EU Budget Plan Compels Members to Respect Values or Lose Funds

(Bloomberg) -- European Union bureaucrats have come up with an ingenious mechanism for getting maverick governments, mostly in Eastern Europe, into line. The EU wants the power to cut off funding to countries it sees as weakening the rule of law. At the same time, if the bureaucrats get their way, the affected governments would be forced to provide financing for the programs the EU is no longer funding.

This proposal was put forward by the European Commission on Tuesday, along with the draft EU budget for 2021 through 2027. The Commission proposes to set the budget at 1.1 percent of the EU's gross national income, or about 1.1 trillion euros  ($1.3 trillion). It is also meant to make it more difficult for nationalist governments to use the union's money to garner voter loyalty. The plan cuts the biggest outlays -- support for agriculture and economic cohesion -- by about 5 percent each, compared with the previous seven-year budget. It also reorients cohesion funds toward international education and reform. These are, to put it mildly, not priorities for nationalists such as those in power in Hungary and Poland.

The difficulty of punishing illiberal governments many see as rejecting EU values is that they stick up for one another. Stripping an EU member state of its vote is close to impossible, as it requires unanimous support from the other members' heads of government at the end of a long procedure. EU budgets must also be approved by national leaders unanimously. So autocrats such as Hungary's prime minister, Viktor Orban, and Poland's behind-the-scenes ruler, Jaroslaw Kaczynski, feel relatively secure that their countries will remain the biggest net recipients of EU funds even though they are challenging the orthodoxy on common values by, for example, rejecting any attempt to make them accept more refugees.

The proposed regulation to make financial punishment possible bypasses this obstacle. It would require majority approval in the European Parliament and a qualified majority in the European Council, which consists of national leaders: The support of 55 percent of the member states representing 65 percent of the EU's population. The maverick countries don't have the votes to defeat the proposal without help.

Ostensibly, the goal of the punitive mechanism is to ensure EU funds aren't stolen. That, the logic goes, is easy in a country with a weakened rule of law. And there's evidence that a significant portion of the money does get stolen. 

The Government Transparency Institute, a Budapest-based think tank, calculated in 2015 that EU funds increase corruption risks across Europe by 3 percent to 20 percent, depending on the measure. A company once run by Orban's son-in-law, Istvan Tiborcz, has been accused of profiting improperly from EU-funded contracts to install street lamps in Hungarian towns. The EU's anti-fraud office has found “irregularities” in the use of subsidies for a farm owned by the Czech prime minister, Andrej Babis.

The EU has stopped payments on specific projects in several countries after finding evidence of corruption. But the new proposal would create a blunter instrument for wholesale budget cuts. If the European Commission finds that a country doesn't distribute EU funds properly or lacks a sufficiently independent judicial system to deal with fraud cases, it can move to curtail funding. A qualified majority of national leaders would need to vote against such a step to prevent it. This would pretty much give the Commission the right to decide who should and shouldn't receive EU funds without violating existing rules, which entitle countries with per capita economic output below the bloc's average to cohesion assistance.

But the nationalists won't be able to blame if the EU funding lapses: The proposed regulation would require them to pick up the bill for the EU-funded programs. That would mean they pay twice for their idea of sovereignty and their increased political control over judiciaries.

The “Cohesion and Values” section of the budget was clearly written with a view to cutting the resources at the disposal of Eastern European nationalists. It doubles allocations to the Erasmus student exchange program, creates a special fund to promote EU values and combat “extremism, radicalism and divisions” and a 25 billion euro reform support program that is unlikely to fund non-mainstream economic policy experiments in Poland and Hungary. 

None of this augurs well for the nationalists in these countries, who have counted on EU funds to continue fueling faster-than-average economic growth. They can hope, however, that the Commission's proposal will lead to a broad backlash. Some Western European leaders are already concerned that the planned spending in the budget doesn't shrink despite the departure of the U.K., a net contributor of funds. Lars Lokke Rasmussen, the Danish prime minister, tweeted: