A. The rise and fall of full-blown state activism

In Western Europe, state activism emerged as the dominant paradigm of political economy in the aftermath of World War II.Footnote ⁸ Conceived as a response to laissez-faire – by then largely discredited after its debacle during the early 1930s – it was regarded not only as the most effective economic model for addressing citizens’ material needs, but also as the most viable institutional arrangement for generating the political consensus necessary to re-legitimise the nation-state in the postwar order.Footnote ⁹ Indeed, state activism sought to promote through government intervention economic prosperity, full employment, social justice, and territorial cohesion. These ambitions made it particularly influential in countries vulnerable to the rise of communismFootnote ¹⁰ or seeking a moderate alternative to coercive economic planning.Footnote ¹¹

At least in its dirigiste form, state activism manifested itself in extensive government intervention across virtually every economic and social domain. It was articulated as a response to three mutually reinforcing economic and social concerns. First, it aimed to secure macroeconomic stabilisation through counter-cyclical demand management: during periods of recession, governments were expected to stimulate aggregate demand by increasing public expenditure (or reducing taxation) and accommodating monetary policies, even at the cost of budget deficits and inflation; conversely, when demand exceeded supply, they were expected to pursue budget surpluses and restrictive monetary policies.Footnote ¹² Second, government activism was considered essential for both the reconstruction and modernisation of the economy, primarily through inward-looking industrial policies designed to reduce regional disparities, promote employment, and strengthen those sectors and firms deemed most promising for economic growth and social welfare.Footnote ¹³ Third, state intervention was regarded as indispensable for advancing income redistribution, notably through the broadening of the tax base, progressive taxation,Footnote ¹⁴ and the provision of social services.Footnote ¹⁵

It is not the purpose of this article to survey the full range of these developments. What is essential to emphasise here is that state activism entailed a dynamic use of fiscal policy and, therefore, of the power of the state to collect revenue through taxes and to spend them in a variety of economic programmes involving indicative planning, state subsidies and the nationalisation of businesses in key economic sectors.Footnote ¹⁶ Instrumental to expansive fiscal policy was the frequent and quantitatively conspicuous recourse to public borrowing, facilitated by accommodating monetary policies implemented by central banks operating with a broad mandate within the executive’s reachFootnote ¹⁷ which involved low interest rates, money creation and the last resort purchase of public bonds.Footnote ¹⁸ Particularly the last tool was crucial in both ensuring the requisite resources to government programmes at a sustainable priceFootnote ¹⁹ and stabilising the level of investments.Footnote ²⁰

If activist government could evolve and expand during the Trente Glorieuses, this was due in no small measure to embedded liberalism, the international economic order established at Bretton Woods to reconcile trade liberalisation with state intervention.Footnote ²¹ In Western Europe, this commitment was first taken up by the European Coal and Steel Community (ECSC) and subsequently by the European Economic Communities (EEC).Footnote ²² The ECSC is well known for its deployment of activist instruments in the government of coal and steel production. Likewise, the EEC became similarly entangled in state activism through its interventions in the agricultural sector. Yet, the most significant contribution of the Community institutions to the success of state activism laid less in their direct use of such instruments than in their enabling capacity: the resurgence of national economies owed, to a considerable extent, to the common marketFootnote ²³ – a project originally engineered and implemented so as to prevent the destabilisation of state activism. So much so, in fact, that until the 1980s, EU Member States retained wide latitude to support domestic firms without facing meaningful restraints or coordination requirements at the Community level.Footnote ²⁴

A generally deferential attitude toward state intervention prevailed within both the Community’s political institutions and the European Court of Justice. Throughout the 1960s and 1970s, economic integration was conceived primarily as a means of enhancing firms’ efficiency and innovation, rather than as an instrument to foster regulatory or tax competition among member states.Footnote ²⁵ Not by chance capital mobility was subject to a restrictive regulatory regime,Footnote ²⁶ on the assumption that full liberalisation of this critical factor of production might undermine national economic policies or destabilise balance-of-payments positions.Footnote ²⁷ To be sure, government activism could in principle be curtailed by the treaty’s constraints on state aid, designed to secure a level playing field for all undertakings within the common market.Footnote ²⁸ Yet, the enforcement of these provisions remained largely dormant: only a limited number of measures were notified to the Commission, and of these, only a small fraction were declared incompatible with the treaty.Footnote ²⁹ State activism also benefited from the limited effectiveness of the mechanisms for coordinating monetary and economic policies established in the treaty,Footnote ³⁰ particularly with respect to addressing balance-of-payments disequilibria.Footnote ³¹ Ironically, this very weakness would later contribute to the erosion of state activism. As capital mobility increased, the poor performance of supranational coordination mechanisms generated severe monetary tensions between strong- and weak-currency states in the late 1960s and 1970s. These tensions, combined with the declining performance of dirigisme, ultimately favoured a shift in the prevailing political economy paradigm.Footnote ³²

Activist government, at least in its dirigiste rendering, came to be discredited as from the late 1970s.Footnote ³³ The end of the Bretton Woods System, the gradual abolition of its attendant capital controls and the oil crises of the 1970s prompted a neoliberal reorientation of the European integration process.Footnote ³⁴ In a context in which tackling government (rather than market) failures was emerging as the overriding priority, and economic prosperity was increasingly viewed as a function of both capital mobility and the capacity of national economies to attract to the most productive and innovative investments, the relative importance of fiscal policy and industrial policy was downsized.Footnote ³⁵ Thus, what had once been the dominant model of political economy came, in little more than a decade, to be seen as obsolete, giving way to economic models and modes of governance more aligned with the prevailing neoliberal Zeitgeist – most notably the social market economy and the regulatory state.

The social market economy (Soziale Marktwirtschaft) had already emerged in West Germany after World War II as a deliberate alternative to dirigisme.Footnote ³⁶ Designed to promote an export-oriented economy, it relied on an independent monetary policy focused on price stability, alongside measures to enhance market competition and maintain wage moderation. Thanks to this approach, West Germany navigated the 1970s oil crises relatively unscathed, unlike countries still influenced by dirigisme, and became a model for other Western economies with its ability to maintain both low inflation and low unemployment.Footnote ³⁷ This success became particularly evident in the 1980s, when the European Monetary System exerted pressure on formerly dirigiste countries, forcing their political economies to converge towards neoliberal tenets.Footnote ³⁸

As a result, independent central banking and price stability became overriding objectives across Western Europe, pursued even at the cost of recessions and higher unemployment.Footnote ³⁹ Increased capital mobilityFootnote ⁴⁰ and constraints on monetary financing of public deficits made expansive fiscal policies harder to implement.Footnote ⁴¹ Industrial policies were constrained and reoriented. On the one hand, Community institutions promoted the liberalisation of markets in energy, transport, and telecommunications, often involving the privatisation of publicly owned firms.Footnote ⁴² On the other hand, the focus of industrial policies shifted: whereas under dirigisme they targeted specific firms or sectors to achieve domestic goals, in the new economic landscape they aimed increasingly at improving the business environment and integrating domestic firms and sectors into global capital and value chains.Footnote ⁴³

B. Subdued state activism

This neoliberal turn was entrenched with the Treaty of Maastricht, and was confirmed by the Lisbon Treaty. Above all, the purposive constitutional framework of the Economic and Monetary Union (EMU) embodied this structural shift signalling the definitive demise of dirigisme.Footnote ⁴⁴

Four distinctive features of EMU substantiate this claim. First, free movement of capital was strengthened through the extension of its scope to third countries.Footnote ⁴⁵ The European Court of Justice abandoned its earlier cautious stance and aligned its jurisprudence with that of the other chapters of market adjudication.Footnote ⁴⁶ In doing so, it recognised the direct effect of this fundamental freedomFootnote ⁴⁷ and employed it as yet another powerful economic due process clause.Footnote ⁴⁸

