Council of theEuropean Union
Brussels, 24 June 2020
(OR. en)9062/20
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PHARM 24
MI 199OPINION OF THE LEGAL SERVICE1
Subject:1

Proposals on Next Generation EU
Compatibility of the package with the Union's principles of budgetarybalance and discipline under Article 310 TFEU



Compatibility of the package with the integrity of the system of own
resources (Article 311 TFEU)



Suitability of Article 122 TFEU as legal basis for the Recovery
Instrument proposalCompatibility of the package with Article 125(1) TFEU (no bail-out
clause).

This document contains legal advice protected under Article 4(2) of Regulation (EC)No 1049/2001 of the European Parliament and of the Council of 30 May 2001 regarding
public access to European Parliament, Council and Commission documents, and notreleased by the Council of the European Union to the public. The Council reserves all its
rights in law as regards any unauthorised publication.

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INTRODUCTION .................................................................................................................. 4II.

FINDINGS OF THE COUNCIL LEGAL SERVICE ......................................................... 6

A.

WHETHER THE NGEU IS COMPATIBLE WITH THE PRINCIPLES OFBUDGETARY BALANCE AND DISCIPLINE (ARTICLE 310 TFEU), AND WITH
THE INTEGRITY OF THE OWN RESOURCES SYSTEM (ARTICLE 311 TFEU) ... 6

1.

Preliminary remarks .............................................................................................................. 6

2.

Is "borrowing for spending" compatible with the Union's principles of budgetarybalance and budgetary discipline under Article 310 TFEU? ............................................. 7a) Legal framework ................................................................................................................. 7b) Legal analysis ...................................................................................................................... 8i)Whether "borrowing for spending" under the NGEU affects budgetarybalance ....................................................................................................................... 14ii) Whether "borrowing for spending" under the NGEU is budgetarily neutral,i.e. duly counterbalanced by an asset ...................................................................... 16c) Intermediate conclusions .................................................................................................. 21
3.

Is the extensive use of external assigned revenue in compliance with the integrityof the system of own resources of the Union and with basic budgetary principles? ...... 21a) Legal framework ............................................................................................................... 21b) Legal analysis .................................................................................................................... 23c) Intermediate conclusions .................................................................................................. 29

4.

Is Article 311 TFEU an appropriate legal basis for establishing elements related to the
NGEU, in particular those linked to the borrowing of funds ........................................... 29a) Legal framework ............................................................................................................... 30b) Legal analysis .................................................................................................................... 31
i)Preliminary remarks ................................................................................................ 31ii) Content and aim of measures on repayment of borrowing laid down in
the ORD proposal ..................................................................................................... 33
Inclusion of the empowerment to borrow funds in the ORD proposal .................... 36
Inclusion of cash management measures in the ORD proposal (Article 6(4)) ....... 39c) Intermediate conclusions .................................................................................................. 40

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Whether, as currently drafted, Article 6(4) of the ORD proposal, which lays down
the rules applying in the case of a default on a loan or an insufficiency of budget
appropriations, by reference to the Making Available Regulation, could entail
joint and several liabilities for Member States .................................................................. 41a) Legal framework ............................................................................................................... 41b) Legal analysis .................................................................................................................... 43c) Intermediate conclusions .................................................................................................. 46

B.

WHETHER THE LEGAL BASIS CHOSEN FOR THE RECOVERYINSTRUMENT (ARTICLE 122 TFEU) IS APPROPRIATE .......................................... 46

1.

Preliminary remarks ............................................................................................................ 46

2.

Legal framework................................................................................................................... 47

3.

Legal analysis ........................................................................................................................ 47a) Examination of the Recovery Instrument ........................................................................ 50i)

The aims of the Recovery Instrument ..................................................................... 50ii) The content of the Recovery Instrument ................................................................ 50
The exceptional character of the measures .............................................................. 51
The temporary character of the measures ................................................................ 55
The economic character of the measures ................................................................. 56b) Examination of the sectorial acts receiving the funds .................................................... 57
i)

Preliminary remarks ................................................................................................ 57ii) Proposal establishing the Recovery and Resilience Facility ................................. 58iii) Proposal for a Just Transition Fund ....................................................................... 60iv) EU4Health, Horizon 2020 and RescEU proposals ................................................. 61
4.

Intermediate conclusions ..................................................................................................... 62

C.

WHETHER THE NGEU IS COMPATIBLE WITH ARTICLE 125(1) TFEU(NO BAIL-OUT CLAUSE).................................................................................................. 63

1.

Legal framework................................................................................................................... 63

2.

Legal analysis ........................................................................................................................ 63

3.

Intermediate conclusions ..................................................................................................... 65

III. GENERAL CONCLUSIONS .............................................................................................. 66

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I.

INTRODUCTION

1.

On 28 May 2020, the Commission presented a package of proposals entitled "NextGeneration EU" (hereinafter referred to as the "NGEU"). The proposals aim at addressing therecovery needs of the EU and its Member States as a consequence of the COVID-19 crisis.
The NGEU consists of a temporary reinforcement of the overall Multiannual Financial
Framework (MFF) of the Union, endowed with a global amount of EUR 750 billion. Thatamount would be financed through the Union borrowing on the markets. The proceeds of suchborrowing would be used for expenditure in an amount of EUR 500 billion and for loans in an
amount of EUR 250 billion.

2.

The package consists of three kinds of proposals: i) those introducing new instruments (mostnotably the EU Recovery Instrument and the Recovery and Resilience Facility), ii) thoseamending a number of proposals presented in the 2018 MFF context (most notably theamended proposal for the Own Resources Decision) and iii) those amending current
legislation (the Fund for European Aid to the Most Deprived (FEAD), the Union Civil
Protection Mechanism, the European Fund for Sustainable Development (EFSD),
Humanitarian Aid and the current MFF Regulation).

3.

The construction of the NGEU is based on three pillars:–

first, the amended proposal for the Own Resources Decision (hereinafter the "ORD
proposal")2, which provides for an exceptional and temporary increase of the own
resources ceiling of 0,6% of EU GNI. The own resources ceiling is increased for thesole purpose of covering all liabilities of the Union resulting from the borrowing(Article 3c of the ORD proposal). The proposal envisages to empower the Commission
to borrow funds on capital markets, on behalf of the Union, and provides for the overall
volume of Union's liability and the essential features of its repayment (Article 3b(3));

2Commission amended proposal for a Council Decision on the system of Own Resources of
the European Union (COM (2020) 445 final), document ST 8140/20 INIT.

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second, the proposal for the EU Recovery Instrument (hereinafter the "Recovery
Instrument")3, based on Article 122 TFEU, which identifies recovery measures(Article 2 of the Recovery Instrument), allocates the borrowed funds to various Union
programmes to that effect (Article 3) and qualifies the part of the borrowing dedicatedto expenditure (EUR 500 billion) as external assigned revenue for the purposes of
Article 21(5) of the Financial Regulation (Article 4(1) of the Recovery Instrument);–

third, the different Union programmes to which the resources are allocated, which lay
down the rules for their implementation, including programming, eligibility andallocation criteria.

4.

In the course of the meetings of a number of preparatory groups of the Council (MFF Ad Hoc
Working Party, Financial Counsellors and the Structural Measures Working Party) as well asof COREPER, the following questions concerning the legality of the NGEU have been raised:
A. Whether the NGEU is compatible with the principles of budgetary balance and discipline(Article 310 TFEU), and with the integrity of the own resources system (Article 311
TFEU).
B. Whether the legal basis chosen for the Recovery Instrument, namely Article 122 TFEU,
is appropriate.
C. Whether the NGEU is compatible with Article 125(1) TFEU (no bail-out clause)

5.

The Council Legal Service will examine the above questions in turn. For the sake of a proper
structure of the analysis, the questions will be divided into sub-questions, as appropriate. As
the questions related to the overall legal construction of the NGEU are of a horizontal nature,
the Council Legal Service may, as necessary, examine other issues of a more technicalcaracter specific to each of the proposals when these will be discussed in the relevant
preparatory bodies.

3

Commission proposal for a Council Regulation establishing a European Union Recovery
Instrument to support the recovery in the aftermath of the COVID-19 pandemic (COM(2020) 441 final), document ST 8141/20 INIT.

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6.

Bearing in mind the length and complexity of each of the questions examined, the Council
Legal Service will treat each of them with their own legal backgrounds and analysis, and will
provide intermediate conclusions at the end of each of the analyses as they relate to eachquestion. All such conclusions will then be grouped at the end of the opinion in a general
conclusion.

II.

FINDINGS OF THE COUNCIL LEGAL SERVICEA.

WHETHER THE NGEU IS COMPATIBLE WITH THE PRINCIPLES OFBUDGETARY BALANCE AND DISCIPLINE (ARTICLE 310 TFEU), AND WITH
THE INTEGRITY OF THE OWN RESOURCES SYSTEM (ARTICLE 311 TFEU)

1.

Preliminary remarks

7.

The budgetary construction of the NGEU and its financing is unprecedented and raises noveland delicate legal issues of a budgetary nature.

8.

For the purpose of the legal assessment of the budgetary construction of the NGEU, thefollowing are the main features of relevance:–

the NGEU draws on an unprecedented high amount of financing raised from borrowing
on the markets;–

such borrowing will be contracted by the Commission on behalf of the Union on thebasis of an empowerment contained in the ORD proposal;–

the majority of the proceeds from such borrowing will constitute external assigned
revenue for the Union budget;

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those proceeds will be assigned through a Regulation based on Article 122 TFEU, theRecovery Instrument, to various spending programmes and will be used primarily for
expenditure, i.e. for non-repayable forms of support4, whereas a proportionately smaller
share of the proceeds from the borrowing will be used for providing loans to Member
States.

9.

The most novel element is the use of borrowing to finance budget spending ("borrowing forspending") and the accompanying budgetary construction. The legal construction should beassessed, in particular, against Articles 310 and 311 TFEU.

10.

This section will be divided in four parts.
The first part will be devoted to assessing whether "borrowing for spending" as proposedcomplies with the principles of budgetary balance and budgetary discipline (part 2 below).
The second part will assess whether the extensive use of external assigned revenue as
proposed is compatible with the integrity of the system of own resources of the Union andwith other fundamental budgetary principles (part 3 below). The third part will focus on thelegal basis for the spending of the borrowed funds, the interaction between the ORD proposal
based on Article 311 TFEU and the Recovery Instrument based on Article 122 TFEU, as wellas their respective roles in the construction (part 4 below). Finally, the fourth part will
examine whether the ORD proposal could entail joint and several liabilities of the Member
States (part 5 below).

2.

Is "borrowing for spending" compatible with the Union's principles of budgetarybalance and budgetary discipline under Article 310 TFEU?

a)

Legal framework

11.

The principles of budgetary balance and of budgetary discipline are both, in the EU Treaties,of constitutional importance.

4

For the purposes of this opinion, financing provided to provision budgetary guarantees istreated as expenditure. Whereas budgetary guarantees constitute repayable forms of support,
the provisioning made to cover for losses in cases of calls on the guarantee is effectively
paid in and therefore constitutes expenditure for the Union budget.

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The principle of budgetary balance is laid down in the third subparagraph of Article 310(1)
TFEU which reads as follows:"The revenue and expenditure shown in the budget shall be in balance." (emphasis added)

13.

Whereas Article 310(1) TFEU relates to the annual budgetary balance, the multi-annual
budgetary discipline is addressed in Article 310(4) TFEU:"With a view to maintaining budgetary discipline, the Union shall not adopt any act which islikely to have appreciable implications for the budget without providing an assurance that theexpenditure arising from such an act is capable of being financed within the limit of theUnion's own resources and in compliance with the multiannual financial framework referred
to in Article 312." (emphasis added)

14.

It is also relevant to mention Article 323 TFEU which provides that "The European
Parliament, the Council and the Commission shall ensure that the financial means are madeavailable to allow the Union to fulfil its legal obligations in respect of third parties"(emphasis added).

15.

Finally, Article 17(1) of the Financial Regulation ("FR")5 repeats the principle of budgetarybalance: "Revenue and payment appropriations shall be in balance.", and Article 17(2) FR,
which is a corollary of that principle, reads as follows: "The Union (…) shall not raise loans
within the framework of the budget" (emphasis added).

b)

Legal analysis

16.

As explained above, the construction proposed by the Commission to address recovery needs
following the exceptional situation which has arisen as a consequence of the COVID-19
pandemic entails that Union expenditure would be financed by future income.

5

Regulation (EU, Euratom) 2018/1046 of the European Parliament and of the Council of
18 July 2018 on the financial rules applicable to the general budget of the Union, amending
Regulations (EU) No 1296/2013, (EU) No 1301/2013, (EU) No 1303/2013,(EU) No 1304/2013, (EU) No 1309/2013, (EU) No 1316/2013, (EU) No 223/2014,(EU) No 283/2014, and Decision No 541/2014/EU and repealing Regulation (EU, Euratom)
No 966/2012 (OJ L 193, 30.7.2018, p. 1).

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The proposal consists in allowing the Union to borrow on capital markets up to EUR 750
billion (2018 prices), with EUR 500 billion foreseen for Union expenditure ("borrowing forspending") and EUR 250 billion for loans (Article 3b(1) of the ORD proposal). The
Commission would be empowered to issue debt on behalf of the Union to be paid back as itreaches maturity.

18.

Those proceeds from borrowing which will be used for spending through Union programmes
would be channelled to those programmes as external assigned revenue (so-called "otherrevenue" as referred to in Article 311, second paragraph, TFEU) for the purposes of
Article 21(5) FR, whereas the repayment of the corresponding debt as it reaches maturity
would be covered by the Union's own resources. The repayment would be guaranteed via aring-fenced compartment provided for in the ORD proposal (Article 3c thereof). Thatcompartment would consist in a dedicated, extraordinary and temporary increase of theceilings for own resources by 0.6 % of EU GNI which may only be used for covering all
liabilities of the Union resulting from the borrowing undertaken to finance recovery following
the COVID-19 crisis.

19.

The novel construction under which the Union would issue debt to finance non-repayable
forms of expenditure raises a question of compliance with the principle of budgetary balance
enshrined in Article 310 TFEU, which requires that "the revenue and expenditure shown inthe budget [to] be in balance."

20.

That principle is directly linked to the Union's system of own resources, under which Member
States allocate own resources to the Union to ensure the financing of the Union's annual
budget (see Article 1 of the current Own Resources Decision ("current ORD"6)). The total
amount of resources for a given year is defined by reference to the amount needed to cover
the total of budgetary expenditure. The GNI-based contribution works as the balancing
resource which fills the gap between the total of all other revenue7 and the expenditureauthorised under the annual budgetary procedure (see Article 2(1)(c) of the current Own
Resources Decision).

