After EU leaders endorse declaration on rule of law, Poland & Hungary drop budget veto
In July, the leaders of the 27 member states of the European Union, meeting as the European Council, approved a €750 billion recovery plan, labeled Next Generation EU, and the Commission’s proposed €1.074 trillion Multiannual Fiscal Framework, the EU’s seven-year budget for 2021-27. The recovery plan, to be administered by the Commission through the MFF, consists of €390 billion in grants and €360 billion in loans to the member states to assist their recovery from the economic consequences of the Covid-19 pandemic.
One of the provisions the leaders included in the recovery plan—and one of the reasons the July meeting went on for five days—was the stipulation that disbursements would be conditional on adherence to the rule of law. Proposed and advocated by leaders of a number of member states in Western Europe concerned about the erosion of the rule of law as a result of political interference in the judicial system, tolerance of political corruption, or politically-motivated interference with the media and educational institutions in some of the central and eastern European member states, and agreed only after Hungarian Prime Minister Viktor Orbán and Polish Prime Minister Mateusz Morawiecki insisted that it be substantially softened, the provision would allow disbursements under the recovery plan to be suspended if there were “generalized deficiencies” in the rule of law that would directly affect the budget.
In September, the German presidency of the Council of Ministers proposed a regulation that would, under certain circumstances, provide for the suspension of disbursements to a member state that violates one of the foundational values of the EU, such as judicial independence and rule of law, but only if the violation affects the spending of funds and if no other member state opposes the suspension. The proposed regulation was rejected by a substantial majority of the European Parliament, which regarded it as too lenient and tolerant of breaches of the rule of law, and by the Netherlands and several other member states that had strongly advocated rule-of-law conditionality in regard to disbursements. Approval of the MFF requires both the approval of the Parliament and the unanimous approval of the Council of Ministers.
Eventually, after two months of discussion, the EU ambassadors and negotiators for the Parliament agreed on language for a rule-of-law regulation that, while making the disbursement of funds conditional on respect for EU values, including independence of the judiciary, would broaden the definition of breaches of the rule of law to include violations that don’t have a direct and immediate effect on the budget and involve only a potential future risk for the EU budget. The Commission would have the power to identify potential future risks to the rule of law and propose a suspension or reduction of funds that would require approval by a majority of member states within a month in order to take effect.
The Parliament was pleased with the new language and approved the MFF. But Orbán and Morawiecki made it clear that Hungary and Poland would not approve the MFF as long as disbursements were subject to rule-of-law conditionality, and at a meeting of the EU ambassadors on November 16, the Hungarian and Polish ambassadors vetoed the MFF. If not lifted, the veto would mean the EU’s rule of the “provisional twelfth” would apply, under which, if, at the beginning of a financial year, the budget has not yet been adopted, the Council can authorize on a month-by-month basis an amount of spending equivalent to no more than 1/12th of the appropriation for the preceding year. That would mean, of course, that the EU could not spend the modest increment in the budget proposed for 2021, could not raise the additional “own resources” revenues that would be needed to service the debt that would be taken on to fund the €750 billion in grants and loans under the Next Generation EU program, and hence could not distribute those grants and loans.
To underscore their determination to block the inclusion of any rule-of-law conditionality in regard to the disbursement of funds, including the €750 billion in the Next Generation EU program, through the MFF, on November 26 Orbán and Morawiecki issued a joint declaration in which, while proclaiming their commitment to the values of the EU, they objected to the link between the rule of law and the EU budget. They said the outcome of the negotiations between the Council Presidency and the European Parliament didn’t conform to the agreement reached by the leaders in July and claimed that, rather than strengthening the rule of law, the mechanism agreed by the Council Presidency and the Parliament would “undermine the Rule of Law within the Union by degrading it to a political instrument.” The proposed conditionality, they said, “circumvents the Treaty, applies vague definitions and ambiguous terms without clear criteria on which sanctions can be based and contains no meaningful procedural guarantees.” They called for a “substantial modification” of the rule-of-law regulation and proposed that the scope of any additional budgetary conditionality be limited to “the protection of the financial interests of the Union in accordance with the July conclusions of the European Council.” And they proposed that the European Council discuss “whether a link between the Rule of Law and the financial interests of the Union should be established. If it is so decided, then the appropriate procedures foreseen by the Treaties, including the convening of an intergovernmental conference, should be considered in order to negotiate the necessary modifications of the Treaties.” In concluding, they declared, “We have decided to align our positions on these issues. Neither Poland nor Hungary will accept any proposal that is deemed unacceptable by the other.” The next day, Morawiecki spoke with German Chancellor Angela Merkel and told her Poland was prepared to veto the MFF and, with it, the Next Generation EU financial package. But he also said he hoped Merkel would find a solution to the problem since the veto would, obviously, have serious consequences for Poland.
After the veto, some members of the European Parliament suggested the €750 billion recovery fund should be separated from the MFF and created as a separate instrument by an intergovernmental treaty of the 25 other member states in a manner somewhat analogous to the creation during the eurozone debt crisis of the European Stability Mechanism. Others suggested that, if Poland and Hungary continued to veto the MFF, the other 25 member states should create the recovery fund through the EU’s enhanced cooperation procedure. Perhaps most importantly, Johannes Hahn, the EU budget commissioner, made it clear in an interview that Commission officials had told representatives of both governments that its lawyers had identified ways to get around their veto, that their veto “cannot stop us from helping our citizens,” and that “we are fully aware of our responsibilities; that is why we have already started on alternatives.”
