Poland and Hungary gamble on funding with EU budget veto

With their veto of the EU budget and pandemic recovery package, Poland and Hungary have brought the European Union to one of its worst impasses in years. EU officials have long been in conflict with the governments of Poland and Hungary, accusing them of flouting the rule of law and anti-democratic tendencies.

In turn, officials from those countries accuse the European Union of aiming to punish them politically because they do not conform to the liberal ideals espoused by the the EU. At a meeting on Monday, Polish Prime Minister Mateusz Morawiecki and his Hungarian counterpart, Viktor Orban, reaffirmed their veto and are now waiting for a compromise proposal from Germany, which, until the end of December, holds the rotating presidency of the Council of the European Union.

The official reason put forth by the governments of Poland and Hungary for their veto is the Rule of Law Mechanism, which would give the European Union a tool for sanctioning violations of stated democratic principles by cutting aid more quickly than is currently permitted. This would only apply to violations of the rule of law that involve the misuse of EU funds — including irregular public tenders. In July, the governments of Poland and Hungary appeared to have agreed to the mechanism. Now, however, officials say it was changed from the provisions to which they’d originally agreed.

There have, in fact, been slight changes to the draft. The most important stipulates that the mechanism can be set in motion as soon as the serious risk of misuse of EU funds is identified; a previous version stipulated that the misuse must have occurred. A significant obstacle was included to enforcement, however: Sanctions require the agreement of at least 15 member states whose populations total at least 65% of the European Union’s overall.

‘New Soviet Union’

The governments of Poland and Hungary have argued that the Rule of Law Mechanism violates the Lisbon Treaty and undermines the very principles that it purports to enforce rather than strengthening them. Officials from the countries have not, however, specified which provisions of the Lisbon Treaty the mechanism violates. They also argue that the wording of the Rule of Law Mechanism is vague and unclear, which could ultimately make it a political tool to be used against disobedient member states.

The 14-page draft of the Rule of Law Mechanism clearly defines when and under what circumstances it can be applied. It seems unlikely that the European Union would use the mechanism as a political weapon — in recent years, the bloc has been very defensive and cautious in disputes about the rule of law.

Morawiecki has said the term “rule of law” is “propaganda” that reminds him of the Communist era. Orban has been publicly skeptical of concepts of rule of law, saying the mechanism would mean a “new Soviet Union.” He charged that it was invented as a punitive measure for EU member states that refuse to extend the right of asylum to displaced people. The statements are most likely aimed at domestic audiences as the mechanism has nothing to do with EU migration policy.

Critics say the two countries are opposed to the Rule of Law Mechanism because it threatens their corrupt and nontransparent allocation of EU funds. In Hungary, the misappropriation of subsidies is a major problem. In fact, Hungary heads the list: From 2015 through 2019, the European Anti-Fraud Office (OLAF) identified 43 cases of misappropriation of EU funds, representing 3.93% of subsidies paid to Hungary during that period. OLAF investigated 235 cases over those years across the entire European Union that amounted to 0.34% of all EU subsidies. Hungary’s proportion of misused funds was over 10 times the EU average — and the number of incidences that were not uncovered could be much higher.

EU funds are very often awarded to Orban’s relatives or their associates. Tenders for projects to be financed with EU cash are sometimes tailored specifically for them. Hungarian law enforcement agencies often do not implement OLAF’s recommendations — they do not launch fraud investigations.

In Poland, the system is less overtly corrupt. OLAF identified 22 cases of misappropriation of EU funds from 2015 through 2019, amounting to 0.12% of the money from the European Union.

Though Deputy Prime Minister Jaroslaw Kaczynski, the leader of Poland’s ruling Law and Justice (PiS), presents himself as a modest and incorruptible politician, there have been cases of suspected graft close to the party. ARMIR, the state agency responsible for paying out agricultural subsidies, has been repeatedly linked to corruption. As political control over the judiciary increases in Poland, so does the danger that such cases will be less rigorously investigated.

Funded by EU

Poland and Hungary have benefited enormously from subsidies since they joined the European Union in 2004. The funds are important to the economies of both countries. In 2018, payments from the EU accounted for 3.43% of the gross national product in Poland and 4.97% in Hungary.

The Finance Ministry has estimated that a quarter of Poland’s growth over the past half decade is attributable to EU aid. Thanks to funding from Brussels, 600,000 jobs have been created. And, following the country’s accession to the European Union, Poland has received foreign investment totaling over €200 billion ($240 billion) so far.

In 2019, Poland got €12.1 billion from the European Union and Hungary brought in €5.1 billion — making the countries, respectively, the No. 1 and No. 2 net recipients of EU funds. Poland and Hungary are also expected to remain in the top group of net recipients in the budget period 2021-27.

The coronavirus pandemic has brought a sharp decline in growth in both countries this year; estimates put the figure at 4%-8%. The European Union’s coronavirus recovery fund would compensate for a large part of these losses — with recipient nations able to repay indirectly through fees and taxes on carbon and financial transactions.

Prime Minister Orban said Hungary would take out loans on the international financial market if it did not participate in the reconstruction program. In the long run, this would place a much greater burden on Hungary’s economy than participating in the EU’s pandemic recovery plan.

This article has been adapted from German.

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