German court dismisses legal challenge against the EU's pandemic recovery fund

The German constitutional court has lifted one big block to much-needed stimulus in the EU.

German court dismisses legal challenge against the EU's pandemic recovery fund

A medical worker attends the opening of a Covid testing station on April 19, 2021 in Berlin, Germany.

Sean Gallup | Getty Images News | Getty Images

LONDON — The German constitutional court decided on Wednesday to dismiss legal challenges against the EU's recovery plan, effectively paving the way for the unprecedented stimulus to be rolled out across the region.

The highest court in Germany had raised questions in late March about the EU's plan to raise 750 billion euros ($900 billion) in financial markets to fund projects across the bloc and thus reduce the economic shock from the Covid-19 crisis.

The move threw a curveball at the much-needed stimulus, and came after a group of euroskeptic citizens highlighted concerns that the additional borrowing could become a permanent feature in EU policymaking.

"Limits apply regarding the volume, duration and purpose of the borrowing to which the European Commission is authorised, as well as regarding possible liabilities incurred by Germany," the constitutional court said in its opinion on Wednesday.

"Moreover, the funds in question are to be used exclusively to address the aftermath of the Covid-19 crisis," the court also said.

The statement from the German court highlights that the decision by the 27 heads of state in July is of a temporary nature. This detail is particularly important for euroskeptics, who tend to be concerned about too much integration among the 27 member states of the EU.

Wednesday's decision allows Germany to conclude the legislative steps necessary before the disbursements take place later this year. As of last week, Austria, Germany, Estonia, Finland, Hungary, Ireland, Lithuania, the Netherlands, Poland and Romania had yet to finish national proceedings before the European Commission is actually able to tap the markets.

A European official, who did not want to be named due to the sensitivity of the process, told CNBC on Monday that if all goes well the first disbursements could happen in July.

Speaking to CNBC last week, Austrian Finance Minister Gernot BlümeI said: "I am convinced there will be no delay to be able to also emit those European bonds."

The funding is particularly important for European nations looking to boost their economies after the pandemic. Though vaccination rates are creeping up across the bloc, some countries are still in lockdown or have tough restrictions in place on the back of a third wave of infections.

The euro kept trading slightly lower against the U.S. dollar after the announcement and the Greek 10-year government bond hovered around the flatline.

Judges at the German constitutional court.

Ronald Wittek