Last Thursday, after meeting with Hahn and other Commission officials, Polish Deputy Prime Minister Jarosław Gowin, after noting that an EU budget functioning under the “provisional twelfth” rule “would not be good for Poland and not good for every other member state,” said “a possible veto would not only trigger the provisional budget, but also something my interlocutors called Plan B…which is some form of cooperation between the 25 other countries….Therefore I believe that it is in the interest of all…to find a good compromise. Such a compromise is possible…through a binding declaration interpreting [the rule-of-law regulation]. The interpretative declaration could be…a clear statement from the European Council that the conditionality rule would not be used to exert unjustified pressure on individual member states in areas other than the proper use of EU funds.” Gowin, the leader of the Agreement party that is a close ally of the Law and Justice party (PiS), is certainly right about the provisional budget not being good for Poland (and Hungary); net EU transfers to Poland amount to about 3.5 percent of GDP and those to Hungary are even more—over 5 percent of GDP—and both will receive substantial additional funds, not only through the 2021 budget, if it is approved, but also through the Next Generation EU program.
Over the past week, the German Presidency took the lead in negotiating an interpretative declaration of the kind described by Gowin that would be acceptable to Poland, Hungary and the EU. As complicated as it would have been in the best of circumstances, that negotiation was further complicated by the fact that, whereas Orbán’s Fidesz party has a huge majority in the National Assembly, Poland is currently governed by a three-party coalition consisting of Law and Justice, headed by Jarosław Kaczyński, Gowin’s Agreement, and Zbigniew Ziobro’s United Poland party, and, in order to retain a majority in the Sejm, the lower house of the Polish Parliament, Morawiecki requires the support of all three parties. Perhaps not surprisingly, it turned out that, because of Ziobro’s staunch opposition to any rule of law mechanism, it was more difficult for the three-party Polish government to agree on the content of the declaration than it was for the de facto one-man Hungarian government to do so. But after a last minute trip by Orbán to Warsaw on Tuesday, Poland and Hungary agreed on the provisions that would be included in a Commission declaration pertaining to the rule of law and the German Presidency presented a summary to the EU ambassadors Wednesday and then to the European Council yesterday.
At yesterday’s meeting, the European Council welcomed the Commission’s intention to adopt a Declaration, to be entered in the minutes of the Council when deciding on the rule-of-law regulation, that expresses its commitment to apply the elements agreed by the European Council yesterday that fall within the remit of its responsibilities in applying the regulation—specifically, that the objective of the regulation is to protect the budget, including Next Generation EU, its sound financial management, and the EU’s financial interests from any kind of fraud, corruption and conflict of interest; that the application of the conditionality mechanism under the regulation will be “objective, fair, impartial and fact-based, ensuring due process, non- discrimination and equal treatment of Member States;” that in order to ensure that those principles are respected, the Commission will develop and adopt guidelines on the way it will apply the regulation, including a methodology for carrying out its assessments; that should an action for annulment be introduced with regard to the regulation, the guidelines will be finalized only after the judgment of the European Court of Justice so as to incorporate any relevant elements from the judgment; that until such guidelines are finalized the Commission will not propose measures under the regulation; that measures under the regulation will be considered only when other procedures set out in EU law would not protect the budget more effectively; that the measures taken under the regulation will be proportionate to the impact of the breaches of the rule of law on the sound financial management of the budget or on the EU’s financial interest, and the causal link between such breaches and the negative consequences on the EU’s financial interests will be sufficiently direct and duly established; that the triggering factors set out in the regulation are to be read and applied as a closed list and not open to factors or events of a different nature; that any formal opening of the procedure will be preceded by a thorough dialogue with the member state involved so as to give it the possibility to remedy the situation; that the Commission will bear full responsibility for autonomously assessing whether the conditions for the adoption of measures exist and will bear full responsibility for the accuracy and relevance of the information and findings on which it bases its assessment; that the measures adopted under the mechanism will be promptly reviewed at the initiative of the member state or by the Commission no more than one year after their adoption by the Council; that if the Commission decides not to submit a proposal to lift the measures, it will state the reasons for its decision and will make its reasons known at a meeting of the Council; that if the member state concerned submits a request for review by the European Council, the president of the European Council will put the item on its agenda and the European Council “will strive to formulate a common position on the matter;” and, lastly, that, since the new regulation was negotiated as part of the new budgetary cycle, it will apply as from January 1, 2021 and only to budgetary commitments starting under the new MFF, including Next Generation EU.
The European Council agreed that those elements, taken together, “constitute an appropriate and lasting response to the concerns expressed” and invited the European Parliament and the Council “to immediately take the necessary steps for the adoption of the whole package of relevant instruments, including the MFF regulation and the Own Resources Decision.” The Commission will now prepare the Declaration, and the Parliament and Council will presumably endorse it and approve the MFF and, with it, the €750 billion in grants and loans under the Next Generation EU program. Those who are concerned about the serious economic consequences of the pandemic on businesses, employment and incomes will no doubt be grateful that the funds in the 2021 budget and the Next Generation EU program will soon begin to flow to all those who need support. But those who worry about the rule of law in Poland, Hungary and elsewhere in central and eastern Europe will wonder if the Commission’s Declaration, filled as it no doubt will be with caveats, conditions and loopholes, will move any of those countries closer to an overarching commitment to the rule of law.
David R. Cameron is a professor of political science and director of the European Union Studies Program at the MacMillan Center.