Green light from Karlsruhe for the ratification of new EU own resources decision. First fractures in the prohibition of fiscal integration?
With a decision issued on the 15th April 2021, the German Federal Constitutional Court (GFCC) declined the request for preliminary injunction against the promulgation of the domestic act ratifying the 2020 Own Resources Decision (ORD), on which the activation of Next Generation EU (NGEU) depends. Once the remaining Member States complete the ratification process in accordance with by art. 311 TFEU, the Union will finally be allowed to collect resources on the market to reinforce its budget and develop a recovery plan for Europe in the aftermath of the COVID-19 pandemic. While the decision of the Court brings great relief to those who believe that NGEU represents a turning point in the process of European integration, the outcome wasn’t something expected due to the well-known hostility of the GFCC towards any form of fiscal integration in the Union.
As noticed by Benedikt Riedl in a recent post published on this blog, the real issue the Court has been called to consider in the case is whether authorising the Commission to borrow up to € 750 billion on capital markets on behalf of the EU and repay it by the 31st December 2058 may pave the way to the establishment of a fiscal union, where Member States and their citizens are mutually responsible for financial obligations taken by the European institutions. From the point of view of the German constitutional law this might represent a violation of the Bundestag’s overall budgetary responsibility, which is part of the Basic Law’s constitutional identity and guarantees citizen’s right to democratic self-determination. The applicants raised two arguments to prove such violation. On the one hand, the 2020 ORD authorises the European Commission under certain conditions to make additional calls on the Member States to provide financing, thus causing unforeseeable budgetary burdens on the German budget without prior constitutive approval by Parliament. At the same time, the 2020 ORD would consist of an ultra vires act, as it infringes the EU Treaties, in particular the prohibition of bailout (article 125 (1) TFEU) and rules on the amendment of the ORD (article 311 (3) TFEU). Sticking to the consolidated case law of the GFCC (as Riedl does) there are sufficient grounds to believe that the complaints of the applicants are founded, even in an emergency procedure. Yet, this time the Court has gone in the opposition direction, by authorising the promulgation of the act ratifying the ORD. While the decision only deals with the application for preliminary injunction, it presents some arguments which might also help the solution of the principal proceeding.
A decision based on the balance of consequences.
As it normally happens in the emergency procedures, the GFCC didn’t provide an exhaustive answer to the requests of the applicants, but adopted a decision based on the balance of consequences. Accordingly, the Court realised that accepting the application for preliminary injunction would have produced a less favourable outcome than authorising the promulgation of the law, because the 2020 ORD wouldn’t be able to enter into force in time and NGEU couldn’t effectively address the consequences of the pandemic, thus putting a significant strain on the European relations of Germany. On the contrary, the probability that ratifying the ORD undermines the Bundestag’s overall budgetary autonomy in a relevant manner remains small.
According to the Court «payment obligations and assumptions of liabilities can violate an upper limit directly derived from the principle of democracy only when such financial commitments not only have the effect of restricting budgetary autonomy, but essentially negate this autonomy, at least for a considerable period of time». In the case of the 2020 ORD, however, not only the authorisation for the Commission to borrow from the capital markets is limited in volume, duration and purpose, but it doesn’t even create direct liabilities for Germany. Such a liability could only arise if the new own resources of the EU budget were not sufficient for the Union to comply with its obligations and the Commission could not generate the necessary liquidity by activating short-term financing on capital markets. In this contingency, Member States may be effectively called to cover the resulting deficit, which, however, would be shared in proportion to their estimated budget revenue. Only in the event that all governments failed to honour a call to provide the necessary financing to this effect, Germany would carry the entire burden of the European debt alone. Clearly the Bundestag and the Bundesrat considered such a scenario unrealistic.
Furthermore, in the event the principal proceeding ended with a declaration of unconstitutionality, the Court would be still in time to demand the German parliament and government «to restore the constitutional order by all means available to them».
First fractures in the prohibition of European fiscal integration?
Apparently the Court doesn’t move from its consolidated case law, according to which, «it is for the Bundestag, as the constitutional organ directly accountable to the people, to take all essential decisions on revenue and expenditure; this prerogative forms part of the core enshrined in article 20(1) and (2) GG, which is beyond the reach of constitutional amendment». For the Court, challenging the fiscal prerogatives of the Bundestag is deeply problematic for two reasons. First of all, the GFCC believes that the principle of democracy, which is of course part of the constitutional identity, can be fulfilled only through the conferral of key policy decisions to the Parliament, as expression of the national people (Volksdemokratie). Protecting the prerogatives of the Bundestag is therefore functional to the preservation of national sovereignty in itself. Second, the specific importance of the Bundestag’s budgetary autonomy depends also on the fact that among all competences, fiscal authority is the closest to the Kompetenz-Kompetenz, because it determines, how many resources are available for the management of other policies. If the EU was able to autonomously collect and allocate resources, the distinction between EU and Member States’ competences would get blurred. Accordingly, the development of some form of fiscal federalism in the EMU might in perspective undermine the conferral principle as such.
