Hungary and Poland Are Bluffing. Merkel Should Call Them Out

(Bloomberg Opinion) -- Angela Merkel, now in her sixteenth and final year as German chancellor, is surely tempted to compromise with Hungary and Poland for the sake of rescuing a historic fiscal deal for the European Union. She shouldn’t.

That’s because so much more is at stake than that deal, however big it is. And despite appearances, the EU actually holds the stronger hand. At its next summit on Dec. 10, and in the remaining weeks until Germany passes the bloc’s rotating presidency to Portugal on Jan. 1, Merkel should play all her trump cards.

In effect, Budapest and Warsaw are trying to blackmail the EU. They’re threatening to veto a fiscal package worth 1.8 trillion euros ($2.2 trillion). It consists of the bloc’s next seven-year budget and an additional corona-stimulus fund to be financed by jointly issued EU bonds. For ransom, they’re demanding the EU drop a new mechanism that makes receiving this money conditional on countries’ abiding by the rule of law.

That mechanism, incidentally, is already watered down from previous drafts — it would kick in only when malfeasance in a member state directly corrupts the way European money is spent. But even that’s apparently too much to bear for Hungary and Poland. Both are being probed by the EU for infringing on judicial independence and other rule-of-law basics.

As usual, the two populist governments are using this standoff for their anti-Brussels propaganda at home. In their absurd narratives, the EU is portrayed as an oppressive empire like the Soviet Union. Brussels, the storyline goes, wants to impose an alien and liberal lifestyle that includes — according to Poland’s ruling party, Law & Justice — a gay and transgender agenda irreconcilable with Catholic Polish culture.

In tone and pitch, this hyperventilation is reminiscent of the Brussels bashing in much of the British press leading up to the Brexit referendum in 2016. “Polexit — We have the right to talk about it,” a pro-government magazine in Warsaw recently blurted on its cover.

And yet, it’s nothing but hot air. The truth is that Hungary and Poland not only depend on the EU but also have populations that are enthusiastically pro-European. The current conflict is being staged by a few cynical autocrats for their own purposes. And it could yet backfire on them.

Let’s start with that budget and stimulus money they’re threatening to veto. In fact, Poland has been by far the largest net beneficiary of European cash, and Hungary is also among the biggest. They would again be among the main recipients from the recovery fund they’re holding hostage.

And both countries need this money badly. Hungary, for example, was hit late but hard by Covid-19. Its economy is contracting sharply, the forint has been losing value and the national budget is deep in the red. Prime Minister Viktor Orban needs to pump cash into the economy soon, unless he wants to risk a depression ahead of the country’s parliamentary election in early 2022.

Moreover, Poles and Hungarians just aren’t polarized about Europe the way Brits were. In the most recent Polish poll, for example, 87% report wanting to stay in the EU, as opposed to only 5% who say they don’t. By contrast, support for the populist government coalition has plummeted — to only 27%, which is neck-and-neck with the liberal and pro-Brussels opposition.

Seen in that political context, Merkel’s options are surprisingly good. First, she needn’t fear entering 2021 without a budget deal outlining the bloc’s seven-year “multiannual financial framework.” Under EU rules, the 2020 budget would simply roll over for one more year. Countries would get money as before, but neither the planned increases nor the added stimulus. Even Hungary and Poland would keep getting cash — unless that new rule-of-law mechanism finds that they shouldn’t.

As to the corona-stimulus fund, officially called the Recovery and Resilience Facility, Hungary and Poland could keep vetoing it. But the other 25 member states could proceed without them.

One way to do this is through what’s called enhanced cooperation: A coalition of willing member states forges ahead while others opt out, although all can join later. EU countries have already done this with patent regulation, divorce law and the taxation of financial transactions, for example.

Another path is to set up the fund through an intergovernmental treaty among the 25 participating states. This way the facility would be technically separate from the EU’s architecture, but docked onto it. One example of such a structure is the European Stability Mechanism, a bail-out pot for the 19 countries in the euro area.

These alternatives are cumbersome and in their own ways controversial. The current plan of combining the budget and the stimulus is obviously cleaner and preferable. But if Hungary and Poland insist on sabotaging that solution, a Plan B can still get fiscal relief to countries like Spain and Italy, while sending this crucial message to Budapest and Warsaw: You’re isolated now — but you’re welcome to re-join any time.

Merkel and the EU face a Faustian test. They could go ahead with fiscal integration, in return for selling out their democratic values. Or they could stand firm on principle, and sort out the money later. It should be a no-brainer.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Andreas Kluth is a columnist for Bloomberg Opinion. He was previously editor in chief of Handelsblatt Global and a writer for the Economist. He's the author of "Hannibal and Me."

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