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.

The last difficult step towards the EU budget

By Myriam Marino

In a European scenario where countries are currently being heavily confronted with the second wave of the Covid-19 epidemics, the veto enacted by Poland and Hungary has represented an impasse, which had to be necessarily overcome, in the path towards the economic recovery of the EU States. The adversities encountered as a consequence of the outbreak, and the first wave of Coronavirus have undoubtedly supplied EU Members with the basic instruments to tackle subsequent upsurges. Nonetheless, the capacity for resilience of the European countries has been called and is being called into question. Despite positive news on the efficacy of tested vaccines and incoming mass vaccination programs, a positive and stable recovery still represents a distant prospect.


On November 17, two of the Visegrád group countries – Hungary and Poland – vetoed the European Union budget. The EU budget includes the Recovery Fund, namely the main instrument of support to boost a post-Covid economic rebound of the Union countries, proposed by the EU Commission. As a fact, on July 21 of this year, the 27 Members had finally agreed on a budget amounting overall to € 1824.3 billion, which comprehended the Multiannual Financial Framework (MFF) for 2021-2027 and the Next Generation EU recovery fund package. The overall response had been positive, particularly thanks to the celerity of the arrangements agreed and defined plan.


Since the decision on the EU financial package requires unanimous agreement among the 27 Member States in order to become effective, the veto enacted by the Hungarian Prime Minister Viktor Orbán and Poland’s Prime Minister Mateusz Morawiecki, a decision which had already been announced on November 16, represented a relevant set-back for further progress. As EU countries are resorting to any possible tool to manage the economic downturn and a social and health crisis, for the majority of the member states the hypothesis of an obstacle to access to funds was off the table.
The reasoning behind the rejection of the package was immediately made manifest and clarified.


On November 5, a provisional agreement had been reached, by a qualified majority, by the Council Presidency and the European Parliament’s negotiators on the new budget conditionality regime, a proposal originally presented in May 2018 with the aim of protecting the EU budget. More specifically, it granted the protection of the totality of EU funds and was therefore aimed at denying or reducing access to them, in case of “breaches of the principles of the rule of law in a member state”. Consequently, the Polish and Hungarian right-wing leaders, by vetoing the whole package, in fact, rejected an instrument that could come back to haunt them. The two leaders eventually confirmed their intention to remain firm in their position through a joint declaration that followed a meeting in Budapest on November 26, officially cementing their union in the context of the controversy. The position of objection towards the conditionality mechanism was supported by the Prime Minister of Slovenia, Janez Jansa, as well.


This occurrence was not, however, an entirely unexpected event. In December 2017 and September 2018, respectively, Article 7 procedures had been introduced against Poland and Hungary, in relation to the rule of law, and, in September 2020, a need to continue with the same legal procedures was made clear.
The veto, nevertheless, sparked turmoil among the Member States and created deep concern to German Chancellor Angela Merkel, particularly taking into consideration that negotiations over the EU budget and recovery package had been subject to discussions for months, while Europe was burdened by the political and social consequences of the first wave of Covid-19, terroristic attacks and increasing migration movements connected to the pandemics. As the general reaction was critical towards the stance of the two Eastern European countries, France, among others, advanced a hypothesis to overcome the veto, namely a separate EU package to be launched through an inter-governmental agreement, in order to unblock the funds.


As far as Hungary is concerned, the government proceeded to clarify the decision to veto by commenting that the rule of law clause might be a pretext for Brussels to justify policies aimed at supporting immigration and gender rights. As a matter of fact, Viktor Orbán expressed criticism towards the way in which the provision of EU funds tightly depends on unspecified and unobjective infringements of the rule of law. The Prime Minister noted how this could potentially allow room for “political abuses”. With respect to Poland, on the other hand, the Polish MEP Ryszard Legutko affirmed that, from his point of view, the European Union is subject to a “tyranny of the majority“, which represents a matter of concern to Poland. Furthermore, the Polish Prime Minister Morawiecki firmly emphasized the potential negative consequences of binding EU funds to political and democratic questions.
A solution to the dispute proved to be more difficult than expected in the previous weeks, as Orbán stated his willingness to approve the EU budget package only in the case of the elimination of the conditionality regime linked to the rule of law. This was further emphasized with the words of the Hungarian Foreign Minister Péter Szijjártó, who claimed the interconnectedness of migration, terrorism and religious extremism, and aligned with the point of view of Orbán on the potential danger of the rule of law conditionality. As the position of the Polish Prime Minister Morawiecki on the issue was equally firm and inflexible, Merkel suggested that a settlement of the issue would have taken time and effort. It must be taken into consideration that in the case of the lack of an agreement on the MFF, Member States would have had to resort to the EU monthly emergency budgets at the beginning of 2021. Moreover, it was clear that, even in the case of a compromise to be reached, the issue regarding the rule of law and the maintenance of democratic standards, including the independence of judges and media freedom, would have arisen again. The controversy has, indeed, signalled a fracture within the EU, which can lead to ulterior consequences in the future of the Union.


