After Poland & Hungary veto budget, EU considers Plan B and Poland signals compromise
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, which will 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. While the €1.074 trillion seven-year budget will be financed, as usual, by the EU’s “own resources”—agricultural levies, customs duties, a Value- Added Tax and a Gross National Income-based “own resource” that covers the gap between expenditures and the other sources of revenue—the €750 billion recovery fund will be financed by borrowings in the capital markets that would be repaid over 30 years beginning in 2028.
One of the provisions the leaders included in the recovery plan—and one of the reasons the meeting at which it was approved went on for five days—was the stipulation that disbursements would be conditional on adherence to the rule of law. Proposed and advocated by the leaders of a number of member states in Western Europe who are concerned about the erosion of the rule of law, whether as the 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 despite the opposition of Hungarian Prime Minister Viktor Orbán, Polish Prime Minister Mateusz Morawiecki and several others, the provision would allow disbursements under the plan to be suspended if there were “generalized deficiencies” in the rule of law that would directly affect the budget.
Adoption of the MFF requires the unanimous approval of the Council of Ministers after the European Parliament has registered its approval. In September, in an effort to find some middle ground in regard to rule-of-law conditionality, the German presidency of the Council proposed a regulation that would, under certain circumstances, provide for the suspension of disbursements to a member state that violated the foundational values of the EU such as judicial independence and rule of law, but only if the violation affected the spending of funds and if no other member state opposed the suspension. The proposed regulation was, not surprisingly, rejected by the member states that had supported rule-of-law conditionality and also by a substantial majority of the European Parliament which regarded it as too lenient and tolerant of breaches of the rule of law. Indeed, they understood that, including as it did the possibility that the opposition of only one other member state would suffice to veto the suspension of disbursements to a member state, the proposed regulation was unlikely to have any effect whatsoever on Poland and Hungary, both of which have publicly proclaimed their readiness to veto any Article 7 sanctions, including for rule-of-law violations, on the other. Needless to say, the proposed regulation was also rejected by the Hungarian and Polish governments and as well as several other member states in central and eastern Europe.
Eventually, after two months of discussion, the EU ambassadors and negotiators for the Parliament agreed on language for a rule-of-law regulation that would, while making the disbursement of funds conditional on respect for EU values, including the independence of the judiciary, 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 but only involve a potential future risk for the EU budget. The Commission, in this compromise, 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. While the new language pleased the Parliament, Orbán and Morawiecki made it clear they would not support the MFF as long as it included rule-of-law conditionality and, to no one’s surprise, at a meeting of the EU ambassadors on November 16, the Hungarian and Polish ambassadors vetoed the MFF.
If Hungary and Poland do not approve the MFF, the EU will be required to follow the EU’s rule of the “provisional twelfth,” under which, if at the beginning of a financial year the budget has not yet been adopted, the Council may 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, of course, mean the EU could not spend the modest increment in this year’s spending budgeted for next year, could not raise the additional “own resources” necessary to service the debt taken on for the €750 billion for the grants and loans under the Next Generation EU program, and of course could not distribute those grants and loans.
To underscore their determination to block the inclusion of any rule-of-law conditionality in regard to disbursement of funds under the €750 billion Next Generation EU program, on November 26, Orbán and Morawiecki issued a joint declaration in regard to the MFF and the draft regulation on conditionality. In it, they proclaimed their support for the common values of the EU described in Article 2 of the Treaty on European Union and the procedure for protecting those values stipulated by Article 7 and said they want a solution to the issue that allows the financial resources of the MFF to be made available to the member states as soon as possible. But they objected to the link between the rule of law and the EU budget, said the outcome of the negotiations between the Council Presidency (Germany) 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 upon by the presidency and the Parliament would “undermine the Rule of Law within the Union by degrading it to a political instrument. The proposed conditionality 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 currently-proposed mechanism 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 made it clear that Poland is prepared to veto the MFF and, with it, the €750 billion Next Generation EU financial package. But he also made it clear that he hoped Merkel would find a solution to the problem since the veto would, obviously, have serious consequences for Poland.
The response in the EU was quite predictable. Some members of the European Parliament suggested that perhaps 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. An alternative put forward by Guy Verhofstadt, an MEP and former Belgian prime minister, was for the other 25 member states to agree to create the recovery fund through the EU’s enhanced cooperation procedure if Poland and Hungary persist with their veto. It’s not at all obvious all of the other 25 member states would either want or be able to take on and service €750 billion of debt and create an administrative entity to allocate the €750 billion. But however fanciful, it is a Plan B.
Nevertheless, even if Plan B is fanciful, the fact that some highly-placed MEPs are talking about it may contribute to a resolution of the crisis. Yesterday, after meeting with Commission officials, Polish Deputy Prime Minister Jaroslaw Gowin said Poland understands that vetoing the MFF and recovery plan will hurt Poland and other countries: “We all realize that in case of a Polish or Hungarian veto, there would be a provisional budget which, contrary to some voices in the Polish public debate, would not be good for Poland and the other member states.” And, he noted, “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.”
Given their recollections of their five-day marathon meeting in July, a good deal of which was spent debating rule-of-law conditionality for the €750 billion recovery fund, probably the very last thing the leaders of the EU want to do when they convene again next Thursday as the European Council is to revisit the issue of rule-of-law conditionality. No doubt they are all hoping that between now and then, the German Presidency will find some ingenious way to resolve the issue so the MFF can be approved, the EU can go into the markets and borrow the €750 billion, and the Commission can then distribute the funds the member states so badly need through the MFF. Perhaps they’ll even take up the Deputy Prime Minister Gowin’s suggestion and draft a declaration that is sufficiently unambiguous that it persuades Poland and Hungary to approve the MFF. The very last thing the EU needs at this moment is to go into 2021 with this year’s budget and without the €750 billion for the Next Generation EU program.
David R. Cameron is a professor of political science and director of the European Union Studies Program at the MacMillan Center.