German Court Gives Nod to EU’s €800 Billion Pandemic Fund

(Bloomberg) -- Germany’s top court dismissed two cases challenging the country’s approval of the European Union’s €800 billion ($839 billion) pandemic recovery fund.

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The Federal Constitutional Court cleared the fund, dubbed “Next Generation EU,” on Tuesday. The massive stimulus plan marked the crux of the region’s economic response to the pandemic, consisting of grants and loans primarily for the worst-hit EU nations.

The program doesn’t “blatantly transgress” the EU rules under which it was set up, Court Vice-President Doris Koenig said as she delivered the ruling. While there are “serious doubts” that the fund is in line with the bloc’s treaty provisions, the concerns aren’t grave enough to warrant the German court stepping in.

While the EU generally has no competence to raise debt, exceptions can be justified if they are temporary, limited to exceptional circumstances and strictly targeted for a certain purpose. In any such step the amounts raised must be capped and may not exceed the EU’s regular own resources, Koenig said.

Since the debt levels that can be raised under NGEU are “strictly earmarked from the outset” to the “historically exceptional case” to overcome the economic impact of the covid crisis, the EU’s interpretation of its own rules can still pass as acceptable, she said.

However the judges voiced criticism that 37% of the NGEU money must be used to fight climate change, even though this has no connection to the pandemic. According to Koenig, that makes it questionable the measure can count as an emergency step under EU rules. Some 10% is also earmarked for other programs that have no link to the pandemic, she added.

‘No-Bailout Clause’

The Karlsruhe-based court didn’t find a violation of the EU’s “no-bailout”clause, which prevents the EU or its members state being made liable for debts of another member state, even though the fund’s goal is also to ease the market pressure on highly indebted countries.

Since the mechanism is of a temporary nature and other member states don’t ultimately have to pay the bill, it’s still tenable, the court concluded. Thus, the fund isn’t the starting point of a general redistribution of assets within the EU, Koenig said.

However, the German parliament must monitor the process and see to it that liability risk for Germany don’t increase, Koenig said.

The ruling was taken with 6:1 vote and the one judge opposing it issued a dissenting opinion, warning the court starts to back away from properly scrutinizing steps of European integration. He said the judges should have sent the case to the EU’s top court to have them rule on the EU law questions.

Germany’s Finance Minister Christian Lindner called the ruling “good news” but said the government will take a close look at the court’s statements that joint borrowing in Europe must remain an exception and can’t be used for financing of general political tasks.

“This is also important for the context of current proposals,” he told reporters in Brussels.

While the German judges cast doubts over the use of NGEU funds to tackle issues unrelated to the pandemic, Russia’s invasion of Ukraine has sparked EU debate on the possible issuance of more common debt to accelerate its push for energy independence and bolstering military capabilities.

Read More: EU Needs More Funds to Escape Russian Energy, Key Lawmaker Says

The litigation was filed in March 2021 on behalf of political group Buendnis Buergerwille, representing more than 2,200 plaintiffs, arguing the EU shouldn’t be allowed to issue debt to finance its recovery program. The court in April 2021 dismissed their emergency request to stop German ratification while the case was pending. Europe’s biggest economy then took that step and the program started to operate in June 2020.

The case also highlights the limits to fiscal integration in the region. German Eurosceptics routinely file challenges to EU programs and Germany’s top court caused a stir in 2020 when it voiced objections to an asset-purchase program of the European Central Bank. However, in that judgment the court gave the ECB a way out by supplying more information about its deliberations to the German government.

The case are: BVerfG, 2 BvR 547/21, 2 BvR 798/21.

--With assistance from Kamil Kowalcze.

(Updates with German Finance Minister comment in 10th paragraph)

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