67

Council Decision (EU, Euratom) No 2014/335 of 26 May 2014 on the system of own
resources of the European Union (OJ L 168, 7.6.2014, p.105).
I.e. revenue from other own resources and from so-called "other revenue".

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LIMITEENThe principle of budgetary balance is a strict one, and any surplus or deficit resulting at theend of the year must be carried over into the next year so as to ensure that the final outcomeof each year is balanced8. The budget technical nature of this principle and its link to own
resources is confirmed by the relevant case law9.
21.

Whereas borrowing with a view to on-lending the proceeds (so-called "back-to-back lending")
has become a relatively established practice, borrowing with a view to financing Union
expenditure in the same way as a State would do, i.e. borrowing to finance current oroperating expenses, has not been considered to be compatible with the principle of budgetarybalance10. This was clarified by the Commission in 2015 in replies to parliamentary questions:"(…) as regards the obligation to balance the EU budget, the consistent interpretation overtime of [Article 310 TFEU] is that the EU budget cannot be balanced by issuing publicdebt"11.

8

9
10

11

See Article 7 of the current ORD and Article 18 FR. In accordance with Article 18 FR: "Thebalance from each financial year shall be entered in the budget for the following financial
year as revenue in the event of a surplus or as a payment appropriation in the event of a
deficit".
Judgment of 31 March 1992, Council v. European Parliament, C-284/90, EU:C:1992:154,
paragraphs 29 and 31.
However, in 1984, Member States agreed on the basis of an intergovernmental politicalagreement to provide reimbursable advances to finance a gap in the budget. Such advances
to finance a budget deficit in reality amounted to loans provided by Member States to theUnion.
See Questions E-001662/2015 and E-005201/2015 inquiring about the possibility for theUnion to issue public debt to finance the Investment Plan. The Commissioner answered asfollows: "The Treaty establishes the principle of a balanced budget for the EU. Filling a gap
between revenue and expenditure by issuing public debt is therefore not possible. The
Investment Plan can therefore not serve to finance EU budget expenditure by issuing public
debt.". When asked to further explain the issue, the Commissioner added: "Indeed,
Article 310 TFEU does not prohibit issuing EU public debt. This is the case, for instance, toraise the funds needed for the financial assistance to Member States or third countries
through back-to-back loans. These borrowing and lending operations are neutral from thebudgetary point of view as no disbursement is requested and the new liability is fully
matched by an asset; if a delay or a default by a borrower has to be compensated by the EU
budget, this is done drawing on the own resources of the Union. However, as regards theobligation to balance the EU budget, the consistent interpretation over time of such Article
is that the EU budget cannot be balanced by issuing public debt." (emphasis added)

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The Union is prohibited from adopting a budget in deficit and, by extension, the Union is notallowed to run an operating deficit12.

23.

However, the Treaty only requires the (annual) budget to be in balance. It does not, contrary
to Article 17(2) FR13, explicitly prohibit (or allow14) financing by means of loans. Actually,
and as mentioned above, neither Article 310 TFEU nor Article 17(2) FR have prevented theUnion from having recourse to loans insofar as they constitute a neutral operation which is not
such as to upset the budgetary balance and insofar as sufficient guarantees are provided to
face the arising liabilities. The following cases are worth mentioning:

12

13

14

See also recital 10 in the 2002 version of the Financial Regulation according to which "Theprinciple of equilibrium constitutes a basic budgetary rule. In this connection, it should beemphasised that recourse to loans is not compatible with the system of Community own
resources. However, the principle of equilibrium is not such as to hinder the borrowing andlending operations guaranteed by the general budget of the Union." (Council Regulation
No 1605/2002 of 25 June 2002 on the Financial Regulation applicable to the general budgetof the European Communities (OJ L 248, 16.9.2002, p. 1)).
The previous wording of Article 17(2) FR was more direct in forbidding the EU to raiseloans: Article 14(2) of the 2002 Financial Regulation provided in a straightforward way that"(…) the Community (…) may not raise loans", while the current wording of Article 17(2)introduced in 2012 provides that "the Union (…) may not raise loans within the frameworkof the budget" (emphasis added) which encapsulates the practice of the off-budget
operations which are thus regarded as not being "within the framework of the budget".
By contrast, while the TFEU itself is silent about borrowing and loans, the Euratom Treaty
expressly allows the Community to have recourse to loans, but only "for the financing ofresearch or investment" (Article 172(4) Euratom Treaty). The Coal and Steel Treaty also
allowed the Community to borrow funds but only in order to grant loans (Article 51 ECSC).

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(a)Back-to-back lending where a basic act authorises the Commission to contract loans onbehalf of the Union with a view to on-lending to Member States or third countries(financial assistance)15, such as the EFSM16, the Balance of Payments Facility17, MacroFinancial Assistance18 and, more recently, the SURE instrument19. In such cases, loans
give rise to so-called contingent liabilities20, i.e. liabilities which will only materialise incase of default on the loan.

(b)

Under Article 266(6) FR, building acquisition projects may be financed through a loan
subject to approval by the European Parliament and the Council. Although of a muchsmaller financial impact, the example is interesting as it is a case of financing
expenditure for the acquisition of an asset (not to lend on the money) by having
recourse to a loan. Contrary to the back-to-back lending situation, the liability of theUnion is not just contingent but certain.

15
16
17

18

19

20

The possibility of granting financial assistance is now directly regulated in the FR, Title X,
which will apply as from the post-2020 MFF, see in particular Article 220 thereof.
Council Regulation (EU) No 407/2010 of 11 May 2010 establishing a European financial
stabilisation mechanism (OJ L 118, 12.5.2010, p. 1).
Council Regulation (EC) No 332/2002 of 18 February 2002 establishing a facility providing
medium-term financial assistance for Member States' balances of payments (OJ L 53,
23.2.2002, p. 1).
Adopted in accordance with Article 212 TFEU (see, by way of example, Decision (EU)2020/33 of the European Parliament and of the Council of 15 January 2020 providing
further macro-financial assistance to the Hashemite Kingdom of Jordan (OJ L 14, 17.1.2020,
p. 1)).
Council Regulation (EU) 2020/672 of 19 May 2020 on the establishment of a European
instrument for temporary support to mitigate unemployment risks in an emergency (SURE)
following the COVID-19 outbreak (OJ L 159, 20.5.2020, p. 1).
Article 2(15) FR defines "contingent liability as follows": "Contingent liability" means apotential financial obligation that could be incurred depending on the outcome of a future
event."

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24.

In both cases referred to above, the loans or the borrowing constitute a neutral, off-budget
operation. In the case of back-to-back lending, the proceeds from the borrowing is notrecorded as budgetary revenue and expenditure arising from on-lending is not recorded as
expenditure, as the two fully counter-balance each other. In the case of building acquisitions,the amount of the loan or borrowing is not recorded in the budget as revenue and the fullamount of the building price is not recorded as expenditure, as the debt is counterbalanced by
the value of the building.

25.

It follows that in both cases above, the debt resulting from the borrowing is counterbalancedby an asset, which justifies its off-budget treatment, namely the claim against the recipient offinancial assistance or, in the case of a building acquisition project, the value of the building21.
The annual budget only contains lines to accommodate, respectively, defaults (in the case of
back-to-back lending) and annual instalments on the loan (in the case of building acquisition)
but those are fully matched by budget revenue as the Union has to honour its liabilities.

26.

The off-budget treatment of the abovementioned borrowing operations means that thebudgetary balance is not affected.

27.

Back-to-back loans are not the only case where the Union carries out operations which may
give rise to substantial liabilities. The Union may also provide budgetary guarantees22. Suchguarantees may generate a contingent liability which may exceed the financial assets provided
to cover the Union's liability (so-called provisioning, see Article 210(2) FR).

21

22

When the provision on borrowing to acquire buildings was introduced in 2012, theCommission made the following statement: "The Commission underlines that using loans
for the acquisition of buildings is not contrary to the principle of equilibrium according to
Article 17 of the Financial Regulation. The borrowing of the funds constitutes an off-budget
operation: the amount of the loan is not recorded in the budget as revenue and the fullamount of the building price is not recorded as expenditure. Only the annual instalments to
be paid to the bank are included as expenditure matched by the annual administrative
budget (revenue). From an accounting point of view, the loan does not finance the budget
expenditures, but the acquisition of an asset. The loan (debt) is compensated by the value ofthe building (asset). Therefore, loans for the acquisition of buildings do not create a deficit."
Article 2(9) FR contains the following definition: "Budgetary guarantee" means a legal
commitment of the Union to support a programme of actions by taking on the budget afinancial obligation that can be called upon should a specified event materialise during theimplementation of the programme, and that remains valid for the duration of the maturity of
the commitments made under the supported programme."

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Budgetary guarantees are an instrument for the implementation of the budget and hence forfinancing Union policies (see Article 62(2) FR). They are repayable forms of assistance andthe liability of the Union is therefore counterbalanced by a claim against the final recipients
whose operations benefit from the guarantee.
28.

It follows from the above that those parts of the Recovery Instrument involving back-to-backlending would not raise novel legal issues, because the debt resulting from the borrowing
constitute neutral, off-budget operations which do not bring into question the compliance withthe principle of budgetary balance23.

29.

The use of proceeds from borrowing to finance operational expenditure entails somesignificant differences from the cases of borrowing referred to above, most notably the factthat it would not give rise to contingent liabilities but to actual expenditure that the Union
would be bound to pay in order to reimburse the debt. On the basis of the cases referred toabove (back-to-back lending, acquisition of buildings, guarantees), it needs to be clarified
whether "borrowing for spending" under the NGEU is organised in such a way that i) the
budgetary balance is not affected and ii) the liability (debt) arising from the borrowing isbudgetarily neutral, i.e. it is duly counter-balanced by an asset.

i)Whether "borrowing for spending" under the NGEU affects the budgetary balance

30.

"Borrowing for spending" involves two steps: first, the Union borrows the money on themarkets and channels the proceeds to the relevant spending programmes as external assigned
revenue; second, the Union pays back the money by using own resources allocated to theUnion as the borrowing reaches maturity.

23

It is noted that back-to-back lending under the NGEU does not entail financial assistance toMember States of the same type as the EFSM.

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31.

It is the first step, under which the proceeds from the borrowing is used for spending, which
requires further assessment. The second step, the repayment, will be fully integrated into thesystem of own resources and be based on conventional budgetary mechanisms. The
repayment will thus be programmed under the MFF ceilings and financed with own resources
allocated up-front under the compartment referred to in paragraph 18 above.

32.

As to the first step, the question is whether the budgetary balance is distorted when theproceeds from the borrowing (revenue) are used for spending, whereas the corresponding
liability (the debt) is not budgeted as expenditure.

33.

In that respect it is recalled that Article 310 TFEU requires that the revenue and expenditure"shown in the budget" shall be in balance and Article 17(2) FR prohibits loans "within theframework of the budget" (emphasis added). Given that, under the Recovery Instrument, themoney would be channelled to the various programmes as external assigned revenue, as
foreseen in Article 4(1) of the Recovery Instrument, the equilibrium of the revenue andexpenditure shown in the budget will not be affected.

34.

This is so because amounts corresponding to external assigned revenue are not provided in thebudget and are not decided upon under the annual budget procedure. In accordance with
Article 7(2)(e) FR, external assigned revenues do constitute authorised spending("appropriations") but they do not form part of the appropriations "provided" in the budget,within the meaning of Article 7(2)(a) FR. They are intended to be additional in nature andcome on top of the voted appropriations24. The budget contains a structure for accommodating
assigned revenue but this does not entail putting amounts on the relevant budget lines25. Froma purely budgetary technique perspective, external assigned revenue by its very nature cannot
jeopardize the budgetary balance.

24
25

In accordance with Article 22 FR, assigned revenue automatically generates commitment
and payment appropriations in corresponding amounts.
In the statement of revenue, there is a budget line with a p.m. entry to receive the revenue,
and the estimated amount figures in the remarks, but the amount does not feature on thelines of the voted budget. On the expenditure side, the budget remarks indicate which budget
lines may receive appropriations corresponding to assigned revenue.

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35.

This situation may legitimately be qualified as comparable to the off-budget nature of backto-back lending operations. It is therefore in line with the practice developed for many years
as regards borrowed money, which has been regarded as compatible with the wording of
Article 17(2) FR in its version since 2012 which prohibits the Union from raising loans"within the framework of the budget".

36.

On the basis of the above, it must be concluded that recourse to borrowing to finance Union
expenditure through Union programmes by means of external assigned revenue does notaffect the revenue and expenditure shown in the budget and, therefore, does not jeopardise thebudgetary balance.

37.

However, as will be explained further below in part 3, recourse to external assigned revenue issubject to clear constraints and cannot be unlimited. More specifically, "borrowing forspending" cannot become a permanent feature of the budgetary landscape, a ban which isprovided for in Article 3a of the ORD proposal.

ii)

Whether "borrowing for spending" under the NGEU is budgetarily neutral, i.e. duly
counterbalanced by an asset

38.

The analysis cannot be limited to verifying whether the principle of budgetary balance isobserved from a purely budgetary technique point of view, as examined in point i) above. An
analysis limited to a purely literal reading of the third subparagraph of Article 310(1) TFEU which requires that revenue and expenditure shown in the annual budget is in balance, butdoes not apply to off-budget operations - would make it easy to circumvent the principle ofbudgetary balance by creating multiple borrowing programmes that would provide funding
through external assigned revenue. That would be contrary to the more fundamental principlethat underpins the principle of budgetary balance, i.e. that the Union cannot run an operating
deficit (see paragraphs 21 and 22 above).

39.

Consequently, in addition to verifying the respect of the principle of the budgetary balance, it
is also necessary to show that "borrowing for spending" under the NGEU is budgetarily
neutral, i.e. that it is duly counterbalanced by an asset.

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Budget neutrality is intrinsically linked to Article 310(4) TFEU which encapsulates theprinciple of budgetary discipline by preventing the Union from adopting any act which islikely to have appreciable implications for the budget without "providing an assurance thatthe expenditure arising from such an act is capable of being financed within the limit of theUnion's own resources" (emphasis added)26. That provision aims at ensuring that the Union
does not undertake any financial obligations which it will not be able to honour. It aims at
ensuring multi-annual financial discipline27.
Article 310(4) TFEU is also a corollary of the principle of budgetary balance as it ensures theproper correspondence of revenues and expenditure over time. Budgetary neutrality isfundamental for the good functioning of the Union budgetary system, which relies solely
upon the resources allocated to it under the Own Resources Decision adopted on the basis of
Article 311 TFEU.

