Rule of law conditionality on the EU budget: a necessary step to protect democracy in the EU

By Erika Frontini

On 5 November 2020, negotiators from the European Parliament and the German Presidency of the Council agreed on a mechanism to link the disbursement of money from the 2021-27 Multiannual Financial Framework (MFF) and the Next Generation EU – the Union’s package for the post-COVID-19 recovery – to respect for the rule of law. The agreement, which was defined as “historic”, came after months of debates and tough negotiations between the Member States and the main EU institutions. However, it was soon questioned, as Hungary and Poland fiercely opposed it by vetoing the adoption of the whole MFF. Eventually, the Member States have reached a solution that seems acceptable to everyone, at least for the moment. Despite this, it might be too early to celebrate this outcome as the adoption of a powerful new instrument improving the currently limited toolkit for the protection of the Union’s democratic values within its borders.


Conditionality: what is it, and why is it useful to protect the rule of law?

This instrument was inspired by the strategy used to Europeanize countries that apply to become members of the Union. In fact, conditionality is a mechanism that is widely employed in the enlargement policy, as candidates must fulfil some conditions in order to proceed further in the accession process. This approach was introduced by the 1993 Copenhagen European Council, which formally outlined the criteria that countries must meet to be considered eligible for EU membership. These include the so-called “political criteria”, according to which applicants must ensure “stability of institutions guaranteeing democracy, the rule of law, human rights and respect for and protection of minorities” . Such principles, which are defined by the Treaties as the values on which the Union is founded, had been previously recognized as indispensable elements for membership on several occasions. Thus, showing respect for these values is a pre-requisite to start accession negotiations, whereas failing to do so might provoke the suspension of the process. Likewise, States must continue to uphold them once they have become full members. Nonetheless, the toolbox to monitor and enforce post-accession compliance is deemed insufficient.

Conditionality, in general, has proved very effective in persuading political actors to adopt particular measures. It is a mechanism based on the manipulation of actors’ positive and negative
incentives: the more significant the “carrots”, or the thicker the “sticks”, that the EU can promise, the stronger the impact of conditionality. In the case of the rule of law mechanism, conditionality appears very promising, since the Member States in which violations of this fundamental principle are now occurring are among the biggest beneficiaries from EU funds. Moreover, it appears that the tool has citizens’ support: according to a recent poll by the European Parliament, 77% of respondents across the Union agree that EU funds should be made conditional on respect for the rule of law and democratic values by national governments. But the road for the adoption of a comprehensive and the well-functioning rule of law conditionality is everything but easy.

The “historic” deal
Much has been achieved so far. The proposal for a mechanism to suspend or reduce funding in case of generalized deficiencies in the rule of law was originally put forward by the European Commission in 2018, following requests by the European Parliament and the general public after worrying developments in some Member States. In July 2020, the Heads of State and Governments endorsed it during one of the most challenging European Council’s meetings of the entire EU history. Nonetheless, the concrete functioning of the instrument was not determined on that occasion, leaving this task for a regulation to be adopted later by the Parliament and the Council. Subsequently, Germany, holding the rotating presidency, submitted its proposal, which considerably watered down the initial idea by the Commission. Indeed, the German text got rid of the expression “generalized deficiencies” in the rule of law, as well as of a list of circumstances that could trigger the penalties, which included threats to judicial independence, failure to avoid arbitrary or unlawful decisions by public authorities, restrictions of the availability and effectiveness of legal remedies. Hence, instead of ensuring the full respect by all Member States for one of the Union’s founding values, the German proposal was aimed at punishing breaches of the rule of law having a direct impact on the financial management of EU funds. This would cover corruption and fraud, but not other severe attacks on the rule of law that endanger the functioning of democratic institutions. Further to that, activating the tool would be more difficult than originally suggested by the Commission, since the use of reversed qualified majority (implying that a qualified majority of Member States would be necessary to block a decision by the Commission to suspend funds) was turned upside down: a qualified majority of Member States will be required to adopt sanctions instead. Besides, the German draft would provide the concerned Member State additional opportunities to delay or even stall the procedure. Eventually, this text became the Council’s official negotiating position.


On the other side, the European Parliament has made a strong case for the adoption of an effective rule of law conditionality, intending to punish corruption and fraud, as well as, most importantly, fighting systemic violations of the Union’s democratic values. Leading figures from the Parliament stated that such a comprehensive and well-functioning mechanism was a pre-condition for the Parliament’s approval of the MFF. This determination bore some fruits: the provisional deal agreed by the two institutions in November maintained the article listing possible examples of the rule of law violations leading to the suspension of funds, while a preventive dimension was inserted. However, the Parliament could not persuade the Council to accept the reversed qualified majority.

