How Cohesion Became the EU’s Vehicle for Economic Policy

Three decades ago, the European Union (EU) made a fundamental choice to build an Economic and Monetary Union (EMU). But, as the Treaties made quite clear, its structure would be ‘asymmetric’. Monetary policy would be supranationalized but economic policy would remain national. And for good reason—only the Member States possessed the necessary democratic and constitutional legitimacy to make economic and related fiscal policies. As the CJEU recognized in Pringle (para 64), ‘Articles 2(3) and 5(1) TFEU restrict the role of the Union in the area of economic policy to the adoption of coordinating measures’.

Much of the legal bickering in the EU of the last fifteen years, and indeed longer, has revolved around the constraints that this Treaty-based asymmetric structure imposes. There was, in particular, growing frustration about the weak implementation of the country-specific recommendations under the SGP and the European Semester, the Union’s main vehicles of economic policy coordination. The frustration was particularly acute regarding the euro-area Member States, whose economic-policy shortcomings—well on display in the euro crisis—resulted in substantial hardship and costs for other Member States. During the euro crisis, adjustment programs and their economic policy conditionality provided a powerful—though intergovernmental and, in many ways, problematic—way of gaining more say over individual member states’ economic policies. The Union itself lacked tools with any equivalent traction.

Something quite remarkable, however, has happened over the course of the last four years. Cohesion policy—which had heretofore been a policy backwater, aimed at addressing regional disparities—has emerged as the EU’s primary vehicle for reshaping economic and related fiscal policies in the Member States. In the EU’s 2021-2027 Multiannual Financial Framework (MFF), the title ‘Cohesion, Resilience and Values’ has turned into a massive area of Union spending, with €426.7 billion allocated to these policies under the MFF itself and an additional €776.5 billion through NextGenerationEU (NGEU). The new regime redirects vast amounts of EU funding to national policy priorities with often little or no obvious connection to the traditional cohesion policy objectives of reducing disparities and the backwardness of least advantaged regions.

Through the Recovery and Resilience Facility (RRF)—whose sole legal basis, it should be remembered, is the flexibility clause in the Treaty’s cohesion title, Article 175(3) TFEU—the use of cohesion policy has transformed supranational involvement in national economic and fiscal policymaking. Via the RRF, cohesion policy has become the basis ‘money for reforms’, regardless of whether the EU or the Member State hold legislative competence in the relevant area. Whereas previously the region served as the relevant unit of cohesion policy, now the focus is on the entirety of the Member State or indeed the EU as a whole.

As a result, cohesion policy and economic and related fiscal policies have morphed into one integrated policy field in which any economic or fiscal policy measure that can be plausibly described as a structural reform (primarily an area of Member State competence, subject to Union coordination) can now be reframed as a measure of EU cohesion policy (a shared competence) that can be supported by EU funds to incentivize compliance. How did this happen?

The Revolutionary Reinterpretation of Article 175(3) TFEU

One might respond ‘Covid’ (and hence NGEU) but that actually would not be exactly right. The basis of this constitutional transformation was in fact a revolutionary reinterpretation of Article 175(3) TFEU that predated NGEU. And that reinterpretation was undertaken by the legal services of the EU institutions largely outside of public scrutiny.

This post seeks to make this hidden legal evolution visible, by examining previously undisclosed legal analyses of the Council Legal Service (CLS) on this crucial question. The CLS is the main source of legal advice that the Council and the European Council use when approving measures, and it is always present in Council decision making. Its advice is highly influential but seldom available for public debate and scrutiny, as the Council continues to insist on its confidentiality despite consistent CJEU case law to the contrary.

Before turning to that legal advice in earnest, however, let us make one thing clear: this blog post is not about the legality of the NGEU. That ship has clearly sailed, the moneys are now largely borrowed, disbursed, and spent, and there is little chance that they would, could, or even should ever be clawed back. What remains, however, open to debate—and indeed should be thoroughly considered—are the potential long-term consequences of the legal revolution.