26

27

See also recital 13f to the ORD proposal: "The repayment of funds borrowed in order toprovide non-repayable support, repayable support through financial instruments orprovisioning for budgetary guarantees, as well as the interest due, should be funded by theUnion budget. The borrowed funds which are granted as loans to Member States should be
repaid by the sums received from beneficiary Member States. The necessary resources need
to be allocated and made available to the Union for it to be able to cover all of its financial
obligations and contingent liabilities resulting from the exceptional and temporary
empowerment to borrow in any given year and under any circumstances in compliance with
Article 310(4) TFEU and Article 323 TFEU." (emphasis added)
The fact that that the claim will most likely not be activated (as in the case of contingent
liabilities in back-to-back lending operations) or will certainly be called (as in the case ofcommitments for the "borrowing for spending") bears no pertinence for examining thebudget neutral effect of the claim.

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EN40.

Borrowing by the Union would be budgetarily neutral if the resulting debt is matched by aclaim allowing the Union to cover the principal, interests and costs associated with thatborrowing and where sufficient assets are dedicated for that purpose28. That claim would
constitute the "assurance" for the financing of expenditure to which Article 310(4) TFEU
refers and would be essential to guarantee the future annual repayments of the debt, and hence
to ensure the budgetary balance throughout the repayment period (as explained previously,
repayments are to be integrated in conventional budgetary mechanisms)29.

41.

It is in the light of the above that it should be assessed whether the construction proposed
under the NGEU sufficiently ensures the budget neutrality of the "borrowing for spending"operations.

28

29

In that respect it should also be noted that the multi-annual nature of Union programmes
regularly involves situations where the Union takes on a liability by means of a legallybinding commitment, without such commitment being counterbalanced by any other asset
than the assurance that ensuing obligations can be covered within the ceiling for own
resources. This is the case, for example, for large-scale projects such as ITER andGALILEO which also stretch well beyond one MFF period. In the field of cohesion, it isequally the case that the full legal commitment for the whole MFF period is undertaken upfront upon the notification by the Commission to a Member State that it has adopted a
programme, see Article 76 of Regulation (EU) No 1303/2013 (OJ L 347, 20.12.2013,
p. 320). Moreover, the "reste à liquider" (RAL) concept is the very product of budget
commitments undertaken which will give rise to subsequent payment claims.
The link between the availability of own resources and the budgetary balance has also been
confirmed by the Court, see judgment of 15 November 2005, Commission v Kingdom ofDenmark, C-392/02, EU:C2005:683, paragraph 54.

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The construction proposed by the Commission, which is anchored in the ORD proposal,
comprises the following important elements:
it introduces a dedicated and temporary increase30 of the own resources ceilings solely–

for the purpose of catering for the liabilities arising from the operations under the
NGEU (Article 3c of the ORD proposal)31;–

it incorporates the maximum amount of borrowing and the further modalities for
repayment (Article 3b);–

it comprises a cash management provision to ensure the timely availability of cash
resources in case the authorised appropriations in the budget are not sufficient for theUnion to comply with its obligations under the borrowing to finance the NGEU
(Article 6(4));–

the Recovery Instrument specifies that the commitment appropriations corresponding to
the external assigned revenue are generated as of the entry into force of the ORD(Article 4(3) of the Recovery Instrument).

30

31

Based on information from the Commission, the dedicated increase of 0.6 % of the GNI of
all Member States is more than sufficient to cover the liabilities (principal, interests andassociated costs) over the repayment period stipulated in the second subparagraph of
Article 3b(2) of the ORD proposal (i.e. 1 January 2028 to 31 December 2058).
Article 3c provides: "The amounts established in Article 3(1) and (2), respectively, shall betemporarily increased by 0,6 percentage points for the sole purpose of covering all
liabilities of the Union resulting from its borrowing referred to in Article 3b until all theseliabilities have ceased to exist, and at the latest until 31 December 2058. Those increased
amounts shall not be used for paying any other liabilities of the Union” (emphasis added).

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The combined effect of the abovementioned provisions in the ORD proposal, and in particular
the dedicated compartment combined with the indication of the maximum amount ofborrowing, constitutes a claim against the Member States which, once the ORD has enteredinto force in accordance with the third paragraph of Article 311 TFEU (and unless it isamended or repealed), becomes an irrevocable, definitive and enforceable guarantee of
payment that is given upfront by the Member States. In that respect, it is recalled that the
ORD, contrary to the MFF Regulation, is not adopted for a limited period of time32.

44.

The Council Legal Service considers that the novel and important provisions in the ORD
proposal referred to above provide a credible and solid asset, thereby ensuring the budget
neutrality of the operation and providing ample "assurance" that the Union expenditures
under the NGEU are capable of being financed, as required under Article 310(4) TFEU. The
measures set out in Article 6(4) of the ORD proposal further contribute to safeguarding thecapacity of the Union to honour its legal obligations in a timely manner as required by Article
323 TFEU33.

45.

The fact that the full amount of borrowing is stipulated in the ORD proposal also ensures thatthe asset consisting of the commitments of the Member States fully counter-balances the debt,
even if the maximum annual amount corresponding to the increase in the ceilings is not in
itself sufficient to cater for the full debt. This is comparable to cases of back-to-back lending,where the asset, i.e. the full claim against the Member State or third country to which
financial assistance is provided, also arises from the outset, but the repayments are madeprogressively in accordance with the underlying loan agreement.

32

33

While it is true that an Own Resources Decision is traditionally replaced for eachconsecutive MFF, this is not a requirement that stems from primary law. Given that such a
decision is adopted by unanimity and subject to the approval by all Member States inaccordance with their respective constitutional requirements, the revocation of thecommitments made by all Member States in the ORD is not in the hands of one or even amajority of Member States. It would require the agreement of all Member States.
The content and scope of Article 6(4) will be assessed separately further below (see part 4 ofsection A).

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Intermediate conclusions

46.

In the light of the above, the following intermediate conclusions can be made:

The Treaties allow the Union legislator to establish a mechanism such as the one
proposed in the NGEU, provided that it incorporates a number of safeguards aimed atpreserving its budget neutrality and, ultimately, at respecting the principle of budgetarybalance:–borrowed amounts are channelled to spending programmes by means of external
assigned revenue which by its nature is additional and does not affect the revenue
and expenditure shown in the annual budget and therefore, from a budgetary
technique point of view, does not generate an imbalance in the annual budget;–the repayment of the Union's debt is guaranteed within the ceilings of own
resources, by a dedicated compartment which may only serve that purpose and byadditional provisions under which the Member States commit to make available
resources up to the maximum amount of borrowing stipulated in the ORD
proposal, the combined effect of which will constitute an irrevocable, definitiveand enforceable guarantee of payment.

47.

It is, however, still necessary to examine whether the substantial amount of external assigned
revenue that is proposed under the NGEU is in line with the rules governing the system ofown resources of the Union, in particular its integrity, and with the basic budgetary principles
of unity and universality.

3.

Is the extensive use of external assigned revenue in compliance with the integrity of thesystem of own resources of the Union and with basic budgetary principles?

a)Legal framework

48.

The system of own resources of the Union, and its integrity, as well as the principle of budget
unity are both, in the EU Treaties, of constitutional importance.

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The first paragraph of Article 311 TFEU on own resources provides:"The Union shall provide itself with the means necessary to attain its objectives and carrythrough its policies."
The second paragraph of Article 311 TFEU provides:"Without prejudice to other revenue, the budget shall be financed wholly from own resources"(emphasis added).

50.

The principle of unity is enshrined in the first subparagraph of Article 310(1) TFEU:"All items of revenue and expenditure of the Union shall be included in estimates to be drawn
up for each financial year and shall be shown in the budget" (emphasis added).
This is repeated in Article 8(1) FR:"All revenue and expenditure shall be booked to a budget line."

51.

The principle of universality, also referred to as the principle of non-assignment, is defined in
the FR and means that all revenue shall finance all expenditure without distinction. Article 20
FR defines the scope of that principle as follows34:"Without prejudice to Article 21, total revenue shall cover total payment appropriations.
Without prejudice to Article 27, all revenue and expenditure shall be entered in the budget infull without any adjustment against each other" (emphasis added).

52.

As an exception to the principle of universality, Article 21 FR sets out a catalogue of internaland external assigned revenues. In particular, Article 21(5) FR stipulates that:"A basic act may assign the revenue for which it provides to specific items of expenditure.
Unless otherwise specified in the basic act, such revenue shall constitute internal assigned
revenue."

34

The principle of universality is also enshrined in Article 6 of the current ORD as regards
own resources: "The revenue referred to in Article 2 [own resources] shall be used without
distinction to finance all expenditure entered in the Union's annual budget."

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b)

Legal analysis

53.

The NGEU is proposed to be financed with EUR 500 billion (2018 prices) of external
assigned revenue, corresponding to the amounts foreseen for "borrowing for spending". The
external assigned revenue constitutes so-called "other revenue" as mentioned in the second
paragraph of Article 311 TFEU and not an own resource. Under the proposed construction,
the amounts are assigned and allocated through the Recovery Instrument, which is based on
Article 122 TFEU35.

54.

Such a substantial amount of external assigned revenue is unprecedented both in absolute andin relative terms36. It would be equal to almost half the size of the amount proposed for the
next "baseline" MFF (2021-2027) and would be rolled out during a shorter period of time37.

55.

This part will analyse the proposed use of external assigned revenue in the light of the systemof own resources of the Union, governed by Article 311 TFEU, and in particular its integrity,and of the basic budgetary principles of unity and universality.

35

36

37

Article 4(1) Recovery Instrument qualifies a part of the total financing as external assigned
revenue: "For the purposes of Article 21(5) of [the Financial Regulation], EUR 433 200 000
000 in 2018 prices of the funds referred to in Article 3(1) shall constitute external assigned
revenue to the Union programmes referred to in point (a) of Article 3(2) of this Regulationand EUR 66 800 000 000 in 2018 prices of those funds shall constitute external assigned
revenue to the Union programmes referred to in Article 3(2)(c) of this Regulation."
By way of comparison, according to Working Document V accompanying the draft budget
for 2020, the total amount of commitment appropriations stemming from assigned revenue(internal and external) amounted to 16 437,4 million in 2018 (and 19 174, 8 million in
payment appropriations). Main sources of external assigned revenue comprised
contributions from EFTA, candidate and third countries to Union programmes and activities
and Member States' contributions to the Facility for Refugees in Turkey, see
COM (2019) 400.
In accordance with Article 4(4) of the Recovery Instrument: "Legal commitments giving rise
to expenditure for support as referred to in Article 3(2)(a), and where appropriate in point(i) of Article 3(2)(c), shall be entered into by the Commission or by its executive agencies by
31 December 2024. Legal commitments in an amount of at least 60 percent of the amountreferred to in Article 3(2)(a) shall be entered into by 31 December 2022."Article 4(5) to (7)of the Recovery Instrument contains similar deadlines for loans and budgetary guarantees,
adapted to their specific features, and Article 4(8) specifies that the deadlines do not apply totechnical and administrative assistance.

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56.

As already indicated in section A, part 2, of this opinion concerning the budgetary balance,
the debt arising from borrowing will be repaid by own resources and the repayments will be
integrated into the MFF and will fully adhere to the regular budgetary mechanisms. This
analysis will therefore not deal with repayments which do not raise the same questions as
external assigned revenues.

57.

As mentioned above, assigned revenue is not an own resource but forms part of so-called"other revenue" that accrues to the Union38. The second paragraph of Article 311 TFEU
expressly recognises that the Union budget may be financed also from "other revenue":"Without prejudice to other revenue, the budget shall be financed wholly from own
resources." (emphasis added). The integration into the ORD proposal of the provisions about
the specific compartment and the borrowing on the markets is legally possible even if theproceeds from borrowing are not qualified as an own resource39.
However, the term "wholly" used in Article 311 TFEU also reflects that the primary source offinancing of the Union budget is to come from own resources and not from other revenue.
This preponderance given to own resources is due to the strong guarantees, rooted in national
budgetary sovereignty, which accompany the Own Resources Decision on the basis of which
Member States allocate own resources to the Union budget in a definitive manner. The
reliance on own resources as the primary source of financing of the budget is also a corollaryof the requirement for sufficiency of means of the Union to attain the objectives and carrythrough the policies of the Union as set out in the first paragraph of Article 311 TFEU, andultimately for the Union's financial autonomy.

38

39

For a further description of other revenue, see Commission fiches 10 and 47 in documents
WK 7294/2018 INIT and WK 10842/2018 INIT. Fiche 47 states the following: "Other
revenue sources are not established through the Own Resources Decision. They can inprinciple be created by a wide range of legislation and be anchored in different Treaty legal
bases. They can thus be founded on secondary law subject to a variety of decision
procedures. The generation of revenue is not the primary objective of such legislation, but aside effect or corollary. Other revenue can be either registered as general revenue (i.e.
fungible with the Gross National Income-based Own Resource) or it can be assigned."
To integrate the proceeds of borrowing as a new category of own resources in the system ofown resources of the Union would moreover be legally problematic, as the proceeds inreality constitute a liability which needs to be repaid and, therefore, are not a genuine
resource which can be allocated to the Union in a final and definitive manner, as genuine
own resources can.

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Any construction involving other revenue, therefore, needs to fully preserve the integrity ofthe own resources system of the Union.
58.

As an exception to the principle of universality, Article 21 FR provides that revenue may be
assigned to specific items of expenditure40. In particular, under Article 21(5) FR, a basic act
may "assign the revenue for which it provides to specific items of expenditure". This is also
the construction proposed for the NGEU.

59.

However, whereas assigned revenue is permitted under the FR and, therefore, forms part ofthe budgetary system, it also follows from the above that it is in the very nature of external
assigned revenue to serve to reinforce specific expenditure provided in the budget. Suchassigned revenue is therefore additional or complementary to the appropriations provided forin the budget and cannot become a generalised means for financing Union needs that would
circumvent and replace the usual budgetary procedures. Due to its additional nature and theway it is generated, assigned revenue is not voted on by the budgetary authority under theannual budgetary procedure41 and is not counted against the ceilings42 of the MFF43.

60.

