Recovery fund will be first casualty in rule-of-law war

What is known in EU jargon as rule-of-law has the potential to turn into a paralysing political crisis. This is about the linkage between compliance with EU legal principles and EU budget appropriations. The first casualty of this war could be the EU's recovery fund, which is an integral part of the so-called multiannual financial framework.

A delay would not in itself amount to a catastrophe. The recovery fund is not a fiscal stimulus instrument in any case. That was the price the EU paid for folding the fund into the EU budget. The fund is a structural facility. The plan is to spread appropriations for €310bn in grants and €250bn in loans evenly over three years. The actual flow of the money will be backloaded for another three years. This is to be expected, since we are dealing with investment projects like mobile data, infrastructure or the electrification of buses and the like.

But would it be right to conclude that we are in a hopeless-but-not-serious category of conflicts? Absolutely not.

There is a non-trivial possibility of serious gridlock at the level of the European Council, in the negotiations between the Council and European Parliament and in national parliaments. It takes just a single national veto for the whole thing to break down.

This dispute is not only about rule-of-law compliance. It goes to the heart of the debate on European integration in the early 21st century. It is about the relationship between the EU and its members; about democracy versus autocracy; about fiscal union; and about the role of the EU in the world. If the EU tolerates violations of the rule of law internally, how can it act as a multilateral referee externally?

Yesterday, a majority of EU ambassadors voted to start negotiations with EP on the budget, based on the German EU presidency proposal. Seven countries were opposed, but for different reasons. Hungary and Poland reject any rule-of-law linkage whatsoever. The Netherlands, Belgium, Sweden, Denmark and Finland want a stronger linkage than the compromise proposed by the German EU presidency. Austria and Luxembourg abstained.

You could argue, as some observers did yesterday, that this means that the proposal is likely to be carried because it constitutes a weighted average of views. We don't think so.

This is not going to be a re-run of the recovery-fund debate. The question we are asking ourselves this morning is whether at least one of the opposing countries, which have a strong overlap with the group of frugals, might use the rule-of-law dispute as a pretext to torpedo the unloved recovery fund. When EU leaders debated the recovery fund in July, they were only haggling over money. The current debate is about deeply-held beliefs, and it pitches the Netherlands and Hungary at opposite ends of the scale.

If there is agreement, it will be similar to the German presidency proposal. We think the final compromise may be even weaker. Angela Merkel made it clear that she prioritises the recovery fund, and that she is ready to sacrifice the rule-of-law mechanism. But not everybody shares her priorities. The Dutch compromised already on the recovery fund. We are not sure that they will so easily compromise on rule of law.

Also yesterday, the European Commission issued a report assessing rule-of-law compliance in all member states. This report does not tell us anything materially new about Hungary or Poland, but it discusses rule-of-law violations in all 27 countries. The strategy is clearly to change the nature of the rule-of-law discussion, away from an exclusive focus on two countries and towards more general principles. We think that is probably the way forward in the end. Establish the big principles now, and make them binding in future financial frameworks.