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Rule of law: What happens after Brussels triggers the conditionality mechanism against Hungary?

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By Jorge Liboreiro
Hungary has been accused of democratic backsliding, lack of judicial independence and systemic corruption.
Hungary has been accused of democratic backsliding, lack of judicial independence and systemic corruption.   -   Copyright  Petr David Josek/Copyright 2022 The Associated Press. All rights reserved

After months facing accusations of procrastination and unjustified delays, the European Commission has confirmed it will trigger a novel mechanism against Hungary that, for the first time in the EU's history, will make the reception of common funds conditional on a country's respect for the rule of law.

The budgetary instrument has never been used since its entry into force despite continued pleas from the European Parliament, whose members resorted to legal action in a bid for force the Commission's hand.

In response, the executive led by President Ursula von der Leyen argued it needed more time to draft practical guidelines and wait for a ruling from the European Court of Justice (ECJ) that was supposed to determine whether the mechanism was legally sound.

Eventually, the two reasons were satisfied: the ECJ ruled in favour of the instrument in mid-February and the Commission published its guidelines in early March.

Then, the Hungarian parliamentary elections happened and Prime Minister Viktor Orbán was once again given a clear majority to govern.

"We won a victory so big that you can see it from the moon, and you can certainly see it from Brussels," said Orbán while celebrating his victory.

Two days after the ballot, President von der Leyen appeared before the European Parliament and gave MEPs the news most of them have been impatiently awaiting.

"The Commission has today spoken to the Hungarian authorities and informed them that we will now send a formal letter to start the conditionality mechanism," von der Leyen said.

The letter is expected to be officially sent in the coming days, marking the start of a lengthy and complex procedure that could end up freezing Budapest's €6.14 billion yearly share from the EU budget.

But given the instrument's novel and unprecedented nature, many doubts remain over its actual strength and efficiency.

What exactly is the conditionality mechanism?

The mechanism is a new tool meant to protect the EU's financial interests against breaches of rule of law taking place inside a member state.

It was designed in a very particular context: the COVID-19 pandemic had inflicted tremendous pain to the bloc's economy and a €750 billion fund was set up to accelerate the recovery. The ground-breaking fund, financed through common debt, was negotiated in parallel to the €1.1 trillion seven-year EU budget.

The substantial increase in financial power fuelled calls to ensure offending governments do not profit from the EU taxpayers' money, a debate that had been raging for years.

Following tense negotiations in late 2020, which saw failed attempts to veto the text, the disciplinary system entered into force in January 2021.

Poland and Hungary have criticised the instrument and unsuccessfully brought a case before the ECJ to discredit its legitimacy.

The two countries are suspected of democratic backsliding and are currently under the Article 7 procedure, which remains stalled as both have vowed to block each other's file.

Orbán has confirmed that "with the Polish, we are in a mutual defensive alliance. We will not allow each other to be excluded from European decision-making".

What conditions can trigger the mechanism?

The regulation defines rule of law as a set of fundamental values, including legal certainty, effective judicial protection, independent and impartial courts, separation of power and non-discrimination.

"Compliance with those values cannot be reduced to an obligation which a candidate state must meet in order to accede to the European Union and which it may disregard after accession," the ECJ said in its ruling.

In practice, however, the instrument's scope is rather limited: it does not target general breaches of EU law, but only those that affect or pose a serious threat to the EU's financial management, namely the common budget.

Situations that can potentially fall under the mechanism are lack of judicial independence, failure to prevent or correct unlawful decisions taken by public authorities and the presence of obstacles to carry out investigations, prosecute crimes and implement rulings.

According to the regulation, these violations can have a negative impact on the execution, control and audit of EU funds, the prevention of fraud and corruption, and the cooperation with relevant EU agencies.

The Commission has long-standing concerns regarding Hungary's judicial independence, conflicts of interests and systemic corruption. OLAF, the EU's anti-fraud agency, has put the country at the top of its list of irregularities involving EU funds, with public projects considered to be over-budgeted and overpriced.

These considerations have prevented the approval of Hungary's national recovery fund, amounting to €7.2 billion in grants.

"Here the main requirement for reform is the anti-corruption question, and we are at the moment being not able to find a common ground and to conclude," von der Leyen told MEPs.

The following day, Orbán told a press conference he did "not know of any outstanding issues" and that "it's just not true, we have agreed on all these issues".

What are the next steps?

First, the Commission has to build a legal case that establishes a genuine and evidence-based link between the EU law breach and the EU budget.

The executive previously sent administrative letters to Hungary and Poland explaining its concerns and asking for clarifications. According to von der Leyen, Budapest's answer was not convincing enough to close the file and her team decided to "move on to the next step."

Brussels will now send a formal notification to the Hungarian government, officially kicking off a procedure that will see a protracted back and forth between the capitals.

Hungary is entitled to make comments about the Commission's legal findings, offer additional information and propose solutions to address the alleged breaches.

If after the exchange of communications, which is expected to drag on for months, the executive believes the wrongdoing persists and the common budget is still under threat, it can issue a recommendation to freeze EU funds.

The recommendation is sent to member states, who have one month to discuss it and take a vote.

The Council has to approve it by qualified majority: 55% of EU countries representing at least 65% of the total EU population. This represents an important difference from Article 7, where unanimity is required.

What measures can be taken against the accused country?

The EU can move to partially or totally suspend, interrupt or reduce EU funds that have been allocated to the accused country.

It can also prohibit the country from entering new financial agreements with the bloc and force it to repay pending loans earlier than initially expected.

The scope and duration of the response have to be proportionate to the damage caused by the legal breaches. This means a total suspension of EU funds is extremely unlikely to happen.

The measures will target government bodies at national, regional and local level.

The regulation stresses the final recipients of EU funds, such as NGOs and farmers, should be allowed to collect the money that has been assigned under "pre-existing obligations". The government cannot use the disciplinary move as an excuse to avoid these payments, the Commission says.

Notably, the executive notes that if the final beneficiaries have been personally involved in breaching EU law, "such as in cases of corruption, systemic fraud and conflicts of interest," they can be in fact deprived of funds.

The measures can be lifted at any time if the accused member state takes action to correct the situation and the Commission concludes the EU law breach, even if it persists, no longer poses a threat to the EU budget.

How long will the whole procedure take?

Given the untested nature of the conditionality mechanism, the timeline is unclear.

EU officials have estimated five to nine months between the Commission's formal notification and the vote by member states.