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German Bundesverfassungsgericht decision is no victory for EU federalists

Summary:
The banner on the home page of the German citizens’ group – Bündnis Bürgerwille e.V. – says “Recht gilt auch in der EU” (Law also applies in the EU) and the sub-header “EU – Verträge müssen eingehalten werden” (EU treaties must be complied with). I have sympathy for that sentiment but not the politics of the so-called ‘Citizens’ Will Alliance’, which recently sought to block German government approval of the much vaunted, much delayed, fairly small recovery plan. The mainstay of the EU is the Eurozone because it comprises 19 of the 27 EU nations and the largest nations. The dynamics of the EU economy are driven by what happens in the largest Member States of the Eurozone. The European Commission has been dithering for more than a year to get a fiscal stimulus plan in place and by the time

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The banner on the home page of the German citizens’ group – Bündnis Bürgerwille e.V. – says “Recht gilt auch in der EU” (Law also applies in the EU) and the sub-header “EU – Verträge müssen eingehalten werden” (EU treaties must be complied with). I have sympathy for that sentiment but not the politics of the so-called ‘Citizens’ Will Alliance’, which recently sought to block German government approval of the much vaunted, much delayed, fairly small recovery plan. The mainstay of the EU is the Eurozone because it comprises 19 of the 27 EU nations and the largest nations. The dynamics of the EU economy are driven by what happens in the largest Member States of the Eurozone. The European Commission has been dithering for more than a year to get a fiscal stimulus plan in place and by the time it eventually gets the pittance proposed flowing, significant economic and social damage will have been done, given that if all 27 states ratify the plan, funds (loans mostly) will only start flowing in July – like 18 months after the pandemic began. The Bündnis Bürgerwille group has challenged the German participation in the German Constitutional Court, the Bundesverfassyngsgericht, which delivered its (interim) decision last week. Bündnis Bürgerwille lost, or did they?

The NextGenerationEU recovery plan

In July 2020, after much horse trading was required to keep the Northern States (particularly the so-called Frugal Four, who are just fronts for what Germany and the Netherlands want) from abandoning the process, the EU agreed to spend €750 billion over five years on its = NextGenerationEU (NGEU) – 750plan.

This was its supposed stimulus plan to help the Continent deal with the ravages of the pandemic and prepare it for a more productive green and digital future.

Those, latter goals, are sound.

But the €750 billion is about 5.6 per cent of EU 27 2020 GDP and that will spread out over five years. A fairly modest response and delayed in impact.

Further €360 billion of the amount will be in the form of loans that will have to be repaid.

The majority of the package is taken up by the = EU Recovery and Resilience Facility – which is worth €672.5 billion.

The €360 billion in loans belong in this component.

Would I rate this stimulus commensurate with what is required? Hardly. It is mean and the fact that it is dominated by repayable loans reduces the stimulus effects.

Member States have until April 30, 2021 to lodge their “national recovery and resilience plans” which have to include structural reforms (yes, the usual nonsense) and investment agendas over the next five years.

Reuters reported last week (April 18, 2021) – Italy risks missing Recovery Plan deadline due to EU concerns, sources say.

Apparently, despite Mr Draghi, a darling of the EU taking over the Italian government, the technocrats in Brussels are unhappy with the extent of the ‘reforms’ being proposed and are blocking the process until, presumably, Italy comes to heel, as they have in the past.

The controversy over the €750 billion package lay in the way it was to be funded.

Under the NGEU package, the EU will issue debt (sell bonds and bills via a group of primary bank dealers in the months up until September.

Around 30 per cent of the €750 billion will be covered by ‘green bonds’.

The EU information page – The EU as a borrower – investor relations – provides necessary details of their plans.

To service the debt (pay interest), the EU will have to raise around €15 billion per year.

The loans will be “repaid by the borrowing Member States” and the “grants will be repaid by the EU budget.”

The EU is proposing to increase the contribution from each Member State to the EU central budget to repay the grants.

Part of the controversy is that the EU will curry favour with the bond markets by using its so-called “headroom”, which is:

… the difference between the Own Resources ceiling of the long-term budget and the actual spending. To ensure sufficient headroom, the EU is increasing the Own Resources Ceiling of its budget by 0.6 percentage points of the EU’s Gross National Income (GNI).

