11 June 2021

Bringing a Knife to a Gunfight

The European Parliament, the Rule of Law Conditionality, and the action for failure to act

On 10 June 2021, the European Parliament adopted a Resolution on the Rule of Law situation in the European Union and the application of the Conditionality Regulation (EU, Euratom) 2020/2092. In this Resolution, the European Parliament expresses its concerns about the regression of the democratic situation in several member States and regrets the inaction of other institutions, notably the Council as regards the Art. 7 procedures initiated against Poland, in 2017, and Hungary, in 2018. The main focus of this Resolution, however, is the Rule of Law Conditionality Regulation.

After reiterating its position that this Regulation entered into force on 1 January 2021 and is directly applicable in its entirety in the European Union and all its Member States for all funds of the EU budget, the European Parliament regrets that the Commission has not yet triggered this mechanism by sending any written notification to any Member State, “despite many concerns about the breaches of the rule of law identified in the Commission’s 2020 Rule of Law Report, as well as the existence of two ongoing Article 7 procedures, which have an impact on the sound financial management of the Union budget and remain unresolved by Member States”. Even though they are not named, Hungary and Poland are clearly concerned.

Since the Commission has not responded to the Parliament’s request, expressed in a previous Resolution dated 25 March 2021, to provide information to the European Parliament and did not activate the procedure laid down in the Rule of Law Conditionality Regulation in the most obvious cases of breaches of the rule of law in the EU, the Parliament then “instructs its President to call on the Commission, within two weeks from the date of adoption of this resolution at the latest, on the basis of Article 265 of the TFEU [the so-called action for failure to act], to fulfil its obligations under this regulation; states that, in order to be prepared, Parliament shall, in the meantime, immediately start the necessary preparations for potential court proceedings under Article 265 of the TFEU against the Commission.” According to Art. 265 TFEU, “should the European Parliament, the European Council, the Council, the Commission or the European Central Bank, in infringement of the Treaties, fail to act, the Member States and the other institutions of the Union may bring an action before the Court of Justice of the European Union to have the infringement established.”

Even though this Resolution contains many interesting aspects, I will focus on this threat of an action for failure to act. After having described the background of the conditionality issue, I will try to assess the chances of success of such a potential action against the European Commission. My personal assessment is that the chances of success for this legal avenue are rather slim and the Parliament arguably should have employed other means to defend the rule of law.

The 2018 proposal for a Rule of Law conditionality

The idea of linking the payment of EU funds to the values of the Union has gradually developed as a potentially effective means of enforcing compliance. Some authors (see for example here and here) have argued that the Commission already had the power, even before the new Regulation, to suspend the payment of EU funds to a Member State that would restrict the independence of its judges. Indeed, Article 142(1)(a) of the Regulation of 17 December 2013 already allows the Commission to suspend all or part of interim payments where there was a “serious deficiency in the effective functioning of the management and control system of the operational programme  (…)”. This clause, interpreted in the light of the Charter of Fundamental Rights of the European Union, could have covered corruption, cronyism or the loss of independence of the courts, which can then no longer effectively verify the proper use of funds. However, the Commission never dared proposing such a bold interpretation of this provision. On the contrary, probably in order to have a more indisputable legal basis and to avoid the accusation of abuse of power, the European Commission proposed, on 2 May 2018, a regulation allowing to suspend the payment of part of the structural funds to Member States that violate the principles of the rule of law, in particular the independence of the judiciary.

According to Article 3(1) of the proposed regulation, appropriate measures shall be taken where a generalised deficiency as regards the rule of law in a Member State affects or risks affecting the principles of sound financial management or the protection of the financial interests of the Union. The same article, in its paragraph 2, gave several examples of “generalized deficiency”, in particular: a) endangering the independence of judiciary; (b) failing to prevent, correct and sanction arbitrary or unlawful decisions by public authorities, including by law enforcement authorities, withholding financial and human resources affecting their proper functioning or failing to ensure the absence of conflicts of interests and (c) limiting the availability and effectiveness of legal remedies, including through restrictive procedural rules, lack of implementation of judgments, or limiting the effective investigation, prosecution or sanctioning of breaches of law.

The measures in question could be of several kinds, up to the suspension of funds, depending on the nature, seriousness and scope of the failure on the one hand, and on the type of management of the programmes concerned (direct, indirect or shared management) on the other.

Under Article 5 of the proposal, where the Commission finds that there are reasonable grounds to believe that the conditions laid down in the Regulation were met, it would send a written notification to the Member State concerned, setting out the reasons for its finding. After a phase of dialogue, if the Commission considered that the widespread failure of the rule of law was established, it would submit to the Council a proposal for an implementing act laying down appropriate measures. Interestingly, the proposal provided for the decision to be adopted by a reverse qualified majority, meaning that the decision would be deemed to be adopted by the Council unless the Council decided by qualified majority to reject the Commission’s proposal within one month of its adoption.

