Explainer

EU “Government Shutdown” Looms

If Hungary and Poland maintain their veto, the EU could be without a proper budget next year.

Emmanuel Macron Pedro Sánchez Donald Tusk Angela Merkel
French president Emmanuel Macron, Spanish prime minister Pedro Sánchez, European Council president Donald Tusk and German chancellor Angela Merkel speak on the sidelines of a European Council summit in Brussels, June 20, 2019 (Elysée/Soazig de la Moissonniere)

The EU could face its own version of a government shutdown in January if Hungary and Poland veto the bloc’s seven-year budget and coronavirus recovery fund, worth a combined €1.8 trillion, at this week’s European Council.

The far-right governments of the two countries oppose the introduction of a rule-of-law conditionality for EU subsidies. Hungarian and Polish voters, and other European countries, favor the proposal.

If leaders don’t find a solution this Thursday and Friday, the European Parliament would not have time to ratify the spending plans before the new year. The council isn’t due to meet again until March.

What happens then?

Emergency funding based on the EU’s 2014-20 budget would go into effect to pay the salaries of civil servants as well as agricultural subsidies, similar to how a continuing resolution would fund essential services during a government shutdown in the United States.

But €25 to €30 billion in cohesion funds for the poorest regions of the EU, Erasmus scholarships and investments in scientific research would be put on hold.

It would be the first time since 1988 that the EU didn’t have a regular budget.

Without approval of the €750 billion coronavirus recovery fund, around of half of which is comprised of EU-backed loans and half of grants, countries hit hard by the pandemic, such as France and Spain, would need to revise their own budgets for 2021.

Spain is planning to draw €72 billion from the fund over the next three years to pay for digitalization, elderly care and the transition to a green economy.

All EU countries are counting on money from Brussels to help pay for decarbonization. If the 2021-27 budget isn’t approved, poorer countries that are still largely dependent on fossil fuels — like Poland — would struggle to meet the goal of the Paris climate agreement: to cut emissions in half by 2030 compared to 1990.

What is the dispute about?

The ruling parties of Hungary and Poland have exerted undue influence over their courts, firing critical judges, putting loyalists in charge of oversight bodies and ignoring rulings by the European Court of Justice.

Both have purged political opponents from government agencies, turned previously independent state broadcasters into propaganda channels and, in Hungary’s case, gerrymandered parliamentary districts and cut subsidies for political parties to make it almost impossible for the opposition to return to power.

The European Commission, at the behest of the European Parliament, has opened investigations that could ultimately result in Hungary and Poland losing their voting rights in the councils of the EU. But Germany, which holds the rotating presidency of the bloc, has been reluctant to go that far, and without unanimity there is no way to sanction member states.

The proposed solution

To stop Hungary and Poland shielding each other from sanctions, the European Council agreed in September that a qualified majority of fifteen out of 27 national leaders, representing 65 percent of the EU’s population, would be enough to withhold funds from countries that undermine the rule of law.

For supporters, it’s the bare minimum the EU could do to protect the democratic values Hungary and Poland also committed to uphold when they joined in 2004.

Those countries insist the proposal is legally unsound and violates their sovereignty.

What are the alternatives?

The Netherlands, one of the driving forces behind the rule-of-law mechanism, has suggested moving ahead without Hungary and Poland.

That may be possible with the coronavirus recovery fund, similar to how the rest of the EU circumvented a British and Czech veto to the European Fiscal Compact in 2011-12.

But it is not an option for the EU budget.

The Polish deputy prime minister, Jarosław Gowin, has suggested that a “binding” explanatory note could be attached to the budget, weakening the rule-of-law conditionality. But it’s unclear how it could be weakened further without becoming moot.

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