The European Parliament gave the executive two months to activate a conditionality system that links the reception of EU funds with respect for the rule of law and fundamental rights.
The European Commission has missed a deadline to trigger a new mechanism to make receiving EU funds conditional on a country's respect for the bloc's core values.
Members of the European Parliament (MEPs) imposed the two-month ultimatum in June in a resolution that included the threat of legal action.
They have been repeatedly calling on the executive to activate the so-called "conditionality instrument" and prevent certain EU countries accused of democratic backsliding -- such as Poland and Hungary -- from benefiting from the bloc's budget.
The system, enshrined in a regulation, was established in December, six months after European leaders agreed on a landmark €750-billion recovery fund to mitigate the devastating effects of the coronavirus pandemic.
The fund, combined with the bloc's annual budget, resulted in a package worth almost €2 trillion, set to be disbursed over the next seven years.
The increase in financial power led to renewed calls to strengthen compliance with the rule of law, a debate that was already raging before the health crisis.
Using the novel mechanism, the European Commission can recommend freezing EU payments to a member state suspected of breaching EU law. The European Council, which consists of leaders of EU countries, would have one month to vote on the Commission's proposal, which can be approved by a qualified majority (55 per cent of member states representing at least 65 per cent of the total EU population).
Potential punitive measures would be a suspension of payments, termination of legal commitments, an early repayment of loans or a prohibition to enter new financial agreements. The measures can be later lifted if the disciplined country corrects the situation.
Executive and parliament in open battle
The ever-closer link between EU funds and the rule of law has ignited an open battle between the European Parliament and the European Commission. The standoff in Brussels could end up in Luxembourg, within the walls of the EU's Court of Justice.
Since the regulation entered into force in early January, the European Parliament has been pushing, to no avail, for its immediate application. A majority of MEPs consider the mechanism should have been already employed in the cases of Hungary and Poland, two countries that have regularly been the target of legal action.
Brussels could hit both with what is referred to in the Belgian city as the "nuclear option", a process that could eventually lead to the restriction of their EU voting rights. But the threat has done little to deter either country.
This year, the Hungarian government was heavily criticised for a new children protection act that includes an amendment banning the portrayal of homosexuality and sex reassignment in educational material and TV programmes addressed to people under 18 years of age.
Meanwhile, judicial reforms in Poland have put the country on the verge of a legal "Polexit". The European Court of Justice (ECJ) has sent multiple injunctions trying to suspend the contested disciplinary chambers for judges and introduce changes that would guarantee judicial independence. But both the Polish government and the constitutional court have disputed the ECJ's competence, going as far as saying domestic law prevails over European law.
Additionally, Poland and Hungary were singled out in an annual report released in July by the European Commission that examines the state of the rule of law across the 27 member states.
MEPs have capitalised on the Article 7 procedure, the rule of law report and the ongoing controversies to put pressure on the Commission to activate the conditionality mechanism.
Following a critical resolution passed in June, David Maria Sassoli, President of the European Parliament, sent a letter to Ursula von der Leyen, President of the European Commission, regretting the executive's inaction and demanding the system be triggered.
According to Article 265 of the EU treaties, once an institution is formally asked to act and implement EU law, it has up to two months to respond and take action. After Sassoli sent the letter to von der Leyen on 23 June, the clock began ticking. At midnight on 25 August, the European Commission missed the deadline.
Speaking on Tuesday afternoon, mere hours before time ran out, Commission spokesperson Balázs Ujvári confirmed the executive doesn't intend to take any action for the time being and called the mechanism an element of "last resort".
"We will not go ahead until we make sure that in terms of our toolbox this is the right instrument to be used and the work has been ongoing in this regard for a number of months," Ujvári said.
"When all the conditions are met for us to start implementing the regulation we will not hesitate to do so."
The spokesperson explained the European Commission is currently drafting guidelines that will facilitate the practical implementation of the regulation and is seeking the views from member states. Consultation is set to finish in the early days of autumn, he added.
