On the triggering of the EU’s conditionality mechanism: what has been done and what could follow

Gonçalo Martins de Matos (Master in Judiciary Law by the University of Minho)

            When the Court of Justice of the European Union (CJEU) delivered, at the beginning of the last year, the two landmark judgements Hungary v. Parliament and Council (Case C-156/21) and Poland v. Parliament and Council (Case C-157/21), the conditionality mechanism created by Regulation (EU, Euratom) 2020/2092 for the protection of the Union’s budget[1] definitely gained the green light for its implementation, in the sequence of which the Commission adopted the guidelines of application of said mechanism. On 27 April of the same year, the European Commission formally announced it would be triggering the conditionality mechanism against Hungary. After an intense period of negotiations between Brussels and Budapest, the European Commission adopted, on 18 September, a proposal on measures for the protection of the Union budget against breaches of the principles of the rule of law in Hungary[2] (COM(2022) 485 final), following which the Council of the EU adopted, on 18 September, an implementing decision on the measures proposed by the Commission.

            Before we proceed with the analysis of the proposed measures and their impacts on the protection of the rule of law, we must briefly provide the necessary legal framework. As we have discussed before, the intention behind the adoption of Regulation (EU, Euratom) 2020/2092 is “the protection of the Union budget in the case of breaches of the principles of the rule of law in the Member States”, as is set out in Article 1 of the same Regulation. Article 3 of this Regulation establishes situations that may indicate a breach of the principles of the rule of law, and Article 4 stipulates the conditions for the adoption of the necessary measures to protect the same principles. Article 5 lays down the measures that can be adopted in case the Commission finds that the principles of the rule of law have been breached under the described terms, following the procedure set out in Article 6 of the Regulation. We further add that Article 5(3) enshrines a principle of proportionality when adopting those protective measures. Article 6(1) determines that the Commission may resort to the conditionality mechanism unless it considers that other procedures set out in Union legislation would allow it to protect the Union budget more effectively. Seeing that the European Commission has already resorted to Article 7 TEU and to several infringement procedures regarding the Hungarian government’s various breaches, the conditions were met to activate the conditionality regime.

             In its proposal on protective measures to adopt by the Council, the European Commission finds that the issues raised during the proceedings “constitute systemic breaches of the principles of the rule of law […], in particular of the principles of legal certainty and prohibition of arbitrariness of the executive powers[3], in light of Article 3(b) of the Regulation, which states that it is indicative of a breach “failing to prevent, correct or sanction arbitrary or unlawful decisions by public authorities, […], withholding financial and human resources affecting their proper functioning or failing to ensure the absence of conflicts of interest”. The Commission cites several of the situations listed in Article 4(2), such as “(a) the proper functioning of authorities implementing the Union budget, […] in particular in the context of public procurement procedures”, “(b) the proper functioning of the authorities carrying out financial control, monitoring and audit and the proper functioning of effective and transparent financial management and accountability systems” or “(e) the prevention and sanctioning of fraud, […], corruption or other breaches of Union law relating to the implementation of the Union budget or to the protection of the financial interests of the Union […]”.

            As to the proposed measures, the European Commission suggests addressing both the programmes under direct and indirect management, pursuant to point (a) of Article 5(2), and the programmes under shared management, pursuant to point (b) of Article 5(2). Specifically, regarding the first, the Commission proposed a prohibition on entering into new legal commitments with any public interest trust and any entity maintained by Hungary under any Union programme under direct and indirect management. Regarding the latter, the Commission proposed suspending 65% of the commitments in three operational programmes for the period 2021-2027 financed from several EU cohesion funds and, if the identified programmes have not been approved before the Council’s decision, the suspension of their approval in total. These measures translate into the freezing of 7.5 billion euros in funds from the Union budget and the freezing of 5.8 billion euros from the Covid-19 Recovery Plan, the total amounting to a suspension of roughly 13.3 billion euros in EU funding to Hungary[4].

            These measures were proposed by the Commission resulting from an intense period of negotiation, as we mentioned above. And the reason why we draw attention to this is the fact that the Hungarian government had counter-proposals to present to Brussels. The initial 7.5 billion euros that the European Commission wanted to freeze were reduced to 6.3 billion, and the 5.8 billion in recovery funds are conditionally suspended. This is the result from Orbán’s government usage of political leverages as a means of negotiation. Hungary was delaying and considering vetoing an aid package to Ukraine amounting to 18 billion euros. Hungary was also considering a veto on a “OECD-agreed global minimum corporate tax”[5]. Hungary agreed to drop both vetoes if the European Commission reduced the amount of funds to suspend.