Assigned revenue therefore also detracts from the principle of unity which implies that all
revenue and expenditure shall be recorded in one single document, namely the budget. That
principle aims at preserving the prerogatives of the European Parliament and the Council in
their capacity as budgetary authority under Articles 14(1) and 16(1) TEU, with responsibility
for adopting the annual budget under the procedure set out in Article 314 TFEU.

40
41

42

43

Article 21(1) foresees that: "External assigned revenue and internal assigned revenue shallbe used to finance specific items of expenditure."
In the case of Article 21(5) FR, the assigned revenue is provided under a basic act, within
the meaning of Article 310(3) TFEU and as defined in Article 2(4) FR, and automaticallygenerates commitment and payment appropriations (Article 22(2) FR).
This is also confirmed in recital 8 to the current MFF Regulation: "The MFF should not takeaccount of budget items financed by assigned revenue (…)." See Council Regulation(EU, Euratom) No 1311/2013 of 2 December 2013 laying down the multiannual financial
framework for the years 2014-2020 (OJ L 347, 20.12.2013, p. 884).
The technical aspects of external assigned revenue and how it would work under the NGEU
are also described in Commission fiche No 69, see document WK 6112/2020 INIT.

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The Treaty-based principle of unity and the principle of universality form part of the basic
budgetary principles listed in Title II of the FR. Their fundamental role and special status isalso reflected in Article 3(2) FR which provides that they may not be derogated from underother legislative acts.

62.

It follows from all of the above that recourse to external assigned revenue is subject toimportant restrictions which aim, in particular, at preserving the inter-institutional balance byprotecting the prerogatives, including the budgetary ones, of the European Parliament and theCouncil. External assigned revenue must, therefore, remain additional or complementary innature in order to avoid deconstructing the system of own resources and the regular budgetarymechanisms, in circumvention of the applicable procedures.

63.

The proposed volume of external assigned revenue for the NGEU is unprecedented andsubstantial. However, the determination of whether the mechanism remains within theacceptable boundaries cannot be based on quantity alone, but must also take into accountqualitative elements, including the specific economic circumstances and context in whichsuch mechanism comes up and the safeguards put in place. Such safeguards must include
guarantees which sufficiently circumscribe the construction to ensure that it cannot become apermanent mechanism or constitute a shift of paradigm in the EU budget processes andmethods which would put at jeopardy the system of own resources as established by theTreaties.

64.

The NGEU is prompted by the exceptional situation which has arisen as a consequence of the
COVID-19 pandemic and the ensuing urgent need to support a swift recovery. It is, therefore,
by no means a typical spending programme. Rather, it is proposed as an exceptional,
temporary and one-off instrument to help economic recovery in a spirit of solidarity44.
Solidarity is a core principle underlying the Treaties. The preamble to the TEU confirms thedesire of the Member States to "deepen the solidarity between their peoples, while respecting
their history, their culture and their traditions"(6th recital). Moreover, solidarity is listed, in
Article 2 TEU, among the values on which the Union is founded.

44

The spirit of solidarity is an element expressly mentioned in Article 122(1) TFEU (suchwording was added in 2009 by the Lisbon Treaty) which is the legal basis of the Recovery
Instrument. It therefore forms part of the specific construction of the NGEU.

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In that respect it is recalled that, in accordance with the first paragraph of Article 311 TFEU,
the Union is to "provide itself with the means necessary to attain its objectives." In the samevein, Article 3(6) TEU provides that the "Union shall pursue its objectives by appropriate
means commensurate with the competences which are conferred upon it in the Treaties".
Finally, Article 323 TFEU provides that "The European Parliament, the Council and theCommission shall ensure that the financial means are made available to allow the Union to
fulfil its legal obligations in respect of third parties."

66.

In order to respond to the exceptional situation, it is thus also required that financial means areavailable which are commensurate in volume to the challenge that the Union and its Member
States face. It is for the Union legislator to decide, under the applicable procedures, what is
considered appropriate and commensurate to the specific situation. In making such a decision,
the legislator enjoys a wide margin of discretion, provided the safeguards described inparagraphs 67 to 69 below - which in essence aim at safeguarding the integrity of the systemof own resources as well as the principles of unity and universality applicable to the Union
budget - are respected.

67.

The Council Legal Service considers that a mechanism such as the one proposed, the purposeof which is to provide for an exceptional, temporary and one-off contribution to support
recovery through targeted spending, which comes on top of budget resources to be provided
under the next MFF, is consistent with the additional and complementary nature of assigned
revenue. The substantial amount of external assigned revenue may, therefore, exceptionallybe considered justified insofar as it is strictly circumscribed to cover measures linked to the
COVID-19 pandemic45 and limited, in size and duration, to what is necessary to that end.

45

A detailed assessment of whether the measures proposed to be financed fall within the scopeof Article 122 TFEU and the specific objective of supporting recovery as a consequence of
the COVID-19 pandemic, is provided in section B below.

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In the view of the Council Legal Service, the construction of the NGEU adequately
incorporates the above safeguards:–

under the ORD proposal, the use of borrowing on capital markets for the financing ofoperational expenditure of the Union is as a matter of principle excluded (Article 3a andrecital 13h). However, by way of derogation, such a construction is exceptionallyauthorised "for the sole purpose of addressing the consequences of the COVID-19
crisis" (Article 3b(1) of the ORD proposal, emphasis added);–

the financial construction relies on a proposal based on Article 122 TFEU, a legal basisthat presupposes exceptional situations, and provides for measures of a targeted andtemporary character (see Articles 2 and 4(4) to (7) of the Recovery Instrument).

69.

The Council Legal Service also considers that - in the light of the substantial amount of
external assigned revenues involved and the fact that, as explained above, external assigned
revenues are not a part of the annual budgetary procedure the legal soundness of themechanism proposed under the NGEU could be further strengthened by establishingarrangements for inter-institutional cooperation which would guarantee an involvement ofboth the European Parliament and the Council, as the two arms of the budgetary authority46,
in a manner which would be consistent with, and respect the specific nature of, assigned
revenue47. This should not amount to establishing a kind of parallel budgetary procedure.

46

47

In its communication "The EU powering the Recovery Plan for Europe", the Commission
invites the European Parliament and the Council to "review on an annual basis expenditures
financed with external assigned revenues under Next Generation EU." See page 2 of theCommunication (COM (2020) 442 final), document ST 8137/20 INIT.
In that respect it is recalled that the annual budget already contains a structure toaccommodate external assigned revenue, in particular by means of indications in the budget
remarks, as explained in footnote 25. The Commission is already proposing to enhancetransparency by including information about the expected amount of annual legal
commitments, see Statement of estimates of the European Commission for the financial year
2021 (SEC(2020) 250).

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Intermediate conclusions

70.

In the light of the above, the following conclusions can be made:

it is for the Union legislator to determine which financial means are necessary toadequately attain the objective pursued by the NGEU for which determination it holds a
margin of discretion which includes the possibility of having recourse to borrowing, theproceeds of which constitute external assigned revenue. That margin of discretion is
however limited by the need to respect the integrity of the system of own resources of
the Union;

in view of the substantial amount that the external assigned revenue envisaged under the
NGEU would represent, adequate safeguards should be provided with a view toprotecting the integrity of the own resources system of the Union and of the budgetarysystem. The exceptional character of the situation the NGEU intends to address and its
one-off nature and limited duration, as duly reflected in the relevant proposals, doconstitute such adequate safeguards;

with a view to reinforcing the consistent of the external assigned revenue with thesystem of own resources and the budgetary mechanisms, the introduction of additionaland specific arrangements aimed at ensuring an appropriate involvement of theEuropean Parliament and the Council in the annual process is advised.

4.

Is Article 311 TFEU an appropriate legal basis for establishing elements related to the
NGEU, in particular those linked to the borrowing of funds?

71.

As already mentioned above, the ORD proposal contains novel elements pertaining to theborrowing under the NGEU.
This part assesses whether Article 311 TFEU is the appropriate legal basis for those elements
and, in particular, for the empowerment of the Commission to contract borrowing on capital
markets. As will be shown below, this issue is also of relevance for defining the specific role
which is given in the general construction to the Recovery Instrument (which is based on
Article 122 TFEU).

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a)

Legal framework72.

The legal basis under consideration is the third paragraph of Article 311 TFEU:"The Council, acting in accordance with a special legislative procedure, shall unanimously
and after consulting the European Parliament adopt a decision laying down the provisions
relating to the system of own resources of the Union. In this context it may establish new
categories of own resources or abolish an existing category. That decision shall not enter into
force until it is approved by the Member States in accordance with their respective
constitutional requirements." (emphasis added)73.

The Own Resources Decision is complemented by implementing measures for the own
resources system, insofar as this is provided for in the Own Resources Decision (see thefourth paragraph of Article 311 TFEU48), and by an act determining the methods andprocedure for making own resources available to the Union, a so-called "Making Available
Regulation"49, adopted on the basis of Article 322(2) TFEU which provides:"The Council, acting on a proposal from the Commission and after consulting the European
Parliament and the Court of Auditors, shall determine the methods and procedure whereby
the budget revenue provided under the arrangements relating to the Union's own resources
shall be made available to the Commission, and determine the measures to be applied, if needbe, to meet cash requirements". (emphasis added)

48

49"The Council, acting by means of regulations in accordance with a special legislative
procedure, shall lay down implementing measures for the Union's own resources system inso far as this is provided for in the decision adopted on the basis of the third paragraph[ORD]. The Council shall act after obtaining the consent of the European Parliament."
The current Making Available Regulation is Council Regulation (EU, Euratom)
No. 609/2014 of 26 May 2014 on the methods and procedure for making available thetraditional, VAT and GNI-based own resources and on the measures to meet cash
requirements (OJ L 168, 7.6.2014, p. 39).

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b)

Legal analysisi)Preliminary remarks

74.

According to well-established case law of the Court of Justice of the EU ("the Court"), thechoice of the legal basis for a Union measure must rest on objective factors which are
amenable to judicial review, in particular the aim and content of that measure50.

75.

Moreover, the case law has established that if an act has a twofold purpose or component and
if one of those is identifiable as the main or predominant purpose or component, whereas theother is merely incidental, the act must be based on the Treaty provision corresponding to themain purpose or the main component of the act. Exceptionally, where a measure has several
contemporaneous objectives or components which are indissociably linked with each otherwithout one being secondary and indirect in respect of the others, the measure must be basedon the various legal bases. Recourse to a dual legal basis is not possible where the procedures
laid down for each legal basis are incompatible with each other51.

50

51

See judgment of 11 June 1991, Commission v Council ("Titanium dioxide"), C-300/89,
EU:C:1991:244, paragraph 10; judgment of 5 May 2015, Spain v Council, C-147/13,
EU:C:2015:299, paragraph 68 and the case law cited.
See judgments Commission v Council ("Titanium dioxide"), cited above, paragraphs 17 to
21; Spain v Council, cited above, paragraph 59; judgment of 11 September 2003,
Commission v Council, C-211/01, EU:C:2003:452, paragraph 39; judgment of
19 September 2002, Huber, C-336/00, EU:C:2002:509, paragraph 31; judgment of
29 April 2004, Commission v Council, C-338/01, EU:C:2004:253, paragraphs 55 et seq.;
judgment of 8 September 2009, Commission v Parliament and Council, C-411/06,
EU:C:2009:518, paragraphs 46 and 47; judgment of 6 November 2008, Parliament v
Council, C-155/07, EU:C:2008:605, paragraphs 36 et seq.

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76.

The case law also underlines that the procedures involved in the different legal bases are theresult of the choice made by the authors of Treaties52. In particular, the Court has pointed out
that: "The rules regarding the manner in which the Community institutions arrive at theirdecisions are laid down in the Treaty and are not at the disposal of the Member States or of
the institutions themselves."53. The choice of legal basis thus cannot be guided by criteria ofpure political convenience linked to the specific procedure it entails (for instance in view of
the use of the unanimity voting rule instead of the qualified majority voting rule) or be
motivated by the type of national procedure a given legal basis would entail.

77.

Two additional preliminary remarks should be made concerning the scope of the thirdparagraph of Article 311 TFEU.
–

First, the scope of the Own Resources Decision needs to regulate measures linked torevenue. This clearly stems from the wording of the third paragraph of Article 311
TFEU which refers to "provisions relating to the system of own resources of the Union"(emphasis added).

–

Second, the third paragraph of Article 311 TFEU empowers the Council to adopt a
decision on the "the system of own resources of the Union". The establishment or
abolishment of categories of own resources, as referred to further in that provision, may
be adopted "in the context" of the provisions relating to the system of own resources.
Hence, the power of the Council under the third paragraph of Article 311 TFEU is not
limited to establishing or abolishing categories of own resources, but encompasses thepower to adopt any provision related to the system of own resources, which is a wider
notion. This is already the case in respect of the provisions of the current ORD which go
beyond the pure establishment of categories of own resources by dealing for instancewith issues such as rebates, surplus and the principle of universality.

52
53

See judgment of 19 July 2012, European Parliament v Council, C-130/10, EU:C:2012:472,
paragraphs 80 to 82.
See judgment of 23 February 1988, United Kingdom of Great Britain and Northern Irelandv Council, C-68/86, EU:C:1988:85, paragraph 38.

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78.

The above has an immediate consequence in relation to the question whether the ORD
proposal may contain provisions related to the future repayment of borrowing under the
NGEU. First of all it is not necessary that the proceeds from borrowing are established as a
new category of own resource for it to be possible to include such provisions in the ORD
proposal. Second, the establishment of the proceeds from borrowing as a new category of own
resources would be legally problematic, as those proceeds are revenues which are not final
and definitive, but engender a liability for the Union. Their legal nature is thus different fromthe notion of own resources, which are due to the Union in a final and definitive manner andwhich do not create a liability for the Union54.

79.

The question is, therefore, whether, in spite of the proceeds from borrowing not being acategory of own resource, measures laid down in the ORD proposal that concern their future
repayment fall within the notion of "system of own resources of the Union", as referred to in
the third paragraph of Article 311 TFEU. That question must be addressed bearing in mind
the aim and content of those measures.

ii)

Content and aim of measures on repayment of borrowing laid down in the ORD
proposal80.

