The German Constitutional Court has blocked the EU's recovery fund. What happens now?
After its shocking ruling of May 2020 that threatened the participation of the German central bank in a vital bond-buying scheme of the European Central Bank, the tribunal has taken aim at another EU-wide initiative: the €750 billion coronavirus recovery fund, also known as Next Generation EU.
In yet another surprising move, the German Federal Constitutional Court, based in the city of Karlsruhe, has paused the ratification process of the Own Resources Decision, the legislative instrument that would allow the European Commission to borrow money directly from the capital markets and repay it over the next decades.
The Own Resources Decision must be ratified by all 27 member states before the Commission can set the recovery fund in motion and distribute the cash in the form of grants and low-interest loans. As of today, only 16 countries have submitted their ratification, with 11 still assessing and debating the bill.
Last Friday, German President Frank-Walter Steinmeier was ready to sign off Germany's ratification of the legal text, which had received a large, cross-party support in both chambers of the Bundestag, the country's federal parliament.
But the constitutional court prevented Steinmeir from rubber-stamping the text in order to examine first an emergency appeal filed by the far-right party Alternative for Germany (AfD) and a civic group named Bündnis Bürgerwille, or Citizens' Will Alliance. Both argue the recovery fund breaches the EU treaties.
Reacting to the news, the European Commission reaffirmed its confidence on the legal validity of the Own Resources Decision. A spokesperson said on Monday that it was "crucial" that all ratifications are in place before the end of June and refused to suggest alternative routes if the deadline is not met in time.
It is unclear how long the German court will take to examine the emergency appeal. It could take weeks or months, perhaps thwarting the Commission's schedule. For the time being, the process is on hold: Germany can't proceed with the ratification until Karlsruhe pronounces itself.
What are the EU's own resources?
The EU needs revenue to finance its own budget, which operates independently from the national budgets of member states. The bloc has three main sources of revenue, which are called own resources:
* A proportion of the gross national income of each member state in line with their level of wealth. This represents the largest revenue source (around 70% of total financing).
* A proportion of the value added tax (VAT) collected by each member state.
* A proportion of customs duties on imports coming from outside the European Union.
At the beginning of 2021, a new revenue source was introduced: a contribution based on the amount of non-recycled plastic packaging waste (€0.80 per kilogram) to stimulate the transition towards a circular economy.
Altogether, this will materialise in a €1.1 trillion multiannual financial framework for the 2021-2017 period, of which €164 billion will be spent throughout 2021.
The Own Resources Decision is a legal instrument that always accompanies the EU budget and determines how much money the EU is permitted to spend. For the next multiannual period, it will be 1.4% of the Gross National Income (GNI) – up from 1.2% from previous years to compensate the budget gap left by the United Kingdom.
However, after the coronavirus hit Europe and wreaked economic havoc of unprecedented scale, EU leaders unanimously agreed to set up a €750 billion recovery fund. The huge amount of money is going to be raised on the capital markets by the European Commission itself, which enjoys an AAA credit rating, and progressively repaid through the EU budget.
To make this repayments possible, the Own Resources Decision added a temporary increase in the expenses, worth a further 0.60% of the EU's GNI. According to the legal text, this extra 0.60% cap "should expire when all funds borrowed have been repaid and all contingent liabilities relating to loans have ceased, which should be by 31 December 2058 at the latest".
The ratification of the Own Resources Decision has always been particularly lengthy, taking more than two years on average. The provisions of each decision apply indefinitely until a new one has been ratified. This protects the EU budget from delays caused by national debates.
But the urgency brought by the coronavirus pandemic means that, this time, EU member states should expedite the ratification of the new Own Resources Decision if they want to receive the first part of the much-awaited funds before the summer.
António Costa, Prime Minister of Portugal, the country which currently holds the rotating six-month presidency of the Council of the EU, has encouraged his fellow heads of government to speed up the chains of events. Christine Lagarde, the president of the European Central Bank, has voiced similar demands.
"I think all of us should put all the energy we have into making sure that we deliver and that implementation follows through as quickly as is possible, without too much procrastination," Lagarde told a committee of the European Parliament in mid-March.
The key question: Article 311
The Commission argues that the article does in fact offer "some discretion as to the choice of the means necessary" that the bloc can use to design its budget – as long as it respects the financial rules of the Treaty.
Additionally, Brussels posits that borrowed money coming from Next Generation EU does not constitute an own resource because own resources are regular income and the recovery fund will be an "one-off additional reinforcement".
"The amounts need to be repaid by the Union, while own resources are a final revenue that is not repaid," the Commission says.
