Karlsruhe Greenlights NGEU
But also — Qatar, Eurogroup, Hungary, China, Deforestation, Parenthood, Sanctions, VAT
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The Briefing
On 6 December, Germany’s Federal Constitutional Court – the Bundesverfassungsgericht — gave a green light to Next Generation EU. Karlsruhe judges have quite a track record of challenging flagship European economic policies. The decision, issued on 6 December, was received with a sigh of relief in Brussels.
LEGALESE • Let’s first take a step back, and a deep breath. In the summer of 2020, EU leaders agreed on a flagship 800 billion euro recovery fund. On 14 December 2020, the Council established the recovery fund via a regulation (‘EURI’), based on the Council’s emergency powers under Article 122 TFEU — which allows it to bypass the European Parliament. The same day, the Own Resources Decision (‘ORD’) was voted, making common EU borrowing legally possible.
Much water has flown under the bridges under Merkel, and allowing the EU to go on a borrowing spree was a sea change in Berlin. Under the Treaties, the EU has no competence to raise debt on its own, under Article 311 TFEU. The EU’s money comes either from its Member States’ contributions or from its ‘own resources’, such as VAT. When the EU raised debt during the financial crisis, it did so via the express backing of its Member States — i.e. the EU itself was not a player on the bond market, its Member States were. Breaking with the past, NGEU was to be composed of both loans (classic) and grants (novelty), to be financed by EU-wide borrowing (huge novelty), instantly making the European Union a “new gorilla on the bond market”.
The TFEU has a ‘no-bailout’ clause, Article 125 TFEU, which prohibits Member States from assuming liability for the debts of other Member States — i.e. Germany should not be expected to foot the bill for Italy, or Greece. Under NGEU however, Italy was set to receive a whopping 200 billion euros — more than Italy’s share of the Marshall plan in today’s euros — while other Member States were to be net contributors to the recovery fund.
LITIGATION • In December 2020, the Council voted the Own Resources Decision into law, making NGEU a reality. The recovery fund’s legal basis, redistributive nature, and the ensuing boost in EU budgetary firepower were big triggers for fiscal hawks in Germany who never shy away from taking big EU policies to court.
Buendnis Buergerwille, a political group, took the Own Resources Decision to Karlsruhe. In April 2021, while they failed to get a temporary injunction to halt NGEU, the litigants successfully blocked Germany’s ratification of NGEU. The order controversially halted Germany’s ratification of NGEU, which Federal President Steinmeir was about to sign. This in effect blocked the disbursement of NGEU funds to covid-struck countries, all the while Germany was dishing out relief money on its own to its own companies.
Germany’s constitutional court does not shy away either from conflict. In the PSPP saga, which concerned the ECB’s sovereign-debt crisis era public sector purchase programme, Karlsruhe went full frontal against the ECB and the Court of justice, declaring that the EU’s top court had acted beyond its powers (ultra vires). Essentially, constitutional judges in Germany pull the judicial trigger when they believe the EU goes beyond what it is allowed to do under the EU Treaties. In doing so, they protect Germany’s constitutional identity.
VERDICT • Now, what did Karlsruhe say? The German judges consider that issuing mutual debt to fight Covid-19 is compatible with the EU Treaty, precisely because NGEU is temporary and that the funds are “used exclusively for tasks for which the European Union has competence”.
The decision was met with sighs of relief in Brussels, but Karlrushe’s endorsement comes with strings attached. While exceptional borrowing got a greenlight, “by contrast, it would be manifestly impermissible for the European Union to borrow on capital markets to provide general financing for its budget”, the Court contends.
The language of the Court, however, is not enthusiastic to say the least. Karlsruhe still has doubts about the legality of using common debt to finance climate-related policies under NGEU and other general EU funds which have “no relation to the Covid-19 pandemic at all”.
Overall, “while the ruling is not as constraining as some might have feared, it does not give card blanche for a more permanent EU fiscal capacity”, argue Thu Nguyen and Martijn van den Brink on Verfassungsblog. Georg Riekeles and Philipp Lausberg of the European Policy Center recently advocated for a “permanent fiscal capacity in the range of 1 trillion euros (...) financed through common EU borrowing” to tackle the biggest challenges going forward. Karlsruhe will not let this happen that easily.
“The tone of the decision is not always as conciliatory as the outcome suggests, and it remains unclear whether the FCC will be equally lenient in its findings the next time an instrument such as NGEU ends up before it. In particular, the judgement raises some questions with regard to other planned instruments, such as REPowerEU”, stress Nguyen and van den Brink.
In Case You Missed It
QATAR • Several people were charged with corruption over the weekend, including Eva Kaili, one of the European Parliament’s fourteen vice-presidents. The affair involves a former MEP from Italy, parliamentary assistants, the secretary general of the International Trade Union Confederation (ITUC), Kaili’s own partner, human rights NGOs – but not this newsletter, although we’re open to sponsorships.
They are all accused of cashing in money to defend Qatar ahead of the World Cup. A Greek MEP from the Socialist & Democrat group, Kaili has publicly defended Qatar’s progress on labour rights and advocated for visa liberalisation with the world’s second largest exporter of liquefied natural gas. Needless to say, the S&D’s tough stance on Hungary’s poor rule-of-law record will get a PR hit.
