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In July, European heads of state agreed to make access to EU funds conditional on the observance of the rule of law and democratic standards by member countries. Yet, the summit ended with a relative lack of clarity as to the exact meaning of the „rule of law mechanism”, inviting conflicting interpretations as to its outcome (initially, the Prime Ministers of Poland and Hungary claimed that no such mechanism was even agreed upon). Now, the vaguely formulated principle needs to be crafted into binding legislation accepted by the European Parliament and the Council of ministers.

Germany decides to move ahead

Germany, currently holding the rotating presidency of the EU, announced it will soon present its proposal for a regulation that would link the access to the Union’s funds to respecting the rule of law. We got hold of the initial draft.

The document proves that Berlin decided to speed up the process and propose a revised version of the “rule of law mechanism” without waiting for the approval of other EU member states. Recent weeks have shown that, at this stage, it is practically impossible to move ahead with the legislation given the unwillingness on the side of Poland and Hungary. Both countries still claim that at the July summit EU members only agreed to an utterly "toothless" provision linking money and the rule of law.

Should Germany’s proposal win the approval of the Council’s majority, the European Parliament could then start debating the issue. The outcome will show whether Poland and Hungary will succumb to the pressure of the rest of the EU.

The proposal is largely based on a 2018 European Commission document which set up a general framework for protecting the Union’s budget in case of generalized deficiencies with regards to the rule of law in the member states. However, following the terms agreed upon during the July summit, the German project does away with the idea of suspending payments almost automatically (unless at least 15 member countries representing at least 65% of the EU population decide to override it) and proposes a new approach instead. Suspending or entirely cutting the funds would now require a majority of the Council to accept a Commission’s proposal. Germany did not yet precisely describe the type of the majority it would require, but usually, it means the approval of at least 15 countries representing at least 65% of the block’s population.

Moreover, facing a potential suspension of funds, the country would be given a possibility to appeal the decision and ask to discuss it at the EU summit. The procedure could be halted for no longer than three months. Even so, to the dislike of Poland and Hungary, the “emergency brake” will still require a vote by the EU Council and unanimous approval by the EU heads of states.

A two-stage trigger procedure

Many MEPs demand that an eventual “rule of law mechanism” not only allows to suspend (or even cut) EU funds when a member country undermines its independent judicial system, but also in other instances, such as efforts to limit media freedom.

Critics of the Parliament’s more hard-line approach to limiting the access to EU funds see it as unrealistic. They call it the “New Article 7 with a perspective of real consequences”, which, unlike the proposed “rule of law mechanism”, requires a practically unachievable unanimity to launch a disciplinary procedure.

Being very clear about suspending funds in cases of "violation of the rule of law", as one of the EU experts has put it, the German mechanism also introduces a "two-stage trigger procedure”. First, the Commission's proposal to suspend or cut payments would be directly tied to violations of the rule of law. Second, the first premise needs to be supported by evidence showing that the violations “directly” affect the proper management of the EU budget (including loans and grants under the Recovery Fund) and imperil the Union’s financial interest. delivered by the Commission that violations of the rule of law in Hungary or Poland, for example, "directly" affect the proper management of EU funds (including grants and loans from the Reconstruction Fund) and are against EU's financial interests.

Because of Victor Orbán’s alleged misappropriation of EU funds, for Hungary, the second trigger presents itself as a much riskier of the two options.

Poland and Hungary threatening to block the Recovery Fund

In theory, passing a regulation which would link EU money to the rule of law only requires a simple majority in the EU Council, but Poland and Hungary already threatened to derail the vote by blocking the Union’s coronavirus Recovery Fund (EUR 750 bln, including EUR 390 bln in non-repayable grants) if the mechanism puts them at a disadvantage. They can put their words into action because unlocking the Recovery Fund necessitates the unanimous financial guarantee of all 27 member states. Thus, the Polish and Hungarian parliaments would have the last word.

Of course, one might see these threats as a mere bluff. Polish diplomats try to be relatively less confrontational on that issue and prefer to let their Hungarian counterparts do all the “dirty work”. Some EU officials remain hopeful that, because of its own need to access the Recovery Fund, Poland might accept the “rule of law mechanism” after all. Even so, Hungary would still need to be convinced.

In its current shape, the German draft proposal is too diluted to meet the expectations that the chairs of major political groups in the EU Parliament expressed in August. Yet, Germany still hopes that MEPs are bluffing too and will accept the compromise. That wouldn’t be the only problem, however. The EU Parliament also demands a major increase in the 2021-27 budget. In July, heads of member states agreed to EUR 1074 trillion, but now the Parliament wants to put an additional EUR 113 billion on top of that. The so-called “frugal four” (Netherlands, Austria, Sweden, Denmark) and Finland announced they will block the Recovery Fund as long as the final budget isn’t revealed.

Poland and Hungary to assess the rule of law of other EU member states

After a meeting with his Polish counterpart Zbigniew Rau in Budapest, Hungary’s chief diplomat, Peter Szijjarto, announced that both countries will be joining forces to set up an institute tasked with assessing the state of the rule of law in other EU member states.

-Some politicians from western Europe have used us as a punching bag for long enough- Szijjarto said.

Other than preventing the EU from employing “double standards” when dealing with Poland and Hungary, according to Minister Rau, the new institute is also supposed to promote “debate and transparency” within the Union.

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