The German constitutional court has opened the door to further ambitious European Union borrowing to promote common energy and industrial projects. But further legal and political squabbling looks likely as the Commission’s appetite for further programmes grows in coming years.
The court’s judgement on 6 December came shortly after Ursula von der Leyen, Commission president, launched a new bid for common funding to counter US and Chinese economic dominance and bolster the bloc’s industrial base.
In a speech in Bruges on 4 December von der Leyen underlined the need for a ‘sovereignty fund’ reacting to the ‘assertive industrial policy of our competitors’, declaiming: ‘A common European industrial policy requires common European funding.’
President Joe Biden’s pro-American business Inflation Reduction Act – interpreted by many as a protectionist challenge to Europe and other parts of the world – ‘should make us reflect on how we can improve our state aid frameworks, and adapt them to a new global environment,’ von der Leyen said.
Calling for ‘complementary European funding’, she affirmed that member states’ investing budgets in strategic sectors was not sufficient. ‘It would favour deep-pocket states and lead to distortions that would eventually undermine the single market.’
The Karlsruhe court’s decision, responding to a legal complaint brought by former politician Bernd Lucke and other plaintiffs, rules that ‘exceptional’ borrowing by the EU to overcome problems caused by the Covid-19 pandemic does not infringe European treaties. In its judgement, which was largely as expected, the court underlined that borrowing for the Next Generation EU programme should be kept temporary and should be strictly tied to the ‘historically exceptional’ case of supporting the post-Covid-19 recovery.
‘It looks possible there will be issues for possible future programmes by the EU – there will have to be a time limit and a size limit and they will have to be able to fund and pay back the funds with its own resources,’ said Christian Lenk, senior market strategist, rates and sovereigns, supranationals and agencies, at DZ BANK. ‘But what does a time limit mean? The NGEU funds don’t have to be paid back until 2058 so the time limit can be quite long.’
Although the Commission will see the Karlsruhe decision as a victory, it is unclear whether it could ease the way for consolidating existing programmes into a more comprehensive package from next year, as some officials favour. Such a solution has been put forward to improve financial market efficiency and cut costs, especially if the Commission decides on joint action to fund rebuilding in Ukraine through common borrowing.
On the possibility of the EU merging its various funding programmes – the Support to mitigate Unemployment Risks in an Emergency programme, Macro Financial Assistance and NGEU – Lenk said ‘One might think about it because to some degree it makes the funding process easier as there would be a unified funding approach.’ However, ‘on the other hand, the programmes do have different set ups,’ he added.
Vague terms used by the court in defining the legal limitations of present and future borrowing make further lawsuits look likely, on a case-by-case basis. Europe has not come much nearer to upholding the vaunted claim of Olaf Scholz, the German finance minister and now chancellor, that it was approaching its ‘Hamiltonian moment’ – named after America’s first Treasury secretary, Alexander Hamilton, who laid the basis of financial self-sufficiency for the fledgling US.
Lucke said the indeterminate language in the ruling was disappointing. He said he was sceptical that planned measures by the Commission to raise funds for common energy programmes would be acceptable under article 124 of the EU treaty.
Part of the ruling is likely to resonate with German parliamentarians as well as with the Berlin finance ministry, which wishes to maintain national political powers over EU fund raising and deployment. The court said the Bundestag had an ‘ongoing duty… to monitor the use of funds from NGEU and the development of risks of liability arising from the programme and, when necessary, to take suitable measures to protect the federal budget.’
There was very little market reaction to the verdict, with few movements in the EU’s bond as well as other ‘E’ name supranational issuers. However, the EU was waiting in the wings for the outcome, having been expected to announce the mandate for its final syndicated transaction of the year on Monday for execution on Tuesday.
‘This week was the final window for a syndication transaction of the EU and they announced the mandate a few hours after the verdict,’ said Lenk. ‘Obviously the funding team were waiting with the mandate as this was a big obstacle.’
The EU eventually announced the mandate on Tuesday – a few hours after the German constitutional court’s verdict – with a dual tranche comprising a €6.5bn 15-year bond for the SURE programme and a €500m tap of a 2052 bond for the MFA programme for Ukraine. Bank of America, Barclays, Deutsche Bank, DZ BANK and Société Générale are the banks leading the syndicated transaction.
Burhan Khadbai is Head of Content, Sovereign Debt Institute, and David Marsh is Chairman, OMFIF. Edoardo Reviglio is Professor of Economics at Luiss Guido Carlo in Rome and a member of the OMFIF Advisory Board.