Hungary Insight Poland

EU funds and Central European strongmen: no honey, no money?

Brussels, Belgium – Today, the European Commission will unveil its propositions for the next multi-annual financial framework, thus kicking-off months of arduous and grueling negotiations to determine how to spend over €1 trillion of European taxpayers money and funds between 2021 and 2027.

You’d be wrong in assuming this is just another technocratic issue best left to the experts. Sure, EU budgets, despite covering relatively “small” sums of money (less than 2% of total public expenditure in the current 2014-2020 framework), are a painstaking and backbreaking exercise. As one senior official mildly put it, “there is always a lot of drama”.

But in the age of Brexit, growing Euroscepticism and worrying signs of an East-West divide, Europe’s future has rarely looked more grim and uncertain. Setting the rules and conditions for how EU money is spent will, therefore, be instrumental in shaping the EU’s policies for the years to come and setting a course in turbulent times.

It’s no coincidence that budget negotiations have, throughout the bloc’s history, come to crystallize wider political issues and brought deeply-rooted fears, ambitions or frustrations to the surface, from French President Charles de Gaulle’s “empty chair” policy to British Prime Minister Margaret Thatcher’s “UK rebate” outburst.

European funds: put your money where your heart is

One of the most controversial measures expected to be unveiled lies in the possibility of cutting funds when the rule of law is at risk. It seems clear that Poland and Hungary are the main targets. Both countries, among the main beneficiaries of EU’s regional and cohesion policy, have been on a collision course with Brussels for the last few years.

Talks about implementing financial sanctions against countries disregarding the founding principles of the EU are not new, and have come to appear as the only viable option to bring Warsaw or Budapest to back down from controversial reforms. The famous article 7 procedure, through which the EU can strip – if unanimously agreed upon – a member state of its voting rights, has quickly proven insufficient, after Hungary vowed to use its veto if such a move was launched against Poland.

The EU regional and cohesion funds have been instrumental in fueling growth in Central and Eastern European nations and financing much-needed infrastructure projects. Poland is the biggest beneficiary of all (64 billion euros for 2014-2020), followed by Italy and Spain. Other Visegrad neighbours, like the Czech Republic (18 billion) and Hungary (17 billion), also heavily rely on EU money to fund projects aimed at the development of the bloc’s poorest provinces and at bridging regional inequalities. If such measures were taken, the challenge would be to exert financial pressure without crippling critical regional and social development projects or impacting local residents.

Stricter financial rules and conditions are also made necessary by Brexit. The U.K.’s departure will leave an annual hole of 13 billion euros in the common budget, therefore motivating cuts in key areas regardless of rule of law considerations: one EU official, quoted on condition of anonymity by Bloomberg, mentioned possible cuts of up to 6% in agriculture and regional development – the two biggest EU spending programs.

Source: Bloomberg

Game-changer or mere negotiating tactic?

Some claim this might be a real game-changer in the way the EU operates, amid growing criticism over the Commission’s perceived leniency towards breaches to European values.

Others, however, see this mainly as a tactical move to bring policy-makers in Warsaw and Budapest to the negotiating table and find a compromise on the controversial domestic reforms they’re trying to push through. It might be a bit of both.

Last September, Jean-Claude Juncker gave a powerful State of the Union address. “East to west: Europe must breath with both lungs. Otherwise our continent will struggle for air”, he argued. The upcoming negotiations on the EU budget will, undoubtedly, play a critical role in determining whether or not EU member states are able to come together in times of turmoil.