Germany can set the "Corona Reconstruction Fund" in motion following a decision by the Federal Constitutional Court. The question remains whether increased borrowing by the member states would be possible to finance the Reconstruction Fund and its transfer services.

A guest contribution by Ravel Meeth in the Neue Zürcher Zeitung (NZZ):

With yesterday's decision by the Federal Constitutional Court to reject the interim order against the final ratification of the Own Resources Decision by the German Federal President, the court has undoubtedly made a decision that is more political than legal. In the reasoning of the decision, the court extensively discusses the potential consequences of issuing such an order, which would have meant an indefinite delay in the establishment of the Reconstruction Fund.

The consequences, particularly in the highly indebted states of southern Europe, could have been devastating according to the court's presumed assessment: a loss of trust from the populations in the EU's capacity for action, populist attacks on Germany, a steep rise in bond yields and the costs of debt servicing. Although the court evidently deemed a legal violation as not unlikely, it did not want to act according to the principle of “fiat justitia et pereat mundus,” which requires the law to be upheld even if the world were to perish in the process. The threatening backdrop of the “economic catastrophe,” which was, among other things, constructed by ECB representatives in the event of the Reconstruction Fund's failure, has evidently impressed the court sufficiently.

For there has been significant commotion in the German and European public since the Federal Constitutional Court initially prohibited the Federal President from issuing the law for the ratification of the Own Resources Decision. The aim of this decision was to prevent the establishment of an irreversible state in order to first examine whether a clear violation of the German Constitution exists. Now, the forthcoming principal proceedings in the form of a constitutional complaint will clarify whether the EU can be authorized on the basis of the European treaties to incur debt for financing budget expenditures. If this is not the case, the Own Resources Decision would be an ultra vires act and thus incompatible with the German Basic Law.

Now, some confusion has spread in the debate surrounding the alleged remedying of the economic damage caused by the pandemic. The complainants are accused of undermining pro-European solidarity and hindering progress in the EU with the help of a (typically German) legalism.

However, this criticism confuses the revenue and expenditure sides of the “Next Generation EU” package. The revenue side is based on the Own Resources Decision, including the borrowing authorization, and is grounded in Article 311 TFEU, whereas the expenditure side, the Recovery Fund, is based on the emergency clause of Article 122 TFEU. These two sides are politically linked but legally distinct. The actions of the complainants are currently directed only against the revenue side, specifically against the financing of NGEU through borrowing by the EU with joint liability of the member states.

Article 311 TFEU clearly stipulates that the EU is financed solely from own resources. This legal interpretation has so far been upheld even by the EU Commission, for example, in responses to parliamentary inquiries. The reason for this contractual borrowing prohibition is that EU debts would lead to a liability community, which would create incentives for unsound financial policies and excessive debt in individual states. For Germany, for instance, it remains unclear to what extent the Bundestag would then have to take responsibility for the follies of other countries. Notably, Germany's liability pledge has been set so high that it could cover the total borrowing and debt servicing.

With dubious legal constructions, the Commission and the Council are trying to circumvent the borrowing prohibition. This approach represents an executive excess from a rule-of-law perspective: The EU institutions are hollowing out the democratically legitimized European treaties to assign themselves self-chosen powers.

Alarmingly often, however, in the debate, politicians and economists justify the taking on of EU debts with the necessity of intra-European solidarity, i.e., the solidarity clause from Article 122 TFEU. That this is misguided, at worst even a deliberate deception of the public, is shown by a simple consideration: The expenditures of NGEU can also be financed differently than through debt pooling.

For example, increased borrowing by the member states could be possible to finance the Reconstruction Fund and its transfer services. National guarantees, like those in the European short-time work program SURE, would also be conceivable. Both would mean that each member state would only take on liability limited to its share. This has always been the case in the EU, and it can be handled this way again.

A conventional financing method would be an honest and transparent solution that could be implemented within a short period in a new Own Resources Decision of the European Council and could finance exactly the same amount of expenditure. That the EU Commission does not want this indicates that the deeper goal of its approach is not to combat the pandemic at all. Rather, the EU is interested in expanding its competencies to be able to conduct its own deficit-financed fiscal policy.

It is now suggested that Italy cannot be expected to take on further debt. However, the EU Commission positively determined Italy's debt sustainability just last year to keep Italy's access to the ESM open. Additionally, the bond yields for Italy are currently historically low: Italy can borrow more cheaply than the USA because the ECB is purchasing significant amounts of Italian government bonds.

That NGEU is less about the pandemic and more about the creation of a fiscal union is also suggested by numerous statements from top officials such as Christine Lagarde and German Finance Minister Olaf Scholz. Meanwhile, those who describe themselves as “pro-European” are treating the principles of the rule of law and constitutional fidelity as if they were stiffly pressed Sunday suits, which only hinder the day-to-day business when they are donned.

After the failure of the preemptive application, the Reconstruction Fund is now becoming a European reality. Nevertheless, the principal proceedings will give the court the opportunity to carefully examine the facts and also present the disputed questions to the ECJ. One should not harbor illusions about how the ECJ will view the matter: The ECJ, in its self-understanding as the “engine of integration,” will ultimately likely approve the interpretation of loans as “own resources” according to Article 311 TFEU. Whether the Federal Constitutional Court, in light of the continued attacks and warnings from the EU establishment since the PSPP ruling in May 2020, will once again have the courage to rein in the self-empowerment of the EU institutions remains to be seen. One can only hope.