A clear path to a muddy deal on the EU budget

One of the challenges inherent in following the EU is the presence of multi-lingual and multi-institutional noise. The two always come together in perfect disharmony during EU budget negotiations. If you thought that the recovery fund was the big European controversy this year, you could not be more wrong. The more difficult issue relates to what is known as the rule-of-law mechanism: the idea that the EU can withhold funds from member states if they are deemed to be not respecting the principles of EU law.

As we keep reminding ourselves and our readers, the EU is very good at deal-making. You should never lightly bet against a compromise. But sometimes a deal takes longer, and delays can be costly. If the EU's 2021-2027 budget is not agreed before the end of this year, there may be delays in the disbursement from the recovery fund, which is part of the budget.

Viktor Orbán rejects any rule-of-law provisions that would affect him. Art. 7 of the Treaty on European Union is the nuclear bomb version of a rule-of-law clause. It allows a country to be sanctioned, but the procedure requires unanimity among all the other members. The rule-of-law linkage to the EU budget aims to give the EU a more finely-tuned instrument to deal with the likes of Orbán.

Orbán, of course, is only too aware of this, and has the stronger hand. The EU budget is subject to a national veto. Mehreen Khan just published the latest German EU presidency draft on the rule of law. The German draft looks as though it was hand-written by Orbán himself. It is instructive to study this document in some detail. All previous references to generalised deficiencies in the rule of law have been changed to breaches, a much higher hurdle. Article 17b is new. It gives Orbán an emergency brake. Should the EU ever try to cut him off, he can refer the matter to the next European Council. This is a procedure similar to the one Mark Rutte obtained for the recovery fund. Another similarity is the reversal in qualified majority voting: the Council would have to find a qualified majority to act against Orbán. In a previous draft, Orbán would have needed a qualified majority in his favour.

The German proposal effectively turns the rule of law controversy into an issue for the courts. This is very typical for Merkel. She is using a similar strategy in the upcoming national decision on whether to grant Huawei a 5G telecoms licence.

But remember, this is just a draft. European Parliament will not be happy about it, and will seek further changes. The Netherlands will also raise objections. The issue clearly has the potential to intrude into the Dutch elections, which will be held in March. By December, when the decision for the 2021-2027 EU budget must be made, we will already be in the middle of the Dutch election campaign. Our downside scenario for the EU budget is not a total breakdown, but a delay. The EU would still function if no budget were agreed by the end of the year. But the longer the stalemate continues into 2021, the higher the political costs.

We do not think that the EP has the stomach for a fight that would risk the recovery fund. But we know that Orbán does. Orbán would happily compromise and let the EU establish new theoretical legal principles that have no concrete impact on his own situation. If there is a deal, we are sure it will be of the usual spin-doctored variety. Orbán wins on substance, the European Parliament gets its fluffy language, and uncritical EU fanboys hail the deal as yet another step in the direction of closer political union.

This analysis is consistent with the revealed preferences of decision-makers. We know that Angela Merkel prioritises unity over everything else. This is why Fidesz, Orbán's party, is still in the EPP. Southern European governments and MEPs prioritise the recovery fund. Northern states that raise objections can be bought off with rebates or pork-barrel spending projects. We see a clear path to a muddy deal.

A prolonged budget crisis with a delayed recovery fund is our worst-case scenario. The more likely scenario is that the EU will sacrifice the rule-of-law principle, for the sake of unity and a short-term public-relations triumph.

If it were up to us, we would sacrifice unity, take this to the brink, and organise the recovery fund, minus disbursements to rule-of-law infringers, as a temporary multilateral project. This would be similar to how the ESM got started. But, to be clear, this is not what we expect will happen.