EU bid to tie recovery fund to rule of law triggers row with Eastern bloc

Poland and Hungary are preparing to face down the rest of the European Union over the question of imposing rule of law conditions for the allocation of EU recovery funds.

Economists expect that the EU will blink first, but that doing so could lead to a weakening of the EU’s power to oversee the use of funds.

The EU Council, currently under a German presidency, submitted a budget proposal making the receipt of recovery funds contingent on adherence to rule of law standards, sparking outrage from Poland and Hungary.

There is strong support in the European parliament to make the funds in the Next Generation EU recovery fund conditional on the rule of law. Jörg Kukies, the German deputy finance minister, said on Tuesday that parliament was seeking a stronger role in the governance of the recovery fund.

Kukies said: “The rule of law is still the most difficult debate facing the EU bud-get,” during an IIF webcast on Tuesday.

Claus Vistesen, chief eurozone economist at Pantheon Macroeconomics, said it was clear that the European parliament had a “genuine desire to go beyond economic oversight and budgetary rules”.

Poland’s Elzbieta Witek and Hungary’s Laszlo Kover (both speakers of their parliaments) met in Poland and, on Wednesday, announced a joint stance that they would not support an EU budget that included clauses to make funds contingent on adherence to the rule of law.

Vistesen said that the stand-off was unlikely to lead to a veto from the holdout countries, saying: “The likeliest outcome — the path of least resistance — is that the issue is fudged away.”

Budget delay fear

But he laid out another possible outcome. “It’s no coincidence the rule of law has become an issue,” he said. “Some of the northern European countries want to make rule of law an issue and could push back on any budget without rule of law conditions. If that happens, the situation could become dicey very quickly for any opposing holdouts like Poland and Hungary.”

If Poland and Hungary do end up holding up the EU budget, Vistesen believes they could become politically ostracised and, in extreme circumstances, be stripped of voting rights by a qualified majority under article seven proceedings.

However, this is the less likely scenario when compared with the possibility of the presidency submitting a budget proposal with a weaker link to the rule of law, acceptable to all nations.