The Own Resources Decision as an Ultra Vires Act or a Violation of Constitutional Identity? An analysis of possible procedural scenarios

Benedikt Riedl, research assistant, lecturer and PhD candidate, LMU Munich

On March 26, 2021, the German Federal Constitutional Court (GCC) held that the Own Resources Resolution Ratification Act (ERatG) must not be executed by the Federal President for the time being.

The extent to which the Own Resources Decision could be an ultra vires act or a violation of the constitutional identity of the German Basic Law has already been presented on the Verfassungsblog and the European Law Blog. Since public interest in the outcome and furthest possible course of the proceedings is high, this article will also present the possible procedural scenarios.

Two possible ultra vires acts and a possible identity violation

First, however, the three most important substantive problems should be summarised once again. The Own Resources System could be an ultra vires act in two respects. Additionally, there is a connecting factor that could be seen as a violation of constitutional identity. Those who have already read the posts from the Verfassungsblog and the European Law Blog can skip straight to the heading "Third Problem: Violation of the overall budgetary responsibility of the German Bundestag".

Background: Own Resources Decision and Next Generation EU

The subject of the summary proceedings is the Own Resources Decision Ratification Act. This is the German law approving the financing of the European Union until 2027. It is the legal basis for the entry into force of the current Own Resources Decision of the European Union of December 14, 2020. The Own Resources Decisions of the European Union are based on Article 311 (3) TFEU and, in addition to other revenue, serve to finance the EU budget. The current Own Resources Decision enables the European Commission in Article 5 (1a) to take out loans of up to 750 billion euros with a term of up to 38 years. With these funds, the European Union intends to temporarily use 750 billion euros within the framework of its NextGenerationEU economic stimulus package to repair the immediate economic and social damage caused by the Corona pandemic. The most important instrument in this stimulus package is the Recovery and Resilience Facility, which will provide 627.5 billion euros in loans and grants to support reforms and investments in the countries of the European Union. Implementation of the economic stimulus packages by the European Union is only possible once all Member States have ratified the Own Resources Decision (Article 311 (3) sentence 3 TFEU).

The German Bundestag approved the Own Resources Ratification Act on March 25, 2021. The vote was preceded by a heated debate, during which the Minister of State at the Federal Foreign Office described the Own Resources System "as a necessary and overdue step towards a fiscal union".

Ultra vires review and identity review

The central question under EU law is whether the Own Resources Decision and the authorisation to incur debt violate the Treaties. If this is the case, this could constitute an ultra vires act of the European Union. The central question under german constitutional law is whether the Own Resources System affects the limits set by the overall budgetary responsibility of the German Bundestag and be incompatible with Art. 79 (3) of the Basic Law.

First, the question arises as to why a Member State‘s constitutional court can decide on this question of EU law at all. The starting point is the primacy of application of Union law over any national law – including constitutional law – which is recognised today by both the GCC and the ECJ. However, since its Costa/E.N.E.L. ruling, the ECJ has assumed an unconditional primacy of application, which follows from the special nature of Union law as a new, independent legal order. In contrast, the GCC, like all other European constitutional and supreme courts, does not derive the primacy of application from Union law itself but assumes primacy by virtue of the constitutional authorisation of the Member States.

Ultra vires review (i.e., review of authority by a constitutional court of a Member State), refers to whether the EU institutions have exceeded their authority in a sufficiently qualified and structurally significant manner. Several European constitutional and supreme courts have already declared Union acts to be ultra vires (e.g. Cohn-Bendit ruling in France, Holubec ruling in the Czech Republic, Ajos ruling in Denmark (also discussed here), PSPP ruling in Germany). In the specific case, the question is whether the Own Resources Decision is manifestly in violation of the Treaties. As far as the question of the legal basis is concerned, it can be assumed that the constitutional complaint will not be successful. The situation is different, however, concerning the questions of earmarking and liability risk.

First Problem: Sufficient legal basis and earmarking?

