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Discussions in the EU over a £1.82 trillion budget and coronavirus recovery package are currently blocked after Hungary and Poland opposed new “rule of law” conditions on the allocation of funds.

This Insight explains the background to what’s happened.

The proposed budget

A financial package was agreed at the European Council (summit of EU leaders) on 21 July 2020 after months of discussions. This had two principal components:

Under NGEU, the European Commission will be able to borrow £750 billion on the markets to fund a mixture of grants and loans. Grants will be available from 2021 to 2023.

In adopting the package, EU leaders agreed that a “regime of conditionality” for the allocation of funds would be introduced. This would be related to “respect for the rule of law” and protection of the EU’s financial interests, with details to be worked out later.

The Rule of Law in Poland and Hungary

Both Poland and Hungary have been subject to proceedings under Article 7 of the Treaty on European Union (TEU). This allows the Council of the EU (Member State ministers) to suspend certain rights of EU membership (including voting rights), where the European Council has determined a serious and persistent breach by a Member State of core EU values. These values are set out in Article 2 TEU and include respect for democracy, the rule of law and human rights.

The European Commission, the European Parliament or one third of Member States can ask the Council to launch proceedings to determine whether there is a risk of an Article 2 breach. The European Commission asked the Council to do so in December 2017 in relation to judicial reforms in Poland. It said these reforms put Poland’s judiciary under the political control of the ruling majority.

In September 2018, the European Parliament adopted a resolution asking the Council to determine whether there was a clear risk of a serious breach of Article 2 values by Hungary. It highlighted several concerns, including the functioning of the constitutional and electoral system; the independence of the judiciary and of other institutions; freedom of expression; and the rights of minorities.

The Council has held hearings in relation to both requests, but these have not made much progress. A European Council decision determining a breach would require unanimous support among Member States (not including the State being sanctioned). A European Parliament resolution in January expressed concern about the lack of progress and that the situation had deteriorated in both countries.

The rule of law conditions

The Council and European Parliament agreed proposed rule of law conditions for the budget on 5 November. This amended an earlier Council proposal based on a European Commission text. The Council proposal gave the Commission the power to suspend payments or budget commitments to a Member State, if it was found that breaches of the rule of law in that State affected the sound financial management of the EU budget or the protection of the EU’s financial interests.

The new Council-European Parliament version broadened the criteria so that more systemic rule of law breaches which could impact on sound financial management are taken into account.

Poland and Hungary block the budget plan

Following the Council-European Parliament agreement, Hungary’s Prime Minister Viktor Orbán and Poland’s Prime Minister Mateusz Morawiecki warned EU leaders they would block the budget in response to the new conditions.

Hungary and Poland are not able to block the proposed rule of law conditions in the budget as the Council votes on this are taken by qualified majority. However, unanimity is required to approve the MFF itself and the “own resources” decision, which determines how the EU raises revenue.

In a meeting on 16 November, both Hungary and Poland voted against the “own resources” decision.

Why the block?

Following the meeting, Hungary’s Justice Minister, Judit Varga, said the proposed rule of law conditions were “arbitrary” and designed to “bring in line” Member States on an ideological basis. Poland’s deputy Foreign Minister Paweł Jabłoński said the reference to “potential risks” in the proposed procedure could mean sanctions could be triggered for “literally anything”. He said Poland needed guarantees it “would not be subject to politically motivated sanctions.”

Slovenia’s Prime Minister Janez Janša has also backed the Hungarian and Polish position. Dutch Prime Minister Mark Rutte said that for the Netherlands, “the agreed compromise on the rule of law is the bare minimum” and it “cannot accept anything less.”  The Netherlands was among a group of countries that pushed for rule of law conditions in the budget.

Next steps

European Council President Charles Michel has said discussions would continue “to find an acceptable solution to all”. But he said the “vast majority” of Members States agreed with the proposed regime.

Without an agreement this year, the EU would need to implement an emergency budget for next year based on the existing frameworks, but with limited spending. New projects would not be able to start. The NGEU recovery programme would not get off the ground.

The MFF will also need to be approved by the European Parliament. Some MEPs have suggested NGEU could be pursued on a different legal basis or in a separate treaty excluding Hungary and Poland.

Further reading

About the author: Stefano Fella is a researcher at the House of Commons Library, specialising in Brexit.

Photo by Guillaume Périgois on Unsplash

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