Rule of Law fight threatens to derail EU budget and bloc stability

The EU was having a rough 2020. With the spectre of Brexit at a time when the EU’s own share of the world’s GDP was contracting, the last time the bloc need was the severe financial crises brought on in numerous member states due to Covid-19. It was thought the EU27 would pull together, but the latest news is not own of solidarity. Poland and Hungary have vetoed the EU’s next seven-year budget over a clause linking EU funding to the rule of law, plunging the bloc into a major political crisis. It’s been kicked down the road a little bit now the budget has passed, but it’s an ominous sign for the EU’s future.

On Monday 16 November, ambassadors of EU governments assembled at a meeting in Brussels to endorse the €1.1 trillion budget agreed for 2021-2027. The package also included €750 billion for a Covid recovery fund, with a clause attached that would make access to these funds conditional on adherence to the rule of law. As I’ve written before, Poland and Hungary have previously butted heads with the EU over questions of law, and they did not appreciate this move. As a result, the two countries blocked both the budget and the rescue fund, which require unanimous support.

Pro-EU figures have condemned the actions of the two countries

Zoltan Kovacs, a spokesman for Hungarian PM Viktor Orban, said: “We cannot support the plan in its present form to tie rule of law criteria to budget decisions.” In a weekly radio interview on the Friday, before the meeting, Orban warned of “ideological blackmail” similar to the Soviet Union: “If they really pass this regulation, then we will have created a Soviet Union out of the European Union.” The Polish Justice Minister Zbigniew Ziobro said that the rule of law issue was “just a pretext”, and that the EU’s intentions were “really an institutional, political enslavement, a radical limitation of sovereignty”.

Pro-EU figures have condemned the actions of the two countries. German ambassador Michael Clauss, who chaired the budget meeting, said that the EU would face “a serious crisis” if the financial package was not quickly adopted. He warned: “We have already lost a lot of time in view of the second pandemic wave and the severe economic damage.” Meanwhile, the German Europe minister Michael Roth said: “This is not the time for vetoes, but for acting swiftly and in the spirit of solidarity. Our people would pay a very high price for a blockade.” The EU Commissioner for Budget and Administration, Johannes Hahn, said he was “disappointed” by the veto.

A number of political observers believe that Poland and Hungary will eventually cave because vetoing the budget would cut off badly-needed funds to their own countries

The move was not unexpected – indeed, Orban wrote to EU leaders to confirm that Hungary would veto the budget, and Polish PM Mateusz Morawiecki made a similar threat. And this now leads to a stand-off between the two smaller nations, likely bolstered by Eurosceptics MEPs from other EU states, and senior EU figures unwilling to let this move derail proceedings. Austrian Chancellor Sebastian Kurz said that “upholding the principles of the rules of law is an absolute necessity”, and the Romanian PM Ludovic Orban said the protection was necessary to protect European taxpayer money.

A number of political observers believe that Poland and Hungary will eventually cave because vetoing the budget would cut off badly-needed funds to their own countries. According to the EU’s own figures, both countries are significantly net receivers from the bloc. According to the 2018 figures, Hungary received €6.3 billion for a €1.1 billion contribution, while Poland picked up €16.4 billion on a €4 contribution. By cutting off the budget, the two countries are also starving themselves of a lot of much-needed money.

An EU with no budget and decreased foreign investment would cripple the continent, and perhaps encourage some countries to turn away from the Euro

The EU needs unanimous consensus to pass its budget, and so Poland and Hungary do have a big card to play – the other 25 EU countries will also be without money, and so they are incentivised to negotiate. But it could backfire too. A number of countries, led by the Netherlands, wanted the link between money and the rule of law to be stronger, and they’re unlikely to be willing to soften their approach. Whatever happens, the blockage and the subsequent negotiations mean that Covid-19 relief money will face further delays. It was originally planned to start flowing from mid-2021, but that target looks increasingly unlikely.

There were even concerns that, if the EU budget is not passed by a key December summit, the Euro will weaken and there will be serious questions about investing in Europe. This would be hugely detrimental – an EU with no budget and decreased foreign investment would cripple the continent, and perhaps encourage some countries to turn away from the Euro. As the Covid recovery fund is supposed to benefit countries like Italy and Spain, big players in the EU, there is both a desire and a genuine need to get this budget passed to keep the EU project afloat.

In the end, the budget was passed, but the underlying issues haven’t gone away. The budget has made it through by altering the rule of law clause, meaning it will only apply to future spending. The immediate relief will pass, but the legality of the bill can still be and will be challenged in the European Court of Justice, and it will likely rear its head again come the next round of agreements. This agreement means short-term funding is assured, but the political battle has only been delayed.

Whatever happens, this budget crisis demonstrates that the signs of unity in early 2020 have fallen away to the same financial division that usually affects the EU. Covid money has become a wider battle about the role of Europe in the lives of its member states, and that’s not a battle the bloc really wants to have right now.