Indeed, the idea has been floated (see, e.g., here and here) that Article 175(3) TFEU could serve as a basis for a non-emergency spending programme or even permanent fiscal capacity in the EU, without the need for further treaty change. While we share (politically) the hope that the EU might attain some kind of expanded and more permanent borrowing and spending capacities in the future, we question (legally and normatively) whether a heroic reinterpretation of Article 175(3) TFEU beyond all recognition is the right way to accomplish that goal. At the same time, we wish to make the power of institutional lawyers in engineering such a profound change visible for a critical examination. Hence this blog post.

The Roots of the Change: The RSP/RDT, EISF, and BICC

As part of the effort to support the adoption of NGEU in 2020, the CLS exceptionally – and strategically – published its legal advice on the emergency programme. This opinion focused exclusively on the compatibility of NGEU with the budgetary rules in Articles 310-311 TFEU, the suitability of the emergency rules in Article 122 TFEU as a legal basis for the EU’s Recovery Instrument (EURI), and the compatibility of the overall programme with the no-bailout clause in Article 125 TFEU. It did not discuss the cohesion flexibility clause in Article 175(3) TFEU as a legal basis for the RRF.

Why did such a momentous legal reinterpretation receive so little attention? Perhaps because the CLS thought the issue was already debated and settled in favour of a broad reading. In the two years prior to the Covid crisis, the Commission had advanced a number of (admittedly much smaller) proposals to create a so-called euro-area budget, all of which were based on Article 175(3) TFEU. The first, in 2018, was the €25 billion Reform Support Programme (RSP), of which €22 billion was to finance the reform delivery tool (RDT), designed to incentivise Member States to undertake structural reforms. The second, also in 2018, was the European Investment Stabilisation Function (EISF) that would have made available a €30 billion pot of loans and interest-rate subsidies for Euro area and ERM II Member States to finance public investments in economic downturns. In 2019, these two instruments were then folded together into a third proposal for a Budgetary Instrument for Convergence and Competitiveness (BICC) encompassing similar elements. However, while the two first proposals were based, in whole or in (overwhelming) part, on Article 175(3) TFEU, the BICC proposal was framed as a measure of economic governance, limited to the euro area states and based on Article 136(1)(b) TFEU in combination with Article 121(6) TFEU. Nonetheless, as we shall see below, the BICC envisaged a substantial component related to financing that was also to be based on Article 175(3) TFEU.

This legislative process, culminating in the BICC, was entering its final stages when the Covid crisis hit in spring 2020. Prior to this, the CLS had issued confidential opinions on all three, which seemingly settled the question of using a radically reinterpreted Article 175(3) TFEU as a legal basis for these sorts of initiatives. This entire process escaped any real scholarly attention, apart from this observation by one of us (writing with a different co-author) that this reading of Article 175(3) TFEU would exclude ‘very few economic policy measures’. This, in turn, ‘rais[ed] the question of how to draw the border between economic policies and cohesion policies’ without effectively emptying ‘the field of economic policies of independent content’.

Given our ongoing work on how NGEU fits into longer term developments in EU law and politics, we made public access requests to both the Commission and the Council for access to the legal advice in consideration of the RSP/RDT, the EISF, and the BICC. The Commission’s response to this request was implausibly small, identifying just a few documents involving minor technical amendments to draft proposals from the final stages preceding their formal approval, none of them illuminating. We find this response unconvincing—the Commission Legal Service must have been closely integrated into the development of these innovative and legally transformative proposals by giving advice in various forms and formats. However, we are still waiting for a decision on our confirmatory application, which also specifically addressed the need to grant access even to other than formal legal opinions, as well as the public interest involved in the legal transformation of the past years.

The Council’s production in response to our requests was more forthcoming, albeit only after an initial refusal to grant full access, which the Council reversed upon a confirmatory application. The Council eventually granted access to four legal opinions: an EISF opinion of 15 January 2019, an RSP opinion of 19 February 2019, and a first BICC opinion dated 15 October 2019 and a second BICC opinion dated 23 January 2020. The first BICC opinion concerned the possibility of using an intergovernmental agreement and is not relevant for the pre-NGEU interpretation of Article 175(3) TFEU considered here. Following our requests, all four opinions are now publicly accessible in the Council’s public register of documents.

