Why Hungary Is Threatening Europe’s Hard-Fought Coronavirus Recovery Fund An old development debate surfaces in the European Union.

“The Polish and Hungarians thwarted the attempt of others deciding about the money due to us,” boasted Viktor Orbán on July 24, shortly after the marathon EU talks to decide the next EU budget and a historic Coronavirus Recovery Fund. The truth is more complicated. Hungary and Poland managed to delay a mechanism that would tie EU funding to rule-of-law conditions for now, but the possibility of a future where the EU can penalize member states for antidemocratic behavior by withholding funding is closer than ever. The fact that the Hungarian leadership is threatening to withhold consent from launching the Coronavirus Fund suggests the Orbán regime sees this future. Opponents question if democratic values can be up for budgetary debate; proponents hold their breath for a way to finally disrupt paralyzed EU governance.

At a glance:

• The EU has limited ways to prevent democratic backsliding in member countries, as evidenced by the rising tide of authoritarianism in Hungary and Poland.
• Existing mechanisms, including Article 7 procedures that could see some membership rights suspended, have been exhausted and dragged on with little consequence.
• The European Parliament passed a resolution warning that the rule of law deteriorated in the two countries while Article 7 procedures have continued.
• Ursula von der Leyen’s European Commission has seriously considered tying EU funding to rule of law conditions.
• The pandemic has escalated the debate around rule of law conditionality as Hungary brazenly introduced a Coronavirus Law that would enable Orbán to rule by decree without a sunset clause.
• EU leadership was discussing a historic Crisis Recovery Fund, and considered stricter conditions around democratic values. Hungary and Poland could veto any budget deal that would be unfavorable to them.
• The EU budget deal tabled a decision on a new rule of law mechanism.
• However, the deal includes a sentence of possibly historic importance. One interpretation suggests future decisions could be made by qualified majority voting instead of unanimous voting.
• Qualified majority voting (which would require only 15 of the 27 votes) would prevent countries like Hungary from holding the budget hostage during future talks.

The Orbán regime has been putting EU institutions to the test for a decade. 

The Union is founded […] on the rule of law and respect for human rights.

Article 2 of the Treaty on the European Union

The rule of law is one of the foundational values of the European Union, which the European Commission defines as  “all members of a society – governments and parliaments included – are equally subject to the law, under the control of independent courts irrespective of political majorities.” According to Molly O’Neal at the GIISA, rule of law breaches can include: violation of the independence of the judiciary system; arbitrary or unlawful decisions by public authorities; limited availability or ineffectiveness of judicial remedies, and failure to implement higher court judgments.

When the Hungarian government launched a campaign against refugees, foreign-funded NGOs, the judiciary, or the independent media, the EU was not prepared to reign in the regime. With no previous precedent of such antidemocratic behavior, the union lacked the resources to penalize Hungary (and soon after, Poland) even as it challenged its institutional values, its functioning, and legal system.

It’s as if the founding fathers of the EU never entertained the idea that member countries could turn their back on the rule of law. Currently, there is no way to expel members from the EU, even if a country blatantly violates everything that the union stands for. Poland and Hungary have also never really suffered financial consequences for violating the EU’s core values: to date, funding from the EU budget has never been tied to democratic standards. 

There are some legal options within the EU, however, most importantly:

1. Infringement proceedings. This is a relatively common legal proceeding where the European Commission, the EU’s executive branch, notifies, and in some cases, penalizes member countries for violating EU law. In case of noncompliance, cases may be referred to the Court of Justice of the EU(CJEU) in Luxembourg.
2. Article 7 procedure. This is an extremely rare and severe procedure that enables the heads of states of member countries (the European Council) to potentially suspend a country’s membership rights, such as voting and representation, for persistently breaching the EU’s founding values. Identifying the breach requires unanimity (excluding the state concerned). The Article 7 procedure has only been used against Poland and Hungary to date (the procedures were launched in 2017 and 2018, respectively).

All of these options have been used against Poland and Hungary. 

In the European Commission’s infringement database, there are 8 infringement cases on the topic of Justice, Fundamental Rights, and Citizenship in the past decade that reached the severe stage where the Commission referred them to the Court of Justice of the EU. Three of the 8 cases involved Poland, and three involved Hungary. 

Article 7 procedures have only ever been launched against Hungary and Poland. In Poland, the procedure was triggered over perceived threats to the independence of the judiciary; in Hungary, over concerns about judicial independence, freedom of expression, corruption, rights of minorities, and the situation of migrants and refugees. 

