Inside the EU Rule-of-Law Deal That Freed $2.2 Trillion in Cash

European Union leaders salvaged a historic $2.2 trillion budget and stimulus package in a breakthrough deal with Poland and Hungary this week, just as the bloc’s economies risk being ravaged further by a new wave of coronavirus infections. The German-brokered compromise convinced the two eastern nations to abandon their veto, which they had threatened to use over their opposition to tying cash to whether members adhered to the rule of law. But Budapest and Warsaw won a concession that will delay the rollout of the tool to target rule-of-law breaches.

1. What was the dispute about?

Last month Germany, on behalf of EU member states, reached an accord with EU lawmakers to tie disbursements from the bloc’s budget and stimulus plan to democratic standards. The new rules, which are due to be formally adopted next week, give the European Commission the power to propose the suspension of payments to countries that undermine judicial independence or fail to prosecute corruption. That means Hungary and Poland, which have been accused of such breaches, could stand to lose tens of billions of euros in EU funds. A proposal to suspend funding by the EU’s executive arm would be subject to approval by a weighted majority of member states.

2. What did they agree to this week?

The leaders of the 27 EU member states agreed that the regulation will protect the bloc’s spending against “any kind of fraud, corruption and conflict of interest.” The text of the regulation didn’t change, and it’s expected to take effect on Jan. 1. While it will apply to any funds distributed after that, the mechanism to sanction countries for undermining the rule of law won’t be employed until the entire regulation is given a green light by the EU’s Court of Justice.

3. How long will that take?

A challenge by Hungary and Poland would go straight to the EU’s top court in Luxembourg, where rulings on such direct actions take on average 19 months. But this may come with a request for a fast-track procedure from the EU side that could take less than a year. An exceptional case was the time-sensitive question of the U.K.’s rights to unilaterally reverse Brexit, which took three months. The commission will use the extra time anyway to “further analyze the situation in all the member states and prepare the ground for possible triggering of the procedure,” Vera Jourova, the European Commission’s vice president for values, told Bloomberg TV.

4. Will it clear the court?

While Hungary and Poland are expected to challenge the regulation, it remains to be seen exactly which parts they’ll focus on. The EU’s top court will only rule on matters of law likely without addressing any of the political or cultural issues such as gay marriage or immigration that Hungarian Prime Minister Viktor Orban and his Polish counterpart, Mateusz Morawiecki, say the penalties are really about. The court is expected to clear the regulation, not least because of its likely ratification by European Parliament and approval of a qualified majority of member states as EU law.

5. What could be sanctioned?

The responsibility to assess and impose sanctions will lie with the commission, and any nation targeted by the freezing of funds can appeal specific instances -- with the penalty remaining in place -- at EU courts. Any sanctions will need to “be proportionate to the impact of the rule of law” on the EU’s financial interests. What’s not clear is how broadly those interests will be interpreted. EU funds flow to everything from education and farming to government administration and non-governmental organizations, while the EU’s draft rules give a broad definition of what is meant by the rule of law. That includes guaranteeing the independence of national courts, protecting people’s fundamental rights and also more widely as being in line with EU values and principles. Breaches are seen as anything from endangering judicial independence to failing to prevent unlawful decisions by public authorities.

6. Will the mechanism be effective?

The scope of the regulation is subject to debate after national leaders endorsed a compromise that only calls for penalties when the EU’s financial interest is at risk. Critics say that renders the tool ineffective to address broad-based rule-of-law violations in increasingly authoritarian EU members.

7. Who won: Hungary and Poland or the EU?

It depends on where you’re reading this. For the first time, the EU managed to create a way to tie its funding to some rule-of-law standards in a way where a unanimous vote from all EU states isn’t required. Budapest and Warsaw also bought time, which was key for Orban, who’s facing tight 2022 elections. But in Poland, Morawiecki had to defend himself against criticism from a ruling coalition partner on Friday, which called the abandoning of Poland’s veto “a mistake.”

©2020 Bloomberg L.P.

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