Can EU save recovery plan from Hungarian-Polish blockade?

File photo. Polish PM Mateusz Morawiecki (L) and his Hungarian colleague Viktor Orban at the EU Council. [Council Newsroom]

EU nations are again at loggerheads over their seven-year budget and coronavirus recovery plan, as Hungary and Poland attempt to block provisions tying payouts to upholding the rule of law.

Here is what’s at stake and how Brussels could break out of its new crisis.

What’s the problem?

The budget and recovery plan must be agreed unanimously among the 27 EU member states, but Hungary and Poland are holding it hostage over a brand-new rule-of-law mechanism.

Hungary and Poland veto stimulus against pandemic 

Hungary and Poland blocked the approval of the EU’s seven-year budget and the recovery fund totalling €1.81 trillion, as both countries continued to oppose the rule of law mechanism attached to the EU funds. 

Under the scheme, European funds would be withheld from countries that infringe on EU standards in areas like judicial independence and fundamental rights.

Both Budapest and Warsaw regularly clash with Brussels and European judges in exactly those areas.

Hungarian Prime Minister Viktor Orbán wants to avoid being targeted for rule-of-law violations before elections in spring 2022, and has complained the scheme constitutes “blackmail” by a “pro-immigration” EU.

Meanwhile Warsaw sees the attempt to enforce EU-wide norms as an infringement on its sovereignty, calling the mechanism a “diktat” by stronger member countries.

What are the dangers?

Hungary and Poland would be among the biggest net beneficiaries of the new EU budget — just as they are feeling the full force of the coronavirus pandemic’s economic impact.

In 2019, EU funds worth 3.3% of Polish GDP flowed to Warsaw and the equivalent of 4.5% of Hungarian GDP to Budapest.

Italy and Spain stand to gain most from the virus recovery plan, but Poland would still pocket €63.8 billion in grants and loans, and Hungary €16.7 billion.

The plan’s grants alone would lift Polish GDP growth by between one and two percentage points annually from 2022, ING Bank Slaski chief analyst Rafal Benecki estimated.

How to break the deadlock?

Germany holds the rotating six-month EU presidency, handing it the lead on finding a compromise.

The budget blockade is likely to be discussed on Thursday at videoconference between leaders, called to discuss the Covid-19 crisis.

Several member states and the European Parliament have already ruled out going back on the recovery plan’s rule-of-law conditionality.

Hungary and Poland could be offered “a non-binding political declaration, committing not to use the rule-of-law mechanism except in case of serious violations,” Jacques Delors Institute researcher Eulalia Rubio suggested.

Alternatively, the two holdouts could be boxed in if the other countries adopt the rule-of-law plan, which — unlike the budget — does not require unanimity, but only a “qualified majority” of the 27 heads of state and government.

“That would call for a bit of political courage, and bet on their threats not being credible” to block the budget, Rubio said.

Meanwhile it would be tricky to make the recovery plan an intergovernmental agreement sidestepping EU structures and the Polish-Hungarian veto, she judged.

Will the EU run out of money?

The EU can operate on an emergency budget if the €1.074 trillion planned for 2021-27 are not approved by year’s end.

In that case, it would be allowed to spend one-twelfth of the total 2020 budget each month.

But only certain programmes would continue, including agricultural subsidies.

There would be no cash for the Erasmus student exchange scheme, nor for research or for aid to left-behind regions.

And the budget is tied to the recovery plan, whose €750-billion firepower, funded by first-of-its-kind joint borrowing among the member states, must be approved both unanimously in Brussels and then by national parliaments.

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