It is undisputed that Article 311 (3) TFEU is the legal basis under Union law for the European Own Resources Decision of 14.12.2020. According to this, the Council, acting unanimously in accordance with the special legislative procedure and after consulting the European Parliament, adopted a decision setting forth provisions governing the Union's own resources. However, according to Article 311 (3) sentence 2 TFEU, only the Union’s own resources can be introduced. The applicants argue that borrowed funds are not the Union‘s own resources. However, according to the wording of the contracts, only the Union’s own funds (own resources) and no external funds (external resources) could be raised. This is a very restrictive literal argument based on the differentiation between debt and equity capital in business economics. The ECJ, with its strongly teleologically oriented case law guided by the idea of effet utile, will most likely not follow this line of argument. Instead, it will probably endorse a broad understanding of “own resources“. Should the GCC follow the applicant's argumentation, a referral to the ECJ would be necessary in any case. There is no acte clair that would make a referral unnecessary.

However, the earmarking of the Own Resources Decision and the regulation establishing the Corona Reconstruction Fund is also important. According to Article 122 (1) and (2) TFEU, the European Union can take action with concrete measures using binding legal acts, for example, to grant a Member State financial assistance under certain conditions in the event of serious supply bottlenecks, natural disasters, or extraordinary events. The above-mentioned instruments of Union law within the framework of the NextGenerationEU economic stimulus packages and the Recovery and Resilience Facility are explicitly based on this provision. The critical point here is whether the economic stimulus packages are only aimed at overcoming the immediate consequences of Covid-19. Only if they remain limited to this exceptional case and comply with the narrow earmarking can they be based on the exceptional provision of Article 122 TFEU, which is to be interpreted narrowly in principle.

A system of “own resources“, which in this respect not only serves as a reconstruction programme but spills over into many other subject areas, would be difficult to reconcile with Article 122 TFEU. Germany, for example, plans to use 37% of the European Union's allocations for climate protection and 20% for digitisation (BT-Drucksache 19/27838). While the use of funds for digitisation can be directly related to the Corona emergency due to the lockdown consequences and the limited possibilities of direct contacts between people, this is not the case for the use of funds for climate protection. It is not apparent why by far the largest share of Corona aid should be spent on climate protection, which has no connection to the Corona pandemic. On the contrary, if the pandemic has any "positive" effects, they have to do with the world climate. Of course, investments in climate protection can also create jobs. But it is doubtful whether this is still sufficiently directly related to combating the Corona consequences. For this reason alone, the GCC will also take a very close look at the earmarking of the European Union's Own Resources Decision. Here, the constitutional complaint has a realistic chance of success.

Second Problem: Violation of the prohibition of mutual liability?

Moreover, a violation of Article 310 and Article 125 TFEU by the Own Resources Decision and the legal acts implementing the NextGenerationEU reconstruction fund is not unlikely. From these norms follows the Union principle that the Member States act autonomously in their fiscal policy and must not mutually assume responsibility for their respective liabilities. Article 125 (1) TFEU contains the so-called "no bailout clause" in this respect. According to this, financial equalisation between the Member States is prohibited in Union law. Neither is the Union liable for the liabilities of Member States nor are Member States liable for the liabilities of other Member States.

The possible liability volume and the liability period are very critical here. Due to the long duration of the loans, future federal parliaments will be bound to the Own Resources Decision until 2058. No one will seriously assume that regular and recurring waves of crises will not occur in Europe until the last repayment instalment in 2058. New aid packages will also be put together in the next crises, as has always happened in the recent past. In this respect, the Own Resources Decision could mark the European Union's first step toward a fiscal union. The Corona emergency could be exploited to make a fiscal union inevitable through the normative power of the de facto. Instead of going down the path of amending the Treaties, the Member States and the EU seem to be attempting to form a fiscal union within the framework of budget planning.

The decisive question is whether Germany alone would be fully liable for 750 billion euros if necessary. If there are insufficient safeguards in the European Union's own resources system, a violation of Article 125 TFEU is inevitable. Finally, the lack of economic transparency in the procurement of funds is also problematic. Where and how will the European Union raise 750 billion euros in debt? Which institutions will provide the loans? Does the European Commission have a free hand in this?

A closer look at the Own Resources Decision can provide some answers, at least for the time being.

Article 9 (4) and (5) of the Own Resources Decision initially appear reassuring. It follows that if there are insufficient EU budgetary resources to repay the debt, the European Commission will first make up this financing shortfall by active treasury management and, if necessary, by recourse to short-term financing on the money market. Only if these possibilities are not sufficient can the Commission, as a last resort, require the Member States to make the shortfall provisionally available in proportion to their respective contribution to the EU budget. This proportionate interim financing seems to exclude, at least formally, liability according to the motto "one is liable for all".

