European funds are likely to be withheld from Poland and Hungary in the next seven-year EU budget amid rule of law (RoL) concerns

All three major EU institutions are adamant that EU financial support should be tied to respecting common European values and the rule of law. Poland and Hungary will likely lose some funding, with the exact amount depending on the hawkishness of a new rule of law mechanism.

Although the precise system of RoL criteria along with details concerning the governance of the mechanism are yet to be determined, pro-RoL stakeholders will likely overcome opposition by Hungary and Poland. Growing pressure from both domestic audiences and the European Parliament (which threatened to block the MFF, the EU’s seven-year budget if no meaningful RoL mechanism is included) means that the Council’s elbow room has shrunk significantly, while the political and financial costs associated with vetoing the entire EU budget mean that Warsaw and Budapest are unlikely to block the MFF. 

The European Commission is set to remain an integral part of the new mechanism, with its annual RoL findings taken into account when determining whether there are threats and deficiencies in member states that jeopardise the union’s financial interests. A new RoL mechanism still needs approval from the Council, though, where a ⅔ majority will be enough to secure adoption. 

Over the next four months, one of three scenarios is likely to unfold. 1) A watered-down procedure is adopted by unanimity, where unanimity is required for the suspension of funds. Such a proposal would mean that no funds are withheld from Poland or Hungary, since the two member states could defend each other by vetoing penalties. 2) A procedure with teeth is adopted by ⅔ majority, where the Council decides by ⅔ majority to withhold funds from recalcitrant member states; 3) The RoL mechanism tied to the entire MFF, increasing the political price of a veto, and it is adopted by unanimity. Ensuing decisions are then made by the Council with ⅔ majority.  

One of the latter two scenarios is likely to materialise. This means that our baseline is now that EU funds from Hungary and Poland will be withheld through a new RoL mechanism in the next seven-year EU budgetary cycle – though the precise scale and timing of the penalties is as yet unclear.