The governance arrangements within the European Stability Mechanism from a Dutch perspective

Toespraak | 24-04-2012

Supreme audit institutions (SAIs) have a responsibility to promote accountability and transparency in public activities where public funds are at stake. This is not only the view of my institution, the Netherlands Court of Audit, but is also the opinion of all EU SAIs and our concern for these matters has been expressed in recent statements and resolutions of the Contact Committee of EU SAIs regarding the financial and sovereign debt crisis. In the case of the European Stability Mechanism (ESM) and the other financial stability instruments that have been set up, European leaders are taking decisions on unprecedented amounts of public funds coming not only from Eurozone member states but also from the European Union itself and international financial institutions. In order to get and maintain adequate public backing for these instruments, transparent reporting on what is being undertaken, holding to account those dealing with the operations and a good independent public audit of the use and effect of the funds are necessary. According to the Netherlands Court of Audit, the financial stability instruments that have been developed do not take these principles enough into account. Compliance with them should be strengthened in the permanent mechanism now being set up.

To be more precise SAIs are of the opinion (Contact Committee statement 2011) that in the governance arrangements of the stability instruments three things are required:

1. sufficient transparency, in the form of reliable and timely information (including national statistics) on actual or intended use of public funds, and the risk to which they are exposed;
2. appropriate accountability, involving public scrutiny of the operations and holding to account decision-makers and those responsible for managing the processes; and
3. adequate public audit, to provide assurance and information on the use of public funds and the risks to which they are exposed, thereby contributing to transparency and providing a basis for accountability.

Let us now take a closer look at the ESM. This financial stability instrument is being set up on the basis of an intergovernmental treaty signed by the seventeen member states of the Eurozone. It will be an international organisation with legal personality under international public law. As described in the study carried out for the Committee on Budgetary Control, the roles and arrangements of the governing bodies of the ESM are clearly defined and aligned with the common practice implemented by international financial assistance providers (i.e. IMF, EIB, World Bank, etc.). The ESM however does not fit within the legal order and institutional framework of the EU – even though a modification of the Treaty on the Functioning of the EU (TFEU) was necessary to enable it – and some (like the Dutch Council of State in its opinions on the bills ratifying the ESM Treaty and the modification of article 136 TFEU ) argue that this has been a deliberate choice. The roles and competences of the European Commission, European Parliament, European Court of Auditors and the Court of Justice of the EU with regard to the ESM are limited and important provisions with regard to democratic and judicial control have not been included in the ESM Treaty.

While the role the European Commission (together with the ECB) will play in the ESM is a crucial one (see article 13) – analysing the severity of the risk to the financial stability of the euro, negotiating the MoU with the ESM member requesting stability support, detailing the conditionality attached to the financial assistance facility, monitoring the compliance with the conditionality in practice – sufficient provisions for the democratic control and effective external audit of the tasks of the European Commission are lacking in the ESM Treaty. The only other explicit reference made in the ESM Treaty to these tasks can be found in the preambule, where it is stated that post-programme surveillance will be carried out by the Commission and the Council within the EU framework laid down in articles 121 and 136 TFEU.

But who will be responsible for checking that the Commission has carried out its ESM tasks properly? The Board of Governors? The Board of Auditors? The Treaty grants the Board of Auditors (article 30) an explicit audit task only with regard to the inspection of the ESM accounts and the verification of the operational accounts and balance sheet. The Board of Auditors can undertake independent audits and has full access to any ESM document needed for the implementation of its tasks. According to Dutch government these are only the basic provisions and they can be expanded in the by-laws that are at present being drafted (see Tweede Kamer documents 33221 nr. 3). The Second Chamber of Dutch parliament recently adopted two motions on this subject and Dutch government has promised that it will exert itself to the maximum to achieve a full-fledged public external audit and anchor firmly the transparency and accountability of the spending of ESM funds. As our German colleagues have just explained, the EU SAIs would like to see that the Board of Auditors can audit regularity, compliance, performance and risk management of the ESM more generally. At present the discussions are taking place on the by-laws that need to be in place when ESM starts operations and we as SAIs have made our wishes known. With the help of our governments these wishes will hopefully be adopted.

If this however is not the case, then perhaps the only audit of the effects and results of the ESM operations possible will be special audits by ECA of the activities carried out by the European Commission within the 121 and 136 TFEU framework. Individual SAIs of the Eurozone member states have no right of their own to audit an international organisation. Their primary task is to audit their national government and its spending of public money. This makes it difficult for EU SAIs to do more than what we at present are doing with our website www.rekenkamer.nl/eu-governance-en, which gives insight into the quickly changing developments in the field thereby helping create transparency for national parliament and the general public. For the ECA audits of the effects and results of the ESM operations are relatively new as their audit task (examining the revenue and expenditure of the Union) has traditionally been restrictively interpreted. Such audits moreover would take place outside the ESM-framework and only form an indirect check of ESM operations. From the perspective of the ESM itself they alone can hardly be seen as adequate public audit of the ESM.