Second, a single currency was established in the absence of the material capacities necessary for a robust pan-European economic policy,Footnote ⁴⁹ most notably a sizeable supranational budget.Footnote ⁵⁰ Despite the lofty aspirations to political unity surrounding the Treaty of Maastricht, EMU’s negotiators could agree only on a modest increase in cohesion funds,Footnote ⁵¹ largely insufficient to exert significant macroeconomic effects.Footnote ⁵² The single currency designed at Maastricht thus rested on an asymmetric institutional frameworkFootnote ⁵³ more conducive to the creation of a Stabilitätsgemeinschaft than a Solidargemeinschaft.Footnote ⁵⁴ This outcome resulted from a combination of contingent and structural factors that have continued to shape the evolution of EMU. First of all, monetary unification was pursued in response to market pressures, but in the absence of meaningful security threats – a condition historically critical for the development of fully-fledged fiscal powers.Footnote ⁵⁵ Next, the timing of monetary unification made it exceedingly difficult for Germany to commit to robust supranational solidarity at a time in which substantial portions of its budget were already earmarked to domestic reunification.Footnote ⁵⁶ Lastly, the Union remained a polity in which the principal democratic and social resources were concentrated at the national level – a circumstance that rendered the centralisation of fiscal policy extraordinarily difficult.Footnote ⁵⁷

Third, to make up for the absence of a fully-fledged EU fiscal policy and the lack of convergence among national economies, the architects of EMU devised stricter mechanisms for coordinating national fiscal policies.Footnote ⁵⁸ Supranational oversight on national budgets was intended to align fiscal policy with monetary policy and, in particular, to address persistent inflation differentials across Member States.Footnote ⁵⁹ In line with neoliberal orthodoxy, inflation reduction was pursued primarily through the containment of public deficits and public debt, recast less as legitimate instruments of economic policyFootnote ⁶⁰ than as sources of negative externalities.Footnote ⁶¹ Accordingly, the Treaty established a general prohibition on excessive deficits,Footnote ⁶² articulated through uniform quantitative limits on borrowing that applied indiscriminately, without regard to the purposes of indebtedness.Footnote ⁶³

Lastly, the constitutional framework of monetary policy revealed a pronounced neoliberal bias. Drawing on the experience of the Bundesbank,Footnote ⁶⁴ the European Central Bank (ECB) was established as the most independent of central banksFootnote ⁶⁵ and as an embodiment of ‘pure’ economic rationality.Footnote ⁶⁶ Its decisions were insulated from political institutions and largely devoid of any meaningful mechanism of political accountability.Footnote ⁶⁷ The ECB’s mandate, enshrined at the constitutional level,Footnote ⁶⁸ was narrowly defined around the primary objective of price stability, without scope for balancing this aim against competing goals such as financial stability or full employment.Footnote ⁶⁹ Its operations were required to conform to the principle of an open market economy with free competition,Footnote ⁷⁰ which excluded intervention in the public bond market. In contrast to the prevailing central banking practices of the dirigiste era,Footnote ⁷¹ the monetary financing of public deficits was expressly prohibited,Footnote ⁷² while the purchase of public securities was permitted solely for the conduct of conventional monetary policy.Footnote ⁷³ For the framers of the Treaties, this design was intended not only to promote fiscal rectitude and safeguard the financial independence of the central bank, but also to reflect the institutional architecture of a polity lacking a robust fiscal capacity, where exposure of the central bank to the risk of losses and of a recapitalisation had to be minimised.Footnote ⁷⁴

Within a constitutional framework so heavily tilted in a neoliberal direction, state activism could not but play a subdued role.

National governments found it increasingly difficult to pursue activist economic policies. In the fiscal sphere, the growing mobility of factors of production, coupled with the de facto impossibility of harmonisation,Footnote ⁷⁵ generated a dynamic of competition that curtailed the scope for direct taxation.Footnote ⁷⁶ Likewise, market discipline and fiscal regulatory constraints ostensibly rendered access to borrowing more difficult.Footnote ⁷⁷ On the expenditure side, state activism was also severely curtailed. From the early 1980s, state aid rules had begun to be enforced with greater stringency, on the assumption that they would help level the playing field and ensure a more efficient use of taxpayers’ resources.Footnote ⁷⁸ Both the number of notifications and the volume of negative Commission decisions increased steadily.Footnote ⁷⁹ Aid to public enterprises – then at the centre of broader programmes of privatisation and deregulation – was particularly targeted, consolidating the principle that state participation in economic initiatives should conform to the ‘private investor’ test.Footnote ⁸⁰

Narrowed down at state level, government activism could hardly be pursued by supranational institutions. Stringent procedural constraints limited the Union’s capacity to raise revenues,Footnote ⁸¹ resulting in a budget that was not only far smaller than that of other federations but, crucially, highly dependent on national contributions.Footnote ⁸² In the absence of substantial fiscal capacity, EU borrowing was likewise discouraged. The principles of budgetary equilibrium and disciplineFootnote ⁸³ were interpreted as prohibiting the Union from issuing debt to cover budgetary shortfalls.Footnote ⁸⁴ This did not entirely preclude borrowing operations, but these were carried out only in the diminished form of ‘back-to-back’ operationsFootnote ⁸⁵ – borrowing for the purpose of lending to Member States or third parties under conditions more favourable than those available on the open market.Footnote ⁸⁶ In such cases, repayment obligations rested with the beneficiaries, and EU liabilities would appear on the budget only in the event of a default.Footnote ⁸⁷

Predictably, the limited size of the EU budget translated into reduced spending opportunities. Not only was it incapable of fulfilling the functions of stabilisation, allocation, and redistribution typically associated with national budgets,Footnote ⁸⁸ but it also proved ill-equipped to respond to sudden crises.Footnote ⁸⁹ Based on its limited and derivative revenues, the EU could finance programmes in areas such as agriculture, cohesion, research, and industrial policy.Footnote ⁹⁰ Yet even in these domains, expenditure reflected the Union’s broader neoliberal orientation. From the Treaty of Maastricht onwards, the redistributive profile of cohesion policy was progressively diluted,Footnote ⁹¹ while industrial policy spending was expected to remain Marktkonform Footnote ⁹² and geared toward competitiveness.Footnote ⁹³

Summing up: with the establishment of EMU, the Treaty of Maastricht and its progeny did not create a constitutional framework amenable to government activism. On the contrary, and consistent with its predominantly neoliberal orientation, the institutional settlement sought to transform economic policies by curtailing state interventionism,Footnote ⁹⁴ even at the risk of colliding with national democratic and social constitutions.Footnote ⁹⁵ As a result, the role of state activism within the EU was eclipsed by the ascendancy of the regulatory state, due to the general assumption that accommodating monetary policy, expansionary fiscal measures, and industrial dirigisme were ill-suited to address the structural deficiencies of national economies.Footnote ⁹⁶

C. Subdued state activism reloaded

The interval between the Treaty of Maastricht and the Treaty of Lisbon largely overlapped with what is commonly described as ‘the Great Moderation’, a period characterized by sustained economic expansion, rising trade volumes, low inflation, and relative currency stability.Footnote ⁹⁷ The principal drivers of this trajectory were private investment and the liberalisation of capital flows, whereas fiscal and industrial policies remained peripheral. Monetary policy was conducted in strict adherence to monetarist orthodoxy, oriented toward fundamental macroeconomic indicators and deliberately refrained from both credit allocation measures and the monetary financing of public deficits.Footnote ⁹⁸

Institutional and policy developments within the EU broadly conformed to this framework. For present purposes, it is significant that despite extensive debates on political union and European constitutionalism at the turn of the century, no substantive progress was made toward completing EMU with a significant fiscal capacity. In the run-up to the second and third stages of EMU, national fiscal policies did move toward convergence, notwithstanding the fact that the enforcement of fiscal rules remained weak.Footnote ⁹⁹ Once established, the ECB operated strictly within its mandate,Footnote ¹⁰⁰ adopting an initial monetary policy strategyFootnote ¹⁰¹ that was fully consistent with monetarist tenetsFootnote ¹⁰² and, therefore, with no room for accommodating measures, let alone for any form of monetary financing of public deficits.Footnote ¹⁰³