These opinions provide a glimpse into what we might understand as the hidden pre-history of Article 175(3) TFEU as a basis for deep EU involvement in important aspects of national economic policy that was ultimately realized through NGEU. Instead of Treaty reform, the institutional legal services turned cohesion policy into the cavalry that rode to rescue, opening the door to altering Treaty-based competence allocations by way of the ordinary legislative procedure.

Article 175(3) TFEU—the Cohesion Flexibility Clause and the Existing Case Law

Article 175(3) TFEU is the flexibility clause in the cohesion title in the TFEU, authorizing the adoption of ‘necessary’ and ‘specific actions’ within the framework of cohesion policy but otherwise ‘outside the Funds’, i.e., those contemplated or specifically mentioned in Articles 174, 175(1) TFEU and/or 177(1) and (2) TFEU.

The key framing language for cohesion policy, first introduced into the treaties in the Single European Act of 1986 and still present in Article 174 TFEU, defines the purpose of this area of EU competence as ‘reducing disparities between the levels of development of the various regions and the backwardness of the least favoured regions’. Based on that language, one would think that the function of Article 175(3) TFEU would be rather limited, tied to supplementing EU action under the existing structural and cohesion funds, whose regional-developmental purposes have been well-settled over decades of experience.

The CJEU’s 2009 judgment in the case of the International Fund for Ireland (IFI) is to our knowledge the only case law extant on the use of cohesion’s flexibility clause as a legal basis (in this case interpreting the substantively identical predecessor clause in Article 159(3) EC). In its ruling, the Court did not follow the AG’s logic, which had stressed that the seemingly capacious term ‘cohesion’, when read in isolation, was ‘a broad overall concept with imprecise contours’ (IFI, Opinion of AG Bot, para 82). Instead, focusing on the phrase ‘specific actions’ in the clause, the Court held that the flexibility provision only serves as the appropriate legal basis when the legislator could ‘guarantee that all of the interventions [of the programme adopted under this provision] will in fact address the objectives that are specific to the [EU]’s policy on economic and social cohesion’ (IFI, para 62). This ‘guarantee’ obligation of the Union legislator, in turn, created a related obligation on the part of European institutions implementing any such programme, to ‘prevent the use [of funds] to cover actions which, while complying with the objectives of [that programme], extend beyond the scope of the [Union]’s policy on economic and social cohesion’ (IFI, para 59).

The Court’s combination of the ‘guarantee’ and ‘prevention’ obligations clearly constrained the discretion of the Union legislator as well as that of implementing administrative actors (both supranational and national) under Article 159(3) EC, and therefore also under Article 175(3) TFEU going forward. EU policy on economic and social cohesion thus has clearly defined limits, supporting the idea that not every policy measure with economic implications could be redefined as ‘cohesion policy’.

Institutional legal opinions typically include analyses of the Court’s existing case law and discuss its relevance for the matter at hand. But the institutional context in which each legal service works also matters. The legal service of the Commission—in line with the task of the master that it serves—remains more integrationist in its approach, focused on removing obstacles that the case law might pose. The CLS, by contrast, is generally believed to be more concerned with preserving Member State interests. But the CLS also enjoys strategic room for manoeuvre on this point. The ‘will’ of the Council is often difficult to discern, given the great variety of views among the Member States. As matter of political reality, that ‘will’ is often based on the views of the dominant or a few strong Member States that have reached an agreement on a particular issue sufficient to push it through. Identifying compromises and providing the legal language for realizing those agreements is where much of power of the CLS derives, even as it seeks to hold itself out as apolitical and impartial honest broker among all the Member States.

In its various opinions on the RSP, the EISF, and the BICC discussed below, the CLS clearly sought to exploit this strategic room for manoeuvre. Rather than operating within the confines of the ‘guarantee’ and ‘prevention’ obligations articulated by the Court in IFI, it seized on the more forgiving logic of the AG’s opinion. The CLS opinions do not cite the relevant paragraphs of the IFI ruling (paras 59 and 62). And yet, the CLS was clearly aware of the ruling, as it indeed did cite and/or quote paragraphs 45, 52 and 53. This selective and highly strategic reading resulted in a significantly more expansive interpretation of Article 175(3) TFEU that is arguably in deep tension with what the Court actually held in IFI.

