Schrödinger’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’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.