Privacy Policy
Code of Ethics

Márton CSAPODI: Integration without control? The FCC has ruled on EU borrowing

On 6 December 2022, the German Federal Constitutional Court (FCC) ruled on a case affecting the whole of Europe, as it had to decide whether the EU Council’s Own Resources Decision (ORD), which authorizes the Commission to borrow up to €750 billion on behalf of the EU, complies with German constitutional requirements. The FCC ultimately allowed the joint EU borrowing (more precisely the domestic legislation implementing the ORD), but the reasoning of the decision gives a more nuanced picture. It seems that this leniency is far from stemming from a conviction in the legality of the borrowing. In fact, the reasoning suggests that the German constitutional judges are far from being convinced that the ORD does not constitute an overstepping of the European Union’s powers. However, under the ultra vires test applied in their decision, anything that does not constitute a manifestly evident overstepping of competence is permissible, even if there are otherwise indications that the boundaries of the Treaties have been left behind. While after their PSPP decision delivered two years ago many feared that other national courts would go on to review EU measures, now it seems that even the Germans have backed down. The question is whether EU legislation will remain subject to any judicial type of control at European or national level.

Tense waiting: will there be another ultra vires decision?

The decision of the FCC was eagerly awaited because in 2020, it fulfilled its earlier threats and dropped the “nuclear weapon”: in connection with the European Central Bank’s bond purchase program launched in 2015, it found that both the ECB and the Court of Justice of the European Union had exceeded their powers. While this did not affect the practical application of the PSPP (public sector purchase program) at the time, it raised fears among many about the future of the eurozone and the EU legal system as to the potential long-term consequences of the decision. What happens if German constitutional judges continue to review other EU measures or “worse”: if other constitutional courts follow the German example? One could look forward with excitement to see what conclusion the FCC will reach now that it is once again examining whether there has been an overstepping of competences by EU institutions.

What did the FCC examine?

The measures examined by the constitutional court are linked to the NextGenerationEU package, part of the European recovery plan following the Covid-19 pandemic, closely tied to the EU’s multiannual budget for 2021-2027. The framework for the financial assistance to Member States to deal with the effects of the epidemic is set out in the European Union Recovery Instrument (EURI). The Treaty basis of the recovery instrument is Article 122 TEU, which allows the Council to grant EU financial assistance to a Member State in difficulties caused by natural disasters or other events beyond its control.

The ORD, the Council’s Own Resources Decision allows borrowing for the Commission on behalf of the EU on the basis of Article 311 TEU (which allows for the creation of new types of own resources) and links it to the EU Recovery Instrument, i.e. the post-crisis recovery from the effects of the epidemic.

The complainants’ request was for the FCC to declare, first, that the ORD violates German constitutional identity and, second, that it constitutes an overstepping of EU competences. According to their application, the ORD does not have a sufficient legal basis in Article 122 TEU and violates the requirements of Article 311 and the non-bailout clause under Article 125.

The identity of the German basic law remains intact

As a preliminary point, it is worth noting that the identity test (i.e. whether EU law violates German constitutional identity) covers a smaller area than the ultra vires test (i.e. whether there has been an abuse of power). However, the FCC’s ultra vires test is also permissive: in the 2020 PSPP decision, for example, it said that the overstepping of competences has to be evident (e.g. the CJEU overstepped its jurisdiction if its interpretation evidently disregarded traditional European methods of interpretation).

In the context of the infringement of constitutional identity, the FCC had to examine whether the ORD infringes on the budgetary powers of the Bundestag (and thus the right to democratic self-determination that is part of the basic law’s identity). The FCC concluded on this issue that the ORD does not infringe the budgetary responsibilities of the Bundestag because it can be used for exceptional, specific purposes and the influence of the parliament on the government during the implementation of the recovery plan is preserved. (During the hearings, both the federal government and the Bundestag stressed the ORD is a one-off, exceptional and special solution, which in no way constitutes a step towards a “fiscal union”.)

