Germany has ratified the law that allows financing of the European Union’s Next Generation recovery fund through bond issues of up to €750bn (at 2018 prices), maturing up to 2058. But because of the special circumstances caused by Covid-19, the EU’s bond issues will be exposed to political and legal uncertainty which could affect credit rating agencies’ views of the risks attached to the borrowings.
The German constitutional court in Karlsruhe on 21 April rejected a request for an injunction that would have immediately prevented German ratification of the EU’s ‘own resources decision’ paving the way for the fund. But the judges assessed the main case as ‘open’. It was launched by 2,281 individuals from a German citizens’ initiative of which I am one of the founding members.
The decision to turn down the injunction rested mainly on grounds of political and economic expediency rather than on strict legal criteria.
The constitutional complaint launched by our group does not attack the recovery fund per se but is aimed at how the fund is financed through EU-issued debt. We argue that this involves mutualisation of debt, which violates both the German constitution and the Treaty on the Functioning of the European Union. The court has declared the case as admissible and ‘not obviously without foundation’. This is the language Karlsruhe uses when a lawsuit appears to be based on serious arguments that cannot be readily dismissed.
The forthcoming legal procedures will presumably involve the Court of Justice of the European Union in Luxembourg (CJEU/ECJ), to which the Karlsruhe court is likely to submit a number of questions in a preliminary ruling procedure. The Karlsruhe judges have pointed out that the ECJ could declare the own resources decision null and void if it violates EU law.
The Karlsruhe court is effectively handing responsibility to the ECJ. This is a deft move because Karlsruhe may still have the last word. If the ECJ does not object to the EU’s own resources decision, Karlsruhe reserves the right to apply German constitutional law if it views the Luxembourg court’s judgement as legally indefensible.
Assuming that all other 26 EU members ratify the recovery fund in the next few weeks, the first EU recovery bonds are expected to be launched on the international capital markets this summer. But the borrowing programme would be subject to two important risks.
The first is focused on a possible ECJ declaration in the next year or two – in response to a corresponding request by Karlsruhe – that the own resources decision is invalid.
Second, the Karlsruhe judges could rule in favour of the plaintiffs in the forthcoming legal case if they fundamentally disagree with the Luxembourg court’s judgement. Karlsruhe could oblige the German government to use all possible powers to bring about a revision of the previously constitutionally binding own resources decision. For example, the Karlsruhe judges have pointed out that the German government could refuse to agree the next EU medium-term financial framework unless other member states declare readiness to modify the own resources agreement. There could be similar conditions on other EU decisions requiring unanimity
What does the 21 April decision mean in practice? The EU is empowered to issue bonds in its own name. An individual member state’s liability is not limited to their share in the borrowings. Instead, this liability can be extended to other countries, at the discretion of the European Commission, in cases where member states either become incapable of paying their share or leave the EU.
A transfer of these liabilities to other countries is, in principle, pro rata for the other member states, but no enforcement mechanism exists. The transfer of liabilities would take place only for those willing to pay, not for all countries capable of paying.
If the own resources decision enters into force, Germany is – by international treaty – obliged to meet claims arising not just from its own share of the debts but also those arising from possible payments difficulties of other member states, up to the full amount of principal and interest.
Unlike the ECJ, the Karlsruhe court cannot nullify this international obligation, even if the lawsuit is judged to be valid. But it would, in this case, require the German government to use all possible means to obtain a consensus of other member states to modify the own resources decision, so that it would comply with the TFEU and the German constitution. This might involve Germany refusing to contribute anything beyond its contractual obligations to the EU budget.
The risks are therefore that either the ECJ calls for partial or outright nullification of the own resources decision, or Karlsruhe rules in a similar way, obliging Germany to demand a revision. How ratings agencies and the wider capital markets will view the legal risks attached to forthcoming bond issues is an open question.
Bernd Lucke is Professor of Macroeconomics at the University of Hamburg and a founder member of Bündnis Bürgerwille (Alliance of Citizens’ Will), which launched a constitutional court case against the EU Next Generation fund. In 2013 he founded (and subsequently left in 2015) Alternative fur Deutschland (Alternative for Germany), which currently has the largest number of seats among opposition parties in the German Bundestag.