As for state intervention, the only notable development was a more permissive stance on state aid. State financing of public services was interpreted with greater flexibility under the treaty framework,Footnote ¹⁰⁴ and with the State Aid Action Plan 2005–2009 Footnote ¹⁰⁵ the Commission refined its approach in two key respects. First, it adopted a more systematic economic methodology in assessing state aid proposals: Member States were required to demonstrate that interventions addressed clear market failures – such as externalities, information asymmetries, coordination problems, or public goods – and that aid was the most suitable instrument for remedying them, given its recognition as a generally suboptimal policy tool.Footnote ¹⁰⁶ Second, the Commission sought to reorient state aid expenditures toward the objectives of the Lisbon Strategy, particularly innovation, research and development, support for new enterprises, and human capital formation.Footnote ¹⁰⁷ To facilitate this shift, it exempted certain categories of aid from the notification procedure.Footnote ¹⁰⁸ Building on the Enabling Regulation,Footnote ¹⁰⁹ which had already empowered the Commission to waive notification requirements for specific types of aid, this reform streamlined approval processes, accelerated reviews, and reduced administrative burdens, thereby allowing the Commission to concentrate its scrutiny on the most consequential measures.Footnote ¹¹⁰

The global financial crisis abruptly ended this course of political economy and triggered a fundamental reconsideration of key elements of the Maastricht economic constitution. In the face of dramatic world-wide market failures, state activism briefly re-emerged to stabilise capitalism and avert a global depression.Footnote ¹¹¹ The EU participated in this effort: in December 2008, the European Council adopted a European Economic Recovery Plan, largely financed through national budgets and supported by the ECB’s accommodating monetary policy.Footnote ¹¹² Between 2008 and 2011, national governments provided the financial sector with support amounting to approximately EUR 4.5 trillion.Footnote ¹¹³ However, by the autumn of 2009 stimulus measures were already being phased out and replaced with austerity programmes, premised on the belief that fiscal consolidation would restore economic growth.Footnote ¹¹⁴ This misguided policy shift, compounded by the panic following the disclosure of Greece’s actual fiscal position, precipitated the sovereign debt crisis. In response, EU institutions doubled down on fiscal discipline, thereby further constraining state intervention.

Admittedly, at the height of the crisis, EU institutions pledged to pursue the long-term completion of a genuine fiscal union.Footnote ¹¹⁵ The envisaged roadmap entailed, first, the imposition of tighter budgetary constraints and the implementation of structural reforms at the national level, to be followed by treaty reforms establishing an EU fiscal capacity and common debt instruments. Of this ambitious plan, however, only the enhanced coordination of national budgets materialised. Economic policy coordination was broadened in scope,Footnote ¹¹⁶ rendered more entrenched,Footnote ¹¹⁷ and endowed with more ambitious fiscal targets.Footnote ¹¹⁸ It also became more detailed in prescribing structural reformsFootnote ¹¹⁹ and more intrusive in supervisory mechanisms.Footnote ¹²⁰ Simply put: EU economic governance evolved into a form of executive federalism that constrained national democratic policymaking and curtailed state activism even more.Footnote ¹²¹ The authority of EU law was mobilised in the service of deeper economic convergence,Footnote ¹²² but little progress was made toward the creation of a pan-European democracy or a supranational activist government. The European Fund for Strategic Investments (EFSI) (the so-called ‘Juncker Plan’) stands as the sole significant gesture in that direction.Footnote ¹²³ It established an EU guarantee of EUR 16 billion,Footnote ¹²⁴ complemented by an additional EUR 5 billion guarantee from the European Investment Bank, which the latter leveraged to raise EUR 60 billion on capital markets. These resources were deployed to de-risk private investment by covering up to 20 per cent of the capital of selected projects.Footnote ¹²⁵

Against this backdrop, Member States remained the primary drivers of activist economic policies. In 2012, the Commission reinforced its approach with the EU State Aid Modernisation (SAM) initiative, building on the framework established by the State Aid Action Plan.Footnote ¹²⁶ Aligning with the broader push for fiscal consolidation, the SAM sought to sharpen the focus of public expenditure on growth-oriented policies under the Lisbon Strategy.Footnote ¹²⁷ This required stricter yet more targeted state aid control. Priority was given to aid measures that complemented private investment and incentivised beneficiaries to undertake activities they would not have pursued otherwise.Footnote ¹²⁸ The exemptions introduced under the Enabling Regulation were further expanded to cover additional aid categories and consolidated in a General Block Exemption.Footnote ¹²⁹

However, if EMU survived the global financial crisis and the sovereign debt crisis, it was not due to stricter fiscal discipline, to emergency financial assistance or the intergovernmental rescue plans designed to prevent its dissolution. Rather, it was thanks to the activism of the ECB.

Compared with other central banks, the ECB’s transition to activism was rather slow and reluctant. Already at the outset of the global financial crisis central banks had embarked into unconventional monetary policies challenging the monetarist operational framework of central banking.Footnote ¹³⁰ In a departure from their previously reactive mode of operation, central banks had engaged in massive purchase of private and public financial products.Footnote ¹³¹ Initially, these programmes had been conceived of as emergency measures justified by the need to secure financial stability; later, they were consolidated as the ‘new normal’ for central banking.Footnote ¹³²

For the ECB, unconventional monetary policies were particularly controversial due to political opposition within and outside its Governing Council and to the legal constraints established at Maastricht. In the early stages of the global financial crisis, the ECB was ready to provide banks with liquidity, purchase private bonds and relax collateral requirements – all of which weakened the commitment to act in accordance with the principle of an open market economy with free competition.Footnote ¹³³ However, it was in coping with the sovereign debt crisis that the ECB became most embroiled in an interventionist spiral of unprecedented dimensions.Footnote ¹³⁴

Initially, with the Targeted Longer-Term Refinancing Operations (TLTROs), the much-needed liquidity was offered to banks, creating the conditions for significant purchases of public bonds.Footnote ¹³⁵ Then, sensing that the pricing of public bonds did not correctly reflect national economic fundamentals,Footnote ¹³⁶ it decided to purchase debt instruments directly in the secondary market with the Securities Markets Programme (SMP), Footnote ¹³⁷ a temporary plan aimed at purifying their price from irrational private investor assessments.Footnote ¹³⁸ The same goal inspired the Outright Monetary Transactions (OMT),Footnote ¹³⁹ the programme through which the ECB signalled its determination to act as a conditional lender of last resort not only on behalf of financial actors but also of national governments entered in a macroeconomic adjustment programme or a precautionary programme under the European Stability Mechanism.Footnote ¹⁴⁰ Finally, once the worst of the crisis had passed, but with European economies still threatened by deflation, the ECB normalised unconventional monetary policies through the Asset Purchase Programme (APP), a substantial programme of purchasing both private and public debt instruments. In particular with the Public Sector Purchase Programme (PSPP),Footnote ¹⁴¹ the public bonds section of the APP, the ECB became the biggest creditor of Eurozone Member StatesFootnote ¹⁴² with the tacit acquiescence of national governments.Footnote ¹⁴³ The policy could be explained as a manifestation of proportionate empoweringFootnote ¹⁴⁴ compensating for the absence of a robust fiscal authority.Footnote ¹⁴⁵ Yet, as the German constitutional court was ready to highlight,Footnote ¹⁴⁶ the departure from the narrow role assigned to the central bank by the Treaty of Maastricht was radical.Footnote ¹⁴⁷ To certify this more interventionist role of the central bank, the interpretation of key treaty provisions had to be adapted to the new economic landscape. This involved reconciling the use of unconventional monetary policy with a treaty framework that was, to say the least, sceptical of central banking activism.Footnote ¹⁴⁸

The focal points of this hermeneutic massaging were the scope of monetary policy (and, therefore, the ECB’s mandate) and the prohibition of monetary financing. As for the former, the Court of Justice had to decide whether Article 127 TFEU could legitimate the OMT and PSPP programmes as measures of monetary policy. The Court responded positively by ruling, rather uncontroversially, that the boundaries of EU monetary policy must be construed in the light of its treaty objectives and tools.Footnote ¹⁴⁹ The standard of review employed by the Court of Justice to accomplish this task was more disputable:Footnote ¹⁵⁰ rejecting the stricter approach suggested by the German Constitutional Court,Footnote ¹⁵¹ the Court of Luxembourg opted for a more deferential criterion on the basis of the technical nature and complexity of monetary policy.Footnote ¹⁵² This resulted in the recognition of broad discretion to the ECB: not only could the latter approve measures contributing to price stability,Footnote ¹⁵³ but, in an application of the implied powers doctrine, it could also undertake programmes conducive to the adequate transmission and unity of monetary policy.Footnote ¹⁵⁴ As for the tools, the Court of Justice recognised that, under article 18 of the ESCB Statute, the purchase of public bonds is legitimate.Footnote ¹⁵⁵ Aware that unconventional monetary policies may indirectly affect national economic policies,Footnote ¹⁵⁶ the Court ruled that their adoption was subject to the principle of proportionality. Under the favoured standard of review, this would leave the ECB with ample discretion.

