An uncertain future for the relationship between the Rule of Law and the EU Budget

The proposed regulation seeks to implement a mechanism by which the Commission, in conjunction with the Council, is given powers to review the allocation of funds to Member States, on the basis of certain fundamental principles. Foremost amongst these is upholding the rule of law which is a founding pillar of the European Union, as defined in Article 2 of the Treaty on The European Union (MFF 2021 -2027 at A24). Specifically the Commission will seek to identify any generalised deficiencies, including (1) endangering the independence of the judiciary; (2) failing to prevent, correct and sanction arbitrary or unlawful decisions by Public Authorities; or (3) Limiting the availability and effectiveness of legal remedies. Any member state breaching these aspects of the rule of law could see the suspension or reduction of payments from the EU budget and/or prohibition to enter into new legal agreements.

Initial criticism of the proposal focused on the broad margin of discretion handed to the Commission. The European Court of Auditors (ECA) delivered its opinion on 17 August 2018 and highlighted a lack of rules on stakeholder consultation and impact assessments. The need for specific criteria defining “generalised deficiency” and need for protecting the interests of EU funds beneficiaries were also underlined.

Further tweaking of the proposal took place at the level of the Budgets Committee (BUDG) and the Budgetary Control Committee (CONT). Most notably, the Parliament was put on the same footing with the Council in respect of adopting and lifting measures. The proposed amendments were backed by the European Economic and Social Committee (EESC) and Committee of the Regions (COR) in their opinions on the Multiannual Financial Framework (MFF) package.

The first-reading legislative resolution on the proposal was adopted by Parliament on 4 April 2019. According to this resolution, and in addition to the above, a generalised deficiency should be further exemplified by specific situations, such as: endangering the administrative capacity of a Member State to respect the obligations of Union membership; and measures that weaken the protection of the confidential communication between lawyer and client.

The proposal was discussed by the European Council in May and June 2019, but member states were unable to reach a common position. The Council did though reassert on 20 July 2020 that the Union’s financial interests and the respect of the rule of law are important considerations which must be protected.

It is now expected that the German presidency will reattempt to reach agreement on the proposal later in the year. In the event the Council does reach an agreement, conditionality could become law before the end of the year. Until then, the Commission has been tasked with developing further measures that could be taken in case of breaches.

Most recently however, following the conclusions of the Budget Summit (held on 17 – 21 July 2020), critics (i.e. Politico and EU Law Live) pointed out that the language on the rule of law mechanism was vague: “A regime of conditionality to protect the budget and Next Generation will be introduced.” […] “In this context, the Commission will propose measures in case of breaches for adoption by the Council by qualified majority.” […] “The European Council will revert rapidly to the matter,” (para 23 of the Conclusions of the European Council Meeting of 21 July 2020)

There is a lack of certainty over what this means for the future of the rule of law in the Union.

It seems likely that any attempt to give the rule of law conditionality real teeth, is likely to face concerns from Hungary, Poland, Czech Republic and Slovenia.

Yet there are upcoming events which may mean the future of the rule of law conditionality will nevertheless be soon decided.

The Council is to enter negotiations with the Parliament on the agreed multiannual budget, ahead of the current Budget running out on the 31st December. The leaders of the four major political groups have warned that there would be no agreement on the next budget unless a formal deal linking EU funds to the rule of law was concluded.

The first annual Rule of Law report covering all member states will be adopted by the Commission before the end of the month. During the State of the Union Address, President of the Commission Ursula van der Leyen stated that “this [is] to be a starting point for Commission, Parliament and Member States to ensure there is no backsliding.”

The future of the rule of law conditionality will be decided soon. While it is clear that a mechanism will be put in place, the question is rather whether it will have the power it was initially designed to have or will it be a paper tiger. It will also be interesting to see what further proposals are put forward by the commission, particularly in respect of the methods used for penalising Member States found in breach.