Will EU funding squeeze rein in Poland, Hungary?

Neither Poland nor Hungary have had their pandemic-related aid plans greenlighted. With its Next Generation EU (NGEU) pandemic recovery and resilience fund adopted in April 2020, the 27-nation bloc is aiming to support national efforts to mitigate the effects of the pandemic with a total of €750 billion ($886 billion).

So far, the European Commission has given the go-ahead to 18 national spending plans, but allowed its deadline to approve Warsaw's plan to pass at the beginning of August.

If approved, Poland could get €23 billion in grants and €34 billion in loans from the EU stimulus package. Hungary can expect €7.2 billion, but payment has reportedly been delayed until after the national elections in spring 2022.

A regulation came into force in January allowing the Commission to suspend disbursement of EU funds to a given state if it is adjudged to have violated the rule of law.

Poland and Hungary have reacted with expected anger to the delays. Polish Justice Minister Zbigniew Ziobro, for example, accused the EU of conducting a "hybrid war" against Poland's justice system. The Hungarian government decided to examine legal action on Warsaw's behalf before the Court of Justice of the European Union (CJEU), arguing Brussels' position on the Polish delay was "scandalous and arrogant."

Milan Nic, a senior fellow at the German Council on Foreign Relations (DGAP) in Berlin, has described the recent developments as a "new crisis" and "a skirmish in a long-term battle" between the EU and the two eastern European states.

"The Commission is now preparing the implementation of guidelines and can buy more time by postponing approval of the Polish national recovery plan. The Hungarian one is in more serious trouble, it has not been even discussed at the EU level," Nic told DW.

The Hungarian and Polish governments threatened to veto the EU's seven-year budget and the recovery fund in late 2020 if EU payments were made conditional on the rule of law. A compromise was reached to suspend the application of the rule pending the ruling of the CJEU.

What is the Commission concerned about?

At the center of the dispute is Warsaw's decision to set up a Disciplinary Chamber of the Polish Supreme Court, which Brussels says undermines the functioning of the country's justice system. Established in 2018, the chamber is able to dismiss any judge or prosecutor.

On September 7, the Commission asked the CJEU to fine Warsaw for failing to comply with the court's July 15 ruling calling for the suspension of the chamber. The Polish government said it would shut down the chamber, though has still yet to do so.

For Hungary, conditions for approval are guarantees on fighting corruption. The payments delay is also linked to concerns that changes to Hungary's court system don't help combat corruption. The EU executive has also started proceedings against the country over a law that's seen as curtailing LGBTQ rights.

Warsaw misunderstood?

Piotr Arak, director of the Warsaw-Based Polish Economic Institute (PIE) suggests this is a double-edged sword for the Commission because it does not have any legal grounds for the delay. "If the Commission blocks the money it may throw Poland and Hungary on a Brexit path that everybody wants to avoid," Arak told DW.

Polish Prime Minister Mateusz Morawiecki has ruled out any possibility of a 'Polexit' and said in an interview with Dziennik Gazeta Prawna on September 11 that the National Reconstruction Plan should be approved in the coming weeks. Morawiecki said that the Polish economy was strong enough to cope with losing funds.

Arak echoed the PM's belief saying a delay in the aid would have only a moderate effect on GDP in 2022. "Corresponding investments [from EU funds] should boost economic growth by 0.6% from 4.2% to 4.8%." Arak added, though, that Warsaw is "more afraid of protracted negotiations."

Next Generation EU funds will play a significant role in the Polish economy in 2023. Arak expects expenditures related to the recovery fund to be nearly 40 billion zlotys (€9 billion; $11 billion) in that year. Overall, his PIE think tank projects that NGEU funding is likely to boost the long-term level of GDP by 2%-2.5%. 

Regarding Hungary, Agnieszka Bien-Kacala said the government of Prime Minister Victor Orban is more open to money from other sources, e.g. Russia or China. The constitutional professor at Nicolaus Copernicus University in Torun told DW Polish authorities are not so open, "so they need the aid from the EU." Bien-Kacala also thinks the EU delay may serve as "fuel for electoral campaigns."

"Sovereignty is the most relevant value within the political agenda of PiS. In my opinion, the delay may be more helpful than the money in gaining a parliamentary majority once again," she said, adding that she doesn't see "a space for backing off" because  "the remodelling  of the judiciary in Poland is the flagship program of PiS and Ziobro."

Hungary adamant

Hungary is sticking to its pandemic recovery plan proposal and won't "cede ground" on the LGBTQ legislation, Hungarian Justice Minister Judit Varga has said recently. And the country's unofficial government newspaper Magyar Nemzet quoted Prime Minister Viktor Orban as saying: "It is time to talk about Huxit."

Bien-Kacala thinks these are "the first voices for leaving the EU in the political communication of rulers."

But Tamas Fricz, a political analyst known for his controversial far-right opinion pieces and his close ties to Orban's inner circle, said in an op-ed for Magyar Nemzet  in August that "the strongest arguments for staying is, if we leave, then the Western companies may leave us." Especially when it comes to relations with German multinationals ⁠— including big carmakers Audi, BMW and Mercedes ⁠— and trade ties with EU member states would "deteriorate." Observers believe Orban was the real author of the Fricz op-ed.

Hungary is the second-largest net beneficiary of the EU budget, receiving more than €5 billion more than it contributes back into the EU budget per year.