With regard to the prohibition of monetary financing, the Court of Justice was called upon to clarify the extent to which Article 18 ESCB could be employed without infringing Article 123 TFEU. The issue was particularly delicate because, unlike under its orthodox application, the programmes at stake involved the purchase of low-rated public bonds, which could be held until maturity. The Court began by emphasizing that Article 123 TFEU prohibits only the direct purchase of government debt instruments, leaving secondary market operations unaffected.Footnote ¹⁵⁷ It then introduced two important qualifications on the use of Article 18 ESCB. First, secondary market purchases must not produce effects equivalent to direct purchases.Footnote ¹⁵⁸ In practice, this required that primary market participants could not be certain that the ECB would subsequently acquire the bonds within a defined timeframe.Footnote ¹⁵⁹ Second, unconventional monetary policies must not relieve governments of their responsibility to pursue sound budgetary policies.Footnote ¹⁶⁰ Accordingly, the ECB had to retain the ability to sell debt instruments in cases of unsound national policies.Footnote ¹⁶¹ To reinforce fiscal discipline, the Court further noted that ECB interventions should be complemented by strict conditionality attached to financial assistance programmes (as with the OMT)Footnote ¹⁶² or by safeguards embedded in monetary measures – such as limits on the volume of eligible bonds, allocation of purchases according to the ECB capital subscription key, caps on the quantity of bonds acquired per issue and issuer, and stringent creditworthiness criteria (as applied in the PSPP).Footnote ¹⁶³

In sum, the global financial and sovereign debt crises left Europe with an incomplete EMU and an institutional framework persistently sceptical of state activism. Crisis responses largely reinforced the neoliberal paradigm rooted in Maastricht, as reflected in stricter constraints on national fiscal policies and the conditionality attached to financial assistance programmes. The ECB stood out as an exception: the deployment of unconventional monetary policies – first to cope with the emergency and safeguard the euro and later as a normalised tool to counter deflation – necessitated a reconsideration of its role and operational framework. Within this context, activist instruments that had once seemed obsolete were reluctantly rehabilitated.

A. Unleashing state activism

As during the height of the global financial crisis, in the most dramatic phases of the pandemic EU institutions once again turned to state interventionism as the last resort to shore up national economies. Vast financial resources were urgently required to reinforce health systems and support firms and workers while large parts of the economy remained frozen. A broad consensus quickly formed around two points. First, state institutions were regarded as the most effective authorities to carry out these rescue efforts. Second, given the rapid deterioration of public and private finances, the necessary funds should be borrowed on financial markets rather than raised through taxation.Footnote ¹⁶⁵

EU institutions were called upon to complement Member States’ initiatives. This required, first and foremost, a relaxation of key pillars of the EU’s economic constitution that constrained state activism. In particular, legal limits on spending and borrowing were swiftly loosened.

State aid was the first policy area in which treaty constraints were relaxed. The Commission introduced soft-law instruments to streamline the authorisation of aid measures aimed at providing liquidity to firms, compensating otherwise healthy undertakings for the damage caused by the outbreak, and ensuring the continuity of economic activity.Footnote ¹⁶⁶ As a result, compensation for companies in the sectors hardest hit – such as transport, tourism, culture, hospitality, and retail – was allowed under Article 107(2)(b) TFEU. Additional temporary measures were authorised under Article 107(3)(b) TFEU, provided that national governments complied with detailed compatibility conditions.Footnote ¹⁶⁷ Finally, the scope of the General Block Exemption Regulation was both extended and prolonged.Footnote ¹⁶⁸

Next, fiscal constraints were loosened. EU finance ministersFootnote ¹⁶⁹ decided to trigger the general escape clause of the Stability and Growth Pact.Footnote ¹⁷⁰ This authorised national governments to temporarily deviate from their adjustment paths toward medium-term fiscal objectives.

Resorting to the flexibility built into the EU’s economic constitution highlighted the purportedly contingent nature of the Union’s return to state activism. Tellingly, EU institutions refrained from introducing reforms that would permanently shift the system from subdued to full-blown state activism, thereby preserving the Maastricht constitutional baseline. Yet, the mere relaxation of constitutional constraints was insufficient to resolve the crisis. Loosening the rules on state aid and fiscal policy enabled governments to intervene in support of their national economies.Footnote ¹⁷¹ Owing to the wide variation in national financial capacities and the lack of substantial equalising interventions by the EU budget, it was foreseeable that disparities within the Eurozone would deepen.Footnote ¹⁷² In practice, borrowing was not an equally viable option for all governments, as financially distressed Member States faced difficulties in accessing capital markets, especially in the absence of central bank support. It thus fell to the ECB once again to break the deadlock and avert the collapse of the EMU, for the second time in less than a decade, through measures that not only stretched the boundaries of its mandate but also further diluted the prohibition on monetary financing of government debt.

B. Monetary equalisation

Like other central banks in advanced economies, the ECB implemented a series of measures to provide commercial banks with liquidity on favourable terms during the most acute phase of the pandemic, so as to ensure the continued flow of credit to businesses and households. Additional measures – including purchases of private-sector securities and a redefinition of the eligibility criteria for collateral used by commercial banks to access ECB credit on advantageous terms – also supported this objective.Footnote ¹⁷³

However, by far the most important instrument designed to address the economic crisis was the Pandemic Emergency Purchase Programme (PEPP).Footnote ¹⁷⁴ Through this programme, the ECB committed to purchasing corporate bonds and government debt securities in response to the extraordinary crisis, so as to ensure the survival of companies and workers during a period of severe economic shock.Footnote ¹⁷⁵

The programme granted the ECB’s Governing Council and Executive Board considerable flexibility to adjust interventions in response to the unpredictable developments of the pandemic.Footnote ¹⁷⁶ Eurosystem central banks were thus required to purchase securities as necessary and proportionate to address the extraordinary economic and market challenges threatening the ECB’s ability to fulfil its mandate.Footnote ¹⁷⁷ Eligible securities were determined using the same criteria as in the APP, covering a wide range of maturities.Footnote ¹⁷⁸ As under the PSPP, the capital key – each member state’s share in the ECB’s capital – served as the general criterion for allocating purchases; critically, however, compliance could be maintained in a highly flexible manner.Footnote ¹⁷⁹ No explicit conditionality was imposed, nor were volume limits established for purchases from any single issuer.

The programme involved several clear departures from the requirements set by the Court of Justice regarding compliance with Article 123 TFEU. Remember that for purchases of government bonds in secondary markets to avoid being equivalent to direct financing, a blackout period was required, and the monthly volume of bonds purchased from any given Member State was supposed to remain uncertain. The first requirement was not implemented, and the second was effectively compromised, as the ECB purchased roughly three-quarters of the government bonds issued by Member States during this period.Footnote ¹⁸⁰ Questions also arose regarding whether adequate safeguards existed to prevent these purchases from undermining sound budgetary discipline. First, the sheer scale of ECB intervention, combined with the relaxation of fiscal rules, could encourage excessive spending. Second, no limits were set on the volume of securities per issuing state, the capital key criterion was applied flexibly, and the credit-quality evaluation criteria were relaxed.

