ECJ confirms Validity of the Rule of Law Conditionality Regulation

On 16 February 2022, the ECJ delivered a highly important ruling on the rule of law conditionality regulation in the two cases of Hungary v Parliament and Council (C-156/21) and Poland v Parliament and Council (C-157/21). The judgement was eagerly awaited and received a lot of attention. The ECJ fully dismissed Hungary’s and Poland’s actions for annulment against the general regime of conditionality for the protection of the European Union (EU) budget provided by the Regulation (EU, Euratom) 2020/2092 (hereinafter: Regulation; as analysed here). The said Regulation allows the EU to cut funds awarded to Member States in case of an established violation of the rule of law by those States, if this violation endangers the EU budget. In its judgement, the ECJ held that the Regulation was adopted on an appropriate legal basis and is compatible with the procedure laid down in Article 7 TEU. Moreover, it is consistent with the limits of the EU’s competences and fully in line with the principle of legal certainty. As expected, the ECJ thus followed the Opinion of the Advocate General Manuel Campos Sánchez-Bordona of 2 December 2021 (C-156/21 and C-157/21, as analysed here). The legality of the Regulation is now definite, which provides the EU with a new tool to sanction violations of the rule of law by its Member States.

Background

For some time now, the EU has been confronted with violations of the rule of law by its Member States, especially by Hungary and Poland. These violations have also been confirmed in recent ECJ rulings (see inter alia C-824/18, A.B. and others; C-791/19, Commission v Poland (Disciplinary Chamber); C-564/19, IS). In Hungary, particularly the rights of refugees, the opposition of the current government, and the press are restricted. Poland is especially criticised for its judicial reform and the Disciplinary Chamber of the Supreme Court, which can waive the immunity of judges. The ECtHR also recently dealt with those issues: In a judgment of 3 February 2022 (ECtHR, application no. 1469/20, Case of Advance Pharma sp. z o.o v. Poland), the ECtHR found that the Polish Supreme Court did not meet the requirements of Article 6 ECHR (right to a fair trial). On 8 February 2022, the ECtHR asked Poland in an interim measure to ensure that no decision in respect of the immunity of a judge may be taken by the Disciplinary Chamber until the final determination of the complaints by the ECtHR (ECTHR, application no. 6904/22, Case Wróbel v Poland). Furthermore, in October 2021, the Polish Constitutional Court issued a highly criticised ruling declaring some provisions of the EU Treaty unconstitutional (Trybunał Konstytucyjny, K 3/21, as analysed here). This case law blatantly violates fundamental principles of EU law. Hungary and Poland are also subject to rule of law proceedings under Article 7 TEU for alleged disregard of fundamental EU values.

In order to combat violations of the rule of law in its Member States, Parliament and Council have adopted the Regulation on 16 December 2020. The Regulation introduces a general conditionality regime to protect the EU budget in the event of breaches of rule of law principles. To achieve this goal, the Council, acting on a proposal from the Commission, may adopt safeguard measures, such as the suspension of payments, which are charged to the EU budget, or the suspension of the approval of one or more programmes financed by the EU budget (see Article 5 of the Regulation). The EU can withhold payments to Member States if the violation of the rule of law in the said Member State sufficiently directly affects the EU’s budget or its financial interests (see Articles 4 to 6 of the Regulation). The rationale for these measures is that respect for the rule of law is a prerequisite for sound financial management and effective financing of the EU (see the Preamble of the Regulation). By asking for a clear link with the EU budget, the regulation has a limited scope. It is not expected to be able to really change the adherence to the rule of law by the Member States.

Since Hungary and Poland refused the idea of EU funds being tied to the respect of the rule of law, they blocked the EU budget framework and the planned Covid-19 aid with a total amount of 1.8 trillion euros at the end of 2020. Finally, they agreed, but maintained the view that the Regulation was not lawful and announced an action for annulment. The Commission effectively suspended the application of the new rule of law mechanism, which has officially been in force since 1 January 2021, pending the ECJ’s ruling. As a reaction, the European Parliament filed an action for failure to act against the Commission. These proceedings are still pending.

In March 2021, Hungary and Poland filed their actions for annulment against the said Regulation. They argued, inter alia, that neither TEU nor TFEU provide an appropriate legal basis for the Regulation, that the procedure of Article 7 TEU is circumvented, that the competences of the EU are exceeded, and that there is a violation of the principle of legal certainty.