The rule of law continued to deteriorate in both countries as procedures dragged on. In early 2020, the European Parliament passed a frustrated resolution warning that the EU’s discussions with Poland and Hungary had not led the two countries to realign with the EU’s founding values. In it, Members of the EP warned that the Article 7 hearings were “neither regular nor structured,” called on the heads of state to allow MEPs to participate more, and establish an EU mechanism that would include yearly independent reviews of compliance with rule of law in member countries.

A new European Commission raised the possibility of withholding EU funding in response to rule of law breaches.

As EU institutions were wrestling with democratic backsliding in Poland and Hungary, a new European Commission was formed in 2019. The incoming president, Ursula von der Leyen made it a priority to address the discrepancy between the fundamental importance of the rule of law in the EU and the struggle to defend it in the face of rising authoritarianism in member states.

The Commission introduced an enhanced rule of law strategy with three key strategies: 

1. Prevention and monitoring rule of law breaches in member countries;
2. Promotion of values around the rule of law; and, most importantly:
3. Response: the possibility to make EU funding conditional on rule of law requirements.

With this, the Commission raised an important question in EU history that would become a core point of contention in the summer of 2020.

Can democracy be a bargaining chip in budget talks? 

This is a topic frequently discussed in international aid circles, but relatively new in the context of the EU. There are viable arguments on both sides. As Molly O’Neal explains in an excellent policy paper, taking the rule of law into consideration could be viewed as a core fiduciary duty of EU leadership. Hungary has misused EU funds over the past years more than any other member state, according to OLAF, the EU’s Anti-Fraud Office. How could EU leaders responsibly write a check from EU taxpayers to a country where the leadership is well known to have been directing public tenders to friends of the prime minister? 

On the other hand, there is an enormous logistical catch in connecting the EU budget to how member countries behave. EU members (or their heads of state in the European Council) have to vote unanimously to accept the budget. In other words, any member can veto it, including those who would be penalized for antidemocratic behavior (like Hungary) and their allies (like Poland). Until there is a way to vote about these issues with a qualified majority instead of unanimity, this type of conditionality that would single out member states could paralyze the budgeting process. 

Finally, there are significant moral concerns over using the rule of law or human rights as a bargaining chip for the simple reason that it puts a dollar (euro) amount of immeasurable human values. How much money does it take for an EU country to respect the rule of law? What happens when the money runs out? Can there be an inflation of democratic values as a result?

The European Commission was going to have to answer some of these questions before their next budget summit. Then came the pandemic.

The pandemic caused EU leadership to reckon with past crises, and escalated the debate over rule of law conditions.

With the onset of the COVID-19 pandemic, several old debates surfaced and escalated at once in the EU. The crisis also made it hard not to reflect on the EU’s handling of the financial crisis, where the culture of austerity, the reluctance to signal a shared financial responsibility over the Euro, and the atmosphere that penalized and humiliated indebted member countries for irresponsible public policies is widely believed to have cemented the divide between wealthier and lower income member states, and fueled anti-EU sentiments. 

In fact, the resulting anti-EU rhetoric has been a core piece of Orbán’s populist communication for the past decade, and one wonders if Hungary and Poland would have reached the same level of authoritarian governance if the EU was more generous and less conditional in its crisis response in the previous crisis. This collective experience further underlined the importance of careful communication and consensus building among all 27 states.

Meanwhile, as soon as countries shut down in March, Orbán passed the infamous Coronavirus Law (nicknamed the Enabling Act), which would allow the government to rule by decree for the duration of the “state of danger” with no sunset clause. This was provocation unlike any other to those who argued that the EU lacks the means to reign in Hungary and other aspiring autocrats, and in new conversations over an aid package, conditioning crisis recovery funds on the rule of law became a priority for many.

The EU has learned from the last crisis and reached a historic recovery deal.

EU leaders made significant efforts to handle the current crisis more efficiently than the last one, as four political scientists point out in The Conversation. The French and German leadership immediately argued for more funding; the aid package was going to be financed from European bonds; and, member states were not singled out and blamed for the pandemic (as they were for their reckless spending and debt a decade ago). 

As the 27 heads of state convened in Brussels in July, they would have to agree on two things: 

1. A crisis response fund of historic proportions (EUR 750 billion, or USD 858 billion) and historic significance (it would be financed from EU bonds); 
2. The next seven-year budget of the EU (EUR 1.8 trillion, over USD 2.3 trillion).