While the Court confirms its commitment to preserve the budgetary autonomy of the Bundestag, the decision to dismiss the application for preliminary injunction does soften some standards previously set to achieve this result.
First, the Court seems to accept that the Bundestag will have a limited role in the management of the new EU resources. This contradicts the previous judgments on the German participation in the intergovernmental rescue mechanisms (EFSF, ESM), which prescribed that the Bundestag must approve every single large-scale financial assistance programme resulting in expenditure for the German budget and maintain sufficient influence over the manner of dealing with the funds provided (possibly through a veto right). Such conditions can’t be fulfilled in the context of NGEU. The Bundestag can only authorise a priori the adoption of the ORD on the basis of article 311 TFEU, but doesn’t have any veto power on the activation of the instruments in charge of spending the borrowed funds (e.g. the Recovery and Resilience Facility), nor can it reject capital calls from the Commission in case of necessity. Accordingly, the real risk for an extension of fiscal liabilities on the German budget won’t depend on the decisions of the Bundestag, but on those of the EU institutions. Also the possibility envisaged by the GFCC that the German parliament and government might be called to reverse the effects of ratifying the 2020 ORD, if the latter was finally declared unconstitutional, seems quite unlikely to pass in reality.
Second, the Court accepted that the potential financial exposure of Germany towards the EU budget will be rather significant. The previous case law clearly forbade the assumption of imprecise fiscal burden, which may be disproportional to the size of the national budget. Yet, this seems the case of NGEU. The Court managed to guess that the exposure of Germany towards the EU debt in the worst case scenario may reach € 21 billion every year until 2058. As Riedl hinted in his post, even if the calculations were exact, such burden can unlikely be qualified as “proportionate” to the capabilities of the German budget, despite its well-known stability. Basically German taxpayers would have to pay around three times the final costs of the new Berlin Airport (0.6% of the national GNI) every year for more than 30 years!
These openings towards the establishment of a European fiscal instrument to fight the consequences of the pandemic have been possible thanks to some relevant innovation in the legal reasoning of the GFCC.
First of all, the Court clarified that the German constitution does not forbid any restriction of the Bundestag’s budgetary autonomy, but only its negation. The assumption of financial obligation at supranational level is therefore admissible in principle, even if it must be well pondered.
Second, in order to ponder the impact of a certain supranational financial commitment on the Bundestag’s budgetary autonomy, the Court has started moving from a “risk averse” to a “risk balancing” approach. While decisions in an urgency procedure are normally taken by considering the margin of probabilities, the Court might use this reasoning also in the principal proceeding to consider whether the risks arising from the ratification of the 2020 ORD are realistic. As noticed in the decision, several conditions must be fulfilled simultaneously to add significant fiscal burdens on the German budget without the acceptance of the Bundestag: the new own resources must become insufficient for the Union to comply with its obligations; the Commission should be unable to recourse to short-term financing on the capital markets; all the other Member States should become unable to answer the call of the Commission to cover the resulting deficits. While this is still conceivable in abstract, it is unlikely it will happen in reality, especially considering that NGEU will contribute to stabilise and strengthen the economic situation of several Member States.
Finally, it is also relevant that the Court seems to be granting a significant margin of appreciation to the German parliament and government on the evaluation of the risks for the budgetary autonomy of the country. These political bodies, accountable to the people, are in principle in a better position to decide whether the assumption of a certain financial responsibility is excessive, while the Court should intervene only as a last resort, when the budgetary autonomy of the Parliament risks being structurally negated.
The end for now, but so many questions remain unanswered.
In conclusion, it appears as if the Court identified some arguments, in particular the balance of probabilities in the assumption of fiscal risk and the margin of appreciation of political institutions, which might be further developed in the final judgment to confirm the legitimacy of the 2020 ORD. Of course, a number of important issues still remain unresolved. For example, while the decision of the 15th of April mainly focuses on the protection of the Bundestag’s budgetary autonomy, the Court didn’t say much on the possible velation of the principle of conferral (see Riedl), probably because it would require a request for preliminary ruling to the CJEU. At the same time, the final decision in the principal proceeding may represent an opportunity to address other underlying issues of the establishment of the first stock of European debt. It might be interesting to see whether the limited influence of the Bundestag on how the funds will be used in the context of NGEU may be compensated through a stronger involvement of the European parliament. In the past, the Court was sceptical on the ability of the European parliament to grant sufficient democratic legitimacy, but after many years things may have changed (especially if there is no alternative). Furthermore, the Court may give some clue on the future steps of the process of fiscal integration in the Union. While a positive assessment of the 2020 ORD might allow to replicate the experience of NGEU in the event of a new emergency on the basis of article 122 TFEU, the creation of a genuine fiscal competence at European level may represent a more complicate challenge.