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Can the EU Solve the Budget and Rule-of-Law Crisis?

Hungary and Poland have vetoed the next EU budget in protest of a new rule-of-law conditionality. What instruments and treaties can Europe use to circumvent Budapest and Warsaw’s hostage-taking?

By: EBR - Posted: Friday, November 27, 2020

"The rule of law enables the EU to function. The single market works because companies from one member state can rely on consistent laws, consistently applied, in the others."
"The rule of law enables the EU to function. The single market works because companies from one member state can rely on consistent laws, consistently applied, in the others."

by Judy Dempsey*

IAN BOND/ DIRECTOR OF FOREIGN POLICY AT THE CENTRE FOR EUROPEAN REFORM

The EU can easily solve the budget crisis—give in to Hungarian and Polish blackmail tactics, and the EU’s next seven-year budget will be approved. But that would exacerbate the rule-of-law crisis, which is much more important.

The rule of law enables the EU to function. The single market works because companies from one member state can rely on consistent laws, consistently applied, in the others. The European Arrest Warrant works because courts in one country can trust courts in another to try cases fairly.

There should be no dispute between Central European member states and others about the rule of law’s importance, so it is good to see the chairman of the Slovak parliament’s European Affairs Committee (and former Carnegie Europe director), Tomas Valasek, and Romanian Prime Minister Ludovic Orban pushing back against the Hungarian and Polish governments.

Rule-of-law problems in the EU should be a common concern; look at the corruption uncovered by journalist Daphne Caruana Galizia in Malta or the allegations against former French president Nicolas Sarkozy.

Even if Hungary and Poland delay agreement on the EU budget for 2021–2027 and the Next Generation EU coronavirus recovery fund, EU leaders must stand firm. They must defend core EU values, not reward countries for rejecting them.

MAREK DABROWSKI/ NON-RESIDENT SCHOLAR AT BRUEGEL

The position taken by the governments of Hungary and Poland is unacceptable. Other member states must not give in to such pressure and should find an alternative way to adopt the Next Generation EU instrument. Legal experts should answer whether the enhanced cooperation or a separate intergovernmental treaty is a better solution.

However, a similar solution does not seem to be possible in the case of the seven-year budget—the multiannual financial framework (MFF)—which must be adopted by unanimity. The EU will have to function with a temporary budget as determined by Article 312(4) of the Treaty on the Functioning of the European Union until the MFF is finally accepted.

It is also important to draw lessons from the current crisis in case of future changes to the EU treaties.

First, the MFF’s unanimity requirement should be replaced by qualified majority voting. This would help prioritize genuine European public goods over cross-country transfers and limit the bargaining process between member states.

Second, there is a need to strengthen the enforcement mechanism—both political and judicial—of the EU treaties and EU secondary legislation in individual member states, especially in respect to the basic values referred to in Article 2 of the Treaty on European Union.

MARTIN EHL/ CHIEF INTERNATIONAL EDITOR AT HOSPODARSKE NOVINY

The exact answer would be that the EU could solve the budget crisis, but not the rule-of-law one. As the EU left Hungarian Prime Minister Viktor Orban to develop into an autocrat within the club during the last decade, it now seems too late for a radical turnaround—which an intergovernmental solution would be.

The EU’s Southern and Eastern members are desperately waiting for recovery-fund money, so the core issue of principles will need to be put into the freezer, at least for some time.

Hungary and Poland are also in desperate need of EU money. And both governments depend domestically on the dynamics coming from their “defense defense-of-national-interest” strategy—or campaign, to say it more precisely. To reconcile both needs, they will look for some face-saving solution that would allow them to say to their domestic audiences that such solution did no harm to their national pride and that the flow of money will be preserved.

The German EU presidency will do literally anything to resolve the situation quickly. So I would expect that the political dispute will change into a legal one and be parked at the European Court of Justice—which will decide in one or two years, when the situation in Europe and in both countries could be different.

ROLAND FREUDENSTEIN/ POLICY DIRECTOR OF THE WILFRIED MARTENS CENTRE

Yes, it can—if it wants to. It was probably not such a brilliant idea to have the rule-of-law conditionality adopted in the same package as the budget and the recovery fund. The latter could have been adopted by unanimity, and the former by majority voting afterward.