As regards the content of those provisions, the ORD proposal lays the foundation for the
borrowing operations under the NGEU in the following manner:–

it establishes the principle that the Union may not borrow on the markets for thefinancing of operational expenditure (see Article 3a of the ORD proposal);–by way of derogation from that principle, it exceptionally empowers the Commission toborrow funds in the amount of EUR 750 billion on capital markets on behalf of theUnion "for the sole purpose of addressing the consequences of the COVID19 crisis",and determines the distribution between loans and expenditure respectively (seeArticle 3b(1), points (a) and (b));

54

See also footnote 39 above. In accordance with well-established case law, the obligation for
Member States to make available own resources to the Union is founded directly on the own
resources framework and does not require any additional act, see judgment of 21 June 2007,
Republic of Finland v Commission, C-163/06 P, EU:C:2007:371, paragraphs 30-32 and 35.

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it establishes an ear-marked compartment by means of an extraordinary and temporary
increase of the own resources ceilings to cover liabilities arising from the borrowing(see Article 3c);–

it sets out further modalities for the repayment of the borrowing, in particular the
repayment period (see Articles 3b(2) and 3c) and a ceiling on the maximum annual
repayments (see Article 3b(2)55), and empowers the Commission to establish thenecessary arrangements for the borrowing operations (see Article 3b(3));–

finally, it includes a provision on cash resources which refers to the applicableprovisions under the Making Available Regulation (see Article 6(4)).

81.

The aim of the proposed provisions and the specific context are detailed in the explanatory
memorandum accompanying the ORD proposal and are further defined in the recitals.

82.

In particular, the explanatory memorandum refers to Articles 310(4) and 323 TFEU56 andindicates that "[i]n order to ensure compliance with those provisions in any given year andunder any circumstances, it is necessary that Member States allocate to the Union the
resources needed to cover the financial obligations and contingent liabilities stemming fromthis exceptional and temporary empowerment to borrow funds."

83.

Recital 13d specifies that the inclusion in the ORD proposal of the empowerment for theCommission to borrow funds on the markets is closely related to the increase of the own
resources ceiling and "ultimately to the functioning of the system of own resources of theUnion". Moreover, it specifies that the unprecedented nature of the operation calls for"certainty" about the overall volume of Union's liability and the essential features of
repayment and the pursuit of a single borrowing strategy.

55

56

The Commission has clarified that the 7.5 % cap on annual repayments only applies to theamounts due for borrowing used to finance expenditure, hence excluding the loan
component. This needs to be better reflected in the second subparagraph of Article 3b(2)which currently refers back to the provision indicating the full amount of EUR 750 billion.
Cited in paragraph 14 above.

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In the same vein, recital 13f further explains the rationale for including the elements in the
ORD proposal as follows: "The repayment of funds borrowed (…) should be funded by theUnion budget. The borrowed funds which are granted as loans to Member States should be
repaid by the sums received from beneficiary Member States. The necessary resources need to
be allocated and made available to the Union for it to be able to cover all of its financial
obligations and contingent liabilities resulting from the exceptional and temporary
empowerment to borrow in any given year and under any circumstances in compliance with
Article 310(4) TFEU and Article 323 TFEU."

85.

In the light of the above, it is possible to conclude that the aim of the targeted amendments to
the ORD proposal is to ensure - at any given moment in time - the Union's ability to repay thedebt resulting from the exceptionally high amount of borrowing, including the contingent
liabilities arising from the loan component. In other words, the aim of the provisions
concerning the borrowing and their repayment is linked to the creation in the ORD proposalof the necessary space for repayments, and ultimately to the proper functioning of the own
resources compartment dedicated to this end. The need for strong guarantees to that effect has
been highlighted above as a necessary safeguard to ensure the legal soundness of the proposedconstruction of the NGEU.

86.

It must now be examined whether the content of the provisions dealing with borrowing andtheir future repayment duly translates those aims.

87.

This is the case in respect of the temporary increase of the own resources ceiling as the key
provision to guarantee the capacity of the Union to repay, but also for the essential features
for repayment and borrowing strategy which form an integral part of the increase of theceiling. Those modalities reflect the conditions under which Member States agree to makeavailable the necessary own resources. Provisions governing the extent to which Member
States agree to make funds available for the specific borrowing operations and the conditions
attached thereto, therefore, fall squarely within the scope of Article 311 TFEU as "provisions
relating to the system of own resources of the Union." Those elements are, moreover, directly
linked to the principle of budgetary discipline as enshrined in Article 310(4) TFEU, underwhich "assurance" shall be provided that expenditure can be financed within the limits of theUnion's own resources.

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88.

Whereas the indication of the final use of borrowing (i.e. for the sole purpose of addressing
the consequences of the COVID-19 crisis, Article 3b(1)) and the general prohibition fromissuing borrowing to finance ordinary operational expenditure (Article 3a) are not directly
relevant for the Union's capacity to repay and may appear more expenditure-related, they
contribute to defining the ultimate limits and conditions for making available the financing
and may, therefore, be considered as ancillary to the general set-up, in the meaning of the caselaw referred to in paragraph 75 above that recognises the possibility of including components
which are incidental in nature to those under the "primary" legal basis.

89.

Two provisions of the ORD proposal, however, deserve a closer assessment, namely theempowerment of the Commission to borrow funds on the markets (Article 3b(1)(a)) and the
cash management measures (Article 6(4)).

Inclusion of the empowerment to borrow funds in the ORD proposal
90.

The ORD proposal, in Article 3b(1)(a), empowers the Commission to borrow funds on capital
markets on behalf of the Union.

91.

The inclusion of that provision in the ORD constitutes a departure from previous practiceunder which the provisions empowering the Commission to borrow funds on the markets havebeen inserted in the legal acts based on the policy legal basis, the latter constituting therequired "legally binding Union act providing a legal basis for [the Union's] action" within
the meaning of Article 310(3) TFEU57. This is known as a "basic act" in budget terminology(see Article 2(4)FR).

57

See for instance the various instruments set up over time to assist Member States
experiencing difficulties with the balance of payments. Article 122 TFEU has also alreadybeen used on past occasions to provide various types of assistance to Member States in caseof events leading to severe difficulties as regards their economic situation: this is notably thecase of the EFSM Regulation (referred to in footnote 16 above), based on Article 122(2)),
the Emergency Support Instrument Regulation (Council Regulation (EU) 2016/369 on theprovisions of emergency support within the Union), recently activated for measures linked
to the COVID-19 crisis, based on Article 122(1), and the SURE Instrument (referred to infootnote 19 above), based on Articles 122(1) and (2) TFEU.

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92.

In the present case, it would therefore have been legally feasible and consistent with the FR to
include the empowerment for the Commission to borrow funds on capital markets in the
Recovery Instrument which is based on Article 122 TFEU.

93.

However, practice alone is not enough to found the legality of an act58 and, by implication,cannot be taken as an expression of what is legally required.

94.

It is, therefore, necessary to examine whether the inclusion of the empowerment in the ORD
proposal may be considered as belonging to the "system of own resources of the Union" aslaid down in the third paragraph of Article 311 TFEU or can be inserted as an ancillaryelement thereof.

95.

Recital 13d of the ORD proposal, referred to in paragraph 83 above, justifies the inclusion of
the empowerment for the Commission in the ORD proposal by stating that it is closely related
to the establishment of the new compartment and, ultimately, to the functioning of the systemof own resources. The empowerment is, therefore, conceived as closely linked to thededicated increase of the own resources ceiling and, eventually, to the Union's capacity to
repay its debt. In that respect, it has to be recognised that "borrowing for spending" - due tothe fact that it generates debt which needs to be covered from future own resources - involves
a strong revenue element. It is that circumstance, combined with the substantial amountconcerned and the need to ensure the Union's capacity to repay the debt, which justifies the
dedicated compartment in the ORD proposal, a feature which is not common to any of theexisting borrowing operations.

96.

On the other hand, whereas the dedicated compartment as well as the specific repayment
modalities and the maximum amount are all directly linked to the conditions under which theMember States commit to repay the debt arising from the borrowing, the same cannot be said
as regards the empowerment. The empowerment is rather an element linked to a specificaction and the ensuing expenditure. It could therefore be considered as quite foreign to the"system of own resources" within the meaning of Article 311 TFEU.

58

See judgment of 6 May 2008, European Parliament v Council, C-133/06, EU:C:2008:257,
paragraph 60.

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97.

However, the case law referred to in paragraph 75 above recognises the possibility ofincluding in a legal instrument components which are incidental in nature to the main
component of the instrument and its "primary" legal basis. This pre-supposes that suchcomponents are secondary and indirect in relation to the preponderant one.

98.

In the present case, the empowerment to borrow may legitimately be considered as
constituting an incidental component of the ORD proposal because, without directly forminga part of the system of own resources, such an empowerment is a logical and necessary part ofthe specific, and novel, construction foreseen for the financing of the NGEU59.
It should be clarified that in the proposed architecture, whereas the ORD proposal contains theempowerment for the Commission to borrow on the markets, it is the Recovery Instrument tobe adopted under Article 122 TFEU, which would constitute the legal basis for the Union's
action within the meaning of Article 310(3) TFEU, defining its scope as well as theimplementation period. It would therefore constitute the "basic act" for the implementation of
the expenditure. This would entail some adaptations to the Recovery Instrument proposal
based on Article 122 TFEU to make it consistent with the FR. These adaptations derive fromthe fact that, whilst Article 21(5) FR foresees that a basic act may assign the revenue forwhich it provides to specific items of expenditure (as external revenue), the Recovery
Instrument proposal does not itself provide for the revenue60.

59
60

Such conclusion, which is based on the specificities of the NGEU, cannot be directlytransposed to future "ordinary" borrowing operations.
The Council Legal Service therefore cannot agree with the assessment contained in theCommission Q and A published on its internet site with regard to the legal construction of
the NGEU: "The Own Resources Decision is an act establishing the revenue of the Union,
the own resources. How can it constitute legal basis for expenditure (repayment of theborrowing)? Article 310(3) TFEU provides that the “implementation of expenditure shownin the budget shall require the prior adoption of a legally binding Union act providing alegal basis for its action and for the implementation of the corresponding expenditure inaccordance with the [financial] regulation”. The Own Resources Decision is a “legallybinding Union act” as defined by Article 2(4) of the Financial Regulation. As long as it canvalidly authorise the borrowing and its repayment (see previous question), the necessaryconsequence is that it will constitute a basic act for the expenditure intrinsically linked tothe borrowing, i.e. the instalments of the borrowing. Therefore, this aspect belongs to the‘system of own resources of the Union' [Article 311(3) TFEU]." The document can beaccessed via the following link:
https://ec.europa.eu/commission/presscorner/detail/en/qanda_20_1024.

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LIMITEENGiven the very technical nature of these implications, the Council Legal Service suggests toaddress them during discussions in the relevant preparatory body.
Inclusion of cash management measures in the ORD proposal (Article 6(4))61
99.

Article 6(4) of the ORD proposal comprises measures to ensure the availability of cash tohonour the liabilities of the Union arising from the borrowing in the context of the NGEU.
Whereas such measures are revenue-related and, therefore, belong to the notion of a "systemof own resources", the question is whether such provision may be introduced in the ORD
proposal, or whether it should rather be inserted in the Making Available Regulation, forwhich, however, no amendment proposal has been tabled62.

100. The Making Available Regulation is based on Article 322(2) TFEU which explicitly refers to"measures to be applied, if need be, to meet cash requirements". As Article 6(4) of the ORD
proposal is a measure aimed at meeting cash requirements, there is no doubt as to thepossibility of including such a provision in the Making Available Regulation, as also
illustrated by the reference, in Article 6(4) of the ORD proposal, to the Making Available
Regulation which already contains provisions on cash management measures in its Article 14.

61
62

The content of Article 6(4) and whether it may entail joint and several liabilities is examined
below in part 5.
Cited in paragraph 73 and footnote 49 above. The Commission has tabled a separate
Regulation governing the making available of the proposed new own resources, and a
proposal for the amendment of Regulation (EEC, Euratom) No 1553/89 on the definitive
uniform arrangements for the collection of own resources accruing from value added tax,
which proposals are both based on Article 322(2) TFEU.

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101. However, the question is whether this finding in itself excludes the possibility of including
Article 6(4) in the ORD proposal. The Council Legal Service has already issued an opinion
which explains the specific features of the own resources framework which consist of several
layers, with the Own Resources Decision at the top of the pyramid. The Own Resources
Decision includes the provisions which are considered most essential to the functioning of theown resources framework, and the legislator has a wide margin of discretion as to essential
elements to be included in the Own Resources Decision, provided that this does not lead toemptying the other acts forming part of the own resources framework of their useful effect63.
102. It is therefore open to the legislator to consider that Article 6(4), in the light of the magnitudeof the borrowing and its consequences in terms of repayment, belongs in the ORD proposal
rather than in the Making Available Regulation, as long as consistency is sought with
Article 14 of the Making Available Regulation which already, at least partially, covers thelegal situation purported to be regulated by Article 6(4) of the ORD proposal. Such inclusionin the ORD proposal would also be justified by the direct link to the other elements on
repayment. Finally, both the current ORD and the Commission's 2018 ORD proposal alreadycontain a limited number of provisions on the making available of own resources.
c)Intermediate conclusions

103. In the light of the above, the Council Legal Service is of the view that:

Article 311 TFEU is an appropriate legal basis for the new elements introduced in the
ORD proposal to cater for the repayment of borrowing foreseen under the NGEU;

63

Opinion of the Council Legal Service in doc. 6198/12, paragraph 10: "it will be recalled, on
the other hand, that the legislator has a wide discretionary margin in order to determine
what is an essential element to include in the ORD, and is therefore not bound to follow the
proposed legal architecture in all its particular detail. However, while in theory all
provisions, essential as well as non-essential, could be included in the ORD, account mustalso be taken of the useful effect of the provisions of 311(4) and 322 (2) TFUE, - insofar
those two legal bases indicate an intention of the Contracting Parties, confirmed by Treaty
preparatory works, to have a number of issues decided by the legislator, but with different
procedural requirements than those of the Own Resources decision."

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LIMITEENthe empowerment of the Commission to borrow funds on capital markets may beconsidered ancillary to those other provisions of the ORD proposal;

it is open to the Union legislator to consider that Article 6(4) of the ORD proposal is an
essential element of the system of own resources which should be included in the ORD
proposal rather than in the Making Available Regulation.

5.

