Schrödinger’s Off-Balance-Sheet Fiscal Agency: The Recovery and Resilience Facility and the Limits to Incremental Fiscal Integration in Europe

Friederike Reimer; Andrei Guter-Sandu; Armin Haas; Steffen Murau

doi:10.1080/07036337.2025.2491618

Schrödinger’s Off-Balance-Sheet Fiscal Agency: The Recovery and Resilience Facility and the Limits to Incremental Fiscal Integration in Europe

Friederike Reimer, Andrei Guter-Sandu, Armin Haas, Steffen Murau

Politics, Languages & International Studies

Research output: Contribution to journal › Article › peer-review

1 Citation (SciVal)

Abstract

The Recovery and Resilience Facility (RRF), introduced as the EU’s main macro-financial response to the COVID-19 pandemic, is an off-balance-sheet fiscal agency (OBFA) that has been hailed as Europe’s Hamiltonian moment and raised great expectations for future fiscal integration. Building on the emerging Critical Macro-Finance literature, we scrutinise both the RRF and the debt instruments it issues. We find that its innovative legal construction yielded ‘Schrödinger’s OBFA’: The RRF has an ‘institutional ambiguity’ which places it simultaneously on and off the EU budget to mitigate the EU fiscal rules. Moreover, as it lacks ‘immortality’ due to its exceptional and temporary nature, it is alive and already dead from a financial market perspective. As Schrödinger’s OBFA, the RRF’s institutional status places inherent limitations on the EU’s ongoing process of incremental fiscal integration and makes it incapable of issuing securities that could assume the status of European safe assets.

Original language	English
Journal	Journal of European Integration
Early online date	16 Apr 2025
DOIs	https://doi.org/10.1080/07036337.2025.2491618
Publication status	E-pub ahead of print - 16 Apr 2025

Funding

In the aftermath of the COVID-19 pandemic, the European Union (EU) launched a new plan to help EU member states recover from the impact of the pandemic (Howarth and Quaglia ). At its centre was the NextGenerationEU (NGEU) programme and its Recovery and Resilience Facility (RRF), a financial vehicle funded through the issuance of common EU debt, with the European Commission borrowing funds on behalf of the EU and distributing them to member states in the form of grants and loans (Bokhorst and Corti ; Hodson and Howarth ; Schelkle ). The similarity between the two schemes was not lost on keen observers of EU policymaking, with the introduction of the RRF quickly being compared to a \u2018Hamiltonian moment\u2019 (Kaletsky ), a trope that would be popularised further by European leaders like German chancellor Angela Merkel and French president Emmanuel Macron. A widespread hope was that the EU had now finally made a big leap towards supranational debt issuance even though the European fiscal framework \u2013 dating back to the 1992 Treaty of Maastricht \u2013 had actually been designed to prevent precisely this, most importantly codified in the no-bailout-clause (Art. 125) and the provision of a balanced budget (Art. 310) in the Treaty on the Functioning of the European Union (TFEU) (Ruffert and Leino-Sandberg ). Moreover, the creation of the RRF seemed an important move towards obtaining a supranational euro-denominated safe asset that \u2013 according to many academics and policymakers \u2013 is urgently required (Leandro and Zettelmeyer ; Van Riet ). The legal argumentation behind the RRF\u2019s coexistence with the fiscal framework in turn also limits the RRF\u2019s balance sheet: The amount of 750 billion euro that the EU can raise through bonds and the one-off limited timeframe until 2026 according to the 2020 Own Resources Decision is highly emphasised in the reasoning and poses a barrier to more elasticity in the system. The borrowing incurred for the RRF has to be paid back until the end of 2058 (Council of the European Union , art. 5). Ex post changes to the RRF framework are possible, as the implementation of REPowerEU has shown. However, these newly available 20 billion euro in grants are financed by non-borrowing sources of revenue in forms of proceeds from the EU Emissions Trading System. Therefore, the elasticity added by RRF grants and the issuance of EU bonds remains limited in volume and temporal dimension, despite having escaped the on-balance-sheet fiscal rules of the EU \u2018Treasury\u2019. The RRF as part of NGEU takes up considerable volume of the MFF 2021\u20132027, with roughly 700 billion out of the total 2,000 billion euro (European Commission 2021). The MFF sets the frame for the yearly budget, which must remain within the MFF\u2019s limits as well as the own resources ceiling (European Commission , art. 54). The latter refers to the amount of funds the EU can call from member states to fund its budget, denominated in percent of Gross National Income (GNI) (Council of the European Union , art. 3). Unlike a nation-state treasury, the EU has no significant tax base that would be in any way comparable to that of sovereigns, but the own resources as a membership fee base. The system of own resources sets limits for the financing of the budget (Mal\u016F\u0161kov\u00E1 ). In the Own Resources Decision that was adopted in 2020 to establish the RRF mechanism, the Commission was empowered to borrow on capital markets in restricted volume and time frame to address the emergency of the COVID-19 recovery (Council of the European Union ). The legal basis for the creation of the RRF is TFEU Art. 122(2), which allows the EU to grant financial assistance to the member states under exceptional occurrences. The debt issuance of the EU for the RRF is backed by the EU budget, more specifically the additional 0.6% of GNI of member states that is additionally set out in the 2020 Own Resources Decision. In this logic, the RRF is part of the EU budget, as from an economic perspective the EU issues debt to finance a part of the MFF, backed by member state contributions as a contingent asset.