The Own Resources ceiling determines the maximum amount of own resources the Commission can call from Member States in any given year to finance expenditure. This gives certainty and predictability to Member States for their budgetary and financial planning. A sufficiently high ceiling allows the Union to cover all of its financial obligations and contingent liabilities falling due in a given year.

So ultimately, the Member States are paying for the stimulus and once the EU starts enforcing the Excessive Deficit Mechanism again, such repayments will place a massive strain on the individual Member State fiscal positions, particularly Italy, which will get around €200 billion of the grants and loans.

Enter the German Bundesverfassungsgericht

Bündnis Bürgerwille group claim they believe in the rule of law, which in the European context if dominated by the various European Union treaties that bind behaviour across the Member States.

When I say that I have sympathy for their mantra – EU – Verträge müssen eingehalten werden – I am referring to the fact that the Eurozone is only surviving because the ECB through its massive government bond-buying programs (and the PEPP accelerated its scale of purchases recently) is effectively funding Member State deficits, which I consider to be strictly its legal mandate under the Treaties.

Everyone looks right and left to avoid owning up to this fact because they know the dysfunctional architecture of the Eurozone would mean many countries would be insolvent by now without the ECB ‘breaking’ the treaty law on bailouts.

So, I think the Bündnis Bürgerwille group are correct in their worry that the EU says one thing and allows another, when convenient.

But that is not what their challenge to the German Bundesverfassungsgericht (Constitutional Court) was about.

The Bündnis Bürgerwille group didn’t like the idea of Germany having to pay more to service debt that would fund initiatives in Italy and elsewhere.

They claimed that under the Treaties, the EU itself, is not allowed to take out loans.

They were not against the additional spending required to deal with the fallout from the pandemic, but wanted each Member State to be responsible for its own affairs and spending.

On March 25, 2021, the German Bundestag ratified the EU Council’s decision to allow loans to be taken out to fund the NGEU. The Bundesrat (the legislative body that represents the sixteen Länder of Germany at the federal level) approved on March 26, 2021.

The Bündnis Bürgerwille group, through a German legal academic, sought an injunction to prevent the German President from signing the legislation, which would, in turn, prevent the EU from moving ahead with its NGEU borrowing plans.

Their claim was that Germany might be held liable to repay significant proportions, if not all, of the 750 billion euros plus interest under certain circumstances, which violated the German constitution (Basic Law).

On March 26, 2021, the German Constitutional Court issued an interim – Injunction – preventing the German President from signing the legislation until it could hear the full argument.

The argument is that:

1. The EU is a “union of states” not a “federal state” and the German Constitutional Court has previously ruled that the Member States are the “Herren der Verträge” (‘masters of the treaties’) and thus determine what the EU can and cannot do with regard spending.

2. They consider this retains the democratic sovereignty of the Member State parliaments and the treaties were designed and agreed to on this basis.

3. They object to the NGEU’s ambition to create ‘joint debts’.

4. They want the European Union’s “own resources” to fund the NGEU, which means it must seek revenue rather than issue debt to fund the program.

5. Under the EU proposal, if the “own resources” are insufficient to serve the debt obligations, the EU will be able to demand additional funding from the Member States. The complaint is that Member States should not be responsible for other Member States spending and debt repayment obligations.

6. Under the NGEU, the German Bundestag would lose control of its overall fiscal affairs and the European Commission could make demands on it to repay loan commitments overall. There is a possibility that Germany would have to pay the whole debt.

The Decision

Well it was an interim decision.

The German Bundesverfassungsgericht considered the application opposing the Bundestag’s legislative approval of the NGEU and on April 15, 2021 made an order, which was published yesterday (April 21, 2021) in this press release – Unsuccessful application for preliminary injunction against promulgation of the domestic act ratifying the EU Own Resources Decision (‘EU Recovery Package’)

The press reaction was interesting.

1. DW proclaimed yesterday (April 21, 2021) – “Top German court tosses objection to EU coronavirus recovery fund” (Source).