The CLS Opinion on the EISF of January 2019

We begin with the CLS opinion that was first in time: the EISF opinion dated 15 January 2019. To recall, the EISF was a Union loan facility that was to provide subsidised loans to Member States in economic trouble, to allow them to maintain adequate level of public investment. The CLS correctly acknowledged that, per the existing case law, ‘cohesion cannot be used as an instrument to achieve the Union aims in other policy areas, such as economic policy’ (EISF opinion, para 28, quoting language from IFI, para 46). But in seeking nonetheless to blur the distinction between those two policy domains so as to avoid the implications of this prohibition, the CLS stressed that the ‘notion of cohesion policy is particularly broad and inclusive’ (EISF opinion, para 35, citing IFI 2009, Opinion of AG Bot, para 90). Instead of considering the actual wording of Article 174 TFEU, the CLS argued that the ‘scope of Article 174 TFEU is not limited to specific sectors and is defined functionally – on the basis of its objectives – , rather than organically’. From this the CLS concluded that the Treaty ‘leaves a large margin of discretion to the legislator as to how the cohesion aims should be achieved’ (EISF opinion, para 35). At the same time, the CLS remained strategically silent on the constraints on that discretion derived from the ‘guarantee’ and ‘prevention’ obligations that the Court had defined (IFI, paras 59 and 62).

In lieu of these requirements, the CLS advanced its own more forgiving analytical framework, grounded in what we might call the ‘preponderant aim’ test. To quote the opinion, the violation of the boundaries of Article 175(3) TFEU as a legal basis should turn on whether cohesion is ‘be[ing] used with the preponderant aim’ either ‘to enhance the economic coordination between Member States’ or ‘of ensuring the stability of the euro area’ (EISF opinion, paras 29 and 31).

To avoid the rather obvious conclusion that this was precisely how the EISF was being used (which an objective analysis of the history of the prior decade or the programme’s stated purposes would seem to warrant), the CLS then engaged in a rhetorical and analytical sleight of hand. Over a series of rather elliptical paragraphs (EISF opinion, paras 12, 40-41, and 54-57), it found in effect that the infamous asymmetry in the EMU between centralized monetary policy and decentralized fiscal policy—eminently a question of economic policy of the most fundamental sort—along with derivative risks of ‘asymmetric shocks’ across the Member States which that structural and economic asymmetry created (EISF opinion, paras 3, 11-13, 38-41, 44, 54-56), gave rise to ‘vulnerabilities’ that the Union legislator was empowered to address as a matter of cohesion under in Article 175(3) TFEU (EISF opinion, paras 39 and 48). The CLS further underlines that the EISF financial support is to be used exclusively for purposes defined ‘in the future common provision regulation for the cohesion policy, or social investment into education and training’ (EISF opinion, para 43).

As regards economic policy, what seemed decisive is that the regulation does not conflict or overlap with the EU’s economic coordination procedures. More specifically, there is a complete silence on the fact that substantive economic policy and its consequences actually fall under Member States’ national competence.

It is our view that, in upholding this choice of legal basis, the CLS engaged in a series of analytical manoeuvres that both ignored the IFI ruling quoted above while also transforming the concept of cohesion to such an extent that it did indeed effectively dissolve the boundary between it and general economic policy. In short, the CLS found that the Union had the tools to address the constitutional design of the EMU, but without the difficult process of treaty change, as one might suppose would be necessary. Rather, it could be done through a back-door process of legally re-engineering the concept of cohesion to extend it to economic ‘vulnerabilities’ at the level of the Member State or EU as a whole arising out of the EMU’s asymmetrical design.

The CLS Opinion on the RSP of February 2019

A month later, the CLS issued the RSP opinion upholding Article 175(3) TFEU as the legal basis for the RSP and, more particularly, the RDT (as well as a similar ‘convergence facility’ for Member States in the ERM II). The RDT, as explained above, was designed to reward Member States with grants in exchange for implementing structural reforms deemed appropriate by the Union.