Let us now briefly reflect on the other two aspects of ESM governance mentioned: transparency and accountability. While initiatives are being undertaken to strengthen ESM governance with regard to public audit, the arrangements formulated in the ESM Treaty for transparency and accountability are weak and as far as we know nothing concrete – aside from the hearing being held today – is being done to alter this. According to the Treaty the ESM shall publish an annual report containing an audited statement of its accounts and shall circulate to ESM members a quarterly summary statement of its financial position and a profit and loss statement of its operations (article 27). The Board of Auditors too shall draw up an annual report and submit this to the Board of Governors. It shall be made accessible to national parliaments, the SAIs of the ESM members and the ECA. While the limited extent of the accountability reporting that will be generated by the ESM is in itself concerning, the Netherlands Court of Audit considers the fact that almost nothing will be made publicly available more disturbing. Without information sharing and public scrutiny how will it become possible to acquire and maintain the backing of the European citizens? We would like to see for instance that the results of the audits carried out by the Board of Auditors are placed on internet.

In its opinion on the ESM Treaty the Dutch Council of State stresses that an important consequence of the chosen intergovernmental structure is that the ESM bodies cannot be held to account in the EU institutional framework. Furthermore it points out that the ESM has judicial immunity, European Parliament plays no role, ECA has no audit right of its own and the Court of Justice can only deal with disputes that are brought to it by an ESM member. Democratic control and public scrutiny only exist to the limited extent that ministers of Finance can be held to account by their national parliament for their individual share in the functioning of the ESM and not for the functioning of the ESM bodies or the organisation as such. The Dutch Council of State considers the deficient democratic control problematic and even more so given the permanent character of the stability mechanism and its potential financial volume. In its opinion the present intergovernmental form cannot be the final outcome of the continuing process of the structuring of ‘economic governance’ , but just an intermediate outcome. Dutch government however disagrees. The accountability that it gives to national parliament for the ESM exceeds that given for other international financial institutions like the IMF. According to Dutch government this in combination with the involvement of EU SAIs and ECA in the ESM Treaty has laid an adequate basis for ensuring the public and democratic control of the ESM.

While the Netherlands Court of Audit is flattered by the democratic influence Dutch government accredits it with, we share the concerns our Council of State has voiced in its opinion on the bill ratifying the ESM Treaty. The limitations placed on transparency and accountability are great. These together with the concerns mentioned earlier regarding the adequacy of the public audit arrangement and the transparency of the results thereof form in our opinion a serious threat to the support of the general public for ESM operations and should be altered where possible.

Finally I would like to point to another area where we see similar problems regarding transparency, accountability and public audit: namely the expenditure of EU funds in the member states. For seventeen consecutive years the ECA has not been able to give an unqualified opinion on the regularity of the spending of EU funds. ECA’s audit however does not show exactly where the problems occur and what improvements are needed to tackle them. Against this background Dutch government decided a number of years ago to give account of how EU funds are spent in the Netherlands in an annual EU member state declaration. Our SAI was asked to give extra assurance to the declaration in the form of an independent opinion and we are doing so now for the sixth time. So far only three other EU member states do the same: Denmark, Sweden and the United Kingdom. In the negotiations that are at present taking place between the European Commission, the Council and European Parliament on the new Financial Regulation this subject has once again become contentious. Council has up to now refused to accept the proposal of European Parliament to include an obligatory member state declaration in the Financial Regulation. And to make things even worse, Council is maintaining in its resistance to make public any form of accountability reporting that can be traced back to individual member states. If these developments in the discussion of the new Financial Regulation are accepted in the end, this would in my opinion turn back the clock on the reform of EU financial management a number of years and deliver the cause of transparency, accountability and good public audit an unexpected blow. A cause that we at the Netherlands Court of Audit and you and your committee have always actively promoted.

I believe that in the coming years the challenge will lie in finding ways to promote strong governance arrangements - both with regard to the financial stability instruments and the implementation of the EU budget. From the perspective of the external auditor the best way to contribute to this is through coordinated action from two levels – the EU and the member state level. Only through the coordination of the interacting and mutually reinforcing chains of accountability and control at the EU and member state level will it become possible to enhance transparency and reconnect with the public. For the ESM possibilities for coordinated action already embryonically exist in the set-up of the Board of Auditors, for the implementation of the EU budget more change will be required. And that is where you come in.