EUROGROUP • Paschal Donohoe was reelected as Eurogroup President on 5 December. He will serve a second term of two and a half years, after being first elected in July 2020. The same day, the Eurogroup issued a statement on draft budgetary plans for 2023, as part of the European Semester. Notably, the “The Eurogroup agrees with the Commission’s assessment that all Member States should progressively withdraw (energy crisis) measures as energy price pressures diminish”.
HUNGARY • During an EU finance ministers meeting on 6 December, Hungary blocked an 18 billion euros package of aid for Ukraine. As a result, the Commission and the other Member States have started working on a possible alternative financing scheme for Ukraine, one that would not require Hungary’s approval but could take longer to see the light of day. “We must make a first payment next month so Ukraine can survive winter. There is no alternative.”, Commission executive president Valdis Dombrovskis declared.
Many countries believe Hungary is using its veto power to push the Council to unfreeze Hungary’s 5.8 billion euro share of the EU’s Covid-19 recovery fund. The Council has until 19 December to vote on whether to withhold the funds or not. If Budapest does not manage to convince other EU capitals to unfreeze the recovery money, it could lose 70% of its share of the fund.
CHINA • On 7 December, the Commission announced it had requested the establishment of panels at the World Trade Organization, in response to two trade disputes with China that bilateral talks have proven unable to end. The first quarrel concerns the Asian giant’s de facto trade embargo of Lithuania, triggered by the Baltic state’s position on Taiwan.
China is accused of having imposed a range of coercive measures targeting Lithunian exports. The second bone of contention is Beijing’s alleged actions aimed at preventing European companies from going to foreign courts to protect their technology patents, through the use of ‘anti-suit injunctions’ by Chinese courts, who threaten them with severe financial penalties.
The first step in the WTO process consists in consultations between the two parties, which are seen as unlikely to be effective. According to the Commission, a panel should be formed on 30 January 2023 at the latest; the proceedings could last up to one and a half years.
DEFORESTATION • The Parliament and the Council reached a provisional political agreement on a regulation on deforestation-free supply chains. The proposal aims at ensuring that goods – mostly key commodities such as rubber, soy and cattle – sold in or exported from the EU “no longer contribute to deforestation” or forest degradation.
With significant implications for the EU’s goals in terms of greenhouse gas emissions, the new rules would impose hefty due-diligence obligations on European companies, ranging from ensuring compliance with local legislation to collecting precise geographical information on the sourcing of their products. This legislation is set to evolve, as the EU legislators have made it clear that the list of products and deforestation-prone regions will often be scrutinised and updated.
PARENTHOOD • On 7 December, the Commission put forth a 65-page proposal for a Council Regulation aimed at harmonising the rules of private international law relating to parenthood. The initiative, supported by the Council and the Parliament as part of the broader EU strategy for the rights of the child and LGBTIQ Equality, strives to ensure that parenthood in a Member State is recognized in all other Member States.
Parents in one EU country would consequently benefit from all the related rights they might have been entitled to under national law, especially regarding succession, custody or the right of parents to act as legal representatives of the child. The Commission hopes that – without impinging on the countries’ competence to legislate on the matter –, these yet-to-be-voted rules will enhance the protection of same-sex couples and parents’ rights across the EU.
SANCTIONS PACKAGE • The Commission is proposing a 9th sanctions package against Russia. Restrictions would hit an extended list of almost 200 individuals and entities. Sanctions would also restrict exports of dual-use (weaponizable) goods, drones and unmanned aerial vehicles, as well as restricting the activities of several news outlets.
“This package comes on top of the full EU import ban on Russian seaborne oil that came into force this week. As well as the global oil price cap agreed between the G7”, said European Commission President Ursula Von der Leyen in a recent press statement. The package is currently reviewed by EU Member States with an expected adoption no later than early this week.
VAT • The Commission proposed a series of measures to overhaul the 30-year-old EU VAT system. Digitization should help track down intra-EU fraud, which accounts for 25% of the 93 billion euro VAT gap, i.e. the difference between expected and actual VAT revenue.
What We’re Reading
Against the odds, European industry is weathering the energy crises well, contends Martin Sandbu in the Financial Times. Rather than hankering for cheap gas, it should adapt, to better meet the needs of a decarbonised economy.
The EPC’s Charles Lichfield and Georg Riekeles penned a policy paper on how the EU and the US should overcome their trade and supply chain disputes.
The Hungary Files: Untangling the political and economic knots - The adoption of the Hungarian recovery plan (€5.8 billion) and the cohesion funds for Hungary (€7.5 billion) by the Council are closely linked. The Jacques Delors Institute publishes a policy brief outlining the issues behind these dossiers.
In Palladium Magazine, Samo Burja ー head writer of the excellent Bismark Brief ー interviews Laibach, the more than four-decade old Slovenian band. On the menu: the future of Europe, the importance of Orson Welles’ most famous line, and more.
This week’s newsletter is brought to you by Julie Houillon, Matteo Gorgoni, Battiste Murgia, Maxence de La Rochère, and Augustin Bourleaud. See you next Monday!