Rule of law mechanism a sticking point in EU pandemic recovery fund plans
At its July budget-setting meeting, the European Council made finding a way to help European Union Member States recover from the Covid-19 pandemic one of its top priorities. As the Council itself said at the time, ‘the socio-economic fallout from the COVID-19 crisis requires a joint and innovative effort at EU level in order to support the recovery and resilience of the member states’ economies’.
The Council came up with what Zsolt Darvas, a senior fellow at European economic think tank Bruegel, says is an unprecedented solution. ‘The grand EU budget deal reached by the European Council […] which includes a one-time €750bn recovery fund named Next Generation EU, is unprecedented,’ he says. ‘For the first time in its history, the EU will borrow from capital markets to finance expenditures throughout the Union.’
The borrowing will allow the EU to make €390bn available as grants with the balance – €360bn – to be forwarded to Member States as loans. The specific aim is to help reverse some of the economic damage the pandemic has left in its wake. Crucially, says Darvas, by making the allocation of funds dependent specifically on how badly individual economies have been hit by the pandemic, the recovery package has been designed to act as ‘an insurance system’ for Member States.
There isn’t in principle anything to prevent the European Council from pushing a scenario where there is some conditionality attached [to accessing the funds]
Paul McGarry SC
Member of the IBA Forum for Barristers and Advocates Advisory Board
The intention is for the money to start being distributed at the beginning of 2021, but a stand-off over Hungary’s poor record on upholding the rule of law is threatening to derail the plan.
When discussions over the EU’s 2021-27 budget first began in 2018, the European Commission proposed creating a link between showing respect for the rule of law and being able to access funds.
When talks turned to recovery earlier in 2020 it was envisioned that that link would be a strong one, with France, the Nordic countries and the Netherlands pushing for cash to be withheld from any government that flouts the fundamental principles of democracy. According to Clément Beaune, the French Minister of State for European Affairs, financial sanctions are something the EU needs to develop ‘because legal and financial measures are the most powerful tools’.
However, Hungary and Poland, which are both already subject to so-called Article 7 rule of law infringement investigations by the Commission, refused to give their backing to the plan, which requires the agreement of all 27 Member States in order to proceed.
Hungarian Prime Minister Viktor Orbán – who stands accused of undermining the independence of his country’s judiciary, media, academia and advocacy groups as well as overseeing an administration that in 2019 topped the European Anti-Fraud Office’s (OLAF) list of closed investigations into the misuse of EU funds – is particularly opposed to the new fund being linked to countries’ democratic records.
As things stand, it looks unlikely that France’s Beaune is going to get his way, with Hungary almost certain to oppose anything other than the weakest application of rule of law conditionality. Despite this, Paul McGarry SC, a Member of the IBA Forum for Barristers and Advocates Advisory Board and a former Chair of the Bar of Ireland, believes conditionality of any kind would, in theory, be welcome, though he notes that actually applying sanctions may not be straightforward in practice.
‘It’s a novel thing to attempt to tack on to what is in itself a novel concept, but there isn’t in principle anything to prevent the Council from pushing a scenario where there is some conditionality attached [to accessing the funds],’ he says. ‘I personally don’t see any difficulty with it, although unless Article 7 is invoked it would beg the question of who is responsible for deciding whether the rule of law is being respected.’
Daniel Hegedüs, a non-resident fellow for Central Europe at the German Marshall Fund of the United States, agrees. He notes that the main question hanging over the proposed fund, regardless of how tough the conditionality clause is, is ‘when and how sanctions can be triggered’.
‘Originally, the Commission wanted sanctions to be introduced by them alone with the Council playing a controlling role,’ he says. ‘The altered [July] version would require a majority of the Council [to be in agreement], but the problem is it’s very difficult to gather a qualifying majority to sanction Member States.’
Hegedüs believes that if the decision-making is by the Council, it can’t be expected that rule of law conditionality will be applied in a committed way. ‘It would always be subject to political considerations and Member States don’t like to sanction themselves or make decisions against members of the Council,’ he says.
If no solution to the stalemate can be found at the European Council’s next meeting in October the entire pandemic recovery plan could be thrown into disarray. As European Council President Charles Michel said at the start of September, securing agreement on the exact conditions for respecting democracy to attach to the disbursement of funds is the biggest challenge to implementing the proposals.
Ultimately, Hegedüs believes that both the European Council and Hungary will be forced to compromise in order for the budget to be signed off in October, paving the way for light-touch rule of law considerations to be attached to the recovery fund.
‘If there is no conditionality the Council can veto [the budget] and if there is hard conditionality then Hungary can veto it,’ he says. ‘It’s like a Mexican stand-off; they will have to meet in the middle.’
Hegedüs explains that when the European Council next meets, there will be enormous pressure on Member States to find an agreement. ‘Between October and December we’ll be able to see whether we’ll have this fund from January or whether the whole issue will be postponed.’
‘If Hungary plays it well it will get support from southern European Member States, who desperately need this support,’ adds Hegedüs. ‘Portugal has already changed its mind and abandoned its support for hard rule of law conditionality.’