Withholding EU subsidies is no panacea for Hungarian rule of law

"Earlier this month, European Commission President Ursula von der Leyen announced in the European Parliament that the Commission will launch a procedure to withhold EU subsidies to Hungary for violating the rule of law. This procedure is based on the so-called conditionality regime in place since January 2021. This regime is intended to prevent the misuse of EU money. Hungary ultimately risks losing tens of billions in EU aid", says Maarten Stremler

T"he Commission has been concerned about the Hungarian rule of law for much longer. Since his election in 2010, Prime Minister Viktor Orbán has implemented numerous reforms that would be at odds with the values of the Union. In its latest report on the Hungarian rule of law (from 2021), the Commission reported on, among other things, erosion of the independence of the judiciary, inadequate combating of corruption and government interference in the media.

So far, the Commission has mainly tried to address controversial developments in Hungary by pursuing infringement proceedings in the Court of Justice. Initially, these proceedings were based on violations of specific, technical provisions of EU law, but later also on violations of fundamental rights under the EU Charter of Fundamental Rights. The Court always ruled in favor of the Commission, but this did not lead to a real change of course in Hungary.

The European Parliament had long before described the developments in Hungary as being contrary to the values of the Union, including democracy and respect for human rights, in addition to the rule of law. Orbán was able to count on the support of the European People's Party (EPP) for a long time, but this support crumbled over the years until Orbán's party, Fidesz, decided to withdraw from the EPP group. The Hungarian government has always dismissed the Parliament's highly critical resolutions as ideologically motivated slander.

In 2018, based on a report prepared by MEP Judith Sargentini, the European Parliament sent a proposal to the Council to determine that Hungary risks seriously violating the values of the Union. This is the first step of the infamous Article 7 procedure, the application of which could eventually lead to sanctions, such as depriving Hungary of its voting rights in the Council. The Council discussed Hungary's situation repeatedly, but never came to a substantive decision. The Eastern European member states, in particular, did not want to take the country to task, let alone punish it.

Both the legal and political approaches thus produced only limited results. It is against this background that the EU legislator decided to add the possibility of a financial approach. By hitting member states that violate the rule of law in the wallet, they might well be forced to adhere to rule of law principles.

Establishing the conditionality regime has been a long process. The original Commission proposal presented the regulation as an instrument to protect the rule of law in member states, but the legal basis of the regulation is a treaty provision that allows the EU legislator to establish financial rules. To provide a link anyway, EU money could only be withheld if rule of law deficiencies in a member state could affect the financial interests of the Union. At the Council's suggestion, this has been adjusted to "sufficient direct impact" on the Union budget. In addition, there is now a more specific requirement for 'violations of the principles of the rule of law' and the regulation gives examples of this, such as compromising the independence of the judiciary.

Although the Parliament found this to be an undesirable limitation of the scope of the instrument, these changes are quite justifiable: EU powers cannot be stretched endlessly and legal certainty requires clear rules. In addition, a general sanction mechanism for violations of the rule of law would create a parallel for the Article 7 procedure, but with less strict conditions and safeguards, which would be contrary to the Treaty. That the ECJ approved the conditionality regime (after it was challenged by Hungary and Poland) is partly due to these changes.

Whether the use (or threat) of the new instrument will actually lead to better compliance with European requirements regarding the rule of law remains to be seen. Governments are sensitive to financial incentives, and so is the Hungarian government. For example, when in 2012 the Hungarian government took measures that affected the independence of the central bank, the European Commission and the IMF then made financial support conditional on the withdrawal of these measures, after which the government gave in and actually withdrew the measures.

On the other hand, the Hungarian government could dismiss the European sanctions as financial blackmail and as punishment for the people for casting the wrong vote - accusations that are already being made. Moreover, respect for the rule of law must rely on more than a calculating attitude: in addition to rules, procedures and penalties, it requires above all a healthy political and legal culture, supported by civil servants and politicians. And furthermore, the scope of the new conditionality regime is thus limited. Corruption can be punished with it, but not all constitutional problems can be linked to money.

Finally, the conditionality regime also contains a high procedural threshold: the Commission can make a proposal to withhold EU subsidies from a member state, as it is now going to do with regard to Hungary, but subsequently the Council has to agree with this by a qualified majority. The discussions in the Council under the Article 7 procedure show that not all member states are willing to take strict action against member states that are alleged to violate the rule of law. Thus, like the legal and political instruments, this new financial instrument is not a panacea for the Hungarian rule of law. Pressure from the EU is desirable, but ultimately Hungarians themselves must stand up for their rule of law."

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