs to the EU’s general budget created when emergency funding was provided to Eurozone states, other than administrative costs.
It is not impossible for the UK to become liable in the future
Despite these agreements, the Leave campaign argues that the UK could still be liable for contributing to funds which support Eurozone members in future.
Article 122 of the Treaty on the Functioning of the European Union says that the EU may offer emergency financial support to member countries:
“Where a Member State is in difficulties or is seriously threatened with severe difficulties caused by natural disasters or exceptional occurrences beyond its control, the Council… may grant, under certain conditions, Union financial assistance to the Member State concerned.”
The EU could theoretically use this power to “grant ad hoc financial assistance to a Member State” in the future, in the words of the EU court. The EU deal negotiated in February doesn’t change the treaties, so its guarantee that bailouts “will not entail budgetary responsibility for Member States whose currency is not the euro” might not be accepted by the court.
So it might be technically possible, if unlikely in practice, for the EU to bypass the dedicated Eurozone bailout fund and the all-EU fund—neither of which put British money at risk—and call upon the EU budget directly.