The watered-down version brokered by Germany

This proposal remained in limbo in the European legislative process for several years, until it became a central issue in the context of the European Union’s economic recovery plan for the Covid-19 pandemic in 2020. As readers will probably recall, France and Germany agreed on an ambitious plan that would see the EU take on debt on international financial markets for the first time to finance national economic recovery projects in the form of grants and soft loans. However, this plan met with opposition from several so-called ‘frugal’ countries, led by the Netherlands. As one of the conditions for lifting their opposition, the so-called “Frugals” demanded that strict conditionality be attached to the disbursement of the funds in question. This requirement brought the 2018 proposal back into the centre of the debate. Unsurprisingly, it was fiercely opposed by Poland and Hungary, the two Member States of the Union currently subject to an Article 7 procedure for clear risk of a serious breach of Union values.

In September, it became clear that the 2018 proposal would be passed through the legislative procedure and that Hungary and Poland would not be able to oppose it due to qualified majority voting. These two states then set out to hold hostage the recovery plan (even though they would be major beneficiaries of it) whose legal pillars, the multi-annual financial framework and the so-called ‘own resources’ decision, required a unanimous vote in the Council.

Faced with this threat, and instead of considering alternatives such as adopting the recovery plan in the form of enhanced cooperation, the German presidency sought to water down the 2018 proposal to make it more acceptable to the two rebellious member states.

First of all, the conditions for triggering the mechanism were changed. On the one hand, the term “generalised deficiency” was replaced by the term “breaches” – a less stigmatising term, but one which, perhaps unintentionally, could facilitate the triggering of the mechanism in that it is a less demanding threshold.

Secondly, these violations of the principles of the rule of law in a Member State must now affect or seriously risk (instead of simply “risk”) affecting the sound financial management of the Union budget or the protection of the financial interests of the Union “in a sufficiently direct way” (this requirement of a sufficiently direct link being also a novelty).

Thirdly, the procedure for adopting measures has been changed compared to the original proposal, since the Council will now decide by a ‘normal’ qualified majority instead of reverse qualified majority.

Finally, an ’emergency brake’ was added to the text. The recitals (and not, it should be noted, the body of the text) refer to an option for the Member State concerned, if it considers that there has been a breach of the principles of objectivity, non-discrimination and equal treatment of Member States, to ask the President of the European Council to refer the matter to the next European Council. In such exceptional circumstances, no decision on the measures should be taken until the European Council has discussed the matter. This process should, in principle, not last more than three months after the Commission has presented its proposal to the Council. However, in view of the voting arrangements in the European Council (consensus), there is a risk that this option will de facto allow the qualified majority requirement to be transformed into a quasi-unanimity requirement.

The Political Compromise at the European Council

Despite the mitigations agreed under the German Presidency, Hungary and Poland persisted in their veto. The watering down of the mechanism was therefore combined with an extra-legal compromise in the form of conclusions adopted by the European Council on 11 December 2020. These conclusions provide, inter alia, that 1) the European Commission must adopt “guidelines” before implementing the mechanism (even though the text does not provide for such guidelines at all); 2) should an action for annulment be introduced with regard to the Regulation (which Hungary and Poland were expected to do), these guidelines will be finalised after the judgment of the Court of Justice so as to incorporate any relevant elements stemming from such judgment; and 3) the examples of triggering factors set out in the regulation are to be read and applied as a closed list, even though Art. 4(2)(h) of the Regulation explicitly states that the mechanism may be triggered in response to any “other situations or conduct of authorities that are relevant to the sound financial management of the Union budget or the protection of the financial interests of the Union”.

It was thus both watered down and neutered that the regulation was adopted on 16 December 2020. As expected, on 11 March 2021, a few days before the deadline, Hungary and Poland filed an action for annulment against the regulation. This action is pending at the time of writing.

The reaction of the European Parliament

This political compromise both side-lined the European Parliament and bypassed its prerogatives. Therefore, the European Parliament, on 25 March 2021, adopted a Resolution in which it stressed “that the Commission is obliged to inform the European Parliament and the Council without delay of any notification sent to Member States in case it has reasonable grounds to consider that the conditions for the adoption of measures set out in the Regulation are fulfilled” and noticed “with disappointment the absence of any written notification to Member States since the entry into force of the Regulation, despite many concerns about the breaches of the rule of law identified in the Commission’s 2020 Rule of Law Report, which have an impact on the sound financial management of the Union budget”. It thus warned the Commission that “in case [it] does not fulfil its obligations under this Regulation and does not provide Parliament with information as mentioned above by 1 June 2021, Parliament will consider this to constitute a failure to act and subsequently shall take action under Article 265 of the TFEU against the Commission.” The Resolution which is the object of the present post is the follow-up to this first Resolution.