Whether, as currently drafted, Article 6(4) of the ORD proposal, which lays down therules applying in the case of a default on a loan or an insufficiency of budget
appropriations, by reference to the Making Available Regulation, could entail joint andseveral liabilities for Member Statesa)Legal framework

104. Under Article 6(4) of the ORD proposal, where authorised appropriations entered in thebudget would not be sufficient for the Union to comply with its obligations resulting from theborrowing referred to in Article 3b, the Member States would be obliged to make theresources necessary for that purpose available to the Commission "in accordance withregulations adopted under Article 322(2) TFEU, as applicable at that time, under the same
conditions as those applying in the event of default on a loan contracted" by the Union.
That wording in Article 6(4) of the ORD proposal must be understood as referring to
Article 14 of the current Making Available Regulation, in particular its paragraphs (3) and (4).

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105. Article 14 of the Making Available Regulation forms a part of Chapter IV "Management of
Cash Resources" and reads as follows:"1. The Commission shall draw on the sums credited to the accounts referred to in Article
9(1) to the extent necessary to cover its cash resource requirements arising out of theimplementation of the budget.
2. If the cash resource requirements are in excess of the assets of the accounts, theCommission may draw in excess of the total of these assets subject to the availability of
appropriations in the budget and within the limit of the own resources entered in the budget.
In this event, it shall inform the Member States in advance of any foreseeable excess
requirements.
3. In the sole case of default under a loan contracted or guaranteed pursuant to regulations
and decisions adopted by the Council, or by the European Parliament and the Council, incircumstances in which the Commission cannot activate other measures provided for by thefinancial arrangements applying to these loans in time to ensure compliance with the Union's
legal obligations to the lenders, paragraphs 2 and 4 may provisionally be applied,irrespective of the conditions in paragraph 2, in order to service the Union's debts.
4. Subject to the second subparagraph, the difference between the overall assets and the cash
resource requirements shall be divided among the Member States, as far as possible, in
proportion to the estimated budget revenue from each of them.
The Commission, when covering its cash resource requirements, shall aim to reduce theimpact of the obligations on Member States to credit amounts of negative interest pursuant to
the third subparagraph of Article 9(1) by drawing with priority on the sums credited to theaccounts concerned."
106. As a result of the reference to Article 14 of the Making Available Regulation, in the event theUnion would not be able honour its obligations vis-à-vis its creditors from the borrowing
referred to in Article 3b of the ORD proposal, the Commission would be able to require each
Member State to make available cash resources that are necessary to cover the requirements
consisting of the need to repay the relevant principal, interest or costs. The needs would be
divided among the Member States - as far as possible - on a pro rata basis. Such cash
measures are provisional only and can never lead to calling cash beyond the ceilings for own
resources.

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b)

Legal analysis

107. In the course of the discussions on the ORD proposal, questions have been raised as towhether, by referring to Article 14 of the Making Available Regulation, Article 6(4) of the
ORD proposal would open the way to a "mutualisation of debt" through the own resources
system, namely whether it would lead to a system of joint and several responsibility ofMember States in relation to debt issued for the purposes of the NGEU, under which each
Member State could be obliged to provide missing cash resources irrespective of the
proportion of its liabilities to the Union as compared to those of the other Member States.
108. It should be emphasised that under the system of own resources of the Union, the financial
liability of each Member State is individual and not joint and several. The system of own
resources is based on the full respect of the budgetary sovereignty of the Member States. Thisis the reason why the Authors of the Treaties have provided that, in accordance with the thirdparagraph of Article 311 TFEU, the Own Resources Decision may only enter into force once
it has been approved by each Member State in accordance with its national constitutional
requirements. While Member States are bound to assume the financial liability they haveaccepted when approving the Own Resources Decision, additional financial obligations going
beyond provisional measures may only be imposed upon them provided that the Own
Resources Decision has first been amended accordingly.
Consequently, the system of own resources of the Union is, as a matter of principle, based on
the system of proportionality in which the contributions of each Member States are
determined pro rata, by a reference to contribution rates which are set out in the Own
Resources Decision itself (in particular the so-called GNI-based contributions) and where theMember States´ contributions are foreseeable and certain and cannot be modified unless the
Own Resources Decision is modified.

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109. Article 14(3) and (4) of the Making Available Regulation thus does not entail a mutualisationof debt but rather establishes a system of provisional compensation among Member States, inwhich each Member State remains ultimately liable to transfer the amounts due by virtue ofthe application of the Own Resources Decision. Article 14(3) and (4) of the Making Available
Regulation lays down a last resort mechanism to be applied in case of default on a loan of theUnion when "the Commission cannot activate other measures provided for by the financial
arrangements applying to these loans in time to ensure compliance with the Union's legal
obligations to the lenders". The emphasis is on the timely payment of the Union's debt, as thebudgeting of additional amounts needed, which at any rate has to be undertaken, may risk
leading to late payment by the Union. The obligation of the Member States to provide,
provisionally, the missing cash resource requirements is based on the system of
proportionality (pro rata).
Although Article 14(3) of the Making Available Regulation would theoretically permit that,
where such proportionate allocation is not possible, the division of the liability among theMember States may exceptionally lead to some Member States providing a higher
contribution than that calculated on a pro rata basis, this cannot be regarded as a joint andseveral assumption of liabilities, as in any event the provision of missing cash resources
would apply on a provisional basis only, as off-budget operations64.
110. However, Article 14(3) and (4) of the Making Available Regulation has been conceived to
repair shortages of cash resources in cases of loans, where i) amounts involved have so far
been much more modest than the borrowing envisaged under the NGEU, and ii) the loans inquestion only give rise to a contingent liability.
By contrast, the NGEU is a very different construction: it entails much larger amounts where
the liability of Member States is bound to arise in relation to a situation of the "borrowing forspending".

64

The cash operations would subsequently have to be regularised in the Union annual budget(typically by means of an amending budget). It is also understood that the Commission will
undertake measures to recover the debt from the defaulting debtor and such recoveredamounts will be budgeted as revenue for the budget.

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111. In the light of comments made during the discussions so far of the ORD proposal, the fact that
the NGEU is such a different construction and the magnitude of the amounts involved could
indicate that the application of Article 14 of the Making Available Regulation to the case athand under the NGEU may be inadequate. This is in particular due to the "borrowing forspending" component, especially as regards the exceptional situations where compensation
under that provision could lead to a provisional redistribution of amounts on a different than
pro rata basis, and which in the NGEU could involve requesting very large sum of missing
cash resources from a limited amount of Member States65.
112. In addition, the general reference from Article 6(4) of the ORD proposal to the provisions on
the management of cash resources under the Making Available Regulation and the dynamic
nature of this reference, i.e. reference to provisions in their version as applicable at therelevant moment and thus subject to any future amendment and legislative evolution66, isdifficult to reconcile with the idea of stability and predictability which underlies theestablishment of a specific compartment in the ORD proposal to respond the issuance of debt
with very long term maturities.
113. In order to take into account the above concerns, it is advised that the ORD proposal itself
contains appropriate wording that is specific to the management of cash resources related to
the NGEU. The ORD proposal could clearly establish the principle of the pro rata division of
missing cash resources as well as the principle that each Member State´s ultimate liability totransfer resources to the Union is in any event limited by the amount that the Member State
has committed to transfer to the Union. The Council Legal Service stands ready to suggest
adequate wording to address these issues.

65

66

At the same time, it should be noted that an insufficiency of resources under the "borrowing
for lending" component is likely to be quite exceptional, as the repayments are fully
foreseeable and programmable due to the fact that the Union takes on a certain (as compared
to only contingent) liability. The Commission has referred to the case of provisional twelfths
which may not ensure the amount of appropriations needed.
It is recalled that the Making Available Regulation can be modified by the Council acting by
qualified majority.

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Intermediate conclusions

114. In the light of the above the following conclusions are made:

the system of own resources of the Union is, as a matter of principle, based on a systemof proportionality in which the contributions of each Member States are determined pro
rata, by a reference to contribution rates which are set out in the Own Resources
Decision itself (in particular the so-called GNI-based contributions) and where theMember States´ contributions are foreseeable and certain and cannot be modified unless
the Own Resources Decision is modified.

although Article 14(3) and (4) of the Making Available Regulation, to which application
Article 6(4) of the ORD proposal makes a reference, does not entail a mutualisation ofdebt but constitutes a system of provisional compensation among Member States in caseof a default under a loan contracted by the Union, those provisions are conceived forsituations different from the envisaged "borrowing for spending" under the NGEU andthe particular magnitude and specific nature of the latter's operations. In order to addressthese specificities and the concerns expressed by delegations, it is advised that the textof the ORD proposal be modified to insert wording that is specific to the managementof cash resources related to the NGEU.

B.

WHETHER THE LEGAL BASIS CHOSEN FOR THE RECOVERY INSTRUMENT(ARTICLE 122 TFEU) IS APPROPRIATE

1.

Preliminary remarks

115. The Recovery Instrument67 allocates the proceeds raised through the borrowing on themarkets under the new Commission´s empowerment set out in the ORD proposal to a numberof recovery measures for which it defines the scope (Articles 2 and 3 of the Recovery
Instrument).

67

Commission proposal for a Council Regulation establishing a European Union Recovery
Instrument to support the recovery in the aftermath of the COVID-19 pandemic(COM (2020) 441 final), document ST 8141/20 INIT.

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116. The Recovery Instrument also provides for the forms that the support shall take (nonrepayable support, loans and provisioning for guarantees, Article 3(2)) and sets out specificrules for the budgetary implementation of the Instrument, including the designation of theproceeds of borrowing as external assigned revenue (Article 4(1)).
However, the Recovery Instrument does not lay down the recovery measures as such but
rather provides that they shall be carried out under specific programmes which the Recovery
Instrument finances (Article 2(2)). Thus the final objectives of the Recovery Instrument are
pursued via the implementation of autonomous spending programmes and according to their
specific features and rules, as established in the relevant Union acts.

2.

Legal framework

117. Article 122 TFEU reads as follows,"1. Without prejudice to any other procedures provided for in the Treaties, the Council, on a
proposal from the Commission, may decide, in a spirit of solidarity between Member States,
upon the measures appropriate to the economic situation, in particular if severe difficulties
arise in the supply of certain products, notably in the area of energy.
2. Where a Member State is in difficulties or is seriously threatened with severe difficulties
caused by natural disasters or exceptional occurrences beyond its control, the Council, on a
proposal from the Commission, may grant, under certain conditions, Union financial
assistance to the Member State concerned. The President of the Council shall inform theEuropean Parliament of the decision taken."

3.

Legal analysis

118. According to the well-established case law of the Court referred to in paragraph 74 above, thechoice of the legal basis for a Union act must rest on objective factors which are amenable tojudicial review, in particular the aim and content of that act.

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119. The Recovery Instrument does not specify whether its legal basis is paragraph 1 or 2 ofArticle 122 TFEU, or whether the two paragraphs constitute the legal basis of the proposal at
the same time.
It is noted that Article 122(2) TFEU provides that the Council may grant under certain
conditions Union financial assistance to Member States. However, the Recovery Instrument
does not grant financial assistance to Member States. It lays down general arrangements forthe use of the proceeds of the Union´s borrowing in a number of Union programmes.
The Council Legal Service is therefore of the view that the Recovery Instrument is based onparagraph 1 of Article 122 TFEU and not on paragraph 2. The wording used in paragraph 2,
where it refers to the difficulties or the exceptional occurrences which may justify its use,
helps however giving an indication on the sorts of exceptional circumstances that Article 122
as a whole is designed to address.
120. Article 122(1) TFEU empowers the Council to adopt the "measures appropriate to theeconomic situation" in a "spirit of solidarity", without specifying which are the situations
which qualify for recourse to that provision or the particular form, nature and content of themeasures that may be adopted on its basis. Article 122(1) TFEU simply refers "in particular"
to severe difficulties in the supply of certain products, notably in the area of energy, but does
not specify exhaustively either the kind of situations which may give rise to that provision or
to the specific measures that the Council is empowered to adopt.

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121. Having regard to its wide wording, the Council has a wide margin of discretion when acting
on the basis of Article 122(1) TFEU. That degree of discretion must, however, be exercisedbearing in mind the following parameters:–

First, recourse to Article 122(1) TFEU presupposes the existence of a situation ofurgency or of exceptionality68 leading to severe difficulties69 in the economic situationof the Member States which cannot be addressed by means of the ordinary Union
measures. The "appropriate" measures to which Article 122(1) TFEU refers must becommensurate to the gravity of the situation. Moreover, as confirmed by the case law,measures adopted under Article 122(1) TFEU must be temporary70. It cannot be used
for the purpose of regulating a matter on a permanent basis or to replace the ordinary
financing of EU policies, since this would encroach on the relevant substantive legal
bases provided for in the Treaties. The introductory words "without prejudice to any
other procedures provided for in the Treaties" underscore the exceptional andtemporary nature of measures under Article 122(1) TFEU, as recourse to that provision
may not undermine or circumvent the use of other legal basis laid down in the Treaties
for use in "normal times".

–

Second, Article 122(1) TFEU belongs to Chapter 1 of Title VIII TFEU, which deals
with economic policy. Measures under Article 122(1) TFEU must therefore be
economic in nature.

68

69

70

The wording of Article 122(1) does not mention expressly the condition of urgency as is thecase for Article 122(2). However, the two paragraphs need to be read jointly and on thebasis of the specific purpose of Article 122 in the system of the Treaties: both contextual andsystemic methods of interpretation point therefore at an "emergency rationale" that applies
to the whole Article.
Art. 122(1) TFEU refers to "severe difficulties in the supply of certain products". While thereference is merely illustrative and not meant to limit the types of difficulties that can beaddressed by the Article, the provision does set a threshold of relevance ("severe
difficulties") that needs to be reached to justify the adoption of measures under this legal
basis and leaves thus a margin of discretion to the Council when adopting the measures. It isnoted that the notion of "severe difficulties" is also used to define the condition for therecourse to financial assistance under paragraph 2 of Article 122.
These conditions have been identified by the Court for the use of Article 103 of the EEC
Treaty which is the predecessor of Article 122 TFEU. See judgment in Balkan Import, cited
above, paragraphs 13 to 17.