By examining the emergency appeal brought by AfD and Citizens' Will Alliance, Germany's highest court will assess the constitutionality of the Own Resources Decision and whether the Commission is acting within the powers granted by the EU treaties – a level of scrutiny usually reserved for the EU Court of Justice in Luxembourg.
In an interview with Euronews, Bernd Lucke, spokesperson of Citizens' Will Alliance, said the legal challenge was centred on the interpretation of Article 311 made by Brussels.
"The legal reason is that the EU is an institution whose core values also include the rule of law. And we do believe that it is illegal, and contrary to the wording of Article 311 of the Treaty on the Functioning of the European Union, to finance expenditures of the EU budget by issuing debt. So this is clearly a breach of European law, and this is why we went to our Supreme Court," explained Lucke, who is also a former MEP from the AfD party.
"The economic reason is that we are opposed to a mutualisation of debt, which is clearly the core issue of the [Next Generation EU] proposal. It would have been very easy for the Council, and actually it is still an open possibility, to finance [Next Generation EU] by issuing national debt and then supplying the resources as own resources to the European Union."
'Overstepping its competences'
The ratification process has been now thrown into doubt at a moment when Europe deals with a third wave of COVID-19 infection and Germany approaches a general election in September that will put an end to the 16-year chancellorship of Angela Merkel.
With Karlsruhe, all bets are off.
"One option is that [the German court] could ask the European Court of Justice to give an opinion on the legality of this. And then, based on that information, take a stance by themselves." Guntram Wolff, director of the think tank Bruegel, tells Euronews.
"They could also come to a conclusion where they judge the instrument to be legal [but] where they impose constraints on the instrument, which I think is quite a high probability." The constraints could include, for example, a faster rate of repayments, he notes.
An all-out rejection of the Own Resources Decision would lead to a "very long, painful and politically very difficult process" to find a solution, Wolff predicts, a desperate path which could even include an in-extremis treaty change.
The dispute around the recovery fund won't be the first time that the Karlsruhe court expresses its opinion on a flagship EU programme.
Last year, the tribunal ruled that the bond-buying scheme that the European Central Bank introduced during the eurozone crisis did not respect the "principle of proportionality" and partly breached German law. The court also suggested the ECB had exceeded its mandate and gave it three months to justify its the quantitative easing (QE) programme in order to retain the the German central bank as a participant.
The ruling sent shockwaves across the continent, with many observers pointing out that, as a EU institution, the ECB is not accountable to any national entity. The row was later resolved domestically, through a letter sent by the German finance minister to the lower house of Germany’s parliament.
"The German court has been overstepping for some time its own competences," Wolff says, in reference to the ECB controversy.
"I think the court was told that it went too far [with the ECB ruling]. I think it was a humiliation for the German court in many respects. And that's why I think they take up this issue now. And I am afraid they will not just easily let it pass."
Hamilton, interrupted
The EU's €750 billion recovery fund agreed in July 2020 after a five-day European summit has been described as "Hamiltonian" moment in the bloc's history.
Back in 1790, a compromise brokered by US Secretary of Treasury Alexander Hamilton enabled the US federal government to take over the debt incurred by the American states during the Revolutionary War and to repay this debt through federal bonds. The arrangement forever changed the competences of the federal government and created a fiscal union.
Next Generation EU does not set up any permanent fiscal union, which remains anathema for many countries, including Germany, but represents an important milestone in European integration. Not since the introduction of the euro, which took up the entire 1990s to complete, has the bloc taken such significant and transformational step.
It was the euro that opened a new chapter in the EU's history but left many others unresolved. Experts have repeatedly singled out the discrepancy between the economic and monetary union of the 19 member states of the euro area and the absence of a fiscal union among them.
The recovery fund will attempt to somewhat patch up this incongruity, even if temporarily. But the recent moves of the Karlsruhe tribunal indicate a growing distrust between national authorities and the EU institutions that could derail or severely restrain future initiatives aimed at pushing the bloc closer together.
"If you keep adding and an ever-lengthening list of conditions and indeed more difficult conditions for European integration to move, then one day you're going to get to the point where German participation, at least in European integration, will be blocked," says Gavin Barrett, a professor specialised in EU law at the University College Dublin.
"And if that happens, that would be a desperately serious measure for European integration, because really, every successful initiative at European level is dependent on, frankly, German participation."
Barrett believes that Germany's over-sized role in the bloc's decision-making will amplify the consequences from the Karlsruhe ruling, possibly paralysing EU action altogether at a time when many citizens are demanding it.
"It's vitally important for the European Union and to show that this is what you would call output legitimacy. In other words, that it is capable of generating responses as it is capable of doing things and that the member states are not capable of doing on their own. And most of all, that it's capable of getting them out the enormous difficulties they're in now with the coronavirus crisis," professor Barrett explains.
"It's a very delicate moment."