04 April 2023

Frozen

How the EU is Blocking Funds to Hungary and Poland Using a Multitude of Conditionalities

After years of inaction, the European Commission and Council jointly acted to freeze EU funds totaling more than €28.7 billion for Hungary and more than €110 billion for Poland at the end of 2022, citing rule-of-law violations. Surprisingly, the decisions were taken not just (or even primarily) using the new Conditionality Regulation designed for that purpose. Instead, they used a variety of other legal tools to which rule-of-law conditionality was attached. It remains somewhat mysterious, however, precisely which funds and what proportion of those funds have been suspended, and how those suspensions have been legally justified. This post, a shorter version of a SIEPS paper that will be published soon, describes what we know about the complex set of funding suspensions intended to make EU Member States pay for their rule-of-law violations.

The Obvious History of Conditionality

The idea of suspending EU funds in response to rule of law violations first arose in a letter written on 6 March 2013 by four EU Member State foreign ministers. At first, it was unclear how this might be done. While the primary mechanism for dealing with challenges to fundamental values seemed to be Article 7 TEU, its high hurdles for activation render it functionally a dead letter. Existing Regulations that authorized funding suspensions, the Common Provisions Regulation (CPR) and the Financial Regulation (both since superseded), had been interpreted to preclude sweeping ex ante suspensions. Instead, the Commission used them on a project-by-project, receipt-by-receipt basis, flagging specific projects and line items for euphemistically called ‘corrections.’ Invoices submitted by the Member States for work done on those projects would then not be paid or money paid out in error would be clawed back. The CPR did contain broad language in Art. 142(1)(a) that might allow for pre-emptive suspension of a broader swath of funds where rule-of-law violations threatened their proper spending. But the Commission declined to interpret its existing legal mandates broadly at that time, opting instead for an explicit legal ground for suspending funds to rule-of-law-threatening Member States.

The flagship Conditionality Regulation was tabled by the Juncker Commission near the end of its term in 2018, when the rule-of-law portfolio was still wielded actively by Frans Timmermans, who had penned the letter to the Barroso Commission. Throughout the legislative process, the Conditionality Regulation was narrowed and weakened. What began as an attempt to sanction rule-of-law violations by withholding EU funds became a law designed to protect the EU budget by withholding potentially corruptible funds until rule-of-law deficiencies could be corrected. The Regulation passed at the end of 2020 in a contentious process that included a highly irregular intervention by the European Council, followed by an unsuccessful legal challenge by Hungary and Poland before the ECJ. Because the Council had promised the Regulation would not be used until the ECJ affirmed its legality, the first and so far only action against a Member State was only initiated more than four years after the Regulation was first proposed and more than a year after it came into effect.

The Commission eventually triggered the Conditionality Regulation against Hungary in April 2022. It proposed that money be suspended for only three programmes under the Cohesion Funds, and only 65% of the funding allocated thereunder. This amounted to only roughly €7.5 billion. Despite Hungary’s many rule-of-law violations, the Commission focused narrowly on corruption, requiring the adoption of a system to detect and prosecute it. The Hungarian government scrambled to enact a series of anti-corruption laws in fall 2022 in response, but the Commission – correctly in our view – deemed these insufficient. Upon reviewing the Commission’s recommendations in December 2022, the Council agreed by a qualified majority vote to back the Commission. However, it reduced the amount of suspended funds to only 55% of these three programs, to recognize Hungary’s reform efforts.

In the end, the considerable effort to enact, defend and deploy the Conditionality Regulation led to the suspension of only €6.3 billion of funding and only to Hungary, despite the huge effect that rule-of-law deficiencies are having across the European Union. Even though this lagged far behind what advocates had hoped for, the key effect was that the Commission seemed emboldened by the Council’s choice to back the unprecedented step linking the issuance of funds to rule-of-law reforms. This led to far greater effects elsewhere.

The Conditionality Regulation was Only the Beginning

As the Conditionality Regulation was making its way through the legislative process, other conditionality mechanisms had been quietly embedded throughout EU law. The Commission has used these mechanisms to freeze more than €20 billion in additional EU funds allocated to Hungary, and at least €110 billion allocated to Poland, without ever invoking the Conditionality Regulation.

The Regulation on the Recovery and Resilience Fund (the centrepiece of the Next Generation EU Package) has been a central piece of the puzzle. It embodies a logic of economic conditionality, in which issuance of recovery monies is linked to fulfilment of country-specific recommendations under the European Semester, long issued by the Council. While most of the recommendations are about macroeconomic conditions, these recommendations have contained in recent years strong rule-of-law language for some Member States. By implicitly linking economic conditionality to rule-of-law conditionality, the Recovery Regulation created a new path for withholding funds.

Each Member State must submit a Recovery Plan to be approved by the Commission, who may refuse the plan or the distribution of funds its implementation requires if country-specific recommendations are not addressed. When the Commission assessed Poland’s and Hungary’s proposed plans, it recommended approval of both, but with rule-of-law strings attached deriving from their respective country-specific recommendations. Consequently, none of the Recovery Funds would be distributed to either country until they met ‘milestones’ that restored judicial independence (for both Member States) and that fought corruption more effectively (Hungary).