Hungary and Poland’s veto
Although this is already a big success, it is not over yet. In fact, for the mechanism to become operational, the MFF must be ratified by the national parliaments of all Member States and additional measures must be adopted by the Council at unanimity. As it could be expected, while EU institutions were still celebrating the landmark agreement between the Parliament and the Council, the situation was again at a standstill. On 16 November, the Governments of Hungary and Poland vetoed the finalization of the Own Resources Decision, a preliminary step necessary for the adoption of the MFF and recovery fund. The two countries have made their opposition to the rule of law conditionality very explicit. Such a move was foreseeable, considering that Budapest and Warsaw will probably be the first targets. Indeed, both countries have been under the spotlight for their attacks against the independence of the judiciary, media freedom, and minority groups. Over the last few years, the Commission has challenged many measures by both governments for the rule of law-related concerns through infringement proceedings. Poland is the only Member State for which the Commission’s rule of law framework was activated in 2016. On top of that, both countries are facing a procedure under art. 7 TEU, the only existing instrument which was deliberately designed to prevent and punish systemic violations of EU founding values – which, however, is leading nowhere, as the sanctioning part of the mechanism needs unanimity to be triggered.

On the other hand, Hungary and Poland rely heavily on EU funds, and they are in urgent need of resources from the recovery facility. This may be what persuaded them to accept a settlement that is not a perfect victory for either side, despite the fact that everyone has described it as such.

Postponing the solution
In mid-December, Hungary and Poland have agreed to a compromise proposed, once again, by the German Presidency. It consists of a declaration adopted by the European Council, containing a minimalist interpretation of the instrument agreed by the Parliament and the Council, which, contrary to what the two countries had advocated for, was not modified. Nonetheless, the most outstanding feature of this arrangement is that the actual solution is postponed to the future: in fact, the rule of law conditionality cannot be used before the European Court of Justice will have ruled on its legality. After that, the Commission will have to develop implementation guidelines by working in close consultation with the Member States. This whole process could take months or, more likely, a couple of years. Thus, what Hungary and Poland have really gained is time, and past episodes have shown how crucial time is when it comes to democratic and the rule of law backsliding. Notwithstanding this, the MFF has been unlocked, the rule of law conditionality was not dropped, and EU institutions seem confident that the Court will give its green light.

Defending democracy and the rule of law: an existential issue for the EU

Therefore, the path towards an effective instrument to protect the EU budget from violations of the Union’s democratic principles has not reached its finish line yet. If the mechanism agreed by the Parliament and the Council will eventually be implemented, this might be a significant step forward. However, the words of the December European Council’s Conclusions suggest that the instrument might be used only for a closed set of breaches affecting the financial interest of the EU – a step back from the Parliament’s endeavour at turning such conditionality into a tool to combat violations of the Union’s values in a broader sense. Still, if they want to keep benefitting from EU funds in the future, Hungary and Poland will have to reconsider some of their policies. At the same time, other Member States could be effectively deterred from embarking on similar undemocratic practices. Nevertheless, there is a risk that the tool will become as unusable as art. 7. If EU institutions continue to fail in taking a firm stance to protect the rule of law and democratic principles – while the situation in Poland and Hungary may deteriorate furthermore countries may defy those core values. In fact, the rule of law concerns exist in the other Member States as well, as described by the Commission earlier this year in its first Rule of Law Report – another milestone for the protection of EU values. This would make it even more difficult to respond to breaches of democracy and the rule of law, bringing the Union further away from being a community of values. In the medium-term, similar developments will make it necessary for the EU to redefine its identity and goals: will it go back to be a mere economic project? Moreover, recurrent violations of those joint values will harm the effectiveness and legitimacy of all EU acts. These are adopted at the EU level with the involvement of politicians who are presumed to be democratically accountable at the national level. In addition to that, the EU legal order is based on the principle of mutual recognition of judicial decisions taken in the other Member States. If anywhere within the Union leaders are not elected through a truly democratic process, or national judiciaries cannot exercise their prerogatives in a completely independent and impartial manner, the whole system will be jeopardized. This is why the EU must act determinedly to safeguard democracy and the rule of law within its borders, and it must do that before it is too late.

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