• A group in Germany, called the Citizens' Will Alliance, complained to the country's constitutional court that the European treaties do not allow the bloc to take on debt jointly.
• As a result, the German court on Friday stopped a law that would have paved the way for the European Commission to raise the funds. The German judges said they had to first rule on a motion for an interim injunction on the law.
• Countries severely hit by the pandemic, such as Italy and Spain, are desperately waiting for the fresh cash so they can rebuild their economies faster.

 LONDON — The European Union's much-needed coronavirus stimulus plan has hit a stumbling block after the German constitutional court raised questions about how the new debt is being taken on.

The EU's 27 nations agreed in July to tap financial markets via the European Commission, the executive arm of the EU, and raise 750 billion euros ($883 billion) to tackle the economic crisis sparked by the coronavirus. It was described at the time as a "Hamiltonian moment" for the bloc, in reference to the deal struck by U.S. Founding Father Alexander Hamilton to convert previous debts into joint obligations of the federal union.

Though EU countries share many political decisions, each nation has full control over its fiscal arrangements. Agreeing to take on new debt proved controversial for more fiscally-conservative nations, who worry their taxpayers might face a higher bill as a result.

This was the case in the Netherlands, for example, but Prime Minister Mark Rutte stressed at the time the unique nature of the deal: it is meant to be a one-off event to deal with an unprecedented and severe economic shock across the region.

But this argument has not convinced every EU-sceptic.

A group in Germany, called the Citizens' Will Alliance, complained to the country's constitutional court that the European treaties do not allow the bloc to take on debt jointly. As a result, the German court on Friday stopped a law that would have paved the way for the European Commission to raise the funds. The German judges said they had to first rule on a motion for an interim injunction on the law.

"We are aware that the Recovery Fund is a political project already decided upon. However, given the considerable risks involved, the federal government should ensure that borrowing at the EU level and a circumvention of the fiscal rules does not become a permanent solution," the German constitutional court said on Friday.

It comes despite 478 out of 645 German lawmakers giving the ratification of the law the greenlight last week.

Practical consequences

The European Commission cannot tap financial markets for the funds before all the member states have legislated in favour of the move. As many as 22 of the 27 EU nations have done so or are due to conclude the process next month. Austria, Poland, Hungary and the Netherlands have not yet confirmed when they will vote, and Germany is now under a cloud of uncertainty.

"Unless the issue is resolved fast and in favour of the law which both houses of the German parliament had approved with broad majorities beforehand, pay-outs from the fund could thus be delayed or even be at risk," Holger Schmieding, chief European economist at Berenberg said in a note on Monday.

The European Commission wants to start raising funds this summer and make them available to member states in the second half of 2021 — a year after the initial agreement. 

Countries severely hit by the pandemic, such as Italy and Spain, are desperately waiting for the fresh cash so they can rebuild their economies faster. And the recovery funds have become even more important as nations across Europe battle against a third wave of infections and impose stricter lockdowns.

"Although the German Court case could generate some noise, we consider it unlikely that it will ultimately thwart the EU's common fiscal response to the Covid-19 pandemic," Schmieding said.

He believes that a delay in pay-outs "would be unfortunate," but as long as markets expect the money to come through at some point, borrowing rates for EU nations should remain low.

A long-term headache

There is another issue at play, however.

This is not the first time that the German constitutional court has raised questions about what it perceives as risky EU integration. In May of last year, the same court ruled that parts of the European Central Bank's government bond purchasing program were illegal under German law.

"The risk of a bigger battle looms because Friday's motion reflects a bigger institutional problem for Germany and for Europe," Erik Nielsen, chief economist at UniCredit, said in a note on Sunday.

He said the constitutional court could chose "a big fight with Germany's other branches of the state" or with the ECB once again, this time over its Covid stimulus program.