THE MITTELEUROPEAN VIEW: When the nuclear option fails – Von der Leyen’s rule of law instruments vs political realities

THE MITTELEUROPEAN VIEW: When the nuclear option fails – Von der Leyen’s rule of law instruments vs political realities
The new president of the new European Commission, Ursula von der Leyen, has promised action to improve the European Union’s policing of the rule of law but she has her work cut out for her
By Marcus How of ViennEast and Gunter Deuber of Raiffeisen Research in Vienna February 25, 2020

Whether the law begets justice is not a foregone conclusion. On February 4, 2020, Polish President Andrzej Duda signed legislation that permits the opening of disciplinary action against judges who criticise reforms put forward by the Polish government. The passage of the legislation is another step in the Law and Justice Party’s restructuring of the legal system, seemingly to its political advantage – and so far, the European Commission has been powerless to prevent what it deems to be the undermining of the rule of law on a systematic basis.

As part of her efforts to secure a cross-party majority in the European Parliament, the president of the new European Commission, Ursula von der Leyen, promised action to improve the European Union’s policing of the rule of law. The pledge reflected the deficit of effective instruments that the bloc has its disposal to sanction problem countries. 

Theoretically, the EU has a powerful instrument at its disposal; namely Article 7 of the Treaty on European Union (‘TEU’), the full of application of which may result in the suspension of certain membership rights of the targeted state, including its ability to vote in the European Council. The Juncker Commission, under the direction of Vice-President Frans Timmermans, opened Article 7 proceedings against Poland in 2017, while Hungary faced similar proceedings by the European Parliament in 2018. However, the requirement under Article 7.2 that enables the imposition of possible sanctions (under Article 7.3) hinges on a unanimous vote by member states (minus the targeted state) in the European Council. Given that Poland and Hungary are providing political support for one another, the achievement of unanimity in this case is impossible. Moreover, it should not be forgotten that the currently perceived East-West division of the EU (from the point of view of the Eastern EU countries) could even result in more than just the one vote of support for a potential breach of the rule of law in such a delicate procedure.

This has not quite left the EU toothless. The Commission may nonetheless file for infringement proceedings with the Court of Justice of the European Union (‘CJEU’), which, as a result of hearing various cases concerning judicial independence in recent years, is developing institutional competence regarding this issue. For example, it suspended the Polish government’s reforms to the Supreme Court, before declaring them to be in violation of EU law in 2019. Yet this is just one pillar of a broader approach that is insufficiently comprehensive, holistic and qualitative.

A novel approach?

The Commission has thus sought alternative avenues through which remedial action could be achieved with respect to the rule of law, which was a key pledge of von der Leyen to secure political support for her administration. In July 2019, the Commission accordingly published a blueprint for action outlining three core proposals.

The first concerned the strengthening of preventative mechanisms, introducing a Rule of Law Review Cycle (‘RLRC’) that would monitor relevant developments on a regular basis, culminating in the issuance of an annual report for each member state. This would expand upon the Commission’s current monitoring mechanisms – such as the justice scoreboard and reviews of public administration as part of the European Semester – and establish an oversight capability that examines indicators for which there had hitherto been no formal measure by the Commission, such as media and elections. Problematic trends would thereby be identified with greater effectiveness – at least on paper – and thus enable them to be addressed – at least in theory.

Indeed, the strengthened economic policy co-ordination and its preventative mechanisms within the eurozone and EU under the European Semester that was catalysed by the existential European sovereign debt crisis have not yet materially strengthened the de facto position of the Commission vis-à-vis member states, and certainly have not enabled it to address the perennial problems of Italy's sovereign debt or Germany's current account surplus.

The second proposal focuses on improving the informational approach of the Commission, which would include holding an annual rule of law event, facilitating greater exchange between judicial and other networks, and developing a communication strategy specially focused on the rule of law. This is a ‘soft’ approach, focused on slow-burn, longer-term benefits through the proliferation of best practice. As with the co-ordination instruments such as the European Semester in economic policymaking, tangible success is therefore likely to be modest, hinging on an adaptive, forward-thinking communication strategy, as opposed to merely duplicating existing measures.

The third proposal is the most radical, tethering the distribution of Cohesion and Structural funds to rule of law measures. If a member state is found to exhibit “generalised deficiencies” with respect to the rule of law, the Commission would be empowered to suspend or terminate the payment of Cohesion funds to the recipient, as well as prevent their entry into new legal arrangements concerning EU funding programmes. Unlike the triggering of the sanctioning mechanism under Article 7.3, approval of the conditionality mechanism requires only a qualified-majority vote by the European Council. For Poland and Hungary, Cohesion funds make up about a quarter of all funding received via the EU.