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122. It has to be examined now whether, in view of the above criteria, the aim and content of the
Recovery Instrument fit within Article 122(1) TFEU. This examination must becomplemented by a subsequent one: since the objectives of the Recovery Instrument are
pursued via the implementation of autonomous spending programmes, it has also to beassessed whether the essential characteristics of those programmes duly translate therequirements that the measures adopted under Article 122 TFEU should respect.
a)

Examination of the Recovery Instrumenti)

The aims of the Recovery Instrument

123. Article 1 of the Recovery Instrument lays down that the objective of the instrument is "tosupport the recovery in the aftermath of the COVID-19 pandemic". Recitals 1 and 2 of thepreamble to the Recovery Instrument identify the COVID-19 pandemic as the source of an
exceptional economic situation. In order to face this exceptional situation, recital 4 sets out
the objectives of the Recovery Instrument, i.e. to put in place an exceptional programme of
economic and social support, in a spirit of solidarity between Member States, and in particular
for those who have been particularly hard hit, as well as to boost an exceptional andcoordinated programme of economic and social support. Recital 6 further underscores that
support under the Recovery Instrument should only be made available in order to address theconsequences of the COVID-19 pandemic or the immediate funding needs to avoid a reemergence of the pandemic.
124. The objectives of the proposal, as described above, duly correspond to those of Article 122(1)
TFEU, namely to address in a spirit of solidarity exceptional situations, in particular if severe
difficulties arise.
ii)

The content of the Recovery Instrument

125. The next question to address is whether the declared aims of the Recovery Instrument areproperly translated in its content. As clarified above, such a content must consist of measures
which are exceptional, temporary and economic in nature.

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LIMITEENThe exceptional character of the measures126. The exceptionality of the measures entails first an examination of whether they are linked tothe situation caused by the COVID-19 pandemic. In other words, the requirement of
exceptionality involves that the scope of the Recovery Instrument must be limited to measuresdesigned to address the consequences of the COVID-19 pandemic.
127. Article 2 of the proposal, on the scope of the Recovery Instrument, provides that it shallsupport the recovery within the Union in the aftermath of the COVID-19 pandemic, for which
it provides "in particular" a number of measures to tackle its adverse consequences(Article 2(1), points (a) to (i), as well as the second subparagraph of Article 2(1) of the
proposal):a) measures aiming at reacting to the immediate impact of the crisis on employment, healthsectors, economic operators (measures under points (a), (c), (d) and (i))71;b) measures supporting the relaunch of Member States´ economies, notably by supporting
reforms and investments and the objective of just transition to climate-neutral economy(measures under point (b) and (h))72;c) measures which reinforce the preparedness of the Union to face future health crises(points (e), (f) and (g))73;d) measures providing support to third countries affected by the COVID-19 crisis (second
subparagraph of Article 2(1))74.
128. The Council Legal Service considers that, the first category of measures referred to in point a)above is clearly connected to the COVID-19 pandemic.

71
72
73
74

To be implemented via REACT EU, the Solvency Support Instrument and the Strategic
Investment Facility.
To be implemented via Recovery and Resilience Facility and additional resources for the
Just Transition Fund.
To be implemented via EU4Health and additional resources for Horizon 2020 and RescEU.
To be implemented via additional resources for Humanitarian Aid and NDICI.

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129. The second category of measures (point b) is justified in the proposal by the fact that the
COVID-19 crisis is having a different impact on the national economies and is amplifying
pre-existing differences in the fiscal capacity of the Member States to support their recovery:
without a unified approach to the recovery, this would set national economies on a divergence
path that would ultimately endanger the single market as well as social an territorial cohesionof the Union (recitals 3 and 4).
Although it is not for the Council Legal Service to assess the merits of the economic
reasoning underlying the second category of measures, it is reasonable to conclude, bearing in
mind the wide margin of discretion the Council enjoys under Article 122 TFEU, that support
aimed at kick-starting the economies of Member States which have been severely affected by
the lock-down to slow the circulation of the virus through helping structural reforms andinvestments that aim at restoring the economic soundness of Member States especiallyaffected by the COVID-19 crisis, does belong to the overall rationale of exceptionality of
Article 122 TFEU.
130. Two kinds of measures - those related to preparedness to future crisis (point c ofparagraph 128) as well as those providing support to third countries (point d) - also deserve
special consideration.
131. Concerning the inclusion in the scope of the Recovery Instrument of measures aimed atstrengthening the preparedness to future crises (points (e) to (g) of Article 2(1)) it must be
clarified that, in principle, Article 122(1) TFEU provides for "reactive" actions in the sensethat it allows to respond to existing difficulties but does not support preventive action to avoid
future hypothetical crisis, for which other legal bases (and ordinary form of financing) areavailable.

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132. At the same time, however, the COVID-19 pandemic is still in progress and it is not possible
to predict at this moment its future evolution (e.g. possible other waves). If not addressed, thedifficulties experienced at the beginning of the crisis in certain areas (e.g. insufficientautonomy of the Union supply chains; insufficient preparedness of health sector in dealing
with infectious diseases; lack of medical supplies, medicaments, research, etc.) could further
undermine the economic situation in case of resurgence of the pandemic. Therefore, it ispossible to consider that measures for preparedness are appropriate to tackle situation
resulting from the COVID-19 crisis, provided, however, that the preparedness measures areclearly related to the difficulties faced during the crisis.
133. The inclusion among the measures supported by the Recovery Instrument of forms of support
to third countries raises also concerns (second subparagraph of Article 2(1)). According to the
proposal, this direct support would be justified in the light of the importance of economic
relations with third countries and of the benefits that the support would bring to the Union bystrengthening trade and economic relations which have suffered from the crisis (recital 7).
This objective is reflected in the content of Article 2(1), second subparagraph of the proposal,
according to which "the Instrument shall also provide crisis support to partner countries inorder to restore and enhance their trade an economic relations with the Union and strengthen
their resilience".
134. In that regard it shall be stressed that the competence set out in Article 122(1) TFEU is basedon the particular spirit of solidarity which exists between Member States75 and which justifies
taking exceptional action when Member States experience situations of severe economic
difficulties. The position of third countries in that regard is fundamentally different.

75

The General Court has clarified that "the spirit of solidarity between Member States thatmust inform the adoption by the Council of measures appropriate to the economic situation,
within the meaning of Article 122(1) TFEU, indicates that such measures must be foundedon assistance between the Member States", judgment of 30 September 2015, Anagnostakis v
Commission,T-450/12, EU:T:2015:739, paragraph 42. This finding has been confirmed by
the Court of Justice in appeal, judgment of 12 September 2017, C-589/15 P,
EU:C:2017:663, paragraph 71.

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Thus, while the difficulties that a Member State experiences due to the interdependence it
might have with the economies of third countries are relevant for triggering Article 122
TFEU76, they cannot justify the provision of direct assistance to third countries for measures
aimed at supporting their resilience to the extent that those measures have no directconsequences on Member States economies. This qualification should be reflected in theprovision and the justification should be further elaborated or the scope should be reduced tothose third countries of particular relevance.
135. The exceptionality of the measures requires also an assessment of their appropriateness for the
economic situation they intend to address. In this sense, Article 3 of the proposal lays down
the overall financing of the Recovery Instrument (EUR 750 billion) as well as theapportionment of that amount into non-repayable support, loans and guarantees, including theallocation to individual programmes. During the discussions in Coreper and relevant
preparatory bodies, various delegations have raised the issue of the necessity and the
proportionality of the overall volume and specific allocations of resources.
136. As clarified earlier, the Council enjoys a wide margin of discretion when deciding about thecontent of the measures under Article 122(1) TFEU. In this particular case, that margin of
discretion may be exercised in the light of the detailed assessment of the recovery needs
resulting from the COVID-19 crisis which the Commission has presented in support of theNGEU77. On this basis, the figures proposed by the Commission do not appear
disproportionate in relation to the unprecedented character of the crisis and to theextraordinary size of its consequences as laid down in the referred Commission assessment. It
is also recalled that the figures proposed correspond to maximum possible amounts and thatthe actual spending will depend on the submission of successful applications for support
under the specific EU programmes, which guarantee that resources will be used only if therelevant eligibility criteria are met.

76

77

The first applications of Article 122 TFEU in fact concerned situations of difficulties that
Member States were experiencing in their balance of payments due to the exposure ofinternational trade or external shocks in the supply of products, notably oil.
See Commission Staff Working Document: "Identifying Europe´s recovery needs",
document ST 8136/20 ADD 1 REV1.

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LIMITEENThe temporary character of the measures137. As clarified previously in this opinion, measures adopted under Article 122(1) TFEU must be
temporary. They cannot become a permanent action of the EU.
138. While not subject to an explicit sunset clause78, a number of features of the Recovery
Instrument allow to conclude that it has a temporary character, in particular:–

the one-off nature of the budgetary construction resulting from the designation of theresources mobilized in the form of non-repayable support as external assigned revenues(Article 4(1) of the Recovery Instrument);–

the rules on budgetary implementation of the Recovery Instrument set out a system ofdeadlines for concluding legal commitments related to the resources mobilized under
the Recovery Instrument. These deadlines circumscribe in time the availability of the
support and the eligibility of the measures;

78

Sunset clauses limiting the effects of the measures in time can be found in other instruments
adopted on the basis of Article 122 (most recently, for instance, in the SURE Instrument
referred above in footnote 18). The inclusion of such a clause is, however, not necessary toqualify the temporary character of the instrument, provided that its limited duration clearly
results from its overall design.

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the deadlines extend over a period of 4 years, with a significant part of the resources 60% of the amounts available in form of non-repayable support - to be subject to a legal
commitment already within 2 years (Article 4(4) to (7)). Such a timeline does notappear unreasonable in light of the magnitude of the volumes of resources at stakes, thelevel of ambition of the objectives of the Recovery Instrument and the fact that the
COVID-19 pandemic is still ongoing. Moreover, such timeline is comparable to thetimeline of other instruments already adopted on the basis of Article 122 TFEU which
are of a far lesser magnitude and ambition79.

The economic character of the measures139. Finally, measures adopted under Article 122(1) TFEU must be of economic nature, which
may include setting up spending programmes (as in the case of ESI), a back-to-back lending
facility based on a guarantee scheme (SURE) or even a mere regulatory frameworkaddressing an economic situation. The Recovery Instrument takes a form which is different,
since it mobilizes resources collected on the basis of the Commission´s empowerment toborrow on the markets and allocates the borrowed funds to a number of measures which are to
be implemented on the basis of Union´s programmes. The Instrument is clearly economic innature since it finances a comprehensive set of measures for economic recovery (recital 4)
which are addressed to tackle the economic consequences of the pandemic through measures
which are related with the economic dimension of the crisis (Article 2(1)).

79

For example, the economic adjustment programme for Portugal adopted on the basis of the
EFSM Regulation, referred above in footnote 15, had a timeline of 3 years for a overall
financial assistance of 26 billions. The conclusion about the temporary nature of themeasures under the Recovery Instrument proposal is not put in question by the fact that thepayments of the committed amounts and the implementation of the financed activities (aswell the reimbursement of maturities under the ORD proposal) extend over a much longer
period, since this different timing follow the different logic of the implementation of themeasures.

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Examination of the sectorial acts receiving the fundsi)Preliminary remarks

140. To the extent that the measures identified in the Recovery Instrument will be implemented via
specific Union´s programmes, it is necessary to ensure that under the rules of suchprogrammes the resources provided via the Recovery Instrument are used in conformity withthe extraordinary and temporary character of the support under Article 122 TFEU, as
described above80. This, in particular, entails to verify whether the support is aimed ataddressing the needs resulting from the COVID-19 crisis as reflected in the rules of therelevant programme regarding allocation of funds, eligibility of operations, assessment
criteria and temporal limitation of the support. A positive reply is necessary to guarantee thelegality of the spending of the resources mobilised by the Recovery Instrument.
141. The Council Legal Service is of the view that, overall, the sectorial programmes, as laid downin the different proposals, properly translate the requirements stemming from Article 122(1)
TFEU. For the sake of brevity, the examination below will only focus on those instrumentsthat deserve special attention or in relation to which questions have been raised bydelegations. The Council Legal Service may later on examine specific aspects of each
proposal when specifically discussed in the relevant preparatory bodies.

80

In the framework of the Article 122 Instrument, the Council cannot determine the rules forthe separate spending programmes which are adopted under the relevant substantial legal
basis in the Treaty, generally requiring the ordinary legislative procedure. However,respecting the conditions set out for using Article 122 TFEU are a condition for the legalityof the spending.

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ii)

Proposal establishing the Recovery and Resilience Facility

142. The Recovery and Resilience Facility (the "RRF"81) aims at supporting reforms andinvestments to address structural weaknesses of the economies of the Member States andstrengthen their resilience, in a context where the COVID-19 crisis seriously affects theircapacity to invest and risks putting them on a path of economic divergence (recitals 4 to 6 of
the RRF proposal). This aim is then translated in the general and specific objectives of the
programme (Article 4), in the eligibility criteria for the support to be provided to Member
States on the basis of a recovery and resilience plan (Article 14) and in the criteria forassessing those plans (Article 16). These provisions give a particular prominence to theachievement of the national reform priorities challenges identified in the framework of theEuropean Semester and to support the green and digital transitions.
143. The aim and content of the RRF fall therefore within the scope of the Recovery Instrument as
described above, and in particular in the category of measures identified under point (b) of
Article 2(1) of the Recovery Instrument. In particular, the focus of the RRF on structuralreforms and long term objectives like the green and digital transitions responds to the logic
identified in paragraph 129 above and offers a plausible link between the economic situation
created by the crisis and its effect on the capacity of recovery of the Member States and hence
the justification of support. A different issue is whether the criteria proposed to allocate themaximum financial contributions to Member States also corresponds to the rationale of
Article 122 TFEU. The methodology of allocation proposed by Commission in Annex I of the
RRF proposal is based on the following:–

the population of the beneficiary Member State as a share of the total EU population in
2019;

–

the inverse of the ratio of the per capita Gross Domestic Product (GDP) of thebeneficiary Member State over the average GDP per capita of the EU in 2019;81

Commission proposal for a Regulation of the European Parliament and of the Council
establishing a Recovery and Resilience Facility (COM(2020) 408 final), document ST
8403/20 INIT.

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the average unemployment rate in years 2015 to 2019 in the beneficiary Member State
over the average unemployment rate for the whole EU in the same period;–

caps for the second and third criterion so to avoid excessive concentration of resources.

144. The criteria proposed by the Commission are indicators of the difference in prosperity among
the Member States and of their underpinning economic weaknesses. By allocating greater
resources to Member States which are less prosperous and which have to tackle higher
structural unemployment, the methodology targets resources to the Member States which are
more in need of investment and economic reforms.
145. Various delegations have raised issues as to the relevance of the reference period for the
calculation of the maximum financial contributions. In particular, the question has been asked
whether data referred to 2019 - that is prior the COVID-19 outbreak - are relevant in light of
the aim of the programme, which is to support the post-crisis recovery.
146. In that regard, the Commission has stressed that the Member States with proven pre-existing
economic weaknesses are those most exposed to the crisis and to the risk of divergence. They
are the ones whose capacity of recovery was already reduced and are now presumed to be
most affected. Moreover, the pandemic being recent and still ongoing, economic data relating
to its impact is partial and does not necessarily reflect the final overall impact in terms ofrecovery needs.
147. It is not for the Council Legal Service to enter into the merits of the economic reasoning that
underlies the methodology for allocation. Suffices it to say that such a presumption does notappear manifestly unreasonable and, therefore, does not undermine the rationale for support
under the Recovery Instrument, even if it only provides an indirect assessment of the impactof the crisis.