European leaders had said in December that "until such guidelines are finalised, the Commission will not propose measures under the regulation", although legal experts point out the executive is an independent body able to freely apply EU law at any given time.
'It’s time to go to court'
The European Commission's explanation is unlikely to satisfy MEPs. In their June resolution, they already warned: "the application of the regulation cannot be subject to the adoption of guidelines."
Article 265 now allows the Parliament to bring legal action against the Commission before the Court of Justice in Luxembourg. The hemicycle has two months to decide how to proceed.
But von der Leyen has rejected the validity of Article 265 in this context.
In her reply to President Sassoli, she argued Parliament's letter is not "sufficiently clear and precise" and lacks concrete cases of EU law breaches that would merit the mechanism's immediate application. In her view, this absence of specific examples nullifies the call to action. She adds the regulation entails "complex assessments" and a "large margin of appreciation".
Dutch MEP Sophie in 't Veld blasted von der Leyen’s response, calling it "an insult to Parliament and European citizens".
"Any politically motivated foot-dragging is against EU law," said fellow liberal MEP Katalin Cseh. "We cannot let go until the rule of law mechanism is implemented. It’s time to go to court."
Green MEP Daniel Freund characterised von der Leyen's argumentation as "nonsensical", "surprising" and overly "procedural", and said it was up to the Commission, not the Parliament, to prove the criteria to trigger the mechanism are met.
"The European Parliament has two months to file the actual lawsuit with the European Court of Justice, and that's exactly what we're going to do," Freund told Euronews, explaining the issue will have to be first discussed and approved by the Parliament's legal affairs committee.
Freund added the lawmakers don't take "special pleasure" in suing the executive and would be willing to withdraw the lawsuit if von der Leyen's team takes action in the next two months.
"This is not about the court case," he said. "This is about getting her [President von der Leyen] to take the defence of the rule of law seriously. And I really hope that she does that, and we can do away with any court case between the EU institutions, because the real crisis here is that there is a severe attack on the rule of law in several member states."
Rule of law or financial interests?
The executive led by Ursula von der Leyen continues to buy time before activating the mechanism, a step that would mark a new era in the supervision of the EU budget and the rule of law. Since the regulation is a new, never-used-before instrument, the process is seen as uncharted territory for the European Commission.
Often called "the guardian of the EU treaties", the Commission has come under fire for failing to curtail the democratic backsliding in several member states. Hungary is no longer labelled as a democracy by the research centre Freedom House.
If eventually approved, the suspension of payments would affect government entities and public authorities at national, regional and local level. While the regulation includes provisions to ensure the final beneficiaries of EU funds, such as NGOs and farmers, do receive the money and don't pay the price, triggering the process could fuel anti-EU sentiment inside the punished country.
Another element poised to hinder the instrument's application is its narrow scope.
Even though MEPs celebrated the regulation as a "major achievement" to guarantee respect for the rule of law, in reality the final text agreed last year under Germanys' Council presidency is exclusively focused on "breaches of the principles of the rule of law affecting [the] sound financial management or the protection of the financial interests of the Union".
This means the Commission will be compelled to prove the violation harms the EU budget's integrity "in a sufficiently direct way". Legislation that stiffens free speech or is considered anti-LGBT is therefore likely to fall outside the mechanism's remit.
Cases that could be targeted are reforms that endanger judicial independence, systematic failures to prevent arbitrary and unlawful decisions made by public authorities, and changes that limit or impair the legal system, such as obstacles in the investigation and prosecution of crimes.
"In practice [the mechanism] could well be the case that an illiberal regime represents less of a danger to the financial interests of the EU than a country in which the judiciary is completely independent, but inefficient," Daniel Gros, an economist from the Centre for European Policy Studies, wrote back in December when the institutions reached the final version of the regulation.
In his analysis, Gros argued that building the rule of law mechanism upon the EU's financial interests was the only viable option to set up the novel system and shield it against legal challenges.
"The misuse of EU funds could very well be more prevalent in southern Italy or Bulgaria than in Poland or Hungary," the economist said. "It was a mistake to frame this regulation as being directed against two countries in particular."
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