The overstepping of competence is not “manifestly evident”

The FCC’s findings on the question of misuse of powers were more complex, despite the fact that it concluded that there was no manifestly evident overstepping of the powers conferred on the EU. While it is true, according to the court, that the Treaties do not contain any specific authorization of the European Union to borrow on the capital markets, it is “not completely implausible” that, in exceptional circumstances, Article 311 TEU would create such a possibility. However, to make this possible, several conditions are set out by the FCC, e.g. that funds are used only for tasks falling within the competences of the European Union in accordance with the principle of conferral, that borrowing is limited in time and amount, and that the amount of “other revenue” does not exceed the total amount of own resources.

The FCC has expressed some concerns that the link between the EURI and the impact of the pandemic is not always close – it also includes tasks such as digitalization and green transition, and 10% of the instruments would finance ongoing programs that have nothing to do with the pandemic. While the judges expressed their doubts about how Article 122 could provide an appropriate legal basis for the ORD, they retreated by concluding that it also “cannot be clearly ruled out” – a manifest overstepping of powers cannot therefore be established here.

The FCC found that, although the amount and timeframe of the borrowing cast doubt on whether it can be considered truly exceptional, the ORD does, after all, contain some limitation in terms of amount and time. The constitutional judges also said that it “appears possible” that other revenues obtained through borrowing exceed the own resources – but this is not manifestly evident. Why? According to the ORD, borrowing can amount to a maximum of €750 billion, while the EU’s multiannual financial framework for 2021-2027 amounts to €1 074 billion. The FCC also concludes, on the basis of the principle of annuality, that borrowing will exceed own resources in 2021 and 2022, in breach of Article 311 TEU. At the same time, if the principle of annuality is not applied (although there is no particular justification as to why), the overall amount of the borrowing is of course lower than the total budget for 2021-2027 (still not significantly). Thus, the FCC avoided to find a manifest violation of Article 311.

According to Article 125 TEU, neither the EU nor the other Member States can be held liable for the obligations of a Member State (non-bailout clause). According to the German judges, since the NGEU does not create a direct liability or mechanism for establishing liability, there is no direct infringement of Article 125. They add, however, that the ORD may constitute a circumvention of Article 125, since ultimately, if the EU’s own resources do not cover it, the Commission will have to call on the resources of the Member States to repay the loan – but this circumvention is “at least not manifestly evident” according to the FCC. Although EU borrowing appears to be somewhat at odds with Article 125, the Treaty does not explicitly rule out the possibility of deriving such powers from Article 122, says the German court.

Integration without control?

The content of the FCC’s reasoning gives rise to some surprise as to the outcome. The court has in fact deduced that the ORD is an overstepping of EU powers – yet it has decided to be lenient. One can only hope that the fact that the German government promised the Commission after the PSPP decision to do its utmost to avoid ultra vires decisions has nothing to do with the surprising outcome. The promise itself reflects a very unique conception of the rule of law, that denies the separation of powers, in particular the independence of the judiciary.

The ultra vires review, which two years ago seemed like a serious weapon, cannot be considered as a means of dealing with overstepping of EU powers, when applied in the manner outlined above. One might ask: if the German Federal Constitutional Court no longer wishes to step up in the event of an abuse of jurisdiction, who will do so? The Court of Justice of the EU cannot be counted on as it in fact does not exercise any vertical control of competences, even though this would be one of its tasks. With this decision, the German constitutional judges have indicated that, although they are aware that there is a likelihood of a misuse of powers and that the ORD was created in breach of/by circumvention of the TEU, they do not wish to put any obstacles in the way of its implementation. This would render ultra vires review meaningless and would also deprive the integration process of judicial control by the Member States, which has so far relied heavily on the authority of the German Federal Constitutional Court. It should be interesting to see which one of the PSPP decision from two years ago and today’s abrupt reversal will be considered the rule and which the exception in the long run.

Márton Csapodi is a PhD student at the Pázmány Péter Catholic University and research fellow at the MCC Center for Constitutional Politics under the MCC’s PhD program. He graduated as a lawyer in 2022 at the Pázmány Péter Catholic University Faculty of Law and Political Sciences. His current research interests include constitutional pluralism, European constitutionalism and judicial review.

Print Friendly, PDF & Email