Does the EU recovery fund have a legitimate legal basis?

Does the recovery fund contravene European budgetary law? Photo: iStock/TarikVision

European Union countries are issuing joint debts of €750 billion for the Covid-19 recovery fund. 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. In a recent article, Caroline Heber argues that the recovery fund contravenes European budgetary law and that the European Union does not have the competence to incur debts. Amendment to the European Treaties and European budgetary laws would be required to prefinance the recovery fund from loans.

Is the debt financing unlawful?

According to the European constitutional framework, the EU is only permitted to act if the European Treaties vest the Union with the necessary competences. Because 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, in spite of the special decision-making procedure, an Own Resources Decision cannot authorise the Union to borrow. She explains that the procedure is aimed at strengthening the EU’s financial autonomy – it is not intended to assign the EU greater powers.

Not compatible with EU budgetary law

Although the legal basis for borrowing is embedded 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 conflicts with 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 cannot constitute assigned revenue. The EU has to pay back 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.

Indirect borrowing competences

The Commission, on behalf of the EU, has on several occasions issued bonds in manageable amounts on the capital market in order 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 the Union is using the Covid-19 recovery fund to hugely influence economic policymaking decisions of the member states which, under the European Treaties, are as far as possible the preserve 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. It is clear from this that borrowing cannot occur on the basis of the flexibility clause. Also, according to Heber, a legal basis to borrow cannot be deduced 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 therefore permits increased burden on the EU budget, but there is no evidence here of carte blanche authorisation to also obtain the necessary funds on the financial markets. In order to implement a debt financing plan for the recovery fund without being in breach of principles of budgetary law and the division of powers between the EU and its member states, the EU Financial Regulation as well as the European Treaties need to be amended.                         

Heber, C. Europarechtliche Grenzen für den Wiederaufbaufonds. EuR, 2021, No. 4, 416-453. 

November 2021