I. What has the Court of Justice of the European Union decided?
On 16 February 2022, the Court of Justice of the EU or European Court of Justice (ECJ), dismissed[1] “in its entirety” a legal challenge launched by Hungary and Poland against the EU’s new “conditionality mechanism”, which makes the receipt of financing from the EU budget subject to the respect by the Member States for the principles of the rule of law, as provided for by an EU regulation adopted on 16 December 2020.[2]
Hungary and Poland were seeking principally, the annulment of the contested regulation in its entirety and, in case the ECJ would dismiss this, partial annulment of the EU regulation.[3]
Noteworthy is that a number of member states, in particular Sweden, Denmark, Finland, Belgium, the Netherlands, Luxembourg, Germany, France, Spain and Ireland intervened in support of the regulation.
Herunder is an overview of the arguments of Hungary and Poland and the ECJ’s response:
1, The first argument by both member states was that there is no appropriate legal basis in the EU Treaties for the new EU regulation. Hungary contends in particular that the provisions of the contested regulation cannot be regarded as financial rules which determine the procedure for implementing the EU budget. In the same vein, it is argued that Article 322(1)(a) TFEU does not authorise the EU to define the cases in which the rule of law will be breached.
To this, the ECJ responds that the new regulation “is intended to protect the EU budget from effects resulting, in a sufficiently direct way, from breaches of the principles of the rule of law and not to penalize those breaches as such”. It adds that “the sound financial management of the EU budget and the financial interests of the EU may be seriously compromised by breaches of the principles of the rule of law committed in a Member State.” It also points out that “compliance with those values” set out by the new regulation is not only required for a country to enter the EU but only afterwards.
- Secondly, Hungary and Poland maintain that the new EU regulation amounts to circumventing the procedure laid down in Article 7 TEU, which provides for the possibility of instituting a procedure against a Member State in the event of a serious breach of EU values or where there is a clear risk of such a breach.
The ECJ dismissed this argument, stating that the regulation “does not circumvent the procedure laid down in Article 7 TEU and respects the limits of the powers conferred on the European Union”, arguing that article 7 is meant “to penalise serious and persistent breaches of each of the common values” while the regulation serves another purpose, which is “to protect the EU budget”.
The ECJ adds that the limits of the EU’s powers have been respected as the new regulation permits EU institutions “to examine only situations (…) which appear relevant to the sound financial management of the Union budget”.
- A third argument by Hungary and Poland is that the new EU regulation involves “a breach of the principle of legal certainty”, lamenting that the regulation would not define the concept of ‘the rule of law’ or its principles.
Also this is rejected by the ECJ, which rules that the principles set out in the regulation “have been developed extensively in its case-law” and “have their source in common values which are also recognised and applied by the Member States in their own legal systems”, concluding that “Member States are in a position to determine with sufficient precision the essential content and the requirements flowing from each of those principles.”
II. Significance and what to expect next
The new EU regulation allows the Council, on a proposal from the Commission, to adopt protective measures such as suspending payments to from the EU budget or the suspension of the approval of one or more programmes to be paid from that budget.[4]
The so-called “conditionality mechanism” could lead to payment cuts both from the EU budget or the new EU recovery fund.
The Hungarian government has alleged[5] that the EU would be able to link payment cuts to accepting certain EU policies, for example on migration. The ECJ ruling does not provide any clarity on whether this will be the case, as it merely determines that the concepts provided in the regulation are sufficiently defined.
Despite the European Parliament demanding this, no formal action has been initiated under the new EU regulation, also as a result of a deal among EU leaders in December 2020 to await the ECJ ruling. The European Commission has however sent formal letters to both Hungary and Poland in November, whereby the EU Commission has outlined what it considers to be democratic shortfalls. In the case of Poland, this involves judicial reforms, and in the case of Hungary, it relates to public contracts, conflicts of interest and corrupt spending of EU funds.[6]
In case the Commission would start the procedure, it would need support by a qualified majority of EU member states to approve the use of mechanism. The European Commission has pledged that it would “adopt in the following weeks guidelines providing further clarity about how we apply the mechanism in practice”, according to President Ursula von der Leyen, who added: “I promised that no case will be lost. And I have kept that promise.”[7]
This briefing was also provided to the European Parliament.
[1]ECJ Ruling in English: https://curia.europa.eu/juris/document/document.jsf?text=&docid=254061&pageIndex=0&doclang=EN&mode=req&dir=&occ=first&part=1&cid=3667881 ECJ press release: https://curia.europa.eu/jcms/upload/docs/application/pdf/2022-02/cp220028en.pdf
[2] Regulation (EU, Euratom) 2020/2092 of the European Parliament and of the Council of 16 December 2020 on a general regime of conditionality for the protection of the Union budget (OJ 2020 L 433I, p. 1).
[3] More in particular both member states demanded Article 4(1), Article 4(2)(h), Article 5(2), the third sentence of Article 5(3), the fourth sentence of Article 5(3), and Article 6(3) and (8) to be declared in violation of the EU Treaties
[4] https://curia.europa.eu/jcms/upload/docs/application/pdf/2022-02/cp220028en.pdf
[5] https://www.reuters.com/world/europe/poland-hungary-test-eu-cash-for-democracy-powers-court-2022-02-15/
[6] https://www.dw.com/en/eu-top-court-dismisses-hungary-poland-rule-of-law-challenge/a-60793974 https://www.theguardian.com/law/2022/feb/16/ecj-dismisses-hungary-poland-complaints-eu-rule-of-law-measure
[7] https://www.theguardian.com/law/2022/feb/16/ecj-dismisses-hungary-poland-complaints-eu-rule-of-law-measure