Although the ECB could not openly acknowledge it, its intervention had a significant equalising effect, as it ensured market access for the most indebted Member States.Footnote ¹⁸¹ Large-scale asset purchases by the Eurosystem not only exerted downward pressure on interest rates but could also generate monetary income that national central banks – subject to their own legal frameworks and profit-distribution rules – could partially transfer to their respective governments.Footnote ¹⁸² In principle, the prohibition on monetary financing, and particularly the capital key criterion derived from it, hindered this course of action. This obstacle was effectively circumvented through the flexibility built into the PEPP, which allowed the ECB to prioritise the debt instruments of countries in greatest need during the most acute phases of the crisis, and subsequently stabilise its balance sheet through more proportional purchases once the worst had passed.Footnote ¹⁸³

The ECB’s activist orientation was further confirmed in its updated monetary policy strategy,Footnote ¹⁸⁴ formulated in 2021 as a revision of the frameworks established in 1998 and 2003. The document endorsed the paradigm shift in central banking that had emerged during the global financial crisis and the pandemic, while also reinforcing the activist trajectory of EU central banking. It achieved this by redefining the objective of price stability and strengthening the ECB’s secondary mandate, particularly with respect to addressing climate change.

First, the ECB reaffirmed its commitment to its Treaty mandate while offering a broader interpretation of it. A key change concerned the definition of price stability: whereas the 2003 strategy targeted an inflation rate below, but close to, 2 per cent, the new strategy committed to achieving the same target in the medium term.Footnote ¹⁸⁵ This revision recognised the deflationary pressures in the European economy and emphasised a symmetric approach, treating both negative and positive deviations as ‘equally undesirable’.Footnote ¹⁸⁶ It implied not only a more dynamic adjustment of key interest rates but also ‘especially forceful or persistent monetary policy measures’ to prevent negative deviations from becoming entrenched.Footnote ¹⁸⁷ In practice, the ECB seemed to acknowledge that unconventional policies could be a standard instrument of monetary policy.Footnote ¹⁸⁸

The ECB’s strengthened commitment to consider the impact of climate change on price stability and the financial system reinforced the perception that the central bank would maintain an interventionist stance.Footnote ¹⁸⁹ By this time, the links between monetary policy and climate issues were widely acknowledged, particularly the tension between EU environmental policies and the ECB’s credit policy.Footnote ¹⁹⁰ Under its unconventional monetary policies, the ECB had purchased private securities according to the principle of market neutrality, that is, reflecting the composition of eligible securities.Footnote ¹⁹¹ In practice, however, this inadvertently supported environmentally harmful activities. This prompted the ECB to develop a climate-related action plan, aiming to make environmental considerations in its operations both systematic and transparent.Footnote ¹⁹² Concrete measures were first outlined in the 2021 Action Plan Footnote ¹⁹³ and the 2022 Climate Agenda.Footnote ¹⁹⁴ The ECB committed to reinvesting proceeds from previous purchases in issuers with stronger climate performance,Footnote ¹⁹⁵ limiting the share of high-carbon securities accepted as collateral, and requiring credit rating agencies to give greater weight to climate-related risks. Unsurprisingly, the plan raised questions regarding its compatibility with existing treatiesFootnote ¹⁹⁶ and the prominent role the ECB had assumed in the absence of a robust system of democratic accountability.Footnote ¹⁹⁷

C. One-off fiscal equalization

Unlike during the sovereign debt crisis, EU political institutions took an active role in managing the COVID-19 crisis through prominent fiscal policy initiatives. Confronted with the EU’s limited fiscal capacity and treaty constraints, policymakers were forced to seek alternative sources of financing and resort to a certain degree of creative legal engineering.Footnote ¹⁹⁸

A first step toward modest fiscal equalisation was the European instrument for temporary Support to mitigate Unemployment Risks in an Emergency (SURE).Footnote ¹⁹⁹ Its objective was to fund national measures aimed at ‘reducing the incidence of unemployment and loss of income’ resulting from containment policies.Footnote ²⁰⁰ The instrument was designed as temporary, complementary,Footnote ²⁰¹ and voluntary.Footnote ²⁰² Under SURE, the Commission could raise up to EUR 100 billion on international capital marketsFootnote ²⁰³ to finance national job-retention schemes in participating Member States.Footnote ²⁰⁴ Financial assistance took the form of loans based on the ‘back-to-back’ operations model.Footnote ²⁰⁵ The servicing of EU debt thus relied primarily on national repayments. To reinforce the credibility of this commitment, Member States irrevocably, unconditionally, and on demand counter-guaranteed the risks borne by the Union.Footnote ²⁰⁶ Given the unpredictable course of the pandemic and the voluntary nature of the programme, the allocation of loans among participating Member States remained highly discretionary,Footnote ²⁰⁷ subject only to a concentration limit whereby no more than 60 per cent of the total envelope could be granted to the three Member States receiving the largest shares.Footnote ²⁰⁸

The programme supported a range of job-retention schemes covering roughly one-third of total EU employment.Footnote ²⁰⁹ Nineteen Member States benefited from the financial assistance, which proved particularly significant for those most severely affected by the pandemic and facing higher borrowing costs. By leveraging the EU’s credit rating and the joint guarantees of all Member States, beneficiaries realised considerable interest savings.Footnote ²¹⁰ The equalising character of the programme was evident both in the fact that the three largest beneficiaries – Italy, Spain, and Poland – were among the countries hardest hit by the pandemic, while the non-beneficiary countries largely coincided with those able to raise resources on more favourable terms than the EU.Footnote ²¹¹

However, the boldest fiscal response to the COVID-19 crisis was Next Generation EU (NGEU), an unprecedented programme financed through EU borrowing on financial markets to support national recovery and resilience plans.Footnote ²¹² While widely hailed as a potential model for future EU fiscal integration, NGEU had limited macroeconomic stabilising effectsFootnote ²¹³ and was explicitly approved as a one-off instrument,Footnote ²¹⁴ justified by the exceptional circumstances of the pandemic.Footnote ²¹⁵ Nonetheless, even if temporary, the programme required a reconsideration of longstanding Treaty interpretations.Footnote ²¹⁶

The financial framework of NGEU consisted of an envelope of EUR 750 billion,Footnote ²¹⁷ raised on financial marketsFootnote ²¹⁸ and allocated to Member States primarily in the form of loans and non-repayable grants.Footnote ²¹⁹ To comply with Article 310 (1) TFEU – which requires that all EU revenue and expenditure appear in the budget – the grant portion of the programme was classified as ‘external assigned revenue’.Footnote ²²⁰ This arrangement allowed borrowing to remain off-budget, thereby avoiding a formal breach of the principle of budgetary balance.Footnote ²²¹ Yet, this temporary ‘shadow budget’Footnote ²²² merely deferred fiscal pressures: debt repayments, scheduled between the end of the 2021–2027 Multiannual Financial Framework (MFF) and 2058,Footnote ²²³ are expected to create liabilities in future EU budgets. To reconcile this with Article 310 (4) TFEU, the principle of budgetary discipline received an evolutionary interpretation: the EU could borrow for expenditure provided that the corresponding liabilities were matched by solid assets.Footnote ²²⁴ Accordingly, funds allocated as loans were to be repaid directly by the beneficiary Member States, while funds disbursed as grants would ultimately be repaid through the EU budget, supported by a temporary and dedicated increase in national contributions.Footnote ²²⁵

On the whole, such a complex architecture served distinct equalising goals evident in the distribution criteria enshrined in programme.Footnote ²²⁶ It is well known that those fundings were earmarked to pursue a wide variety of policy goals,Footnote ²²⁷ that the governance of the plan loosely followed the template of cohesion policy,Footnote ²²⁸ and that disbursements were subject to a complex mix of ex ante Footnote ²²⁹ and ex post conditionalities.Footnote ²³⁰ To our purposes, what is of special significance is that the NGEU and, most notably, its grant part, was conceived of as a tool for significant cross-country redistribution.Footnote ²³¹ EU legislators were aware that, absent equalising measures, the post-pandemic recovery risked being very uneven in different Member States and that, owing to their different fiscal abilities, divergences between national economies were poised to increase endangering both the single market and territorial cohesion.Footnote ²³² Therefore, support should target in particular hard hit Member States.Footnote ²³³

