The German Constitutional Court, the Ratification of the ORD and the Hamiltonian leap.
The BVerfG's decision on the Own Ressources Decision Ratification could be significant not only for the European Recovery Plan but more important for the debates on fiscal unification
On March 26, the German Constitutional Court (BVerfG) has placed a very important hold on the ratification by the Federal President of the Own Resources Directive (ORD). The ORD is a necessary piece of legislation to ensure that the EU budget is duly backed by the commitments of each individual Member States.
This has taken more importance this year because the Next Generation EU (NGEU) and the Recover and Resilience Facility (RRF) are two central parts of the EU’s recovery plan and are entirely dependent on the EU’s ability to borrow in capital markets, which is itself dependent on the ratification of the ORD.
The plaintiffs who have motivated the BVerfG’s are made up of a list of hundreds of individuals led by Bernd Lucke, the Economics Professor who spearheaded a number of previous Court cases and ended up founding the Alternativ Fur Deutschland (AfD) Party before leaving it.
The Court has ordered the Federal President not to sign the ORD into Law. In 2012, the Court had only asked (rather than ordered) the Federal President to do so. The Bundestag had voted on the ESM treaty and the modification of article 136 on June 29th and the Court eventually ruled on September 12th to allow the ratification. It therefore took the BVerfG then a mere two and half month in the middle of an acute financial crisis.
This precedent explains why a large part of the German Government seems fairly relaxed about the Court’s forthcoming ruling. In addition, since 2012, the Court’s profile has evolved, in particular since the departure of its President Voßkuhle in June 2020 replaced by President Harbarth, the Court is perceived to become more liberal.
However, the legal question at stake might be more difficult and a ruling may not be as straightforward as it seems. The plaintiffs are effectively making two distinct claims:
1. The authority for the EU to borrow is not present in the EU treaties and the ORD therefore opens the door to the EU acting Ultra Vires (beyond the law). The union is not allowed to borrow, and Member States are liable to meet any of the EU’s obligation (because the EU budget must be balanced at all times).
2. The EU’s borrowing capacity creates a potential liability for the German federal budget and thereby challenges the principles of the responsibility of the German Bundestag. Indeed, the plaintiffs claim that the Commission is deciding on the use of funds and on the reimbursement key such that Germany could eventually be made responsible for the whole of the EUR 750bn to be issued.
The EU has essentially rooted the recovery fund in two legal bases: Article 311 of the EU treaty which allows for the creation of new own resources (in this case Borrowing). And Article 122, which allows for solidarity in the case of emergency.
The Court is now left with essentially three choices:
1) It can, in the footsteps of the ESM ruling decide to clear the way for the ratification of the ORD without further comments. This would probably occur by the end of May/early June and would not only clear the way for disbursement of the RRF more or less on schedule but would also be seen as a fairly positive step towards future expansion/extension of the RRF.
2) It can decide to offer only a partial ruling but consider, very much, like for the PSPP/QE ruling that the Court is not competent to rule for matters of EU law and therefore send the Case to the European Court of Justice for its interpretation. In the PSPP/Weiss case, the BVergG sent the case to the ECJ On July 2017 and the ruling from the ECJ came on December 2018. During this time, the PSPP programme was not undermined because it required no legal act to be passed because the BVerfG didn’t issue an injunction. Here the Court could decide to hand over the case to the ECJ for its opinion:
a. while authorise a ratification while imposing some safeguards/limited application.
b. While blocking the ratification until a ruling by the ECJ is issued, which would mean that no ratification can take place before at least 6 months delaying the ORD and the RRF to the end of 2021 at best.
It is quite likely that the ECJ would rule favourably on the case by considering that borrowing is a form of New Own Resources just as legitimate as a new tax. However, it might consider that Article 122 may not be a reasonable legal basis to provide funds over a long period of time thereby encouraging Member States to consider either an alternative legal basis or a Reform of the EU treaties if they were to expand or make the RRF permanent. After this ruling by the ECJ, the BVerfG would still be left with two options:
a. Accept the ECJ ruling and authorise the ratification (as it did with the OMT programme).
b. Disagree with the ECJ’s ruling (as it did in May 2020) with the PSPP ruling and thereby open a potential conflict between the BVerfG and the German Federal Government.
3) In part because of its frustration over the ECJ’s PSPP ruling and because it considers the ECJ to be able to act ultra vires, the BVerfG could decide to rule and decide to assert its competence on the two aspects of the case (the compatibility with EU law) and the Compatibility with the German Constitutional Court.
a. Ruling on the compatibility with EU law would be a significant precedent regardless of whether it rules in favour or against, because it would signal that despite the BVerfG having been put in his place both by the ECJ and the German Government, the battle of the judges would still be on.
b. Ruling on the compatibility with the Constitution would be very natural. here a negative ruling would be very significant because it would substantially raise the bar of the Hamiltonian moment that the EU seems to be hoping since the agreement on the RRF last July.
All in all, my sense is that the central scenario is that the BVerfG will refer the case to the ECJ. This would delay the ratification of the RRF quite significantly. The BVerfG could still rule on the compatibility with the Constitution and give a nod or on the other hand object, which would then not only delay the ratification but upend it.
The German Government, the market and European policymakers have been taking this very lightly so far. I am afraid this might be optimistic. I continue to believe that the RRF decision last July was a significant step but as I did then, I don’t think the Hamiltonian Rubicon has been crossed yet. In fact, we might be about to find out that this struggle will take several years.
Happy to discuss as usual,
Best Regards,
Shahin