The same pro rata provision of funds applies if a Member State cannot meet its share of the debt repayment. The defaulting Member State remains obliged to pay its financing share of the debt repayment. It can be concluded that this is not an assumption of liability in the true sense of the term, as funding from the remaining Member States is only temporary and not final. Legally, the defaulting Member State remains responsible and liable for its share of the financing and must pay it as soon as possible. It is a fact, however, that some Member States may not be able to make these payments.

However, Article 9 (6) of the Own Resources Decision reveals through several references (Article 6and Article 3 (1) and (2) the enormous extent of the liability risk for each member state. Currently, according to Article 3(1) of the Own Resources Decision, the total amount of “own resources“ available to the Union for annual appropriations for payments must not exceed 1.40% of the sum of the gross national income of all Member States. In the future, from 2028, according to Article 6, the annual “own resources“ ceiling will be raised by a further 0.6 percentage points until 2058. This may sound like little, but in reality, it is much more. This is confirmed by the following example calculation for Germany. According to the Federal Statistical Office (Destatis), the gross national income in Germany in 2020 was 3,427 billion euros. This would result in a liability sum for Germany of 0.6% of the gross national income with 20.5 billion euros (exemplary for the year 2020) per year. According to Art. 5, the borrowing of 750 billion euros is at 2018 prices and is subject to a fixed deflator of 2% per year. Therefore, a total debt of the European Union of up to €820 billion must be expected by 2026. With a repayment term of 31 years (from 2028 to 2058), the liability sum for a member state like Germany could amount to up to 770 billion euros in the worst case. This would effectively lead to a fiscal union.

Third Problem: Violation of the overall budgetary responsibility of the German Bundestag

However, even if the new Own Resources System of the European Union is in order under European law, the German Ratification Act must not violate the constitutional identity of the German Basic Law. Also European Union legal acts are to be reviewed against the standard of the Basic Law if this is indispensably required to monitor the preservation of Germany's constitutional identity, which is guaranteed by Article 23 (1) sentence 3 in conjunction with Article 79 (3) of the Basic Law. And here, too, the constitutional complaint likely has good prospects of success.

The GCC anchors the protection of the overall budgetary responsibility of the German Bundestag directly in Article 79 (3) of the Basic Law. The unalterable core area of the principle of democracy is violated if the German Bundestag is deprived of its parliamentary budgetary responsibility by a measure of the European Union to the extent that it or future federal parliaments can no longer exercise the budgetary right on their own responsibility. This also includes the prohibition to be jointly liable for the decisions of third parties with consequences that are difficult to calculate.

The question of the violation of the overall budgetary responsibility of the German Bundestag is strongly related to the second problem. Here, too, the question is whether Germany is exposed to incalculable liability risks. In the ESM ruling, the GCC had decided that the principle of democracy is only respected if the Bundestag remains the place where decisions on revenues and expenditures are made on its own responsibility. This decision also deals with international and European liabilities. In this ruling, the GCC had not assumed a violation of budgetary responsibility because the payment obligations assumed with the ESM Treaty did not exceed €190 billion, and liability beyond this was excluded by a joint declaration of the ESM members that was binding under international law.

Accordingly, one possible safeguard that the GCC could demand in the case of the Own Resources System ist he adoption of a protocol declaration that excludes the obligation to make additional contributions to repay the EU debt incurred under the Recovery and Resilience Facility.

An analysis of possible procedural scenarios

Starting point: Hanging decision

The decision of the GCC of March 26, 2021, is a so-called "hanging decision" (i.e., the decision only applies provisionally until the GCC has decided on the application for a temporary injunction). This is, therefore, "urgent preliminary legal protection " for particularly urgent cases where there is a threat of a fait accompli up until a decision is made on the urgent application. However, this also means that the decision of March 26, 2021, has not even been the penultimate word in this matter. The decisions on the preliminary legal protection and, in particular, on the merits of the case, are still pending. It will therefore take even longer for the court to decide on the constitutionality of the Own Resources Ratification Act.