2. CNBC (April 21, 2021) = “German court dismisses legal challenge against the EU’s pandemic recovery fund” (Source).

3. Financial Times (April 21, 2021) – “German court clears way for EU recovery fund deployment” (Source).

And more like this can be found.

But if you read the summary reasoning from the Constitutional Court, the reality is a little different.

The Court did not approve the German government’s decision to ratify the NGEU on March 25, 2021.

There was no final judgement given.

The Court concluded:

The constitutional complaint lodged against the German act of approval in the principal proceedings is neither inadmissible from the outset nor clearly unfounded: the applicants have demonstrated that it is at least possible that domestic ratification could encroach upon the constitutional identity of the Basic Law … or that the decision to be ratified might exceed the EU integration agenda … in a manifest and structurally significant manner.

So the decision is not a rejection of the basic logic of the case brought before them.

The Court thought that it was not a near certainty (“highly likely”) that they would find the ratification decision was a violation.

In that case, they had to consider the costs of continuing their inquiry with the injunction against the ratification process proceeding (the President’s signature) continuing, which they said might involve a lengthy period, against, relaxing the injunction, while they proceeded to examine the merits of the case.

They said:

Therefore, the decision in the present preliminary injunction proceedings must be based on a balancing of consequences … the consequences that would arise if the preliminary injunction sought were not issued but the act of approval were later found to be unconstitutional are less severe than the consequences that would arise if the preliminary injunction were in fact issued but the constitutional complaints lodged by the applicants ultimately turned out to be unfounded in the principal proceedings.

Put another way, and in the context of the global pandemic ravaging Europe, the Court thought the damage would be much worse if they considered the case with the injunction in place, which would prevent the NGEU proceeding, and they ultimately found the case to have no merit, relative to the damage that would arise by relaxing the injunction and then finding the case had merit.

In their statement of facts they made it clear that:

The constitutional complaint lodged in the principal proceedings is neither inadmissible from the outset nor clearly unfounded.

They then recited why:

1. “The right to democratic self-determination” is inviolable and the Bundestag determines what the EU can do with respect to Germany not the other way around.

2. “The budgetary powers of the Bundestag and its overall budgetary responsibility are protected” under the Constitution. The EU cannot make imposts on the German state without its approval.

3. “It is for the Bundestag, as the constitutional organ directly accountable to the people, to take all essential decisions on revenue and expenditure …”

4. “It would thus be impermissible under the Basic Law to create permanent instruments that would essentially entail an assumption of liability for decisions taken by other states, especially where this could have potentially unforeseeable consequences.”

5. Significantly:

To the extent that measures agreed on at the supranational level can structurally affect parliamentary budgetary powers, it must in addition be ensured that the Bundestag retains sufficient influence on how the funds provided will be used. It would thus violate the principle of democracy if the type and level of public spending were, to a significant extent, determined at the supranational level, depriving the Bundestag of its decision-making prerogative.

6. It was “at least possible” that the NGEU arrangements “infringes the Bundestag’s overall budgetary responsibility, encroaches upon the Basic Law’s constitutional identity, and violates the applicants’ right to democratic self-determination.”

The upshot of the decision is that the ratification by Germany can proceed but under specific conditions including that Germany cannot be liable for any more than its proportionate contribution, that the funds are only used for COVID relief and that no additional EU borrowing is countenanced.

Conclusion

The German Constitutional Court has made it clear that any hint that this development is providing a pathway to the creation of a ‘federal Europe’ with permanent debt raising capacities would be unacceptable.

That the elevated own resources contribution is strictly temporary and tied to the pandemic relief. It cannot be used as permanent expansion of the Brussels footprint.

Stay tuned. There is more to play out here.

But for the progressives who think the NGEU is a sort of Trojan horse to get more federal fiscal capacity, the Court’s statement would belie that aspiration.

That is enough for today!

(c) Copyright 2021 William Mitchell. All Rights Reserved.

Bill Mitchell
Bill Mitchell is a Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), at the University of Newcastle, NSW, Australia. He is also a professional musician and plays guitar with the Melbourne Reggae-Dub band – Pressure Drop. The band was popular around the live music scene in Melbourne in the late 1970s and early 1980s. The band reformed in late 2010.

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