But anyway, now that the crisis is here, we need to somehow move ahead. That may still include adopting the conditionality separately, followed by the budget and recovery fund as well as a solemn declaration by the other member states about the political impartiality of the process and legal remedy.

The option to go ahead, if necessary, in an intergovernmental framework—as with the EU’s stability pact—should definitely remain on the table. Orban and Jaroslaw Kaczynski, the leader of Poland’s ruling Law and Justice Party (PiS), mustn’t get away with what they have mostly gotten away with up to now: a compromise in which they keep 90 percent of the substance and only 10 percent of the others—that is, values and principles.

This proportionality needs to be reversed, otherwise the EU can forget about its proclaimed values. Incidentally, it could also forget about projecting good governance and therefore stability to the neighborhood. There is no democratically legitimate power without values.

DANIEL HEGEDUS/ FELLOW FOR CENTRAL EUROPE AT THE GERMAN MARSHALL FUND OF THE UNITED STATES

The primary ingredients to solve the budget and rule-of-law crisis are determination and political will.

Experience with Hungary’s and Poland’s autocratization over the past years has clearly demonstrated that fine-tuned policy instruments and technocratic quibbles do not provide any solution if stakeholders lack clear political vision and determination to use them.

Circumventing the Hungarian and Polish blockade by establishing the Next Generation EU recovery package as an intergovernmental or enhanced cooperation excluding Europe’s semi-authoritarian twins is not a solution.

It might guarantee EU member states access to the coronavirus recovery funds in the second quarter of 2021 but provides no answer for the blockade of the MFF, which would likely continue. However, it can indeed be a useful threat posture against Budapest and Warsaw.

Watering down the rule-of-law conditionality or terminating the Article 7 procedures would only encourage extortion by veto in the future, create a Mexican standoff with the European Parliament, and rehabilitate Budapest’s and Warsaw’s illiberal Fidesz and PiS governments, respectively, which are—as a matter of fact—in serious noncompliance with fundamental EU values.

The only way forward is undermining the raison d’etre of the Hungarian and Polish blockade by officially adopting the rule-of-law conditionality as soon as possible and offering some (non-substantial) concessions for Budapest and Warsaw to withdraw while saving face.

SHADA ISLAM/ EU COMMENTATOR AND MANAGING DIRECTOR OF NEW HORIZONS PROJECT

Ursula von der Leyen was sworn in almost a year ago, in December 2019, as president of a “geopolitical” European Commission. In fact, her main struggles are not global but domestic and center on her ability to ensure that the EU can stand up to the “illiberal” governments of Hungary and Poland, which are upending the bloc’s founding values and principles.

Both countries are becoming increasingly confident of their EU-wide role and influence. For example, Dutch Foreign Trade and Development Cooperation Minister Sigrid Kaag said after a meeting of EU development ministers on November 23, 2020, that she was “deeply alarmed and deeply concerned” over attempts by Budapest and Warsaw to “push back on women’s and girls’ rights.”

It’s time to say enough is enough and to call the two states’ bluff. The €750 billion EU Next Generation recovery fund is vitally important. More than that, the EU’s domestic and international credibility is at stake.

First, the European People’s Party, the largest political group in the European Parliament, must stop protecting Hungary and Poland.

Second, EU leaders must be more vocal in calling out the two countries on their violation of EU values.

Third, the EU should use all other provisions in its toolbox, including qualified majority voting and enhanced cooperation to move ahead on key goals, even if it means leaving some countries behind—at least for the moment.

BRUNO MACAES/ SENIOR ADVISOR AT FLINT GLOBAL AND FORMER EUROPE MINISTER OF PORTUGAL

There are two separate questions. First, what to understand by “rule of law” and, second, what concrete cases an EU rule-of-law mechanism can apply to. This will always remain contentious and open to debate.

But the negotiation process this time has been clarifying in at least one respect: Hungary and Poland have vetoed a viable compromise, thereby placing themselves outside the whole debate.

There is an opportunity here to apply an ad hoc mechanism. The other countries should separate the recovery plan from the budget and proceed without Hungary and Poland. It is as if a rule-of-law mechanism—a political one in this case—was already to be applied to the negotiations themselves.

Why is this necessary?

