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POLAND/HUNGARY: Rule of law dispute could bear financial consequences

Table of Contents

  • Hungary and Poland could see further delays in the approval of their national recovery and resilience plans due to rule of law and anti-corruption concerns in both countries.
  • Faced with substantial financial penalties, Budapest and Warsaw would be more likely to compromise rather than seek to deepen the conflict with Brussels.
  • Neither Hungary nor Poland is likely to leave the EU for the foreseeable future, but persistent conflicts with Brussels pose reputational risks.

In mid-July, the Court of Justice of the European Union (CJEU) ruled that the disciplinary regime of judges in Poland was not compatible with EU law and requested a complete suspension of the Disciplinary Chamber of the Supreme Court. In response, the Polish Constitutional Tribunal (TK) issued a conflicting verdict that rulings by the CJEU affecting the organization of Polish courts were in violation of the country's constitution. At the same time, the European Commission (EC) launched legal procedures against Hungary and Poland over rights of LGBT+ persons in both countries. Finally, the EC's annual edition of national rule of law reports published on 20 July once again voiced concerns about significant deficiencies in judicial independence, media freedom as well as anti-corruption frameworks in both Hungary and Poland.

The tensions between the EU and populist governments in Hungary and Poland are unlikely to abate in the near term. Poland's TK on 3 August is scheduled to continue hearings in a case – initiated by Prime Minister Mateusz Morawiecki – on whether the Polish constitution takes precedence over the EU law. At the same time, Warsaw has until 16 August to comply with the CJEU order to suspend the Disciplinary Chamber of the Supreme Court. Meanwhile, Hungary's Prime Minister Viktor Orban has proposed a referendum on the controversial child protection law, which had triggered the EU's legal action.

Economic implications

The standoff could have tangible and immediate economic implications both for Hungary and Poland. First, Warsaw could face financial penalties if it disregards the CJEU ruling to suspend the disciplinary chamber. Budapest could see similar measures unless it rolls back the controversial provisions in the child protection law. Faced with financial penalties in the past, both countries had backed off from their contentious policies.

Second, the mounting concerns about the quality and independence of Hungarian and Polish institutions to ensure the transparent and effective investment of post-pandemic recovery funds have prompted the EC to delay the approval of their EUR 7.2bn and EUR 36bn national recovery and resilience plans, respectively. The ongoing negotiations on measures to ensure sufficient oversight of EU investments could be protracted, particularly amid persisting tensions on multiple fronts.

Third, there are growing calls within the EU to launch the new rule of law conditionality mechanism – agreed following contentious negotiations in December 2020 – aimed specifically at protecting the EU budget from rule of law violations. While this could potentially lead to a suspension of the EU's funds for Hungary and Poland foreseen in the 2021-2027 budget, the application of this mechanism is unlikely in the near term – at least until the CJEU issues a ruling on its compatibility with EU law and the EC develops specific guidelines for its application.

Political implications

At home, both populist governments are using their battles with Brussels to reinforce their image as guardians of sovereignty and traditional values, an approach which has proved effective to mobilize their right-wing electorates in the past. However, if tensions with Brussels ever translate into real and substantial financial losses, both Fidesz and PiS would face significant challenges in maintaining popular support and internal coherence. As a result, while neither of the governments could be expected to overturn their policy direction, they are likely to compromise with Brussels.

Despite the persisting disputes with Brussels, Hungary and Poland will remain members of the bloc for the foreseeable future. The EU has no legal mechanism to suspend both countries' membership, while their voluntary exit lacks public and political support. It would also make little economic sense given the vast financial support coming from the EU and close trade relations with the bloc. However, the exit scenario could become more plausible in the long-term, especially when both countries become net payers to the EU budget and if nationalist parties maintain their substantial political influence. In the meantime, the protracted debates about Hungary's and Poland's membership and role in the EU will continue to inflict reputational damage on both countries.

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POLAND/HUNGARY: Rule of law dispute could bear financial consequences

Hungary and Poland could see further delays in the approval of their national recovery and resilience plans due to rule of law and anti-corruption