EU’s budget and recovery package stalls over rule of law spat

Hungary and Poland blocked the progress of the EU’s €1.8tn budget and recovery package at a crucial meeting of diplomats on Monday, stalling the centrepiece of the bloc’s economic response to the pandemic. 

At a meeting of ambassadors, the two countries’ envoys signalled their opposition to key elements of the package advancing the bloc’s budget and recovery fund, diplomats said. Zoltan Kovacs, a Hungarian government spokesman, said his country took the decision because it could not agree to new rules linking spending to rule of law norms.

The move will further delay the EU’s long-awaited budget deal, which was agreed in principle at a leaders’ summit in July. The spending proposals include a new mechanism that ties EU money to respect for the bloc’s values, including the independence of judges. That linkage has sparked resistance from Hungary and Poland, which have sparred with Brussels over the rule of law for many years.

The matter is now likely to be escalated to the level of European leaders who are discussing Covid-19 co-ordination matters at a videoconference on Thursday, said a senior EU diplomat before the meeting took place. The diplomat said the expected veto would mean “we are back in crisis”, forcing German chancellor Angela Merkel and the EU’s leadership to discuss the next steps with member states including Hungary’s premier Viktor Orban. 

European governments are anxiously watching the progress of the legislative package accompanying the bloc’s budget and recovery fund as their economies buckle under the pressure from Covid-19 related lockdowns. Until recently many hoped that Poland and Hungary’s longstanding opposition to the rule of law mechanism would quickly fade given the cash injection the countries stand to receive from the recovery fund. 

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The centrepiece of the EU’s recovery proposals — a plan to distribute €390bn of grants to member states hit hard by the pandemic — would provide a net benefit worth 3 per cent of 2019 gross domestic product to Poland and Hungary, according to calculations from the European Central Bank in September.

However diplomats and officials have been wrongfooted by the hardline stance taken in particular by Mr Orban. Poland, too, has complained about the rule of law mechanism. Last week Mateusz Morawiecki, the Polish prime minister, said in a letter dated November 9 that Poland would not accept “any discretionary mechanisms that are based on arbitrary, politically motivated criteria”.

He added that without sufficient guarantees that member states’ treaty rights would be respected, “we do not see the possibility of ratifying the budget in the Polish parliament”.

Monday’s ambassadors’ meeting was intended to push forward the key legislative elements of the budget and recovery fund package — including the seven-year budget itself, the regulation providing for a new rule of law mechanism, and a decision to boost the bloc’s so-called own resources ceiling. 

The latter move, which needs to be ratified in all the 27 member-state parliaments, is needed to permit the EU to borrow on capital markets to endow the recovery fund. While the rule of law mechanism can proceed even despite Hungary and Poland’s opposition, the own resources decisions need unanimous consent. 

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