EU member states share sovereignty. They make decisions together. If a member state does not have guarantees that decisions in other countries are democratically legitimate, then their own democracies will be impaired, and their own citizens will be subject to partially illegitimate decisions and regulations. On this there can be no compromise.

ALINA MUNGIU-PIPPIDI/ DIRECTOR OF THE EUROPEAN RESEARCH CENTRE FOR ANTI-CORRUPTION AND STATE-BUILDING AT HERTIE SCHOOL

This could be part of a series together with “Can humanity solve global warning while letting poorer countries catch up?” and “Can we stop the spread of the virus while relaunching the economy?” to be studied in public-policy classes. Only, it would instead be studied in the “tradeoffs” class. No?

The reason for the EU’s special recovery fund is that remedies for epidemics and common market slumps need to be applied at the same time to the whole organism for the recovery to work.

That’s the problem with negative externalities. We cannot isolate them. So to build recovery, excluding Hungary and Poland cannot work—except maybe as an efficient threat in a game of chicken.

The differences in values or standards among the EU’s twenty-seven member states are too complex to be “solved” by a standoff, which is a simple power contest. The issue is how to cut the EU funds of the bad guys without them being able to pose a veto, and how sound a rule-of-law mechanism modeled after the Cooperation and Verification Mechanism for Bulgaria and Romania is.

We all want the bad guys to lose, but we will have to make them lose the Hungarian and Polish constituencies they still have. That’s the real battle.

CHRISTIAN ODENDAHL/ CHIEF ECONOMIST AT THE CENTRE FOR EUROPEAN REFORM

There is an odd pessimism in the question. This is not a crisis. The EU, for the first time, is trying to lock in a meaningful rule-of-law mechanism into its spending programs, even though it needs the consent of the governments it is trying to contain.

How to solve this conundrum?

First, put a humongous pot of money on the table ready for the opposing governments to tap into. The coronavirus pandemic has provided that opportunity. Hungary and Poland, for example, have not been hit particularly hard by the pandemic and yet are bound to receive enormous amounts from the new recovery plan.

Second, make sure the financial deal contains elements for everyone, including the allies of the opponents, so that vetoing this carefully crafted deal is certain to piss off everybody else.

Third, turn the rule-of-law screws until the reluctant governments squeak.

Fourth, show them the EU’s arsenal—for example letting spending programs just run out—should they veto the deal.

Fifth, find their pain threshold and settle just below it.

Et voila, another EU standoff is resolved. Don’t panic. We are currently in stage four and need calm resolve and patience to proceed to five.

MARTA PILATI/ POLICY ANALYST AT THE EUROPEAN POLICY CENTRE

It can and it will. At least in this specific case. A classic EU political compromise will be reached within weeks.

Hungary and Poland know they cannot scrap the rule-of-law mechanism, whose text will remain untouched, but they might be able to obtain some political reassurances on the respect of national sovereignty, for example. They will be able to claim a win in the eyes of their national publics—their main intention to begin with—and the remaining EU leaders and the European Parliament will score the introduction of a new mechanism and a coronavirus recovery package.

Importantly, however, the battle over the rule of law should not finish here. The mechanism is a first step in the right direction, but it is not very powerful.

The link to the EU’s financial interests is difficult to prove and restricts the scope of what is sanctionable. Press freedom, minority rights, and other violations of EU values are excluded. Nothing prevents EU leaders from introducing a wider, stronger, and more usable rule-of-law conditionality in the future; there is a qualified majority for it. In this case, they should get ready for a real fight.

GIANNI RIOTTA/ VISITING PROFESSOR AT PRINCETON UNIVERSITY AND DIRECTOR OF LUISS DATA LAB

There are no values or ideals involved in the latest brouhaha between Hungary, Poland, and the European Union. Pundits write: “This is a feud over the rule of law!”—but do not believe the hype. Budapest and Warsaw do not have the stamina to block the EU’s €1.8 trillion budget-and-recovery package, which is desperately needed by millions of citizens during the worst pandemic in a century.

Like grumpy neighbors, Hungary and Poland will eventually yield—however, not before feeding their populist constituencies a sanguine diet of slogans, muscle flexing, and boasting.