This new opinion proceeded according to a similar logic as the EISF opinion (indeed, it incorporated its foundational paragraphs by reference). The programme was once again designed to solve a problem that went to a core economic policy feature of EMU: the ‘more intensive and effective policy coordination’ envisioned by the Delors Report in 1989 (p 11, para 12) that eventually evolved into the (admittedly dysfunctional) European Semester system of the last decade.

The key feature of the RSP, grounded in Article 175(3) TFEU, were ‘financial incentives for the implementation of non-investment related structural reforms by the Member States’ (RSP opinion, para 3; see also paras 9, 24-25, and 43). Reforms eligible for funding under the tool are those that ‘aim at addressing challenges identified in the context of the European Semester’ (RSP opinion, para 11, quoting Article 8 of the Commission’s RSP Proposal). The justification for cohesion payments for such reforms depended on whether or not the action ‘promot[ed] resilient economic and social structures in the Member States’ (RSP opinion, para 8). While approving the legal basis, the Council Legal Service made its use “subject to a number of adaptations of provisions relating to i) the eligibility of reforms, ii) the assessment and allocation criteria for funding, iii) the governance and decision making, so that they constitute a genuine instrument of cohesion” understood, now, in terms of resilience (RSP opinion, para 64).

Promoting ‘resilience’ at the level of the Member State became, in effect, the hook on which the use of cohesion legal basis Article 175(3) TFEU ultimately hung. The aim of the RSP, the opinion found, was ‘not to create the conditions for the optimal and proper functioning of the euro, thus its stability’; rather, it was ‘to underpin the economic resilience of Member States’ and hence was an exercise of cohesion policy as now expansively reinterpreted (RSP opinion, para 48). This attempted distinction, of course, borders on the absurd. These two aims are really one and the same and trying to differentiate between them is rather nonsensical. But these are precisely the sort of mental gymnastics that the CLS’s proffered ‘preponderant aim’ test forced on its lawyers in order to support the RSP. Indeed, the opinion went so far as to claim that, if the money spent under the RSP advanced any of these aims, it should ‘[i]n principle’ be seen as ‘earmarked for policies which are identified as cohesion’ (RSP opinion, para 28). The opinion included no mention of the fact that, substantively, the structural reforms to be promoted fall under Member State competence and form a core area of their democratic policies.

The CLS Opinion on BICC of January 2020

The reinterpretation of Article 175(3) TFEU reached its culmination in the CLS legal opinion of January 2020 on the BICC. The Commission had proposed the BICC in 2019 as a comprehensive vehicle for implementing a euro area budget, encompassing (and therefore also superseding) the earlier RSP and EISF proposals. The BICC sought to provide euro area member states with financial grants, not only as reward for reforms as in the RDT, but—as a nod to the EISF—also to finance public investments. It envisaged a process whereby member states would submit projects for reforms and investments, linked to National Reform Programmes, in this sense anticipating the NRRP process under the RRF.

The BICC’s specified legal bases were Articles 121(6) and 136 TFEU (authorizing establishment of multilateral surveillance procedures to coordinate budgetary and economic policies). However, there were allusions in the publicly available record on Council discussions of Article 175 TFEU also serving as a possible basis, at least in terms of financing. It is also the applicability of Article 175(3) TFEU that the Council Legal Service analyses in its opinion.

The challenge of using Article 175(3) TFEU to finance the BICC implicated a classic obstacle in the political economy of the EU budget—juste retour—or what would each Member State receive from the instrument relative to their contributions to the general EU budget. Relying on the approach created for the RSP, the BICC would allocate the funding based on a complex formula tied, inter alia, to relative population and GDP of each Member State (BICC opinion, paras 12-14). Several Member States were concerned that this allocation method thus ‘would incorporate a refunding or “juste retour” logic’ that ‘would put at jeopardy the cohesion [i.e., developmental] objectives of the instrument’ (BICC opinion, para 25).

