April 1, 2021

Europe

EU: German constitutional court probes recovery fund – it is not just noise

BY Carsten Nickel

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( 5 mins)
  • Germany’s powerful constitutional court is looking into the EU’s pandemic recovery fund.
  • Until further notice, Berlin is banned from completing national ratification, meaning the EU fund cannot come into force.
  • The proceedings could take time; the political desire to turn the fund into a nucleus for greater EU fiscal integration might increase the legal risk.

As Karlsruhe is once again looking into a tool for fiscal burden sharing in Europe, there is a strong temptation to label this as just another instance of short-term drama and noise. The court has never outright blocked (Germany’s participation in) any of the various European rescue funds or, most recently, bond buying operations. But one risk factor should not be underestimated: the programs and institutions under scrutiny have, over the last decade, become ever more ambitious.

The path has led from an initially temporal intergovernmental institution outside EU treaties to joint and targeted bond buying. Whether this growing ambition is good or bad is a political question, but it does warrant caution on the legal front. Rulings from the last decade may not be the best guide for what might be ahead, given that the EU is, over time, clearly moving towards greater fiscal integration. The need for German constitutional change is looming ever larger on the horizon. The court might not forever continue with its old habit of reviewing but ultimately greenlighting European solutions.

Luxembourg referral?

Any eventual decision might take some time. The court has blocked the federal president from signing Germany’s ratification into law. But this immediate court order is only the first of three procedural layers now in play; its purpose is to win time to assess the second, emergency request for the court to block ratification. Only if and when the court rules in favor of this second-level request, would it turn to the substantial case of the recovery fund’s legality. If the court continues all the way to this third stage (and does not already reject the second-level emergency request), another referral to the Court of Justice of the EU (CJEU) is likely.

As in previous cases, the plaintiffs refer (partially) to European law. To them, the debt-financed recovery fund represents a breach of the ban on non-balanced EU budgets. While this has usually been understood as banning the EU from issuing debt, it seems to stand in some contrast with the European Council’s power to introduce new categories of “own resources”. But the plaintiffs claim that “own” resources exclude funds raised in the markets, which they consider to be “extraneous” resources instead. This seems to be a rather far-fetched argument; a probably more realistic way of understanding the concept of “own resources” is that these resources belong to the EU – in contrast to member states. In any case, the CJEU will likely continue to back whatever enables further integration, rather than following German linguistic musings about the true meaning of adjectives and possessive pronouns.

Talk of Hamilton

But language might matter in another context: the EU rule limiting fiscal assistance for member states to extraordinary situations and natural disasters. One question is whether the recovery fund remains within these parameters although it mandates large-scale investment into Europe’s green transition. Is green investment just the most sensible way of growing out of the pandemic-induced economic crisis, or does it reflect political attempts to use the fund for bigger purposes than just an immediate crisis response? Previous statements by German government officials could become crucial, most importantly, Finance Minister Olaf Scholz’s talk of the fund as Europe’s “Hamilton moment”, i.e., the birth of integrated fiscal policy. From a strict perspective on EU law, this is precisely what the fund is not supposed to be. But again, the CJEU should not be expected to take issue with this. However, one risk is that such an assessment could tempt the German court into another “ultra vires” verdict, rejecting Luxembourg’s habit of pragmatically clearing whatever it takes to move Europe forward.

As in previous cases, the biggest question arises in the area of national constitutional law. The fund’s construction envisages a long time horizon for repaying the relevant debts, which makes it difficult to assess the exact risks emerging for the German budget. This gives rise to the by now well-known question, whether the fund is in line with the principle of Bundestag budgetary responsibility. This principle is, in turn, considered a key aspect of Germany’s “constitutional identity”, i.e., a rule that cannot even be altered by changing Germany’s Basic Law but would instead require a new constitution.

Next steps

Looking ahead, the court might not even get to the third layer of a more substantial assessment, rejecting instead the emergency request to block German ratification. And even if the judges were to look deeper into the fund, there is a chance that Karlsruhe clears the project, perhaps by attaching some additional requirements regarding Bundestag powers. On the other hand, the fact that this is what has happened in the past will provide less and less valuable guidance as the fiscal integration project becomes ever more ambitious.

The irony of the current situation is that it was arguably the court’s decision to look into the ECB’s bond buying programs, which motivated the German government to send a signal of its commitment to Europe in times of crisis, thus taking a political decision to set up the fund. But what will at some point be required is a conversation about Germany’s constitution. The ultimate question for the judges is whether this critical moment has now been reached by the decision to set up the recovery fund.

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