Pedro Madeira Froufe (Editor) and Tiago Sérgio Cabral (Managing Editor) 

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Heresy, realpolitik, and the European Budget

1. The negotiation preceding the final approval of the 2021-2027 Multiannual Financial Framework (hereinafter, “MFF” or “Budget”) has marked by a significant number of twists, turns and eleventh-hour surprises. From the beginning this would always be a difficult negotiation. Being the first budget without the UK as a Member State, on one hand there was the need to show a united European Union after Brexit, but, on the other hand, there was the always unpleasant matter of redistributing the bill among remaining Member States.

2. In 2018, the Juncker Commission proposed a Budget with the value €1 135 Billion. Parliament considered the proposal not to be ambitious enough, an made a reinforced “counter-offer”, naming a much higher price for its consent in its November 2018 Interim Report on the Budget. However, in Council negotiations, the proposal was on track to be severely reduced. Plenty of factions were formed around the budget discussion such as the frugals (who wished to cap the budget at 1% of the GNI) or the friends of cohesion (who were not satisfied with cuts or shifting of funds from cohesion). Europe’s farming industry also lobbied against the decline in importance of the Common Agricultural Policy, and especially direct payments in the budget. At the end, things certainly seemed to be going into a pretty disappointing direction. The most likely result appeared to be a non-innovative budget pushed through after plenty of (arguably) petty squabbling.

3. But negotiations never quite reached their endgame, because the COVID-19 pandemic came and completely shifted the negotiating ground. No longer was this a budget designed in a relatively prosperous time (Europe may not have been growing as much as it wished to, but it was growing nonetheless). Now, the budget was a full-on crisis budget. We are quite sure that some European leaders certainly had flashbacks to the 2008 financial crisis and remembered the high political and financial price that is still being paid for delayed European action and lack of solidarity in certain political options.

4. Truth be told, some of the mechanisms implemented and lessons learned in the aftermath of the 2008 financial crisis are proving their usefulness now (even if national political leaders will not sing their praises on live TV) such as the European Stability Mechanism. The Von der Leyen Commission also appeared to be much better prepared and willing to act quickly and decisively to address the pending crisis when compared with the Barroso Commission, with measures such as proposing the use of the general escape clause of the EU Stability and Growth Pact and flexibility in state aid for companies who were viable pre-COVID. Euro countries also benefit from a much more hawkish monetary policy by the European Central Bank shielding them from a debt crisis.  

5. However, relying on the abovementioned instruments and tools does not appear to be enough to jolt the European economy back into life. A further worry is that the recuperation from the pandemic could widen the disparities between Member States, as the economic power to intervene in the economy varies widely across the EU. One must not forget that damaging a part of the Single Market as a negative effect in the whole.

6. The European Union, in general, is not designed to be able to act quickly. On a curious note, the same ones who normally criticise excessive overreach from Brussels and argue that the Union should have fewer powers are frequently the ones who argue that it should act quicker and more decisively in a crisis. Unfortunately, it is not possible to have the best of both worlds, and due to the systems of checks and balances responses from the Union will always take more time to come than the ones from Member States. Nevertheless, when they do come, they can have more muscle behind, in comparison to what could be achieved by any single State. The question of whether the EU should have broader emergency powers also has some merit, but it depends on the availability for further integration. Regarding the COVID-19 pandemic, the fact that the Budget was within its negotiation stage was actually a lucky break, as it allowed European Institutions to rework it in a manner that would give the EU more firepower to meet the expectations place upon it my Member States and citizens.

7. And to get that firepower the Union added the €1 074.3 billion MFF to a €750 billion program (NextGenerationEU). The NextGenerationEU is a temporary recovery instrument composed of grants and loans on favourable terms to boost the recovery of the EU’s economy. While it is not technically a part of the MFF it was designed to work alongside it, support it and negotiated with it. Its implementation required considerable flexibility by some Member States, the type that can only be found in extreme crisis and, for some, would border on heresy. In short, the EU is borrowing the €750 billion from financial markets making all Member States liable for its repayment (aka common debt).

8. Such a step goes significantly further than anything attempted during the 2008 financial crisis and, due to this, a significant number of Member States wanted assurances that this money would be spent adequately. A part of this equation to provide such assurances is the new Regulation on a general regime of conditionality for the protection of the Union budget (the “Rule of Law Regulation”) which allows measures to be taken, including the suspension or reduction of funds when a breach of rule of law in a Member State affects or seriously risks affecting the sound financial management of the EU budget or the protection of the financial interests of the Union in a sufficiently direct way. It is important to know that these breaches of the rule of law include endangering the independence and working of the judiciary.  