The concern was entirely understandable in view of established understandings of cohesion policy as interpreted in the case law, notably the ‘guarantee’ and ‘prevention’ obligations (IFI, paras 59 and 62). Specifically with regard to the dimensions of the allocation criteria that suggested reliance on a ‘juste retour logic’, the Council Legal Service now concluded that those dimensions:

can be reconciled with the cohesion purposes of the proposal, bearing in mind the very specific nature of this cohesion instrument which aims at bringing convergence and competitiveness within the euro area through the implementation of reforms and investments. Actually, in an area so economically integrated as the one of the monetary union, the implementation of eligible reforms and investments by bigger economies (i.e., those with the higher share of GNIs) may have a more significant impact in bringing about the overall convergence and competitiveness of the euro area as a whole (BICC opinion, para 27).

Thus, the eclipsing of the traditional regional-developmental focus of cohesion policy in favour of the pursuit of more general economic policy goals like ‘convergence and competitiveness’ across the EU as a whole—which the Council legal opinions for the EISF and RDT had suggested—was now essentially complete. This is clearly evidenced by how the legal bases of cohesion and economic governance were used interchangeably by the Commission, with the blessing of the CLS, for more or less the same legislative proposal.

Conclusion: Toward a Permanent Fiscal Capacity Based on Article 175(3) TFEU?

This is where the matter stood when, in spring 2020, the demands of the Covid crisis led to the withdrawal of the BICC (and hence the RSP and EISF) in favour of the NGEU, the EURI, and the RRF. But those earlier efforts lived on as models to be built upon in these new crisis instruments. As specified in the RRF proposal, for example, the new spending programme took ‘as a basis the latest text discussed by the co-legislators on the proposal establishing a Reform Support Programme … and makes appropriate changes to it to reflect the revised objectives, and the adjusted delivery mode of the new instrument’.

We can only assume that the analysis of Article 175(3) TFEU as a purportedly adequate legal basis for these measures lived on as well. But certain obvious distinctions must be drawn. Whatever tenuous connections those earlier instruments had with cohesion (now radically redefined) were now effectively obliterated entirely in the RFF. That new instrument now sought to justify its extraordinary breadth—providing funds to support measures in essentially any policy domain regardless of the locus of legislative competence (national or supranational)—on the basis of Article 175(3) TFEU.

Beyond the substantive strain this reinterpretation placed on that provision, given the tenuous link to cohesion, there is also the question of scale. From the comparatively meagre €25 billion in grants for the RSP or €30 billion in loans and interest-rate subsidies for the EISF, the RRF upped the ante twelvefold to a total of €672.5 billion (at 2018 prices), distributed to all member states, as grants (up to a total of €312.5 billion in 2018 prices) and loans (up to a total of €360 billion in 2018 prices).

This transformation was accomplished without substantial public debate and only with limited analysis of risks and consequences. This approach raises considerable concerns regarding whether or how Article 175(3) TFEU, outside the emergency context of NGEU, might ever possibly serve as the basis of a more permanent fiscal and economic-policy capacity in the EU. These concerns include the impact of this provision’s radical re-engineering on Treaty-based allocations of economic-policy competence between the EU and the Member States, on respect for the principle of conferral, and on the more general dangers of ‘integration by stealth’ at the expense of democratic politics.

We believe that this re-engineering of Article 175(3) TFEU is simply too flimsy and tenuous a legal basis to bear the weight that a permanent regime would place on it. That flimsiness is not only a consequence of questionable reinterpretations or the massive scale of funding these reinterpretations are now meant to support. It is also a consequence of the broader institutional effects of this radical scaling-up. These earlier legal opinions (on which the RRF would apparently ultimately be based) make no mention, for example, of Member State competence to settle substantive policy choices or the role of national parliaments. This is just one of many silences that need to be further explored from a consequential perspective. The legal opinions achieve an outcome perceived desirable in the institutions rather than providing a balanced description of the applicable constitutional framework (alas, an approach that is hardly unprecedented in the recent history of integration).

While the institutional legal services routinely claim that ensuring the quality and objectivity of their advice demands that they remain confidential, the opposite might in fact be true. These opinions need to be exposed to public debate and critique lest they undertake fundamental transformations without the requisite democratic and constitutional legitimation. Further analysis of these concerns, as well as many others, require more room than a mere blog post – even a long one – can provide. We look forward to expanding on them in the larger project of which this post is just a part.