            At first glance, both sides can claim victory, with the EU celebrating sanctioning Viktor Orbán’s illiberal agenda, and the Hungarian PM celebrating his State’s influence over the EU. But Orbán does not, in fact, have that much to celebrate: while it is true that he has managed to get the European Commission to lower the amount of funds suspended, he still has to implement 27 milestones regarding the independence of the judiciary, the non-discrimination of minorities and the separation of powers and arbitrariness of executive powers, which can result in an effective loss of his grasp on Hungary’s state apparatus. And he must reach them indeed, seeing that Hungary “is grappling with a drastically worsening economic situation: high inflation […], a fall in the forint exchange rate […] and rising debt[6], which means that EU funding is essential for its economic stability. Not only that, EU funds “are instrumental for maintaining the stability of the power structure”, seeing that they are “an essential tool to serve the interests of party-linked oligarchs, who commonly win public tenders for EU co-financed projects[7].

            What can we take from all of this? First, it is a relief to watch the European Commission and the Council finally taking immediate actions to address Hungary’s rule of law backsliding, which has been a concern for the past decade. After the stagnation that were the attempts to trigger Article 7 TEU and a few pyrrhic victories through infringement procedures against Hungary, the triggering of this mechanism represents an important step in upholding the rule of law in a systemic way within the EU. Because what causes more damage to the principles of the rule of law is the lasting effects that illiberal policies and practices generate at their core. Hungary’s unfair elections elect more often the ruling party; the ruling party has a discriminating view towards certain minority groups; the government’s policies affect those minorities, thus eroding the principles of human dignity and equality before the law. And the same basis can be applied to every other aspect: the judiciary is controlled by Orbán loyalists, which implodes the oversight that the judiciary power holds over the executive, generating legal uncertainty and unbalancing effective judicial protection. A Fidesz super majority in Parliament dilutes the barriers between the legislative and the executive powers, which can (and does) lead to favour exchanges, corruption and lack of transparency. Addressing these issues with a systemic approach, recognising that every aspect, however small, influences all others when it comes to the rule of law, is the right path to follow.

            Other important effect that results from triggering the conditionality mechanism is that it sends a message to other illiberal Member States, that the European institutions are on the lookout and on guard when it comes to respect for the rule of law, ready to react to any violation of its principles. If political tools such as Article 7 TEU and the Rule of Law Framework have been ignored by these backsliding Member States, the possibility of losing access to EU funding has an immediate and resounding effect on them. At least, it appears to be that way, seeing that we are only at the beginning of a hard journey to uphold the rule of law within the EU, one that we hope to closely follow.

            Naturally, some criticisms arise, especially concerning the scope of the conditionality mechanism. For example, if discriminatory policies regarding ethnic or gender minorities do not directly impact the Union budget, not fulfilling the subject matter of the Regulation, then the whole regime is rendered useless. But we think these arguments are only valid if the EU fails to deploy its many other tools to uphold the rule of law, which is not the case. If we mean to uphold the core principle of the rule of law within the EU, we must look at every tool available in an integrated way. And the developments we address here, we think, give us a positive sign in that sense.

[1] Available at https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:32020R2092.

[2] European Commission, COM(2022) 485 final – Proposal for a Council implementing decision on measures for the protection of the Union budget against breaches of the principles of the rule of law in Hungary, Brussels, 18.09.2022.

[3] COM(2022) 485 final – Proposal…, recital 57.

[4] Alice Tidey, “Brussels recommends freezing €7.5 billion in EU funds to Hungary over rule of law concerns”, Euronews, 30.11.2022, available at: https://www.euronews.com/my-europe/2022/11/30/brussels-to-announce-decision-to-cut-75-billion-of-eu-funds-to-hungary-over-rule-of-law-co (consulted in 19 January 2023).

[5] Gabriela Baczynska and Jan Strupczewski, “EU strikes deal with Hungary over Ukraine aid, tax plan, recovery funds”, Reuters, 13.12.2022, available at: https://www.reuters.com/world/europe/eu-wrangles-with-hungary-over-ukraine-aid-tax-plan-billions-risk-2022-12-12/ (consulted in 20 January 2023).

[6] Andrzej Sadecki, “Conditionality mechanism: Hungary facing the threat of withheld EU funds”, OSW – Centre for Eastern Studies, 20.09.2022, available at: https://www.osw.waw.pl/en/publikacje/analyses/2022-09-20/conditionality-mechanism-hungary-facing-threat-withheld-eu-funds (consulted in 20 January 2023).

[7] Ibid.

Picture credits: Duu0161an Cvetanoviu0107 on Pexels.com.

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