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Why the German Constitutional Court will (probably) not kill the €750 bn EU recovery fund

Jean-Claude Piris

Date: 07/04/2021
The German Constitutional Court’s postponing of its decision on two claims against the EU recovery fund does not (yet) mean that Next Generation EU will not happen. But there will be a delay and the court’s final decision might remain uncertain for some time.

On 14 December 2020, after arduous negotiations (including a four-day European Council session in July), and following approval by the European Parliament, the EU Council unanimously adopted a new Decision on the EU’s Own Resources (ORD). This Decision contains, in particular, the necessary provisions for the financing of the temporary EU Recovery Fund (€750 bn: €390 bn in grants and €360 bn in loans), also called Next Generation EU (NGEU). 

It marks a milestone in European integration as, for the first time, it allows the EU to borrow money on the markets. Most member states will benefit from a better interest rate than they can get on their own, and will then reimburse their debt over the next decades. However, the ORD cannot enter into force until it is approved by all member states, according to their constitutional requirements (article 311 TFEU). This is in progress, with more than half of them having already given their approval.

German hurdles

In Germany, the law approving the ORD was passed by a two-thirds majority in the Bundestag and unanimously in the Bundesrat, respectively on 25 and 26 March 2021. However, it must be signed by the head of state before coming into force. On 26 March, the German Constitutional Court (GCC) issued a press statement saying that the President of the Federal Republic was not permitted to sign the law for the time being, given there were two cases challenging the conformity of the law, both with the EU Treaties and with the German Constitution. The process was thus put on hold.

The decision taken by the GCC on 26 March is an interim measure, pending a formal decision which will probably be taken within the next two or three months. It will most likely follow one of these three paths:

  1. The German law approving the EU decision shall immediately enter into force, because the arguments of the claims are manifestly unfounded and must be rejected without further ado.
  2. The GCC will adopt an interim decision, according to which the German law can be signed, given that the GCC judgment on the conformity of that law with the German Constitution, and also on the conformity of the ORD with the EU Treaties, will be taken later, the latter only after a judgment of the Court of Justice of the European Union (CJEU) to which a preliminary question about that conformity would be requested by the GCC before deciding (article 267 TFEU). This might take between six to twelve months.
  3. The GCC will adopt an interim decision, according to which the German law cannot be signed now, given that its final judgment on the claims will be taken later, thus preventing the law from being signed and the ORD to enter into force during the time it takes for the GCC to judge these claims on substance (which might be up to one year or more).

A decision to immediately reject the claims would permit the NGEU to be implemented. Even an interim decision permitting signature would allow the ORD to enter into force and the recovery fund to be established, if all member states give their approval. They could finalise their national plans and implement them when approved by the EU, without waiting for the judgement of the GCC. However, uncertainty would persist until that final judgement is made.

In contrast, an interim decision forbidding the signature of the law would de facto be fatal for the recovery fund. The fund is needed now, and not in 2022 or later, to allow the member states to try and recover from the acute economic crisis provoked by the COVID-19 pandemic.

German exceptionalism?

Why do these kinds of legal disputes appear so often in front of the GCC? It is widely acknowledged that the scope of the principle of primacy of EU law (see Declaration N°17 attached to the Final Act of the Lisbon Conference), and thus of the delineation between the powers of the national constitutional courts and the CJEU, are not interpreted by all in the same way. However, a kind of unwritten modus vivendi exists. Most constitutional courts, while claiming not to be completely legally bound by the case-law of the CJEU, carefully avoid upending the delicate balance between the national and the EU’s legal orders.

The German CC has taken a different, and more aggressive, stance. It has not hesitated to put EU law and the EU’s legal order in jeopardy a number of times, including in judgements on the Lisbon Treaty ratification (June 2009), the euro rescue measures (September 2011), the Outright Monetary Transactions (January 2014 and June 2016) and on the Public Sector Purchase Program (PSPP) of the European Central Bank (May 2020).

The most striking elements of these judgements go as far as to deny the primacy of EU law over national law in certain circumstances, jeopardising the independence of the European Central Bank (ECB), denying the exclusive role of the CJEU to interpret EU law, and so on. They thus risk creating a situation wherein Germany is violating its explicit international obligations under the EU Treaties (see also article 23 of the Fundamental Law), and others are encouraged to question the EU’s legal order.

EU-sceptics to the fore

Given this case-law, it is not surprising that the EU’s opponents (in Germany) have seized on the opportunity to try to undermine the EU and/or Germany’s European policy. In the two current cases, the GCC was called on by members of the extreme right political party AfD (Alternative für Deutschland) and other Eurosceptics (Bündnis Bürgerwille).

Their claim is that the ORD is in breach of the EU Treaties, given that the EU is not permitted to borrow, and that its member states cannot be mutually liable for each other’s national debt. They argue that article 311 TFEU on own resources was not respected, and likened the adoption of the ORD to the USA’s Hamiltonian moment at the end of the 18th century, when US Secretary of Treasury Hamilton enabled the federal government to take over the debts of the states and to reimburse them with federal bonds.

Getting it right?

This line of criticism misses the point. The ORD determines how much the EU is permitted to spend. For the next multiannual period (2021-2027), it cannot spend more than 1.4% of the EU’s Gross National Income (GNI). However, with the €750 bn NGEU, the ORD would add a one-time temporary increase of 0.6% of EU GNI, which will expire automatically with the repayments of the borrowed sums. This is not excluded by article 311, and article 4 of the ORD states that “the funds borrowed on capital markets cannot be used for the financing of operational expenditure of the EU”. Being a one-off, time-limited additional fund, it will be reimbursed: therefore, it is not an own resource (which would not be repaid). The reimbursements will be made by all member states over a maximum period of 37 years, a long-term duration that is not out of the ordinary.

There is no mutualisation of the debts of the member states: “The borrowed funds which are used to provide loans to Member States should be repaid using the sums received from the beneficiary Member States”. Each member state will have its share of the repayments, and Germany will not be liable for the repayments of others. A Hamiltonian moment would have happened with the repayment of national debts by EU federal bonds, which is obviously not foreseen in NGEU.

The complainants also argue that the EU’s Decision is incompatible with the Fundamental Law of Germany, as regards the principle of democracy therein (article 20), considered to be an “eternity clause”, i.e. which cannot be modified (article 79 paragraph 3). This principle is interpreted by the GCC in its case-law as including the budgetary powers of the German Parliament. However, the argument of the complainants is not plausible in the current case. First, the German Parliament had to approve the ORD. Second, there is no mutualisation of debt. Third, even in the worst-case scenario, the burden on the German budget could never be considered a significant risk, given the amounts at stake, its share between member states, the duration of the repayments, and comparing these elements to the German budget.

Losing momentum?

On the basis of these elements, it is legally arguable that the German Constitutional Court should immediately confirm the legality of the law approved by the government and the two chambers of the German Parliament. However, given its previous case-law, and the traditional detailed motivation of its judgements, it is more likely to decide to authorise the signature of the law and its entry into force, while reserving its judgement on substance for later.

In that case, the GCC is likely to, at the same time, request a preliminary ruling of the CJEU on the conformity of the ORD with the EU Treaties and take its time to examine the conformity of the German law approving the ORD with the German Constitution. Despite the fact that NGEU would follow its course, this would raise uncertainty until the final judgment of the GCC. Moreover, the GCC would, once again, show its reserves toward and misgivings about any EU or member states’ joint financial instruments, which might sometimes be needed in an economic and monetary union.

Jean-Claude Piris is a consultant on EU law and politics and international public law, and former director-general of the EU Council Legal Service.

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