The main question at this point is: to what extent were Hungary and Poland willing to renounce to EU financial support?
Both countries are currently being deeply challenged by the coronavirus pandemics. As a matter of fact, after a spring wave which, overall, displayed that the country had been able to contain the threat with a relatively lower number of infections in comparison with several EU countries, Hungary is now confronted with a more dangerous situation with the second Covid-19 wave. It was, therefore, deemed necessary to introduce, between the end of October and November, new and stricter limitations, including a curfew from 8 pm to 5 am which will remain in force until January 11. On the other hand, Poland has reached more than 1 million confirmed coronavirus cases and the restrictions introduced at the beginning of the month of November for sports clubs, theatres, cinemas and restaurants were extended to December 27. Not to mention that, on a domestic political level, Poland has recently been the scene of massive anti-government protests, between the months of October and November.


Moreover, it is worth mentioning that both Hungary and Poland have, over the years, figured among the largest net beneficiaries of EU funds. Nonetheless, in the context of the controversy, Viktor Orbán stated that a lack of agreement on the issue, and, consequently, the failure to unblock the EU budget would not have represented a financial problem for his country. Thus, taking into consideration the present times of crisis, there are no doubts that both Budapest and Warsaw are in the same position of the need of urgent and substantial support from the EU as the other Member States. Moreover, both countries were placing themselves in a dangerous potential position of isolation in the European Union. Given the fundamental importance of the EU budget, the hopes were always that the two countries would eventually give up and agree on the mechanism. If not, a compromise needed to be achieved, since the inter-governmental option excluding Poland and Hungary would have been hazardous and the process to complete it would have been long and difficult. Furthermore, a similarly extreme solution would have made money available for an immediate economic boost. However, the fundamental issue at stake would have remained unchanged, challenging the cohesion of the Union.


On November 25, the head of the European Commission, Ursula von der Leyen, suggested that Poland and Hungary should take their issue to the Court of Justice of the European Union, a proposal which was then rejected by the Polish Prime Minister.
By December 7, little progress was made on the issue, as the leaders of both countries refused to give in to what they perceived as Brussels’ “blackmail”. In the view of the debate taking place on December 10-11 in the context of a European Council Summit, however, the situation began to change, and breaches towards a resolution started to open, particularly as the mayors of Budapest and Warsaw distanced themselves from the decision of their governments. The prospect of an alternative program of support initiated by the EU, excluding Poland and Hungary indeed created concern. On both parts, nonetheless, the official position was unremovable.


Finally, from December 9, a more open attitude was taken towards possible proposals and tangible progress in the discussion were achieved through the intervention of the German presidency. A compromise was, in fact, eventually reached and the veto was lifted. The EU budget remains attached to the rule of law mechanism, which was not removed as hoped by the two V4 countries. However, the legality of the mechanism will be discussed in the context of the European Court of Justice and, until then, breaches of the rule of law cannot be sanctioned as the regulation will not be in function. This might mean that the rule of law conditionality will not be appliable for one or two years.


It is difficult to declare a winner and a loser in this controversy. While the EU managed to move forward without surrendering to the demands of Poland and Hungary, the rule of law mechanism remains temporarily frozen. Nevertheless, high contentment was shown by the involved parts as a consequence of the final agreement. From the point of view of the vetoing countries, the settlement was considered progress in terms of improving unity and solidarity at the European level, with a further reaffirmation of their intent to protect their populations and provide them with all necessary tools for recovery.


The EU budget will officially enter into force for all 27 Members on January 1, 2021. The EU Member States can indeed breathe a sigh of relief, but the now-solved disagreement creates a degree of uncertainty in the long term. What is certain is that, at present, the priority of the European Union at the turn of the year is to eradicate the pandemic and cope with the effects of it.