This horror movie mirrors the American final saga of U.S. President Donald Trump: like the defeated Republican leader, Kaczynski and Orban huff and puff, aware that they will not stop German Chancellor Angela Merkel and French President Emmanuel Macron.

Yet both scary movies hide a real danger. U.S. President-elect Joe Biden will arrive at the White House, and the EU recovery fund will survive the Eastern swamps. But the United States and Europe need a functioning governance, ready to undercut the greedy nationalistic blackmail.

Our post-pandemic world will need sharp innovation and brave plans to spur the economy. Biden and the European Commission should act fast to isolate the naysayers.

MARTIN SANDBU/ EUROPEAN ECONOMICS COMMENTATOR FOR THE FINANCIAL TIMES

Yes—if by that we mean the narrow crisis of Hungary and Poland’s veto of the seven-year budget and the recovery package in protest against the conditionality regulation agreed between the European Council and European Parliament negotiators.

There is no good endgame for the vetoers if everybody else holds their nerve. The conditionality rules will become law by qualified majority.

If the budget remains vetoed, a limited rollover of the previous one will apply—leaving Budapest and Warsaw worse off financially and without avoiding the rule-of-law condition.

The recovery package can be pursued at the level of twenty-five members through enhanced cooperation or, more awkwardly, as an intergovernmental structure. That leaves Hungary and Poland without the very substantial grants they were set to receive. In addition, they will suffer further opprobrium from indefinitely blocking core EU activities.

This is far from ideal but a situation the twenty-five can tolerate longer than the two. This will become clearer as 2020 draws to a close. A minimally face-saving gesture and well-judged pressure will encourage a lifting of the veto.

This would not divert the Hungarian and Polish governments’ course away from the EU as a common project. But rewarding their obstructionism now would accelerate that drift.

DANIEL SMILOV/ ASSOCIATE PROFESSOR AT THE UNIVERSITY OF SOFIA AND PROGRAMME DIRECTOR AT THE CENTRE FOR LIBERAL STRATEGIES

The EU’s budget crisis caused by the Hungarian and Polish veto is an opportunity for the union.

If the other twenty-five member states stick together and make a credible effort to pass the recovery aid package through enhanced cooperation, the EU will achieve two goals.

First, it will show to opportunistic national populists that there will be no compromise on values such as the rule of law and the rights of minorities. The union should not be blackmailed by leaders who have gone down the autocratic road or become paragons of corrupt governance.

Second, making enhanced cooperation operational will solve a long-term strategic problem for Europe. At present, the EU appears to be in a joint-decision trap: any meaningful reform is likely to be blocked by one country or another. Because of that, the only viable options appear to be either status quo or exit. This trap fuels populist and anti-European sentiments. Enhanced cooperation could allow the EU to move forward and achieve deeper and more efficient integration.

Furthermore, if enhanced cooperation becomes a plausible policy option, opportunistic veto players, such as Hungary and Poland in the present case, will most probably back down and avoid the threat of being marginalized.

ZSUZSANNA SZELENYIRICHARD VON WEIZSACKER/ FELLOW AT THE ROBERT BOSCH ACADEMY

Ten years after Orban openly began challenging democratic values, his EU partners got the political will to introduce the rule of law as a conditionality of EU financial transfers.

The fact that the Hungarian and Polish governments took the risk of vetoing the EU’s historic crisis-recovery fund demonstrates how crucial a problem this conditionality is for them. They used the urgency of the crisis to gain a negotiating position.

Urgency is the reason why I think EU leaders will reach a compromise at the European Council summit on December 10–11.

For Germany, keeping the bloc together is an ultimate priority, and they want to wrap up the budget dossier before the end of 2020. The compromise will result in a more watered-down conditionality, and I predict that Orban will require further informal concessions, for example that the ongoing Article 7 procedure against Hungary is dropped. Von der Leyen’s informal promise would be valuable for Orban.

The EU will move on from the actual debate, but the rule-of-law crisis will remain with us.

The confrontational action has, however, resulted in further loss of trust toward noncomplying countries, and it will be tempting in the future that coalitions of the willing move on to more exclusive forms of cooperation. To save the EU, however, the real job is to work more consistently on reinforcing democracy.

*Nonresident Senior Fellow, Carnegie Europe and Editor in chief, Strategic Europe
**first published in: carnegieeurope.eu

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