Poland Stares Down EU Sanctions Talk by Revamping Supreme Court

(Bloomberg) -- The European Union is set to move ahead next week with plans to slap unprecedented sanctions on one of its own members, Poland, for failing to uphold democratic norms during overhauls of the country’s legal system.

Backed by Germany and France, the EU’s executive arm is likely to recommend activating a European Treaty article that would bring Poland a step closer to losing its voting rights, Budget Commissioner Guenther Oettinger said Friday. Polish Prime Minister Mateusz Morawiecki was defiant, saying his country has the right to revamp courts without interference from Brussels.

Back in Warsaw, Poland’s senators passed two more pieces of contested legislation, overhauling the Supreme Court and a judicial council which appoints judges late on Friday. The zloty suffered its worst week in more than a month amid rising political risk.

Imposing sanctions would require unanimous support from the bloc’s other 27 countries, which is unlikely as Hungary has vowed to back Poland. As the standoff escalates, EU officials are separately working on limiting access to EU funds for countries that disrespect the bloc’s values, which could harm Poland -- the biggest net beneficiary from its budget.

“There is much that suggests Article 7 will be triggered for the first time,” Oettinger told Deutschlandfunk public radio.

Cash and Values

The conflict was set off by judicial changes implemented by Poland’s ruling Law & Justice party that the EU and with human-rights groups say undermine the independence of courts and the rule of law. French President Emmanuel Macron and German Chancellor Angela Merkel said during an EU summit in Brussels that they would support the commission if it calls for application of sanctions on Poland.

EU leaders have criticized Poland for taking about 10 billion euros ($11.8 billion) per year in EU aid while failing to respect the bloc’s values. Merkel vowed to work with Morawiecki and said the EU felt it was forced to act. Macron urged Poles to clarify ambiguities and said he saw positive steps.

Morawiecki said Poland needs to revamp courts to speed up judicial procedures and kick out judges who were active during the pre-1989 communist era.

“I didn’t go to Brussels to ask for anything,” he told reporters during the flight back to the Polish capital. “The commission has its own procedures and we have the right to reform our courts.”

The Senate approved the final batch of judicial overhauls, which will force 40 percent of the country’s Supreme Court Justices into mandatory retirement as well as give politicians more sway over court appointments. The draft laws now await the signature of President Andrzej Duda, who vetoed similar legislation in August but whose advisers said this week that he would probably sign the two current bills.

The zloty gained 0.4 percent to 4.2049 against the euro on Friday, paring its weekly decline. Polish bonds gained while Warsaw’s WIG20 stock index, which has surged 24 percent this year, declined 0.7 percent on Friday.

“The zloty is performing worse than other currencies from the region, which may be explained by an increase of political risk connected to EU sanctions,” MBank SA analysts, led by Ernest Pytlarczyk, said in a note. However, the lack of a “synchronized sell-off” indicates that political risk “isn’t yet a significant factor for investors.”

If the commission were to make an Article 7 recommendation, four-fifths of EU governments would need to support the move, which would amount to a declaration that Poland poses “a clear risk of a serious breach” of democratic principles. A subsequent step would be for the bloc’s leaders to decide unanimously that Poland represents “a serious and persistent breach” of EU principles and then for national governments, acting by a weighted majority, to decide on sanctions including the suspension of voting rights.

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