Germany seeks breakthrough on linking EU payouts to rule of law

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Germany on Monday floated a compromise plan on linking payouts of EU funds to respect for the rule of law, aiming to defuse a highly emotive dispute that threatens to hold up approval of the bloc’s €1.82 trillion budget-and-recovery package.

Berlin, as the current presidency of the Council of the EU, put forward a plan that many observers saw as a watering down of a European Commission proposal from two years ago. It would set a higher bar for withholding payouts and use a narrower definition of what would represent unacceptable behavior.

To stand a chance of success, any compromise has to appeal to multiple, very different constituencies. Poland and Hungary, accused by EU institutions of undermining the rule of law, are wary of any measures that could restrict their access to EU cash and have threatened to block the budget and recovery package until they are satisfied with rule-of-law measures.

Some Western and Nothern European countries, by contrast, have insisted that a strong link to the rule of law is essential to them and their national parliaments, who also have a key part to play in setting up the recovery fund.

Much of the European Parliament has also been outspoken in demanding a tough stance on rule of law. MEPs have made such a measure a prerequisite for their approval of the bloc’s seven-year budget, the Multiannual Financial Framework (MFF). Leaders of Parliament’s four main political groups urged Commission President Ursula von der Leyen and German Chancellor Angela Merkel in an August letter to adopt a strong mechanism.

The German proposal triggered sharp criticism from advocates of a strong sanctions mechanism. But there were signs that some diplomats and the European Parliament’s two biggest groups at least saw it as a reasonable starting point for negotiations.

The compromise plan was meant to solve an issue that has become a stumbling block ever since EU leaders adopted, as part of their recovery deal, deliberately vague wording on rule of law to get all leaders to sign off on the budget package.

“This so-called compromise makes the July deal even worse,” said Daniel Freund, a German MEP from the Greens and the group’s rapporteur on the rule-of-law mechanism. “This creates a mechanism that will never be applied. It will only be added to the long list of tools that the Council has not used.”

The new German text ditches the Commission’s use of the term “generalised deficiency” in rule of law to describe what might be punishable. Instead, it talks of “breaches of the principles of the rule of law.”

The text also drops the idea — championed by the Commission and the Parliament — that a qualified majority of votes from EU member countries would be needed to block a cutoff in funding proposed by the Commission. Berlin’s plan flips that notion on its head: a proposal to cut funds would need the support of a qualified majority to go ahead.

In a nod to the demands of some Central European governments, the new compromise text also allows member countries facing possible sanctions to ask for their case to be discussed by EU leaders at the European Council.

‘Unholy alliance’

One European Parliament official called the text clear on financial corruption and fraud, but vague on the scope of the rule of law. Under the Commission’s initial plan, areas indicative of rule of law deficiencies included “endangering the independence of the judiciary” and “failing to prevent, correct and sanction arbitrary or unlawful decisions by public authorities” — categories that were eliminated from the new compromise text. 

“It’s only limited to the management of the budget,” the official said. “If you set up gay-free zones, there is no penalty for that,” he said, referring to the recent decisions by local authorities in Poland to sign anti-LGBTQ declarations.

Some diplomats said that the German presidency’s draft amounted to bowing to pressure from Hungary and Poland.

One EU diplomat said there was an “unholy alliance in the Council” among countries wanting to slow down recovery fund ratification. He argued that while countries such as Hungary are blocking the recovery fund over concerns about a strong rule-of-law mechanism, self-declared frugal countries would benefit from delays because if the recovery fund comes into effect late, less money will be spent: “Many countries are interested in taking a lot of time, and that’s why we’re stuck.”

Nevertheless, pressure has been growing in EU capitals for a compromise to be reached — even at a cost.

“We think that in the end, this might fly,” said a second diplomat.

A third diplomat said the compromise would need careful study: “The devil is in the details and the member states would like to be sure what exactly is behind [the compromise] before giving their consent.”

At the European Parliament, divergences began emerging among the main political factions. While the Greens and the liberal Renew Europe appear to still see a strong mechanism as a prerequisite for an agreement, the positions of the center-right European People’s Party (EPP) and center-left Socialists and Democrats have softened.

Some stressed that while the text might be flawed, introducing a link between payouts and rule of law is already a major step in the EU’s efforts to strengthen itself as a community of values.

“It is good to see Council is finally working toward a common position on the proposal from 2018,” Manfred Weber, the leader of the European People’s Party group, said in a statement to POLITICO.

Weber said the Parliament was ready to enter into negotiations to finalize the proposal “whenever the Council is ready for it.” And he said an agreement on the measure would need to be reached before his group would give its approval to the budget.

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“This issue is crucial to stop citizens’ erosion of trust in the functioning of our Union. As EPP we are clear: We will not approve the MFF before we have agreed on this legislation,” he said.

This article is part of POLITICO’s coverage of the EU budget, tracking the development of the seven-year Multiannual Financial Framework. For a complimentary trial, email [email protected] mentioning Budget.