So far, three things are still pending: (1) The statement of reasons for the hanging order. The GCC's order so far only states "The statement of reasons will be submitted later". (2) The preliminary legal decision on the urgent appeal. (3) The decision on the constitutional complaint on the merits.

First procedural problem: When will the statement of reasons be submitted?

We can only guess as to when the GCC will submit the reasons for its hanging decision. There have been no previous constitutional rulings on the matter. At the administrative court level, there have already been several hanging decisions. However, not much can be deduced from these that would apply to the constitutional summary proceedings. This is because these requirements do not apply without restriction to interim legal protection in constitutional complaint proceedings. In any case, it cannot be ruled out that the GCC will only submit its statement of reasons with the decision on the preliminary legal protection itself. 

Second procedural problem: Preliminary legal protection

In the meantime, the GCC will be able to clarify the open legal and factual questions concerning any safeguard mechanisms of the European Union's Own Resources System and how funds are raised, at least to the extent that a preliminary decision will be possible within the framework of a weighing of consequences. A preliminary injunction would be in effect for six months and could be renewed. The standard of review is different than in the main proceedings. It is about a weighing of consequences: "the consequences that would arise if the preliminary injunction were not issued but the application in the principal proceedings were successful must be balanced against the disadvantages that would arise if the preliminary injunction sought were issued but the application in the principal proceedings were unsuccessful". This also takes into account the public interest and the interests of third parties. Nonetheless, a preliminary injunction cannot be considered if principal proceedings are inadmissible or manifestly unfounded from the outset. The fact that the hanging decision was issued indicates that the emergency application has a chance of success and is not manifestly futile.

It will also be interesting to see how long it will take the court to issue a decision on preliminary legal protection. In the ESM proceedings, the GCC ruled on the interim injunction within three months after the oral hearing. Since the ESM proceedings also dealt with liability risks for the Federal Republic of Germany, it could be similar in this case. Likewise, a decision on the interim proceedings now pending could take just under three months.

Third procedural problem: Possible question for referral to the ECJ

The GCC will likely refer one or more questions to the ECJ. These would concern the substantive problems addressed above. Through the referral question, the GCC could persuade the ECJ to safeguard and contain the Own Resources Decision under European law.

In para. 118 of the PSPP judgment, the GCC stated the following: "Where an ultra vires review or an identity review raises questions regarding the validity or interpretation of a measure taken by institutions, bodies, offices and agencies of the European Union, the Federal Constitutional Court, in principle, bases its review on the understanding and the assessment of such a measure as put forward by the CJEU. However, this no longer applies where the interpretation of the Treaties is simply not comprehensible and thus objectively arbitrary (see paras. 112 and 113). "

This means that the GCC will generally accept the interpretation of the ECJ after a question of referral unless this is " simply not comprehensible ". The reason for this is the division of tasks between the courts. The ECJ is responsible for interpreting Union law, while the GCC interprets the GG (which, however, also includes Article 23 (1) sentence 2 in conjunction with Article 79 (3) in conjunction with Article 20 (1) and (2) of the Basic Law). This harsh choice of words is thus nothing other than a broad standard of review by the GCC. It serves to protect the ECJ's monopoly of interpretation of Union law.

Fourth procedural problem: Decision on the merits of the case

Two questions are then decisive for the likelihood of the decision on the merits: (1) Will the GCC refer the question to the ECJ? (2) If so, how will the ECJ answer the question?

If the GCC does not submit a question for referral to the ECJ, it is highly unlikely that there will be a further decision on the main case to the detriment of the Own Resources System. The reason for this is that since its Honeywell decision, the GCC has only interpreted the ultra vires control in a way that is friendly to European law, which includes a prior referral to the ECJ.

Should the GCC refer the matter to the ECJ, which seems likely, it will rely on its decision. The more convincing the justification of the interpretation of European law turns out to be and the sooner it limits the liability of the Member States, the less likely it is that the GCC will activate ultra vires review or identity review.

As a result, it is up to the ECJ to avoid an ultra vires decision or activation of identity control by providing a convincing answer and ensuring liability barriers. This is how interaction within the European constitutional court network functions. As long as the democratic feedback of the EU at least also happens via the Member States, an interplay between court actors of both levels (EU, Member States) is also necessary as a procedural safeguard.

 

Photo credit: Ronald Kunze, via Wikicommons Media