This notion was reflected in the allocation mechanism for non-repayable grants, which considered the economic impact of the pandemic, per capita GDP, and the unemployment rate as key variables alongside population.Footnote ²³⁴ Admittedly, the extent of cross-country redistribution remains contested. Some scholars argue that the programme is regressive, as it neither fully reflects the pandemic’s actual impact nor ensures substantial redistribution from wealthier to poorer Member States.Footnote ²³⁵ Others note that the final allocation mechanism departed from the Commission’s initial proposal by reducing support to lower-income countries, instead favouring larger economies and those with steeper GDP declines, making the system resemble a form of fiscal insurance.Footnote ²³⁶ A definitive assessment of the redistributive effects of the plan will only be possible once decisions on debt repayment are finalised.Footnote ²³⁷

Nevertheless, two preliminary conclusions can already be advanced. First, hard-hit and fiscally constrained countries received the largest allocations of non-repayable grants. For instance, Spain (22.85 per cent) and Italy (20.43 per cent) – reflecting both their economic weight and pandemic toll – topped the list, followed by France (11.08 per cent) and Germany (8.29 per cent), though the latter’s share was modest relative to its GDP. Per capita, Greece, Portugal, Spain, and Italy ranked highest, while Eastern European states such as Bulgaria, Croatia, and Slovakia received two to three times more than their German and French counterparts.Footnote ²³⁸ Second, no substantive legal constraint barred the EU from spending significant amounts of financial resources. Provided national governments unanimously consent and secure revenue, the EU can deliver substantial (albeit not unlimited) grant-based assistance to Member States.Footnote ²³⁹

D. Emergency equalisation?

The response to the Covid-19 pandemic witnessed the emergence of an original and unprecedented form of EU-enabled state activism, characterised by a clear equalising aspiration. EU institutions played a central role not only by loosening legal constraints that normally limit state action but also by implementing a range of monetary and fiscal measures designed, whether explicitly or implicitly, to reduce territorial disparities. Creative interpretations of the treaties have ushered in a mode of intervention that holds substantive and institutional appeal. Substantively, EU equalising programmes may help narrow fiscal disparities among Member States and thus enable forms of activist government that respect their equal status, promote territorial cohesion, and avoid disrupting the single market. Institutionally, EU-enabled state activism seems to offer the model of intervention most consistent with the Union’s demoicratic character:Footnote ²⁴⁰ rather than developing forms of direct EU rule, for which the Union currently lacks both the democratic credentials and the institutional capacity, EU measures strengthen domestic state institutions, recognising them as the most appropriate venues for revitalising state activism given their deeper democratic embeddedness and greater administrative capacity.

To be sure, concerns remain about the actual implementation of equalising EU-enabled state activism during the pandemic. The modes of governance tested in both monetary and fiscal equalising programmes relied heavily on unaccountable technocratic bodies and executive authorities,Footnote ²⁴¹ and the conditionalities attached to NGEU are difficult to square with the principle of conferral and with national democratic self-government.Footnote ²⁴² Moreover, the underlying logic – particularly evident in NGEU – is that the substantial financial support provided by the Union to Member States with more limited fiscal capacity comes at the price of equally substantial constraints on their discretion over activist policy choices.Footnote ²⁴³ Nonetheless, even if imperfect, EU-enabled state activism may be understood as a first approximation of a mode of governance in which most activist efforts take place at the level where democratic resources and collective identities are primarily located, while the Union plays a complementary enabling role that is consistent with its current democratic credentials.Footnote ²⁴⁴

Importantly, this equalising dynamic was largely driven by the emergency context. The crisis justified relaxing state aid rules, easing fiscal constraints, allowing the ECB to purchase significant amounts of state debt with temporary deviations from the capital key, and creating key mechanisms of financial assistance. Without an emergency to justify these legal relaxations and exert pressure on political institutions, the EU would remain constrained by its constitutional framework. Indeed, there are limits to what legal creativity can achieve, and several obstacles stand in the way of enabling state activism in ordinary times, chief among them the requirement of unanimity for both the mobilisation of the EU budget and the issuance of EU public debt to finance an EU fiscal policy.Footnote ²⁴⁵ Absent a treaty reform, state activism would likely remain inchoate or develop in a highly asymmetric manner.

A. ECB disengagement

For the ECB, the post-pandemic phase was marked by decisions designed to gradually realign monetary policy with monetarist orthodoxy. This entailed a normalisation of monetary policy and, in particular, the progressive withdrawal of support for national fiscal policies. In effect, this amounted to retreating from the equalising role that monetary policy had played during the pandemic.

The first step in this direction was the introduction in July 2022 of the Transmission Protection Instrument,Footnote ²⁴⁶ a new tool that redefined the conditions for ECB interventions to safeguard the transmission mechanism of monetary policy. With this decision, the ECB explicitly signalled its intention to cease using monetary policy as a means of accommodating government expenditures. Indeed, compared with the PEPP, the TPI could more credibly be presented as a tool to safeguard the effective transmission of monetary policy. It represented an adapted version of the OMT since, like the latter, it could be selectively activated to counter unwarranted market turbulence that threatened monetary policy in the euro area.Footnote ²⁴⁷ In addition, it permitted the purchase of government bonds on secondary markets without any predefined limits, with eligible securities having maturities between one and ten years. Unlike the OMT, however, the activation of the TPI was not tied to a macroeconomic adjustment programme or to the involvement of the European Stability Mechanism, thus removing a key obstacle to ECB intervention, namely the opposition of national governments. Moreover, the TPI also imposed conditions reinforcing fiscal policy coordination, as it limited ECB support to states facing deteriorating financing conditions that were not attributable to their underlying economic fundamentals.Footnote ²⁴⁸

The second step in the ECB’s disengagement strategy was the launch of Quantitative tightening,Footnote ²⁴⁹ namely the gradual divestment of securities acquired under previous quantitative easing programmes. The purchase of public bonds under PEPP had already been discontinued in March 2022Footnote ²⁵⁰ and under APP in June of the same year.Footnote ²⁵¹ Divestment began in the spring of 2023 and was carried out in a phased manner through the partial reinvestment of maturing securities, with the expectation that excess liquidity would be absorbed by 2029. Even then, however, the pre-global financial crisis conditions would not be restored, as the ECB’s balance sheet would remain three times larger than in 2007.

This strategy served multiple purposes.Footnote ²⁵² First, the ECB judged that its reserves exceeded what was necessary to steer short-term market rates. In this context, it could reduce its holdings while regaining flexibility for future interventions should the scope for interest rate policy be exhausted again. Second, divestment was intended to correct the distortions created by unconventional monetary policies, since the ECB recognised that its large-scale interventions had inflated the value of financial assets and real estate – developments with adverse implications for both financial stability and social cohesion. Gradual sales would ease these imbalances and contribute to the fight against inflation. Third, the ECB also sought to limit its exposure on financial and political grounds. Within a context still shaped by monetarist orthodoxy, the size of its balance sheet risked reviving fears of fiscal dominance, potentially undermining confidence in monetary policy. In short, while the ECB acknowledged it could not revert to the marginal role it had occupied before the financial crisis, it was equally determined to reassure markets and governments that its turn toward interventionism was only temporary.