Does an action for failure to act, if initiated, have any chance of success?

It is important to emphasise, first, that, by the present Resolution, the European Parliament only instructs its president to initiate the pre-litigation phase of the so-called action for failure to act by calling the Commission to act, as required under Art. 265(2) TFEU. According to this provision, “the action shall be admissible only if the institution, body, office or agency concerned has first been called upon to act. If, within two months of being so called upon, the institution, body, office or agency concerned has not defined its position, the action may be brought within a further period of two months.” No action can therefore be brought before the Court of Justice before August. This could be interpreted as a way of kicking the can a bit further down the road. The first Resolution of the European Parliament could probably have served as an invitation to act, as needed under Article 265(2) TFEU, since it clearly required the Commission to inform the European Parliament of written notifications sent to Member States regarding which there are “reasonable grounds to consider that the conditions for the adoption of measures set out in the Regulation are fulfilled.” It could therefore be argued that the European Parliament could have dispensed with a second invitation to act and could have brought the action before the Court immediately. It is not unlikely that this procrastination was a condition imposed by certain European parties in exchange for their consent to the text.

It must also be observed that, in order to end its potential failure to act, the Commission just needs to take a position, and not necessarily the one favored by the European Parliament. To put it otherwise, if the Commission was to issue a statement explaining why it is not able to send any notification to any Member State under the Regulation for the moment, this, in itself, would put an end to the (potential) failure to act – thus opening the separate issue as to whether an action for annulment would be possible.

That being said, if the Commission remains silent and if the European Parliament does indeed bring the matter before the Court, would such action have any chance of success? Trying to forecast the outcome of a judicial procedure is always a tricky gamble. However, based on the available information, we can consider it rather doubtful.

A “failure to act” under Article 265 TFEU refers to a situation whereby an EU institution, body, office or agency did not adopt a certain act even though it was under a legal obligation to do so. Surely, the European Commission is under a legal obligation to execute EU legislation, including Regulation 2020/2092. However, claiming that the Commission has failed to act, in the strictly legal meaning of the term, by not sending notifications to any Member State since the entry into force of the Regulation would imply that the Commission legally had no other choice than sending notifications. In other words, it would mean that the Commission has no discretion. This, however, is very doubtful.

Firstly, it could be argued that the notion of “breaches of the principles of the rule of law in a Member State” that “affect or seriously risk affecting the sound financial management of the Union budget or the protection of the financial interests of the Union in a sufficiently direct way” is broad enough to warrant a margin of interpretation for the Commission. Surely, there is a growing body of rulings in which the Court found that Hungary and Poland infringed fundamental values of the Union, including the rule of Law (see for example here, here, here and here). The Commission can also use its own findings, appearing both in its proposal for a Council decision under Art. 7(1) TEU against Poland and in its 2020 Rule of Law reports. However, these rulings and findings do not per se establish a serious risk of affecting EU finances. As a matter of fact, the Resolution precisely “asks the Commission to include in its annual Rule of Law Report a dedicated section with an analysis of cases where breaches of the principles of the rule of law in a particular Member State could affect or seriously risk affecting the sound financial management of the Union budget in a sufficiently direct way.” This is indeed a commendable suggestion, one that would greatly help streamline the implementation of the Conditionality Regulation. However, so far, the Rule of Law reports do not contain such dedicated section.

Secondly, and more importantly, there is no specific timeframe for the Commission to trigger the conditionality procedure. It is true that, in its March Resolution, the European Parliament issued a deadline to the European Commission. However, this deadline was not in itself legally binding on the Commission. To put it otherwise, the Commission can claim that it needs more time to assess the situation of 27 Member States.

The power of the Commission to supervise Member States under the Regulation can probably be compared, mutatis mutandis, with its power to supervise the Member States responsible for an infringement of the Treaty rules, in particular those relating to competition. According to the Court of First Instance in the 1994 case Ladbroke Racing, that power necessarily implies that that institution has a wide power of assessment. This, in turn, according to the CFI, means that power “is not coupled with an obligation on the part of the Commission to take action which may be relied on in seeking a declaration that the Commission has failed to act” (para 38).

And yet, there was a viable legal avenue for the European Parliament to challenge the de facto suspension of the conditionality mechanism. Several academics, the author of the present lines included, argued soon after the conc