14 August 2023

How Cohesion Became the EU’s Vehicle for Economic Policy

Tracing the Hidden History of Article 175(3) TFEU

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 un