9. However, pursuant to their known issues with the rule of law, which we have addressed frequently in this blog[1], Hungary and Poland threatened to veto the Budget. As stated above, the MFF and NextGenerationEU were being negotiated as a package (nothing is agreed until everything is agreed) and these countries agreement would be needed for the MFF and to amend the Own Resources Decision, even if the Rule of Law Regulation could be approved (and, in fact was) by qualified majority in the Council[2].

10. After and intervention from Germany, Poland and Hungary dropped the veto subject to a number of assurances made by other Member States, as agreed in the European Council. From theses assurances arises a significant issue… In accordance with the Conclusions from the European Council meeting (10 and 11 December 2020): “the Commission intends to develop and adopt guidelines on the way it will apply the Regulation, including a methodology for carrying out its assessment. Such guidelines will be developed in close consultation with the Member States. Should an action for annulment be introduced with regard to the Regulation, the guidelines will be finalised after the judgment of the Court of Justice so as to incorporate any relevant elements stemming from such judgment. The Commission President will fully inform the European Council. Until such guidelines are finalised, the Commission will not propose measures under the Regulation”. This excerpt from the conclusions could be constructed either as realpolitik in action or a blatant violation of the rule of law in itself. Let us see:

a) The European Council does not possess law-making powers. Therefore, it cannot establish conditions for the application of the Rule of Law Regulation. Whether they are the drafting of Guidelines, a mandatory precursory judgment by the European Court of Justice (“ECJ”) or the conditions for the application of the Regulation. In doing so the European Council is acting ultra vires.

b) The European Council cannot hinder the Commission in ensuring the application of the Treaties, and of measures adopted by the institutions pursuant to them or in overseeing the application of Union law under article 17(1) TEU. The Commission must also act independently and cannot take instructions from any Government or other institution, body, office or entity in accordance with article 17(3) TEU.

c) Only the ECJ can suspend the application of a legal act where a case was brought before it, in accordance with article 278 TFEU. In addition, the European Council may be creating a new type of ex ante constitutionally control within the EU, a mechanism that could actually be useful, but that it does not have the power to create[3].

11. In a very insightful piece, Alberto Alemanno and Merijn Chamon bring the abovementioned shortcomings to light and propose two possible solutions: a) the other Institutions should ignore the European Council’s conclusions, as they have no binding nature and breach EU law, and if the Commission fails to do so, Parliament should pursue an action for failure to act under article 265 TFUE and/or; b) bring an action for annulment under Article 263 TFEU against the European Council’s interpretative declaration.

12. Parliament pretty much followed option a) through the European Parliament resolution of 17 December 2020 on the Multiannual Financial Framework 2021-2027, the Interinstitutional Agreement, the EU Recovery Instrument and the Rule of Law Regulation, also warning that it would request the ECJ to make use of the expedited procedure if an action for annulment was brought against the Rule of Law Regulation. However, there is good reason to think that option b) should also be triggered.

13. The Rule of Law Regulation puts the final decision on adopting measures to the Council. In our opinion, it would be very unlikely for the Council to fall out of line with the opinion of the European Council, and, thus, it may not act until it gets the desired decision from the ECJ. Therefore, even if the Commission acts, excessive power vested in the Council may derail the proper application of the Regulation. In this case, triggering article 265 against the Council would be too late – and there is always the question of whether the ECJ could even address a decision by the Council to not implement sanctions, as this seems to be entirely discretionary power of this Institution.

14. However, for the Council to hold out any decisions until a judicial review of the Rule of Law Regulation is carried out, would be much more difficult if the European Council’s interpretative declaration were struck down by the ECJ. It is possible that an analysis of this interpretative declaration could performed quicker than an analysis of the Rule of Law Regulation (main question would be whether it is a reviewable legal act). In addition, while Council would probably be happy to engage in an institutional battle with Parliament and even with both Parliament and the European Commission, ignoring a decision of the ECJ, will probably be a red line. One can also foresee that ignoring a decision of the ECJ to “protect” breaches of the rule of law with an impact on the common budget (i.e. on every citizen’s pocket) could be a political landmine (particularly in more budget conscious countries). Lastly, it would send an important message to all Institutions, regarding the need to respect the Treaties and balance of powers therein.

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[1] Note that Hungary, in particular, suffers from a very high mismanagement of EU funds, with the European Anti-Fraud Office having identified 43 of misappropriation from 2015 to 2019, the highest number of identified cases by this body in the European Union. Cf. https://ec.europa.eu/anti-fraud/sites/antifraud/files/olaf_report_2019_en.pdf

[2] Unanimous decisions and the intervention of national parliaments (namely regarding the Own Resources Decision) was still needed for the rest of the package

[3] A mechanism for ex ante evaluation actually exists for international treaties: the opinion advisory procedure under article 218(11) TFEU

Pictures credits: Social Media by Bru-nO.