Lastly, the opportunity to demonstrate its attachment to monetary orthodoxy was provided by the surge in inflation that emerged in the final stages of the pandemic and was later exacerbated by the shock following the Russian invasion of Ukraine. Already in 2021, looming price increases linked to pandemic-related supply chain disruptions were evident. In response to the first signs of inflation, central banks adopted a cautious stance, waiting to see whether the increases would fade on their own or whether interest rate intervention would be required.Footnote ²⁵³ The outbreak of war in Ukraine, however, pushed central banks to abandon this wait-and-see approach and to implement aggressive interest rate hikes, even though many analysts contended that the inflationary shock would be temporary.Footnote ²⁵⁴ The Federal Reserve was the first to act, and other major central banks soon followed, motivated by concerns over capital flight and excessive currency depreciation. In June 2022, the ECB Governing Council decided a 25-basis-point rate increase, announcing a further rise for September, and left open the prospect of additional hikes if necessary.Footnote ²⁵⁵ After almost a decade of near-zero rates, the main refinancing rate began to climb again, rising from 0.25 per cent in July 2022 to 4.50 per cent in September 2023.Footnote ²⁵⁶

Although forced by the Federal Reserve’s moves, the ECB’s shift in monetary policy represented a radical departure from the pandemic phase. While the pandemic response had been managed with some success through the coordination of monetary, fiscal, and industrial policy, the inflationary shock of 2022 marked a rapid return to monetarism. This response rested on the questionable assumption that the situation resembled the inflationary shocks of the 1970s,Footnote ²⁵⁷ and that the raising of interest rates was therefore the most appropriate policy answer. The decision to raise interest rates, however, came with significant drawbacks. Higher rates could dampen inflationary pressures, but they also constrained national governments’ access to financial markets, thereby curbing public investment at a moment when it was most needed. Moreover, tighter monetary policy carried the danger of slowing economic activity and pushing unemployment upward. In this sense, the ECB’s return to monetarist orthodoxy not only overlooked the distinctive nature of post-pandemic inflation but also foreclosed the possibility of an economically more nuanced and socially more balanced response.Footnote ²⁵⁸

B. The return of (revised) legal constraints

With the worst phase of the pandemic behind, legal constraints on national fiscal and industrial policies were expected to be reinstated. However, this process was delayed and only partially implemented due to another unforeseen crisis: Russia’s invasion of Ukraine. Beyond its geopolitical impact, the war caused severe and widespread economic disruptions, further postponing the full restoration of state aid rules. Building on the lessons of the Covid-19 Temporary Framework, the Commission introduced a new Communication setting out compatibility criteria for approving aid measures.Footnote ²⁵⁹ Priority was given to liquidity support for the most severely affected businesses,Footnote ²⁶⁰ as well as measures aimed at accelerating the green transition through strategic investments.Footnote ²⁶¹ Consequently, Member States increasingly directed aid toward environmental protection, energy, and technological innovation,Footnote ²⁶² with block-exempted measures accounting for 88 per cent of total state aid.Footnote ²⁶³

It was, however, through the reform of the rules governing the coordination of economic policies that the EU signalled its aspiration to scale back fiscal activism.Footnote ²⁶⁴ For at least a decade, the European fiscal rules under the Stability and Growth Pact had been at the centre of expert debates. Critics highlighted their pro-cyclical effects, excessive complexity, lack of transparency, and overall ineffectiveness.Footnote ²⁶⁵ During the suspension of these rules, the European Commission had attempted to address such concerns with a cautious amendment proposal, which already suggested that the priority in Brussels was reducing public spending rather than promoting public investment.Footnote ²⁶⁶ In short, rather than a paradigm shift, Europe was moving toward a revival, albeit stripped of its harshest elements, of the pre-pandemic framework.Footnote ²⁶⁷ Once the proposal reached the Council, it was amended to become even more restrictive. The approved text thus left little doubt: European institutions were steering toward disengagement from national public investments and a return to fiscal consolidation policies.

Admittedly, on the surface, the new Stability and Growth Pact appeared to pursue more balanced objectives, such as the gradual, realistic, and lasting reduction of debt and the creation of fiscal space for countercyclical policies and investment strategies.Footnote ²⁶⁸ Yet, beyond this rhetoric, continuity with the previous framework and its inherently restrictive character becomes evident upon closer examination of the substantive and procedural features of the new institutional setup.

First, the European SemesterFootnote ²⁶⁹ and the Maastricht Treaty’s deficit and debt limits were reaffirmed.Footnote ²⁷⁰ Within this longstanding institutional framework, a new instrument was introduced as the primary reference point for fiscal policy coordination: the medium-term national structural budget plan.Footnote ²⁷¹ This plan required national governments, the Commission, and the Council to agree on a programme of reforms, investments, and – most importantly – an individualised debt reduction path spanning four years, with the possibility of a seven-year horizon if the government committed to more ambitious reforms.Footnote ²⁷² The overarching objective of these paths was to ensure compliance with the Maastricht criteria by the end of the adjustment period,Footnote ²⁷³ particularly aiming for the deficit to return well below the 3 per cent threshold.Footnote ²⁷⁴

Second, the new Stability Pact established specific rules governing the pace of deficit and debt reduction. To ensure debt sustainability, it required that the debt-to-GDP ratio decline by at least one percentage point per year for states with public debt above 90 per cent of GDP, and by 0.5 percentage points for those with debt between 60 per cent and 90 per cent.Footnote ²⁷⁵ Regarding deficits, an annual structural improvement of 0.4 per cent of GDP was mandated, but this could be lowered to 0.25 per cent if the adjustment period was extended.Footnote ²⁷⁶

Thus, while deficits and public debt were – at least on paper – placed on a steady trajectory toward meeting treaty-mandated targets, the approach to public investment remained ambivalent. On one hand, the new Stability and Growth Pact introduced a limited ‘golden rule’ for EU-cofinanced investments, allowing expenditures fully or partially supported by European funds to be excluded from net spending calculations.Footnote ²⁷⁷ On the other hand, it stopped short of establishing a growth-oriented trajectory for public capital spending comparable to the rigid debt-reduction requirements, and it did not extend the ‘golden rule’ to exempt nationally financed investments.

This framework could be interpreted in two rather opposite ways. On a benign reading, it could reflect a preference for the type of EU-enabled state activism tested during the NGEU era: by shielding only EU-funded investments from fiscal constraints, the rules encouraged Member States to pursue structural reforms while implementing public investments with shared financing and under Brussels’ oversight. On a more critical reading, however, the same rules reinforced fiscal discipline, leaving state activism contingent on future intergovernmental agreements on additional EU fundings. Without unanimous consent, such activism would become an asymmetric privilege, accessible only to deep-pocketed countries.

C. Stumbling blocks to a stronger EU fiscal capacity

The economic environment in which European institutions operate today differs sharply from that of the early 1990s, when the Maastricht Treaty was adopted. At the time, fiscal and industrial policies were largely dismissed as outdated, while growth was expected to stem from free capital movement and the capacity of national economies to attract the most productive and innovative investment flows. Today, however, European institutions face mounting societal demands for public investment to support decarbonisation, digitalisation, and responses to the geopolitical instability.Footnote ²⁷⁸

On all these fronts, European institutions confront a dual challenge. On the one hand, they must contend with the scale of subsidies and public investment mobilised by the U.S. and China for the green and digital transitions.Footnote ²⁷⁹ On the other hand, they remain constrained by the precarious budgetary position of many Member States and by the fiscal limits imposed under the renewed Stability and Growth Pact. The imperative to avoid falling behind global competitors while preventing further divergence within Europe points to a clear policy direction: the development of EU-level fiscal and industrial interventions.Footnote ²⁸⁰ This need is further underscored by requirements for macroeconomic stabilisation and by renewed, albeit still largely rhetorical, aspiration to financing European public goods.Footnote ²⁸¹ However, significant legal and political obstacles stand in the way of the transition from emergency fiscal measures to a strategically oriented fiscal policy.Footnote ²⁸²

From a legal standpoint, it is important to recall not only that the approval of NGEU was explicitly framed as exceptional, but also that this exceptionality proved decisive in the German Federal Constitutional Court’s ruling on it.Footnote ²⁸³ The Court held that the extraordinary nature of NGEU was essential in satisfying certain EU law requirements, especially in preventing the tenuous link between recovery plan and the pandemic emergency from amounting to a manifest violation of the treaties.Footnote ²⁸⁴ While Karlsruhe ultimately validated the key legal innovations underpinning NGEU, it also set out substantive guardrails that, in the absence of guidance from the European Court of Justice,Footnote ²⁸⁵ cast a shadow over new EU fiscal initiatives. Notably, the Court accepted a reinterpretation of the balanced budget rule to authorise EU borrowing: although the treaties do not explicitly confer such powers, they may be read as permitting them by analogy to national fiscal regimes.Footnote ²⁸⁶ The Court also endorsed the use of ‘shadow budgets’ to finance limited-duration spending programs, and even the recourse for spending purposes to legal bases other than Article 122 TFEU’s emergency clause.Footnote ²⁸⁷ However, the Court conditioned the viability of this solution on strict requirements: (1) borrowing authorisation must accrue exclusively to the EU; (2) the funds raised must be used solely to pursue objectives within EU competences; (3) borrowing must be subject to temporal and quantitative limits; and (4) the loan volume cannot exceed the Union’s total revenue from own resources.Footnote ²⁸⁸