The jurisprudential reasoning underpinning the conditionality mechanism is that the rule of law has a direct impact upon economic development. A business environment in which the regulatory, administrative and legal authorities are compromised by political or otherwise informal interests is one in which the absorption of EU funds is suboptimal, which thereby impedes market efficiency and fair competition. This may, in turn, undermine solidarity within the EU: a member state that is not confident that their taxpayer funds will be allocated fairly may lose the incentive for maintaining its contributions.

The Hungarian and Polish governments have argued that this reasoning is tenuous. However, the conditionality mechanism is not quite as unprecedented as it seems, building out from three existing provisions. First, Article 19 of Regulation 1303/2013 stipulates that the Commission may suspend the payment of funds from all of its programmes if the ex-ante conditionalities governing their effectiveness and efficiency are not fulfilled by the recipient member state. The institutional and legal frameworks of the recipient member state must accordingly fulfil these conditionalities. Second, Article 23 of the same regulation establishes macroeconomic conditionality, under which Cohesion funds may be suspended. Third, Regulation 515/2014 links financial support for external border security with the principles of the rule of law.

No gain, no pain?

Precedents therefore exist that increase the ease with which the rule of law conditionality mechanism may be consolidated. On paper, the conditionality mechanism would appear to be able to exert substantial pressure on states such as Hungary and Poland, given that the EU funds distributed to them under the Multiannual Financial Framework (‘MFF’) for 2014-2020 amounted to approximately 3% and 2% of GDP per annum respectively – although this includes all EU funds, not just the Cohesion fund. In Hungary, Cohesion funds are particularly enjoyed by foreign investors, who accounted for 66% of the amount allocated to large enterprises, the highest proportion in the EU. Furthermore, EU-funded contracts are a reliable revenue stream for many Hungarian businesspeople who enjoy the patronage of Prime Minister Viktor Orban.

Yet it is unclear whether the conditionality mechanism, if triggered, would inflict the sort of material damage that could disincentivise the abuse of independent institutions. There are three reasons for this.

First, as a result of inevitable cuts to the MFF for 2021-2027, most of the lower-income member states – which tend to be more vulnerable to practices undermining the rule of law – will need to become less dependent on Cohesion funds regardless of whether they would be subsequently targeted under any conditionality mechanism. Although negotiations are not yet concluded, Hungary and Poland are facing budget cuts of up to 25% compared to the MFF for 2014-2020. This will likely incentivise the strengthening of mechanisms to improve the efficiency with which project funds are absorbed, while countries that are (psychologically) dependent on funding shift their development strategies.

Second, the impact of Cohesion funds on economic development is unclear. A 2015 study conducted by the Commission found that Cohesion funds appear to have a positive but small impact on growth overall. If this is the case, their suspension would have an impact on projects on a short-term basis, increasing risks that the associated contracts will at the very least be delayed or otherwise altered. The European Parliament is proposing to shield innocent beneficiaries of funds by obliging national governments to make up the difference. More generally, any economic fallout beyond the short-term will likely be limited. Indeed, this would be the primary objective of the conditionality mechanism; to disrupt pending correction, rather than inflict any structural economic damage, which would likely be counterproductive.

Third, structural economic impacts provide a powerful buffer. The ultra-low interest rates in Western Europe and the eurozone, with its spill-over effects to non-eurozone countries in Central and Southeastern Europe (‘CESEE’), facilitate long-term financing via the financial markets and private or institutional investors, be it in foreign or local currency. Moreover, it is likely that the structural low interest rate environment inside the euro area – especially regarding long-term interest rates – should persist for most of the MMF time horizon. Therefore many investors who depend on long-term interest income are very interested in financing infrastructure projects in such an environment. This holds especially true for investments outside the ultra-low interest eurozone, but still inside the EU. Even local national development banks from the region have no difficulty in obtaining funds for investment. A shortage of financial resources in CESEE is therefore probably feared a little too much.

Cuts in Cohesion funding for EU-CESEE member states would likely also provide an opportunity for the Chinese-led Asian Infrastructure Investment Bank (‘AIIB’) in the region. Institutions with a well-established regional foothold, such as the European Bank for Reconstruction and Development (‘EBRD’) and European Investment Bank (‘EIB’), would not welcome such competition, in addition to EU member states with a strong role in the local financial systems.

Yet the utility of a punitive policy that only causes short-term disruption, and which would possibly undermine the footprint of European international financial institutions in the region, is questionable beyond its symbolic value. In other words, targeted states might simply be able to grin and bear it. Cohesion funds are not the only source of income, with programmes such as the European Regional Development Fund and the European Social Fund providing a revenue stream. Furthermore, many businesses would continue to benefit from sizable payments under the Common Agricultural Policy (‘CAP’), which is not included in the proposal. For example, were Cohesion fund payments to the Czech Republic suspended for whatever reason, Agrofert, the agribusiness giant associated with the alleged conflict of interest of its founder, Prime Minister Andrej Babis, would hardly be affected.

