German court says yes to recovery fund — but maybe not to much else
Constitutional court cleared the way for the EU to issue joint debt to finance its recovery fund , but it did not give a ringing endorsement.
Just when it looked like the tide might be turning in favor of the EU pooling its resources to stave off crises or fund one-off super-projects, it looks like Germany might be putting the brakes on again.
While the country's constitutional court on Tuesday cleared the way for the bloc to issue joint debt to finance its €750 billion recovery fund — the unprecedented scheme governments in the EU established as they struggled with the costs of the pandemic in 2020 — it was far from a ringing endorsement for anything similar any time soon.
That common debt issuance, the first of its kind in the EU, was legitimate, the court ruled, because it was temporary, exceptional, linked to a specific purpose and not larger than the overall EU budget. That will draw sighs of relief from Brussels and other countries which had staked much political capital on the ambitious package.
But there was a big caveat. "It would be manifestly impermissible for the European Union to borrow on capital markets to provide general financing for its budget," the court said.
As the EU battles rising inflation and a sluggish economy and is faced with questions over how to help rebuild Ukraine, the question of how much governments should spend to boost growth has come under renewed focus.
The recovery fund, known as NextGenerationEU and agreed in July 2020 at the same time as the bloc's €1 trillion seven-year budget, was seen then as a one-off. But its success has led to calls for other projects along similar lines, such as to help fund Kyiv's reconstruction efforts.
That looks to be unlikely after the German court's ruling, analysts said.
"This is not a positive sign for future fiscal integration," said Thu Nguyen, of the Jacques Delors Centre. "The court seems extremely skeptical, essentially arguing all along that the program is legally very problematic, only to then conclude that it will not block it."
The recovery fund allows the European Commission to raise money on capital markets to help finance jointly agreed reforms and investment plans of member countries, partly as grants and partly as loans.
It was seen as breaking a long-standing EU taboo about the pooling of debt. But it raised fears, particularly in richer countries like Germany, that they would be liable for the bill if other governments defaulted.
It's this that alarmed judges in Germany.
"The court raised serious doubts about whether the joint issuance to finance the fund is in line with the treaty of the functioning of the EU," said Holger Schmieding, chief economist at Berenberg Bank. "The German court — once again — emphasized German limits for EU fiscal integration.”
The ruling leaves "the question open" of whether the court would approve the participation in further joint EU debt issuance in the future, he added.
Plaintiffs had sought to stop the joint debt issuance, arguing that it was illegal and contrary to the wording of Article 311 of the Treaty of the Functioning of the European Union to finance expenditures of the bloc's budget by issuing debt.
They also said the program implied incalculable liability risks for Germany's federal budget, meaning that the government should never have agreed to the country's participation.
The German government had approved the scheme. The court in Karlsruhe ruled that it did not present an “obvious infringement” on rules governing European integration. “Also, it does not impair the overall budgetary responsibility of the German Bundestag.”
The decision is "far from a blank cheque" for future initiatives, said International Monetary Fund legal counsel Sebastian Grund.
There might still be some wriggle room, however, with analysts pointing out that at one time the German government's approval of the recovery fund in the first place would have been unthinkable.
The decision opens the door to some joint debt issuance on other tailored spending projects, according to Friedrich Heinemann, of the ZEW economic research group.
"With this tailwind from Karlsruhe, the pressure from Brussels on the federal government will now increase to clear the way for debt financing of new EU programs, he said.