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The Maastricht Diplomat

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Council of European Union & European Parliament – Rule of Law Conditionality of EU Budget

Updated: May 8, 2021

In the Multiannual Financial Framework (MFF), the European Union declared its proposals for a new long-term EU budget. The framework would enter into force in 2020 and replace its predecessor for the following 7 years. “A budget for a Europe that protects, empowers and defends” are keywords of its content as well as the factual €1,105 billion of annual budget. Special attention was given to the Commission’s aim to interlink sound management of the long-term budget with respect to the rule of law. This is where the newly adopted Regulation on a General Regime of Conditionality for the Protection of the Union Budget (Regulation 2020/2092) comes into play. The objective of the Regulation is to protect the Union’s financial interest against generalised deficiencies regarding the rule of law in a Member State that cause a risk – or have the potential to cause a risk – of financial loss. The protection of the EU’s fundamental values, such as the rule of law principle, is certainly nothing new and has been enshrined in Article 2 of the Treaty on the European Union (TEU). The Regulation, however, does not aim at combating general breaches of the rule of law principle on Member State level, other procedures are in place for these issues (for instance, article 7 TEU procedure for suspension of voting rights). The main difference is that the Regulation provides a specific mechanism that is triggered when the EU’s financial interest is at stake relating to the EU budget. Additionally, neither the article 7 procedure nor political dialogue have so far produced any progress in stopping the rule of law backsliding in certain Member States. The new rule of law conditionality aims to protect common EU funds from the consequence of breaches of the principle, such as corruption.

More recently, the pandemic and subsequent NextGenerationEU temporary recovery fund of €750 billion provided a new perspective on the values of democracy and rule of law on the continent. A survey requested by the European Parliament conducted within the 27 Member States (mid-pandemic) shows that 77% of the EU’s population does not want to spend EU money without full respect of the Union’s democratic values and rule of law. Seems sensible, right? However, is the newly adopted Regulation a genuine step in the right direction for realizing the EU citizens’ wishes?

Sanctions that follow establishment of a breach within the scope of the Regulation are of fiscal nature. It includes the suspension of payments and EU-funded programmes. Common criticism that arises on this particular point is that sanctions of this type do not directly impact the offending government but rather the beneficiaries of the EU programmes. It can be doubted whether these beneficiaries are contributing to the rule of law problem in their country or whether they can be held accountable for it. On whether the sanctions are hitting the wrong people, we need to take into consideration how the State’s government is structured. For instance, a point can be made if the country in question is governed by a dictatorial ruling clique that holds its citizens in tight grip. In such a situation, the government that was formed is not a reflection of society which subsequently will have a bigger impact on the suppressed population rather than the corrupt government. However, within the EU, this is not the case and will most likely not be the case in the foreseeable future either. Member States that are currently being under scrutiny and that actively object against the adoption of the Regulation are Poland and Hungary. These governments were formed through a fair and just democratic process. Nevertheless, they have been under investigation for an alleged breach of judicial independence and subsequent non-compliance with the separation of powers. But, since the government that was formed by elections that were judged fair and free, policies of the Polish and Hungarian governments are backed by an electorate which voted for these policy platforms in the first place. Furthermore, the new conditionality rules of the Regulation targets among other things the EU cohesion and agricultural spending. Beneficiaries of these spendings can mostly be found in more rural regions of these countries, which are typically the regions that show the most voter support for the elected parties forming the current governments. Still, one can ask how democratic it is to ‘punish’ a specific voter group for their political preference as well. Additionally, arguments are made that dispute the adoption of the Regulation since it would impact numerous individual voters that strongly opposed these current governments. However, under the current form of the Regulation, the EU has made sure to protect beneficiaries of the funds. In cases where there is a suspension of financial transfer from the EU budget to the Member State in breach under the conditionality mechanism, the State is nevertheless obliged to continue to implement the programmes financed from the EU budget.

As former Commission President Jean-Claude Juncker stated when the first idea of conditionality linked to sound management of the EU budget took shape, he considered that the mechanism would be “poison for the continent and divide the European Union”. The concern was that placing this type of financial pressure on Member States would lead to countereffects. Increase in nationalistic and anti-European sentiment would be inevitable. On this issue, empirical literature provides mixed evidence. On the one hand, there is evidence that the sanctions would initiate autocratic responses and suppression of possible reform movements. However, the opposite is also a possibility, that sanctions would increase the likelihood of regime reforms, leading to democratic development. Despite these findings, not less polarizing is the regime before the financial sanctions were available under the new Regulation. As the survey mentioned above indicates, many EU citizens and politicians, especially of net-contributing countries of the EU, are frustrated by the need to give financial support to countries that violate one of the EU principles. In that sense, having no financial sanctions available at all might also be “poisonous”. While conservative parties gain increasingly more support from citizens in recent elections, this frustration evidently undermines EU integration as well. Therefore, implementing a financial sanction could help restore the eurosceptical movements in the whole of Europe.

Another argument in favour of the rule of law conditionality is that EU-funding relies to a large extent on the quality functioning of the institutions. In practice, funding is most effective if it is accompanied with a well-constructed public administration, independent courts, and radical containment of corruption. When one of these elements shows deficiencies, the non-compliance with the rule of law reduces effectiveness of EU-funding drastically as EU money can easily be spent in areas it was not meant for. This is the case in Hungary and Poland, which currently arrange their judiciary in such a way that it aligns with the interest of governing political parties; paving the way for injustices and corruption. In April, the European Commission referred Poland to the CJEU for passing a law that enables the government to penalize their judges more easily. According to the Commission, the law undermines “the judicial independence of the Polish judges” and is “incompatible with the primacy of EU law”.

In conclusion, the rule of law conditionality is very promising to say the least. Nevertheless, effective EU-funding depends to a large extent on the quality of checks and balances of individual Member States. Additional mechanisms for financial sanctioning of misconduct by Member States contribute to reaching this paradigm. High thresholds provided in other sanctioning methods available in cases of non-compliance of the rule of law have made them ineffective. Especially, since populism is rising and Euroscepticism is affecting the liberal constitutional democracy, the EU has to protect its fundamental values while it still can.

This article was written for the MD x EuroMUN Printed Edition.


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