The Federal Constitutional Court’s ruling foreshadows the possibility of deploying future financial instruments similar to NGEU, but only within qualitative and quantitative limits that may weaken their effectiveness.Footnote ²⁸⁹ Beyond these substantive constraints, the creation of new fiscal policy programs remains exposed to veto risks: whether through fresh borrowing mechanisms or new revenue streams for the EU budget, additional own resources require unanimous approval and national ratifications. While national governments succeeded in meeting this requirement during the Covid-19 emergency, replicating such consensus under less urgent and cogent circumstances appears far less likely.Footnote ²⁹⁰ As a result, the prospects for an EU-level fiscal policy remain tied to the possibility – yet for now an improbable one – of a new intergovernmental agreement.Footnote ²⁹¹

Both the Federal Constitutional Court’s decision and a sober reading of the treaties should therefore temper the optimism of those who see NGEU as heralding a new era of EU fiscal autonomy. Institutional creativity and expansive treaty interpretation may stretch the existing constitutional framework, but hard legal constraints – above all the procedural requirements prescribed by Article 311 TFEU – remain immovable barriers. Mounting geopolitical and economic pressures undoubtedly push towards deeper fiscal integration, yet equally powerful countervailing forces – whether through active resistance or passive inertia – continue to block substantial progress. Indeed, since the pandemic, no major experiment in EU fiscal policy has emerged. Instead, we have seen only low-profile measures, such as modest increases and reallocations within NGEU resources.Footnote ²⁹²

Let us be clear: procedural hurdles are only the tip of a far deeper structural iceberg. The stringent requirements of Article 311 TFEU for establishing new EU revenue streams reveal a deeper flaw in EMU’s original design, namely the construction of an incomplete (or asymmetrical) monetary union. This institutional choice reflected an often-overlooked reality that continues to shape debates on EMU’s future: neither at Maastricht nor in today’s EMU has there ever been a supranational political community or political system capable of generating the solidarity needed to legitimise a genuine and sufficiently robust European fiscal policy.Footnote ²⁹³

Against this backdrop, it is hardly surprising that the Commission’s flagship initiative, the Competitiveness Compass,Footnote ²⁹⁴ falls short on the crucial issue of funding. While the document acknowledges that achieving its objectives would require investment increases of around five percentage points of EU GDP per year, it places its main bet on mobilising private capital through a ‘Savings and Investment Union’.Footnote ²⁹⁵ In this vision, EU fiscal policy plays only a marginal role: the next MFF will see a modest increaseFootnote ²⁹⁶ and the available resources will be redirected to a ‘European Competitiveness Fund’ aimed primarily at de-risking private investment in strategic technologies and manufacturing.Footnote ²⁹⁷ Yet, one can doubt that this strategy alone will mobilise the required scale of investment. If the EU risks falling short of its competitiveness agenda, it will likely have no choice but to resort to a new round of monetary equalisation or rely on asymmetric state activism.Footnote ²⁹⁸ In this regard, the Commission appears committed to steering national expenditures towards shared EU goals in overt disregard of regional disparities, building on instruments developed during earlier crises. Still, such efforts will do little to prevent distortions in the internal market and the widening of regional inequalities.Footnote ²⁹⁹

D. Industrialization through rearmament

The indirect bias of the existing treaty framework toward asymmetric EU-enabled state activism is particularly evident in the field of investments for security and defence. Confronted with the twin pressures of Russian militarism and declining U.S. reliability,Footnote ³⁰⁰ both EU institutions and national governments have shown growing determination to strengthen deterrence capabilities.Footnote ³⁰¹ As a result, security and defence expenditures are set to rise to unprecedented levels, with clear repercussions for both industrial and fiscal policy.Footnote ³⁰²

Despite the European Commission’s grand rhetoric,Footnote ³⁰³ the EU’s adoption of a more bellicist posture has not triggered a qualitative or quantitative leap toward a federal structure grounded in both economic and security concerns.Footnote ³⁰⁴ In the Union’s new strategic blueprint – labelled Readiness 2030 – security imperatives more modestly drive the reorientation of the existing institutional framework rather than its transcendence.Footnote ³⁰⁵ Instead of creating a common supranational defence or preparing the EU for high-intensity warfare through structural reform of the defence governance, the initiative focuses primarily on stimulating national military spending with only limited equalisation measures. In short, rather than leveraging defence as a catalyst for deeper political integration, the EU appears to be treating rearmament as a proving ground for asymmetric state activism.

At first glance, Readiness 2030 appears to follow the familiar blueprint of the EU’s Covid-19 response, promoting an equalising form of EU-enabled activism in a context of emergency. Much like during the pandemic, the plan prioritises unleashing national fiscal policy, although this time only to bolster defence investments. To achieve this, fiscal rules are selectively relaxed, allowing member states to trigger national escape clauses in a coordinated fashion for security purposes.Footnote ³⁰⁶ Beyond fiscal flexibility, the EU offers financial assistance to reduce disparities in spending capacity and enhance interoperability, notably through joint procurement initiatives.

Upon closer examination, the equalising potential of Readiness 2030 proves largely illusory. While the plan encourages national governments to finance defence spending through market borrowing, it critically lacks ECB backing – a safeguard that would mitigate borrowing costs for highly indebted states. Unsurprisingly, this omission has created preconditions for further divergence. On the one hand, many fiscally constrained Member States have refrained from profiting from the national escape clause.Footnote ³⁰⁷ On the other hand, several countries have tremendously accelerated their activist plans. Germany, in particular, has moved decisively in that direction. Its recent constitutional amendment permanently exempts defence expenditures exceeding 1 per cent of GDP from debt-brake rules.Footnote ³⁰⁸ Additionally, it creates a EUR 500 billion special fund for infrastructure and climate neutrality, valid for 12 years.Footnote ³⁰⁹ This move not only entrenches Germany’s fiscal dominance but also widens the gap with other Member States, which lack comparable fiscal room.

Aware of this issue, EU institutions have sought to introduce an element of equalisation into what remains a deeply asymmetrical industrial and fiscal framework. Building on the SURE experience, the Council recently approved Security Action For Europe (SAFE), a new temporary and emergency instrument grounded in Article 122 TFEU.Footnote ³¹⁰ Like Readiness 2030, SAFE aims to strengthen the European defence technological and industrial base. Its contribution comes via a EUR 150 billion fund,Footnote ³¹¹ borrowed by the Commission on capital markets,Footnote ³¹² and used to finance loans to national governments.Footnote ³¹³ These loans will be available until the end of 2030Footnote ³¹⁴ and must be repaid within up to 45 years.Footnote ³¹⁵ As with SURE, financial assistance in SAFE is both complementaryFootnote ³¹⁶ and voluntary.Footnote ³¹⁷ SAFE is designed to address gaps, inefficiencies, and fragmentation within European defence systems,Footnote ³¹⁸ thereby enhancing interoperability and interchangeability across the EU. This objective is pursued primarily through common procurement.Footnote ³¹⁹

Beyond responding to long-standing defence concerns, SAFE carries significant industrial and fiscal implications. On one hand, the financial assistance is explicitly structured to benefit contractors, infrastructure, and products predominantly based in, or originating from, EU member states, EEA EFTA states or Ukraine.Footnote ³²⁰ On the other hand, it is likely – much as in the case of SURE – that fiscally constrained countries will be the main beneficiaries, though some adjustment may be made in favour of Member States facing heightened military threats.Footnote ³²¹ Nevertheless, SAFE on its own appears insufficient to correct the EU’s uneven defence and industrial landscape. Compared with national initiatives, its funding is too modest to create a level playing field. Moreover, the reliance on loans subject to uncertain interest rates and allocation rules does little to address entrenched structural disparities.Footnote ³²²