Hungary, Poland Block EU Debt Plan, Delaying Recovery Fund

(Bloomberg) -- The rollout of the European Union’s jointly financed economic recovery package faces fresh delays after Hungary and Poland insisted on vetoing the accord, a move that will likely force another round of fraught negotiations between the bloc’s leaders.

The two eastern governments have said they disagree with a deal that Germany, on behalf of member states, struck last week with EU lawmakers over the conditions attached to 1.8 trillion euros ($2 trillion) in disbursements. Budapest and Warsaw say that the so-called rule-of-law conditionality unfairly stigmatizes them over their democratic standards.

At a meeting of EU envoys Monday, the two members expressed reservations over one aspect of the the budget and stimulus package, a spokesman for the German presidency said on Twitter. The EU requires unanimity to authorize the European Commission to issue unprecedented amounts of jointly backed debt.

Two officials familiar with the matter said leaders will now have to weigh in on the deadlock during a scheduled video summit on Thursday that was originally planned to tackle the unfolding pandemic. Poland and Hungary stand to receive at least 180 billion euros in grants between them over the next seven years from the budget and recovery fund, according to Bloomberg calculations.

Negotiations over the terms of the package are already behind schedule and a senior EU diplomat in Brussels said earlier Monday that a veto would throw them into crisis. The diplomat said that delays in disbursing the funds to rebuild the European economy after the coronavirus pandemic are now inevitable.

While EU leaders agreed in July on the bloc’s seven-year budget and a stimulus program funded by joint debt, parts of the accord still need unanimous backing by member states.

At Monday’s meeting, envoys signed off on a deal linking funds to the rule of law despite opposition from Hungary and Poland, because that part of the accord only needs an enhanced majority of member states. But the requirement for unanimity on allowing debt issuance to fund the EU’s budget payments gave the two holdouts a chance to block the entire package all the same.

Orban’s Letter

Hungarian Premier Viktor Orban underlined his government’s stance in a letter to Germany’s Angela Merkel, Commission President Ursula von der Leyen and Charles Michel, who heads the EU leaders’ council. Orban said there is “no deal until there’s agreement on all details,” state news agency MTI reported Monday. The plan makes it too easy to slap sanctions on member states, he said.

“When it comes to the future of our children and grandchildren, Hungary and Hungarians don’t agree to compromises, whether in the case of a revolution or just a simple veto,” Hungarian Justice Minister Judit Varga said in a post on her Facebook page. “It isn’t Hungary which is blackmailing and pressuring Brussels in the talks about EU budget funding, but the other way around.”

Polish business lobby groups said in a joint statement that a veto would hamper the economy’s ability to bounce back after the pandemic, undermine investor interest and leave the country “alone and at odds with its allies in Europe.” But economic interests appear to be losing to political ones, with the justice minister and his allies publicly demanding that the government reject the budget plan.

“This is key moment in our history, how much is sovereignty worth, a billion, several dozen billion, several hundred billion euros? For us it’s priceless,” Poland’s Deputy Justice Minister Michal Wojcik said on Monday.

If there’s no agreement by the end of the year, the EU will go into a partial shutdown, meaning that only salary payments to bureaucrats, some farm subsidies and humanitarian aid will continue to be paid, based on contributions agreed in the previous budget.

“It’s an absolute necessity that rule of law principles are observed,” Austrian Chancellor Sebastian Kurz said at a conference of the German Christian Democrats on Monday. “We’re routinely discussing much smaller amounts at length, so it would be rather dangerous to jettison our principles when it’s about such a huge amount of funds.”

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