Funders	Funder number
Recovery and Resilience Facility
NextGenerationEU
EU Emissions Trading System
European Commission

Keywords

EU governance
EU integration
Eurobonds
NextGenerationEU
fiscal policy
public debt

ASJC Scopus subject areas

Sociology and Political Science
Political Science and International Relations

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10.1080/07036337.2025.2491618Licence: CC BY

Cite this

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title = "Schr{\"o}dinger{\textquoteright}s Off-Balance-Sheet Fiscal Agency: The Recovery and Resilience Facility and the Limits to Incremental Fiscal Integration in Europe",

abstract = "The Recovery and Resilience Facility (RRF), introduced as the EU{\textquoteright}s main macro-financial response to the COVID-19 pandemic, is an off-balance-sheet fiscal agency (OBFA) that has been hailed as Europe{\textquoteright}s Hamiltonian moment and raised great expectations for future fiscal integration. Building on the emerging Critical Macro-Finance literature, we scrutinise both the RRF and the debt instruments it issues. We find that its innovative legal construction yielded {\textquoteleft}Schr{\"o}dinger{\textquoteright}s OBFA{\textquoteright}: The RRF has an {\textquoteleft}institutional ambiguity{\textquoteright} which places it simultaneously on and off the EU budget to mitigate the EU fiscal rules. Moreover, as it lacks {\textquoteleft}immortality{\textquoteright} due to its exceptional and temporary nature, it is alive and already dead from a financial market perspective. As Schr{\"o}dinger{\textquoteright}s OBFA, the RRF{\textquoteright}s institutional status places inherent limitations on the EU{\textquoteright}s ongoing process of incremental fiscal integration and makes it incapable of issuing securities that could assume the status of European safe assets.",

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author = "Friederike Reimer and Andrei Guter-Sandu and Armin Haas and Steffen Murau",

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AU - Guter-Sandu, Andrei

AU - Haas, Armin

AU - Murau, Steffen

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Y1 - 2025/4/16

N2 - The Recovery and Resilience Facility (RRF), introduced as the EU’s main macro-financial response to the COVID-19 pandemic, is an off-balance-sheet fiscal agency (OBFA) that has been hailed as Europe’s Hamiltonian moment and raised great expectations for future fiscal integration. Building on the emerging Critical Macro-Finance literature, we scrutinise both the RRF and the debt instruments it issues. We find that its innovative legal construction yielded ‘Schrödinger’s OBFA’: The RRF has an ‘institutional ambiguity’ which places it simultaneously on and off the EU budget to mitigate the EU fiscal rules. Moreover, as it lacks ‘immortality’ due to its exceptional and temporary nature, it is alive and already dead from a financial market perspective. As Schrödinger’s OBFA, the RRF’s institutional status places inherent limitations on the EU’s ongoing process of incremental fiscal integration and makes it incapable of issuing securities that could assume the status of European safe assets.

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Schrödinger’s Off-Balance-Sheet Fiscal Agency: The Recovery and Resilience Facility and the Limits to Incremental Fiscal Integration in Europe

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