Poland’s Constitutional Court ruling that the founding Treaty of the European Union plays second fiddle to its own constitution is a serious up-ending of the European legal order that could have consequences beyond Poland. Hungarian prime minister Viktor Orban has taken it as a rallying cry, declaring his public support of the Polish position. There could also be legal challenges to the EU from the Czech Republic.
“The Polish government and the European Commission, as guardians of the EU’s Treaties, may be heading towards a legal collision course,” said Michael Huertas, head of financial regulation at PWC Legal. “It’s important that the European Commission, along with Member States makes clear that certain lines cannot be crossed.”
The central legal question stems from the fact that the Maastricht Treaty conferred power to the EU, and that this can conflict with national constitutions. Huertas said: “EU advocates ought to make clear that national constitutions were created at a time when the EU did not exist in its present form, and therefore do not take account of the Treaties, which are more regularly updated than national constitutions, and were ratified by national parliaments, in particular since those Treaties and the goals therein were ratified by national governments and parliaments.”
However, Huertas added that “it is important to acknowledge that the present Polish ruling courts may be influenced by political motivations, rather than purely legal arguments.”
The ruling has raised fears of Poland exiting the EU, prompting citizens to take to the streets of Warsaw in protest against the possibility. Investors believe the possibility is remote. Huertas said that “the EU and Poland as a member state need one another”.
Huertas believes that it will likely be up to French president Emmanuel Macron to present a “strong voice” and represent the EU’s interests. “Chancellor Angela Merkel, because of her caretaker role, doesn’t really have the
mandate to lead negotiations,” he said, referring to the German leader stepping down after almost 16 years in power.
The immediate consequences are severe enough, however, that Poland’s neighbours who might empathise will likely be deterred. Its 10 year government bond yields are climbing sharply — 25bp in the last week. A CEE portfolio manager said that the clash with the EU would be “bad for Polish asset prices”.
The EU Commission also has a great deal of leverage. Poland submitted its national recovery and resilience plan to the EU Commission in May. Most countries have already had their plans approved and many have received pre-financing from the EU. Poland’s plan is unlikely to be ratified until the Commission has wrangled the legal implications of the Polish court verdict thoroughly.
That jeopardises €24bn of grants and €12bn of loans earmarked for Poland under the EU’s recovery and resilience facility. EU funding can be held back from member states if they do not adhere to rule of law. Hungary and Poland challenged this mechanism in the European Court of Justice on Monday.
Should Poland’s EU membership end, the country would stand to lose around €70bn that it would have received in EU Cohesion policy funding over the next five years.