Judgement of the ECJ

The ECJ fully dismissed Hungary’s and Poland’s actions for annulment and followed the Opinion of Advocate General Manuel Campos Sánchez-Bordona. Hungary and Poland based their actions for annulment on four main arguments, which will be discussed below.

(1) Legal basis of the Regulation

Firstly, Hungary and Poland argued that Article 322(1)(a) TFEU, which contains the EU competence to set financial rules establishing and implementing the EU’s budget, is not a sufficient legal basis for the Regulation. Amongst others, they pleaded that a condition to cut financial means must be closely linked either to one of the objectives of a programme or of a specific EU action, or to the sound financial management of the EU budget.

The ECJ disagreed with this reasoning and argued that, under Article 2 TEU, the EU is founded on values such as the rule of law and that, under Article 49 TEU, respect for those values is a requirement for joining the EU (C-156/21, para. 124). The Member States have defined and share the values of Article 2 TEU, they ‘define the very identity of the European Union as a common legal order’. The EU must therefore be able to defend them (C-156/21, para. 127).

In addition, the EU’s budget is a highly important instrument for giving practical effect to the principle of solidarity according to Article 2 TEU. The implementation of this principle through the EU budget is based on mutual trust between Member States as regards the responsible use of the common resources contained in this budget (C-156/21, para. 129). The ECJ concluded that the rule of law can form the basis for a conditionality mechanism (horizontal conditionality) which falls under the concept of ‘financial regulation’ within the meaning of Article 322 (1) (a) TFEU (C-156/21, paras. 145 – 146). Therefore, the ECJ concluded that the Regulation has a sufficient legal basis (C-156/21, para. 153).

(2) Circumvention of Article 7 TEU and Article 269 TFEU

Secondly, Poland and Hungary argued that the procedure introduced by the new Regulation circumvents the procedure under Article 7 TEU. Article 7 TEU regulates the sanction mechanism in case of a serious violation of the fundamental values stated in Article 2 TEU. In addition, the two Member States argued that in case of a procedure under the Regulation, the strict limitation of the ECJ’s jurisdiction in relation to Article 7 TEU proceedings, as defined in Art. 269 TFEU, would be undermined.

Both arguments were also rejected by the ECJ. The Court held that the rule of law can also be protected by other norms than Article 7 TEU (C-156/21, para. 163). Further, it argued that the purpose of the procedure provided by Article 7 TEU aims at enabling the Council to sanction serious and persistent breaches of each of the common values of Article 2 TEU. Article 7 TEU seeks to encourage the Member State concerned to put an end to these violations (C-156/21, paras. 169 – 170). On the other hand, the purpose of the Regulation is the protection of the EU budget in accordance with the principle of sound financial management in case of a violation of the rule of law in a Member State (C-156/21, para. 171). Moreover, Article 7 TEU refers to all values of Article 2, while the Regulation relates only to the rule of law, whereby there must be reasonable grounds to consider that those violations have budgetary implications (C-156/21, paras. 173 – 174). Through further comparisons, the ECJ concluded that the procedures of Article 7 TEU and the procedure established by the Regulation pursue different aims and that each has a clearly distinct subject matter (C-156/21, paras. 175 – 179). The ECJ finally concluded that the allegation of a circumvention of Article 7 TEU and Article 269 TFEU is unfounded (C-156/21, para. 197).

(3) Compatibility with Article 4(2) TEU

Thirdly, Poland further argued that the application of the Regulation resulted in a violation of the first sentence of Article 4(2) TEU, namely a breach of the principle of equality of the Member States before the Treaties and the non-respect for their national identities. Poland claimed that decisions concerning measures of the Regulation must be adopted by the Council by qualified majority, which – according to Poland - exposes small and medium-sized Member States to a risk of discrimination. This argument was also rejected by the ECJ. The Court emphasised that the assessments of the Commission and the Council are subject to procedural requirements, which are specified in the Regulation (Articles 6(1) to (9)). The Commission is obliged to follow an evidence-based approach and to respect the principles of objectivity, non-discrimination, and equal treatment of Member States before the Treaties. The assessment must be objective, impartial, and fair. Moreover, compliance with all these obligations is subject to full judicial review by the Court (C-157/21, para. 286). Finally, the ECJ stated that according to Article 16(3) TEU, the Council votes with qualified majority and that this does not imply a violation of the principle of equality of Member States (C-157/21, paras. 307 - 308). The ECJ thus concluded that this plea is also unfounded (C-157/21, para. 310).