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LIMITEENIn order to strengthen the emergency rationale of the spending, the Council could consider
complementing the envisaged methodology - which refers to parameters previous to thepandemic - with other parameters or criteria linked to the actual or estimated impact of thecrisis on the prosperity of the Member States or with a mechanism of modulation of theallocation taking into account the evolution over time of the pandemic and its economic
impact.
iii)

Proposal for a Just Transition Fund148. The Just Transition Fund (the "JTF"82) is a cohesion instrument proposed by the Commission
before the COVID-19 crisis and aimed at addressing the socio-economic challenges of thetransition towards a climate neutral economy. The Commission is now proposing tosignificantly increase the JTF with additional resources mobilised by the Recovery Instrument
via an amended JTF proposal.
149. Having regard to its aim and scope, the JTF falls under the general concept of theCommission's communication83 and makes the two respective concepts of transition andrecovery coexist in one legal instrument. In particular, the JTF is covered by the scope of
Article 2(1)(h) of the Recovery Instrument whereby the support under the Recovery
Instrument is meant to warrant that a just transition to a climate-neutral economy will not be
undermined by the COVID-19 crisis. Likewise, the social dimension of the JTF may beconsidered as corresponding to the scope of the Recovery Instrument insofar as the latter ismeant to restore employment and create jobs.

82

83

Commission amended proposal for a Regulation of the European Parliament and of theCouncil establishing the Just Transition Fund (COM(2020) 460 final, document ST 8386/20
INIT.
According to the Commission´s communication "solidarity, cohesion and convergence must
drive Europe's recovery" (COM 2020 456; p.1), document ST 8136/20 INIT.

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150. Yet, the additional resources are allocated to Member States in accordance with themethodology set out in the original JTF proposal. This methodology aims at allocating
resources in light of the Member States´ relative capacity to make investments to cope withthe transition towards climate neutrality on the basis of a number of criteria. However, thesecriteria refer to the situation before the pandemics84, whose relevance to assess the impact of
the COVID-19 pandemics on the referred capacity of Member States is not clear.
151. It follows, that even though the mobilisation of additional resources is based on theassumption that the COVID-19 crisis has adversely affected the capacity to tackle thetransition challenge, this assumption is not translated in relevant parameters able to capture
the additional needs resulting from the crisis for regions, economic sectors and Member States
so as to enable a targeted and efficient financing of the transition, in particular, in the first
period following the COVID-19 pandemic. These parameters should be adapted so that theallocation of funds is sufficiently linked to the needs stemming from the COVID-19 crisis.
iv)

EU4Health, Horizon 2020 and RescEU proposals

152. In the Commission proposal, the Recovery Instrument will provide additional support forvarious programmes which have a permanent character and broader objectives than handlingthe consequences of the pandemic. This is the case of EU4Health85, Horizon 202086,
RescEU87, which support a number of actions in the area of health cooperation, research andinnovation and civil protection.

84

85

86

87

These criteria include parameters on the scale of the transition challenge at regional level(through the corresponding industrial CO2 emissions), on the scale of social challenges in
the light of potential job losses in industry, coal and lignite mining and the production ofpeat and oil shale. The method also takes into account Member States' level of economic
development and related investment capacity as detected by economic indicators relating to
the period 2015-2017. See Annex I to the JTF proposal.
Commission Proposal for a Regulation of the European Parliament and of the Council on theestablishment of a Programme for the Union's action in the field of health - for the period2021-2027 and repealing Regulation (EU) No 282/2014 (COM (2020) 405 final), document
ST 8595/20 INIT.
Commission Proposal for a Omnibus Regulation amending sectoral regulations of Horizon
Europe, NDICI, CAP, EAGF and EAFRD (COM (2020) 459 final), document
ST 8555/20 INIT.
Commission Proposal for a Decision amending Decision 1313/2013/EU on a Union Civil
Protection Mechanism (COM (2020) 220 final), document ST 8330/20 INIT.

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153. As clarified above, such a form of support to preparedness measures is compatible with the
Article 122(1) TFEU rationale only to the extent that a sufficient link can be establishedbetween the measures that are financed and the current pandemic. In order to guarantee theregularity of the spending, this link needs to be translated in appropriate provisions so as to
avoid that the additional resources are directed at measures unrelated to the current ongoingcrisis, as it would be the case of civil protection measures concerning disasters of a different
nature than a pandemic, or research programmes and health measures unrelated with the
pandemics or its effects.

4.

Intermediate conclusions

154. In the light of the above, the following conclusions can be made:

bearing in mind the exceptional and temporary character of the measures that it provides
for, Article 122 TFEU is the correct legal basis for the proposed Recovery Instrument;

Article 122 TFEU does not allow for the provision of direct assistance to third
countries, in respect of measures aimed at supporting their resilience, to the extent thatthose measures have no direct consequences on Member States economies. The relevant
proposals should be adapted in this regard;the sectorial programmes recipient of borrowed funds under the NGEU properlytranslate, in general, the requirements stemming from Article 122 TFEU of being
exceptional and temporary in nature. However, the criteria under the JTF for allocationof the NGEU funds, as well as the scope of the EU4Health, Horizon 2020 and RescEU
proposals are defined in a too broad manner; they should be further defined so as to be
sufficiently linked to the economic impact of the COVID-19 pandemic.

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C.

WHETHER THE NGEU IS COMPATIBLE WITH ARTICLE 125(1) TFEU (NOBAIL-OUT CLAUSE)

1.

Legal framework155. Article 125(1) TFEU reads as follows:"The Union shall not be liable for or assume the commitments of central governments,
regional, local or other public authorities, other bodies governed by public law, or public
undertakings of any Member State, without prejudice to mutual financial guarantees for thejoint execution of a specific project. A Member State shall not be liable for or assume thecommitments of central governments, regional, local or other public authorities, other bodies
governed by public law, or public undertakings of another Member State, without prejudice tomutual financial guarantees for the joint execution of a specific project." (emphasis added)2.

Legal analysis

156. The question has been raised whether the legal construction under the NGEU is compatible
with Article 125(1) TFEU, the so-called "no bail-out" clause.
157. This question can be examined from two different angles. The first one relates to whether
Member States' contributions owed through the system of own resources in order to reimburse
the Union´s debt to the markets entail those Member States assuming in a joint and several
manner the commitments from the other Member States to the Union´s own resources. The
second one relates to whether funding through the NGEU would amount to the Union being
liable for the commitments of Member States.

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158. First, as clarified above (paragraphs 108 and 109), the ORD proposal is based on a system of
pro rata liabilities, i.e. on the principle that each Member State remains solely responsible forits share of the commitments that it has assumed to the Union for the future repayment of debt
issued under the NGEU. This is in line with the system of own resources of the Union underwhich the financial liability of each Member States is pro rata, individual, and not joint andseveral. Therefore, Member States' liabilities under the ORD proposal do not entail assuming
the commitments of other Member States in the meaning of Article 125(1) TFEU.
159. Second, in relation to the compatibility of funding through the NGEU with the "no bail-out"clause, it is observed that in the Pringle case88, which dealt with the compatibility of the ESM
Treaty with Article 125(1) TFEU, the Court concluded that the aim of that provision is toensure that the Member States follow a sound budgetary policy, more specifically, that theyremain subject to the logic of the markets when they enter into debt, since that ought toprompt them to maintain budgetary discipline89. It is recalled that the financial assistancegranted to the Member States under the ESM Treaty was aimed at replacing the markets towhich the Member State concerned was unable to accede due to its financial and budgetarysituation. Therefore, the need not to diminish the Member States´ incentive to conduct asound budgetary policy was the raison d´être for the strict conditionality that was attached tothe stability support provided by the ESM to the Member States90. It is that conditionality that
permitted the ESM assistance to be considered as compatible with Article 125(1) TFEU.
160. Accordingly, the scope of application of Article 125(1) TFEU does not cover forms offinancing which, differently from the assistance under the ESM Treaty, are not intended toassume the liability of Member States before or in lieu of the markets.

88

See judgment of 27 November 2012, Pringle, C-370/12, EU:C:2012:756.

89

See judgment Pringle, cited above, paragraph 135. See, for further reference, Council Legal
Service opinion in doc. 7197/20.
See judgment Pringle, cited above, paragraph 143.

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161. From that point of view, the NGEU would be fundamentally different from the assistanceunder the ESM Treaty. The NGEU would involve a large spending programme intended to
kick-start the economy as a reaction to the severe economic shock induced by the COVID-19
pandemic. As opposed to the legal and factual situation analysed in the Pringle case, theNGEU, and the Union programmes through which the borrowed funds are to be channelled,
do not consist in providing financial assistance to the Member States that would be replacing
the markets. The NGEU is not a mechanism for assuming the liability of Member States
before or in lieu of the markets, in the meaning of Article 125(1) TFEU as interpreted by the
Court in the Pringle case.
162. The NGEU would consist in a number of instruments of Union expenditure throughprogrammes, both existing and new, aiming at achieving the objectives of different Union
policies (most notably those of cohesion). In view of its construction, the NGEU thus neither
results in the Union assuming commitments of Member States as means of treasury financing,nor aims at replacing or supplementing Member States´ financing on the markets by Union
financing.
163. Moreover, it is recalled that all legal bases that are included in the Treaties are by naturecompatible with each other. There is no hierarchy between them. All of them must be applied
harmoniously in accordance with the methods of interpretation followed by the Court ofJustice. The objectives pursued by the different policies of the Union on the basis of primary
law are therefore presumed compatible with Article 125(1) TFEU. In particular, funding inpursuance of EU policies, most notably cohesion, are by essence compatible with Article
125(1) TFEU.
164. The NGEU, therefore, falls outside the scope of application of Article 125(1) TFEU.

3.

Intermediate conclusions

165. In the light of the above, the following conclusion can be made:

The general construction of the NGEU, and more specifically the ORD proposal as wellas its funding structure, is compatible with Article 125(1) TFEU.

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III. GENERAL CONCLUSIONS
166. In the light of the above, the Council Legal Service concludes as follows:
Whether the NGEU is compatible with the Union's principles of budgetary balance anddiscipline, (Article 310 TFEU), and with the integrity of the own resources system (Article 311
TFEU)
167. The Treaties allow the Union legislator to establish a mechanism such as the one proposed in
the NGEU, provided that it incorporates a number of safeguards aimed at preserving its
budget neutrality and, ultimately, at respecting the principle of budgetary balance:–

borrowed amounts are channelled to spending programmes by means of external
assigned revenue which by its nature is additional and does not affect the revenue andexpenditure shown in the annual budget and, therefore, from a budgetary techniquepoint of view, does not generate an imbalance in the annual budget;–the repayment of the Union's debt is guaranteed within the ceilings of own resources, bya dedicated compartment which may only serve that purpose and by additional
provisions under which the Member States commit to make available resources up to
the maximum amount of borrowing stipulated in the ORD proposal, the combined effectof which will constitute an irrevocable, definitive and enforceable guarantee of
payment.

168. It is for the Union legislator to determine which financial means are necessary to adequately
attain the objective pursued by the NGEU for which determination it holds a margin of
discretion which includes the possibility to have recourse to borrowing, the proceeds of whichconstitute external assigned revenue. That margin of discretion is however limited by the needto respect the integrity of the system of own resources of the Union;

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169. In view of the substantial amount that the external assigned revenue envisaged under the
NGEU would represent, adequate safeguards should be provided with a view to protecting the
integrity of the own resources system of the Union and of the budgetary system. The
exceptional character of the situation the NGEU intends to address and its one-off nature andlimited duration, as duly reflected in the relevant proposals, do constitute such adequate
safeguards.
170. With a view to reinforcing the consistency of the external assigned revenue with the system ofown resources and the budgetary mechanisms, the introduction of additional and specificarrangements aimed at ensuring an appropriate involvement of the European Parliament andthe Council in the annual process is advised.
171. Article 311 TFEU is an appropriate legal basis for the new elements introduced in the ORD
proposal to cater for the repayment of borrowing foreseen under the NGEU. The
empowerment of the Commission to borrow funds on capital markets may be consideredancillary to those other provisions of the ORD proposal. It is open to the Union legislator toconsider that Article 6(4) of the ORD proposal is an essential element of the system of own
resources which should be inserted in the ORD proposal rather than in the Making Available
Regulation.
172. The system of own resources of the Union is, as a matter of principle, based on a system of
proportionality in which the contributions of each Member States are determined pro rata, by
a reference to contribution rates which are set out in the Own Resources Decision itself (inparticular the so-called GNI-based contributions) and in which the Member States'
contributions are foreseeable and certain and cannot be modified unless the Own Resources
Decision is modified.
Given the particular magnitude and specific nature of the envisaged "borrowing for spending"as well as the concerns expressed by delegations, it is advised that the text of Article 6(4) of
the ORD proposal be modified to insert wording that is specific to the management of cash
resources related to the NGEU.

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Whether the legal basis chosen for the Recovery Instrument (Article 122 TFEU) is appropriate
173. Bearing in mind the exceptional and temporary character of the measures that it provides for,
Article 122 TFEU is the correct legal basis for the proposed Recovery Instrument.
174. Article 122 TFEU does not allow for the provision of direct assistance to third countries, inrespect of measures aimed at supporting their resilience, to the extent that those measures
have no direct consequences on Member States economies. The relevant proposals should be
adapted in this regard;
175. The sectorial programmes recipient of borrowed funds under the NGEU properly translate, in
general, the requirements stemming from Article 122 TFEU of being exceptional andtemporary in nature. However, the criteria under the JTF for allocation of the NGEU funds, aswell as the scope of the EU4Health, Horizon 2020 and RescEU proposals are defined in a too
broad manner; they should be further defined so as to be sufficiently linked to the economic
impact of the COVID-19 pandemic.
Whether the NGEU is compatible with Article 125(1) TFEU (no bail-out clause)
176. The general construction of the NGEU, and more specifically the ORD proposal as well as its
funding structure, is compatible with Article 125(1) TFEU.

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