Political realities

Viewed from the political level, more radical action to penalise member states that systematically undermine the rule of law is unlikely, reflecting the delicate balancing act in which the von der Leyen Commission must engage to sustain its razor-thin majority in the European Parliament, where it relies on the votes of political parties from the very states whose conduct it is seeking to address.

Von der Leyen is also likely to require the support of CESEE member states on strategic issues beyond the simple sustenance of her parliamentary majority. With the snowballing shock posed by Brexit, the pending resignation of German Chancellor Angela Merkel, the continuing significance of the refugee issue into the foreseeable future, and the structural crisis in the German automotive sector, von der Leyen will need to be flexible in order to build coalitions that might be able to recalibrate the geopolitical balance within an EU that is teetering on the precipice of secular and demographic decline.  Feuding over the rule of law could prove to be counterproductive and the issue sacrificed for the sake of political prudence. Von der Leyen’s cautious approach is already evident in how the policy mandate for the rule of law has been divided across commissioner portfolios – namely, that of values and transparency, and justice – thereby slowing action owing to the necessity of interdepartmental co-operation.

Yet she can also not be seen to do little or nothing.

Consensus building is therefore necessary for progress to be made. Von der Leyen cannot appear to be singling out Hungary or Poland, or CEE member states more generally, especially where significant issues relating to the rule of law exist in countries including Malta, Greece, Italy, Portugal and Austria – not least because some of these member states are likely to be among the largest beneficiaries of the EU Cohesion funding re-distribution within the MFF for 2021-2027, as well as the Green New Deal, which will require arduous heavy-lifting within the EU-CESEE.

The commissioner appointments themselves indicate that von der Leyen is prioritising pragmatism, dialogue and prevention over intervention. The Vice-President for Values and Transparency, Vera Jourova, is an experienced commissioner, having served in the Juncker Commission; however, it is no coincidence that she is a Czech national and member of ANO, the ruling party in Czechia and personal vehicle of Prime Minister Andrej Babis. Didier Reynders, the former Belgian foreign minister who is responsible for the justice portfolio, is an architect of the RLRC, which is very much a preventative mechanism. Meanwhile, Frans Timmermans, who championed intervention to the extent that he was sued by the previous Romanian government, is now responsible for the Green New Deal – even if this reinforces the EU-CESEE member states' view that this plan is mainly driven by Western European interests.

The appointment of the former Hungarian ambassador to the EU, Oliver Varhelyi, as the Commissioner for Neighbourhood and Enlargement is also significant. Although Varhelyi will not be responsible for the proposed reforms, he will preside over the efforts of official and aspiring EU candidate states to align with the bloc’s standards – including on the rule of law, which the government Varheyli represents is deemed to have systematically undermined. Varheyli’s appointment is indicative of the mixed signals that the von der Leyen Commission has sent.

The Commission is likely to succeed in passing the preventative and informational mechanisms included in its blueprint. Yet for the time being, this would only create one more discussion group, as in the case of economic policy co-ordination. Additionally, there is a risk that the conditionality mechanism will either be abandoned or diluted. Although the measure itself is approved by a qualified majority in the European Council, it is also tethered to the MFF, the passage of which requires unanimity. The conditionality mechanism is therefore at risk of falling victim to the horse-trading between member states and European parliamentary groups, especially where CEE governments are already restive about budget reductions.

Indeed, European Council president Charles Michel has already mooted a higher threshold for the suspension of Cohesion payments in order to secure the support of Hungary and Poland in the fraught negotiations over the MFF.

Forecast

The implication of this is not that the von der Leyen Commission will not improve the instruments available to EU institutions in policing the rule of law. Structural changes in assessment methodologies, information dissemination and anti-institutional co-ordination may be expected. The CJEU is also likely to become an increasingly assertive actor related to the rule of law, capable of constraining member states. This is a positive indicator for the longer term, albeit that the use of activist court measures will in turn prompt questions about democratic accountability and national competencies.

However, political realities constrain von der Leyen perhaps even more than they did Jean-Claude Juncker, despite Juncker’s own squeamishness on the issue. Symbolic gestures are more likely in order to avoid sabotaging the formation of coalitions relying on the votes of CESEE member states to address issues such as the EU’s stance towards China, as well as fiscal prudence. 

The EU’s internal sanctions arsenal is therefore unlikely to acquire many more teeth and those that it does have are likely to be used only sparingly. A universalist approach to the assessment of the rule of law will weaken claims by problematic member states that they are being scapegoated. Yet the emphasis on dialogue carries risks if the process is exploited by member states who are acting in bad faith. 

However, the good news for investors in the real economy and on financial markets in EU-CESEE is: in reality, the EU-CESEE region is likely to receive sufficient long-term financing, despite the probable increase in political noise, be it via the EU budget and/or investors with an appetite for returns.

 

Opinion

Dismiss