(4) Legal certainty objections

Finally, Hungary and Poland argued that the Regulation does not meet requirements of legal certainty and legislative clarity. Hungary argued that there was no precise definition of the rule of law principle and that it could not be interpreted uniformly due to national identity of the Member States. This argumentation was also dismissed by the ECJ. The Court pointed out that for the horizontal conditionality mechanism to apply, there must be a ‘real link’ between violations of the principles of the rule of law, on the one hand, and the impact or serious risk of impact on the sound financial management or the protection of the EU’s financial interests, on the other hand (C-156/21, para. 244). A breach of the principles listed in Article 2(a) of the Regulation must also concern a situation or conduct attributable to a public authority of a Member State and be relevant to the sound financial management of the EU budget. Particularly, this breach must affect or seriously risk affecting, in a sufficiently direct way, that sound financial management (C-156/21, para. 253). In addition, a sufficiently ‘direct link’, namely a genuine link, must be established between a breach of one of the principles of the rule of law and that serious risk (C-156/21, para. 267). The ECJ also stressed that the measures must be strictly proportionate to the impact of the breaches of the rule of law principles on the EU budget (C-156/21, para. 271). In particular, these measures could target other EU measures exclusively within the limits of what is strictly necessary to achieve the objective of protection of the EU budget (C-156/21, para. 275). Additionally, the Commission must comply with strict procedural requirements (C-156/21, paras. 280 - 288). Thus, the ECJ also dismissed this plea (C-156/21, para. 289).

Comment and outlook

The ruling undoubtedly represents an important step in strengthening the rule of law principle in the EU. The actions for annulment brought by Hungary and Poland were dismissed in their entirety and the legality of the Regulation was confirmed by the ECJ. In line with the Opinion of Advocate General Manuel Campos Sánchez-Bordona, the two judgments do not come as a big surprise. It is noteworthy that, in addition to the procedures of Article 7 TEU, the EU can have other parallel instruments to protect its core principles. This also paves the way to introduce further conditionality measures with horizontal effect. The Commission now disposes of a new tool to tackle violations of the rule of law.

However, it should be noted that there must be a strong connection between the breach of the rule of law and the threat to the sound financial management of the EU budget. Additionally, the measures must be proportionate. These requirements lead to a limited scope of application. It will have to be clarified, certainly also in future case law of the ECJ, to what extent the ‘direct link’ must be given. However, the impact of a measure according to the Regulation can be significant if a reduction of financial resources hits an affected Member State hard. For Poland, around 140 billion euros of EU money is at stake, while for Hungary it is 40 billion euros. At the moment, it cannot be estimated to what extent the Commission will make use of the new Regulation. After the announcement of the ruling, Commission President Ursula von der Leyen emphasised that the Commission will now thoroughly analyse the reasoning of the judgement as well as possible consequences. The new instrument will only be applied once the guidelines for its application have been detailed in the light of the ruling. The Commission has closely monitored the situation in the Member States since the Regulation came into force. Von der Leyen expressed her determination to protect the EU budget and pointed out that the Commission will act decisively, if the criteria for action according to the Regulation are met.

Hungary and Poland have reacted differently to the ruling. Polish Prime Minister Mateusz Morawiecki had a meeting with Ursula von der Leyen two days after the judgement was published. This meeting indicates a rapprochement between Poland and the EU executive and gives first signals of a de-escalation of the situation. Meanwhile, Hungary has reacted with serious accusations. Hungarian Justice Minister Judith Varga called the decision ‘politically motivated’ and stated that Brussels was abusing its power. In Hungary, parliamentary elections will be held in April 2022 and an application of the Regulation before the elections will possibly be interpreted as interference in the election campaign. With Russia’s invasion of Ukraine, any kind of soon measure seems unlikely, as the EU has other, more urgent problems to be solved. As Hungary and Poland both suffered greatly under Russia’s control during the Cold War, hopes are high that the two countries will finally remember what the benefits of the EU are and move closer to the other Member States again.