The Polish milestones, published in June 2022, were widely criticized – including by five Commissioners – because they did not require Poland’s compliance with all of the ECJ’s judicial independence decisions. Four European umbrella organisations of judges have even taken EU institutions to the ECJ over this decision. Chastened, the Commission seemingly tightened conditions, rejecting various reform attempts by Poland to unlock the money that were widely thought to be inadequate. So far, Poland remains unable to access the €35.4 billion authorized under the Recovery Fund. Meanwhile, Hungary’s Recovery Plan was finally approved in December 2022. But before funds could flow, Hungary was required to meet more exacting and detailed conditions aimed at restoring judicial independence, mirroring its country-specific recommendations. Until these ‘super-milestones’ are met in full first, Hungary cannot access its entire €5.8 billion in Recovery Funds.

But the biggest budgetary hit came from an even more surprising source. At the start of each EU budget cycle, the Commission negotiates Partnership Agreements with each Member State that specify how EU funds should be spent. The new Common Provisions Regulation, enacted in 2021, includes in Articles 9(1), 15 and Annex III a methodology for applying as a ‘horizontal principle’ (or ‘enabling clause’) the requirement to comply with the Charter of Fundamental Rights (CFR) in the implementation of the wide array of funds it covers. In both the Hungarian and Polish Partnership Agreements, the Commission, using the Council’s qualified majority around the Conditionality Regulation as political cover, weaponized this additional conditionality tool to freeze all CPR-covered funds until both states restore, principally, an independent judiciary as required by Article 47 CFR.

The EU-Hungarian Partnership Agreement covers €22 billion and includes 11 national programs. This plausibly includes the €6.3 billion in funding for the three Cohesion Fund programs that are withheld under the Conditionality Regulation procedure. However, because the Partnership Agreement seems to authorize withholding all the funds covered by it, Hungary is facing the suspension of at least an additional €16.2 until it reinstates judicial independence. This is more than the total withholdings under the Conditionality Regulation and Recovery Regulation combined. Additionally, the Commission has withheld monies under some of these funding streams pending a) a repeal of the ‘child protection law’ that infringes LGBT+ equality rights, b) the restoration of academic freedom by changing the politicized boards of trustees of the newly privatized universities and c) compliance with the right to asylum which Hungary keeps violating according to the ECJ. The relevant Charter articles are mentioned in each of the implementing decisions as explicit conditions to remedy.

Taken together, Hungary faces the suspension of at least €28.7 billion. Once the implementing decisions are published for other programs, we may find that even more funds are being withheld. For example, we know that Hungary has been cut off from both the Horizon Europe and Erasmus+ programs, following the Council’s Implementing Decision on the Conditionality Regulation that additionally bars any EU funds from flowing to the newly and controversially privatized universities. We cannot attribute a Euro value to this particular decision, as the funding amount results from competitive proposals not yet assessed.

In Poland’s case, the suspensions, including their amounts and rationales, are even murkier. Poland signed a Partnership Agreement with the EU in June 2022, in which the CFR conditionalities were limited to concerns about gender equality and the rights of persons with disabilities, with no mention of judicial independence. Reports in October, however, suggested the Commission was withholding what seems to be about €75 billion in Cohesion Funds after Poland’s failure to undertake promised judicial reforms. While the Commission has not publicized the legal basis for its decision, it has likely followed its approach taken in Hungary’s case and invoked Article 47 CFR as a horizontal condition on the funds covered by Poland’s Partnership agreement. There may be even more funds withheld under other funding streams not yet visible because none of the implementing decisions for Poland have been published.

Finally, Poland has taken an additional hit to its EU funds because the Commission has been deducting €1.5 million per day in fines for Poland’s continuing violation of decisions of the Court of Justice. The amount owed is now approaching €500 million. Between the Recovery Fund and Partnership Agreement suspensions, plus the docked fines, Poland is facing suspension of at least €110 billion, all without any invocation of the Conditionality Regulation.

Does Money Make Reform Happen?

Unlike anything else that the Commission has tried over the last ten years, suspending large amounts of money has generated action. Both Poland and Hungary have already moved to enact new laws to remedy the problems that stand between them and the money they expected to receive.

But the Commission should remember that both the Polish and Hungarian governments are run by lawyers who have even jointly created a comparative law institute to ransack other EU Member States’ legal pantries for ideas that they can use to appear to comply with EU law even while undermining it. With ‘legalistic autocrats’ running the show in both countries, the Commission needs to ensure it is not fooled by mere appearances.

So far, the Commission has successfully recognized fake compliance. It refused Poland’s replacement of the politicized judicial Disciplinary Chamber with a new one that nonetheless featured many of the same judges. Now Poland has run into domestic problems enacting more substantial reforms. The government faces a divided Parliament, with some of its own supporters refusing to yield to EU threats while others are eager to compromise and release the money. The new judicial reform program has now landed on the docket of the Constitutional Tribunal, which itself is facing a new infringement action from the Commission for violating EU law. So the restoration of the rule of law in Poland is not imminent.

In Hungary, Prime Minister Viktor Orbán has an impregnable parliamentary majority that will follow his orders. He also is particularly adept at faking compliance with rule-of-law norms while undermining them. The Hungarian government already rushed through a set of laws establishing an anti-corruption program in fall 2022, which the Commission rightly rejected as insufficient. However, it did consider the government’s new plan to reform judiciary reasonable in theory, even as leading Hungarian human rights NGOs have already demonstrated it is more cosmetic than real.

Now that the Commission, using the qualified majority in the Council for the Conditionality Regulation as political cover, has seized the power to leverage great change, it must reject Potemkin reforms and distinguish paper promises from reality. Having surprised us all with massive suspensions of EU funds to the rogue states, the Commission now needs to bar the door on the flow of funds and not unlock the money until the rule of law is restored.