EU Joint Debts – Is it Legal?
To finance billions in aid to a Ukraine devastated by war, the EU Commission is discussing several options, including borrowing on the capital market on behalf of the EU. In this context, Ursula von der Leyen has pointed to the Corona recovery fund as a successful model.
For the Covid-19 recovery fund, European Union countries are issuing joint debts of €750 billion. The European Commission has been borrowing on the markets and redistributing the money in the form of non-repayable grants and low interest loans to the member states, which are particularly affected by the pandemic. The money is intended to support the green and digital transitions, and member states must therefore submit relevant recovery plans.
PD Dr. Caroline Heber argues that the recovery fund violates European budgetary law and that the European Union does not have the competence to incur debts. Amendments to the European Treaties and European budgetary laws would be required to prefinance the recovery fund from loans.
Own Resources instead of financial competences?
According to the European constitutional framework, the EU is only permitted to act if the European Treaties vest the Union with the necessary competences. Since the Treaties do not explicitly authorise the EU to borrow, the Own Resources Decision, which entered into force on 1 June 2021 forms the legal basis for the issuing of bonds by the Commission on capital markets.
The EU Own Resources Decision was adopted unanimously by the Council and ratified by the Parliaments of the member states. The Commission therefore argues that this procedure effectively makes the Own Resources Decision a quasi-constitutional law and a sufficient legal basis for borrowing.
According to Heber, even with this special proceedings, an Own Resources Decision cannot authorise the Union to borrow. She explains that this procedure is intended to strengthen the EU’s financial autonomy – it is not intended to assign the EU greater powers. Although the legal basis for borrowing is enshrined in the Own Resources Decision, the bond proceeds, worth €750 billion, do not fall under own resources and instead are treated as other revenue which is placed outside the European budget. The other revenue classification aims to avoid an infringement of the EU’s ban on debt financing within the framework of the budget.
The justification for the non-budgetary treatment differs depending on whether the financing is for loans or grants. In the case of loans to member states, it is argued that they have no impact on the EU budget because the liabilities are simply passed on and repaid by the member states. In the case of grants, the bond proceeds constitute external assigned revenue.
According to Heber, both attempts at justification are flawed. The supposed budget neutrality of the loans clearly contradicts the principle of universality. If neither the EU borrowing nor the loans to member states are reflected in the EU budget, the desire for comprehensive financial planning and control is undermined. Also, in the case of grants, the bond proceeds can not constitute assigned revenue. The EU has to repay the loans and thus the necessary link between revenue and expenditure cannot be established. The outcome might be different if we already knew the revenue stream that will help the EU to repay the loans raised to finance the Covid-19 assistance.
Other options to extent EU competences?
The Commission has issued bonds in manageable amounts on the capital market on behalf of the EU on several occasions to support member states in economically challenging times.
In most cases, the legal basis for the secondary law authorising borrowing was the flexibility clause enshrined in Article 352 of the Treaty on the Functioning of the European Union (TFEU). Could this also form a legal basis to borrow in the context of the recovery fund? Article 352 states that the EU may act if such action is necessary to achieve the objectives defined in the EU Treaties, even when the competence is not explicitly provided for in the Treaties.
Heber argues that with the Covid-19 recovery fund the Union hugely influences those economic policies, which, under the European Treaties, belong to the greatest possible extent within the competence of the member states. In addition to this qualitative factor, the recovery fund of €750 billion must be considered in terms of its quantitative significance. This clearly shows that borrowing cannot occur based on the flexibility clause.
Nor, according to Heber, can a legal basis to borrow be derived from Article 122 TFEU – the European solidarity clause. Article 122 TFEU provides the assurance of “Union financial assistance” to member states impacted by natural disasters or exceptional occurrences. Such assistance might of course put a strain on the EU budget, but this article gives by no means carte blanche to obtaining the necessary funds from the financial markets.
In order to implement a debt-financing plan for the recovery fund without breaching principles of budgetary law and the division of powers between the EU and its member states, both the EU Financial Regulation and the European Treaties need to be amended.
Heber, Caroline, Europarechtliche Grenzen für den Wiederaufbaufonds. EuR, 2021, Nr. 4, 416–453. DOI: 10.5771/0531-2485-2021-4
Heber, Caroline. European Legal Limits for the Recovery Fund. Working Paper of the Max Planck Institute for Tax Law and Public Finance No. 2020-16 SSRN
May 2022