There were several points of contention, some economic, some political, but much of the marathon summit revolved around the question of Hungary and the rule of law. For the months leading up to the talk, Orbán was enabled to rule by decree and just weeks before the talks, Index, country’s most prominent news site, announced its independence was in danger. Orbán did nothing to assuage concerns over democratic backsliding and firmly held his ground, knowing that the EU budget and the crisis recovery fund was more important to all participants at that moment than reining him in. 

There were two real options: a deal that didn’t tie EU funding to the rule of law, or no deal. Decisions over the budget and EU Recovery Fund require unanimity; Hungary and Poland would certainly veto any deal that was unfavorable to them. So, after some “old-fashioned horse-trading,”  that lasted four days and four nights, the heads of state agreed on a deal that included more loans and less grant funding than originally, tabled the conversation on the rule of law for later, and seemingly, everyone was satisfied.

A victorious, if exhausted Orbán and Morawiecki declared victory. Orbán posted this on his facebook, went to bed, and just days later, Hungary’s most prominent independent news site was blown to pieces. “I would like to thank everyone for your encouraging words. And now, two days of sleep 😴😴😴”.” He went completely offline for a few days, and then announced on public radio that he successfully thwarted efforts to crush the country’s independence.

There is a sentence in the budget deal that could fundamentally alter the EU’s options to penalize future rule of law violations.

Yes, neither the recovery funds, nor the budget agreement was tied to rule-of-law requirements — this time. That would have been impossible; Hungary and Poland would have held the budget hostage. However, the agreement includes some historic, if vague language for future changes. 

A regime of conditionality to protect the budget and Next Generation EU [the €750 billion recovery fund] will be introduced,” …“In this context, the Commission will propose measures in case of breaches for adoption by the Council by qualified majority.

“Qualified majority” is the phrase with history-changing potential. The sentence can be read in many ways, but one of them opens the door for the European Commission to impose sanctions on a country like Hungary or Poland for violating the EU’s core values, with just a qualified majority instead of a unanimous vote. In a qualified majority vote, 55 percent of member states vote in favor (so currently, 15 out of 27 members); and the proposal is supported by member states representing at least 65 percent of the total EU population. 

According to Daniel Hegedus at Politico, Orbán and Morawiecki were celebrating because in the way they read the story, any rule of law conditionality remains a matter for European leaders in the Council, which operates by consensus — which would not only postpone the debate, but prolong their veto power over the budget forever. 

Today, Hungarian leadership is threatening to withhold approval from launching the recovery fund until a regulation on a proposed rule of law mechanism is finalized, according to several Members of the European Parliament. This suggests that the Hungarian leadership in fact recognizes the importance of the phrase as well. 

The door is opening; the historic dilemma remains.

A hundred years ago, in 1920, European Leaders gathered in Paris to decide on the borders of post-World-War-I Europe. Hungary, like Germany, did not have a seat at the table, because the French, the British, and the rest of the Allied Powers sought to punish the losing side for causing the war that caused the deaths of tens of millions of soldiers and civilians, the Europe-wide economic depression and the wave of revolutions that swept through Europe. Hungary was on the losing side.

The harsh terms of the resulting treaties (history’s most hated treaties) stripped Germany of 13 percent of its territory and one tenth of its population, and forced Germany to pay the current equivalent of USD 37 million reparations to the winning parties, which the country only completed repaying in 2010. Germany spiralled into a recession in the 1920s, and it is widely believed that the humiliation of the Versailles Treaty enabled the rise of the Nazi party. 

Hungary, which was also criticized at the time for mistreating minorities under the Austro-Hungarian Monarchy, was stripped of two thirds of its territory, two thirds of its population, and about two thirds of its GDP. The traumatic outcome fueled a sense of Hungarian victimhood, and it led Hungary to side with Hitler’s Germany in World War II once Hitler gave promises to return the territories lost in the treaty. (For more, please watch Jesse Alexander’s incredibly thorough Youtube explainer on the Treaty of Trianon.) A hundred years after it was signed, the Treaty of Trianon remains a mainstream rallying point for the Hungarian alt right and extreme right.

A decision that financially penalizes countries for antidemocratic behavior can have severe unintended consequences for a society in crisis. But currently, Hungarian civil society is hopelessly fighting for its life, with few stakeholders to turn to besides the EU. If EU leadership doesn’t find a way to influence the Orbán regime’s antidemocratic behavior, and keeps funding it, it will be propping up an authoritarian regime with the help of European taxpayers. A more effective decision-making mechanism is the first step to change this status quo.

Contributed by Lili Török.
Illustration by István Gábor Takács.