Germany suspends ratification of the EU recovery fund: is the future of Europe green and digital?


SDG 8 Decent Work and Economic Growth

SDG 13 Climate Action

SDG 17 Partnerships for the Goals

Agreed upon on July 21, 2020, the EU recovery fund is a €1.824 trillion financial package that will be given out by the European Union to boost post-pandemic economic recovery. It will be a combination of the EU’s long term budget of 2021-2027 (€1,074 billion) and a temporary recovery instrument NextGenerationEU (€750 billion). The EU recovery fund is set to be the largest stimulus package ever issued with the EU budget.

Figure 1, How the NextGenerationEU will be financed. Copyright 2020 by European Union

The EU recovery fund will repair the economic and social damage from the COVID-19 pandemic and rebuild “a greener, more digital and more resilient Europe.” The recovery fund has notably identified “fair climate and digital transitions” as one of its three main elements and the two transitions will be supported via the Just Transition Fund and the Digital Europe Programme.

The European Council has pledged to dedicate at least 30% of the package to climate action — the highest share ever of the European budget. Receiving €17.5 billion alone, the Just Transition Fund (JTF) is key to the delivery of the European Green Deal, which is the Union’s “new growth strategy” that envisions a sustainable continent. The JTF critically targets the social and economic effects of this transition towards a climate-neutral economy by 2050. In particular, the JTF’s “exclusion of fossil fuel financing” means that its effort to diversify the economic activity and retrain workers to close the unemployment gap in coal-dependent regions will be crucial.

The Digital Europe Programme (DIGITAL) will be equipped with €7.5 billion to accelerate Europe’s digital transformation of society and economy. The DIGITAL seeks to benefit the daily lives of people, but in particular small and medium-sized enterprises to advance Europe’s economic competitiveness. It will work in close conjunction with other EU programmes including Horizon Europe, which is the EU’s key funding programme for research and innovation.

While a consensus on the EU’s 7-year budget was established on Dec. 17, 2020, the NextGenerationEU (NGEU) recovery plan is still awaiting ratification from 11 of its 27 Member States. The €750 billion NGEU recovery plan will be financed through joint debt, but the Own Resources Decision (ORD) must be ratified by all EU Member States before it can enter into force. Ursula Von der Leyen, President of the European Commission, has continually called for “all Member States to ratify” the ORD “as fast as possible.”

Figure 2, The German Constitutional Court will decide whether to issue a full injunction that delays the country’s ratification of the EU recovery fund, by T. Wagner, 2021, Financial Times. Copyright 2021 by T. Wagner/EPA-EFE.

On Mar. 26, 2021, the German Constitutional Court blocked the law that would have ratified the ORD. Both chambers of Germany’s federal parliament had ratified the legislation with a large majority just a day before, but judges of Germany’s top court have yet to sign off the legislation as the Court is currently examining an emergency appeal against the recovery fund. The appeal was put forward by a group named Citizens’ Will Alliance, consisting of more than 2,200 citizens. The Alliance is headed by Bernd Lucke, who is also the founder and former leader of the far-right party Alternative for Germany. The group argued that the €750 billion debt-financed investment is “unlawful” as the EU is “contractually obligated” to maintain a balanced budget.

“The EU’s objective remains to ensure the completion of the ratification process in all Member States by the end of the 2nd quarter of this year,” said a European Commission spokeswoman. On the other hand, the German ratification could be delayed until June as the Constitutional Court has up to three months to rule on the appeal. Although this will be in accordance with the EU timeframe, analysts warn that this uncertainty could harm investor confidence even if Germany eventually passes the ratification law.

Despite the EU recovery fund’s huge potentials to “build back better,” Andrés Rodríguez-Pose, a professor of economic geography at the London School of Economics and Political Science, emphasises that politics will be fundamental. The enormous debt may only generate limited impact if governments prioritise “shovel-ready” projects previously not granted funds for the very reason that they were deemed non-essential. There intrinsically exists a trade-off between governments’ electoral goals and the extended timeline of green and digital projects.

The future of “Europe’s moment” of solidarity is uncertain, so is Europe’s resilience for the next generations. Whether Europe “builds back” or “builds back better” will depend on the involvement of citizens in the decision-making process, says Rodríguez-Pose. Projects that pursue sustainable development rather than immediate impact on the hardest-hit could see a rise in discontent in a system that is already challenged by rising populism. The massive joint debt and the urgency for action both require discussions to be made not behind the doors and in much greater detail.

About the author

Nicole Jin is a Journalist in SRP’s Writing and Interviewing Program. She is a first-year BSc Geography with Economics student at the London School of Economics and Political Science. Her areas of interest centre around sustainable cities, inequalities and international development.

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