On 16 February 2022, the European Court of Justice (ECJ) released its judgement on the cases C-156/21 and C-157/21, dismissing the request of annulment brought by Poland and Hungary against the regime of conditionality for the protection of the Union budget in the event of breaches of the rule of law principles. For the first time in the history, the ECJ delivered its judgement in live streaming.

The cases were allocated to the full Court in view of the fundamental importance of this issue, regarding the options available under the Treaties to enable the European Union to protect its budget and financial interests in the face of breaches of the principles of the rule of law in the Member States. This judgement has a great historical weight, since it would express the Court position in the rule of law crisis in Poland and Hungary.

The “illiberal” turn taken by Orbán’s and Morawiecki’s governments has been continually battering the scaffolding of the democratic state, particularly addressing the separation of powers and the independence of judiciary. The rule of law principle, enshrined in Article 2 TEU, is also an important precondition for, among all the EU policies, the sound financial management and effective EU funding. This constitutes the basis of the so-called ‘Rule of Law Conditionality Regulation’, namely the Regulation on the protection of the EU budget in case of generalised deficiencies as regards the rule of law in the Member States, proposed in 2018 by the Commission and approved in 2020.

After the iter of the debated proposal review described in a previous post, on 16 December 2020, the EU finally adopted the Regulation 2020/2092, which established a regime of protection of EU budget from circumstances where a violation of one of rule of law principles risks to or compromises in a sufficiently direct way the sound financial management of the Union’s resources. The Regulation includes also a definition of ‘rule of law’ through stating the principles that compose the concept and lists different aspects of the financial management of the budget that can be endangered by breaches of rule of law pillars. In order to protect the EU budget, this Regulation specifically empowers the Commission to propose to the Council, which then decides by qualified majority voting, to adopt measures such as a suspension of EU payments or of legal commitments and the reduction of pre-financing or commitments to the interested Member State.

On 11 March 2021, both Hungary and Poland introduced their actions of annulment against the Regulation. Both the applicants’ arguments centered around three principal concepts: the unsuitability of Article 322 TFEU as a proper legal basis; the Regulation is incompatible with Article 7 TEU and Article 269 TFEU as well as with the principle of legal certainty.

Firstly, Hungary and Poland put in question the suitability of Article 322 TFEU as a legal basis for the Regulation. Indeed, according to the legal disposition, the Union legislator shall adopt financial rules relating to the implementation of the Union budget; however, they argued that the present Regulation does not contain such financial or budgetary provisions.

Secondly, the applicants claimed that the procedure established by the contested Regulation infringes Article 7 TEU, since it constitutes a ‘parallel procedure’ that it is not allowed pursuant to such Article. At the same time, the procedure established by the Regulation is contrary to the division of competences laid down in Article 4, par. 1, TEU, infringes the principle of conferral laid down in Article 5, par. 2, TEU and the principle of institutional balance laid down in Article 13, par. 2, TEU; moreover, the ‘parallel procedure’ infringes also Article 269 TFEU, which establishes, in the case of Article 7 TEU, limitations to ECJ powers to rule solely on compliance to procedural requirements.

Thirdly, the two governments appealed to the violation of the principles of legal certainty and legislative clarity. Indeed, the Hungarian Government submitted that the concept of the rule of law on which Regulation 2020/2092 is based is partially abstract and, on the other side, it cannot be the subject of a uniform definition in EU law. For that reason, it argued that this definition cannot guide the assessments and measures which may be made or adopted on the basis of the Regulation or of enabling the Member States to identify with the necessary certainty the aspects.

Following the October hearings of the case, the Advocate General (AG) Campos Sánchez-Bordona expressed his Opinions (here and here), suggesting to reject the applications for annulment of Regulation 2020/2092 as an instrument of financial conditionality.The ECJ aligned with the positions of the AG upon the three arguments.

As for the legal basis, the ECJ argued that the measures that may be adopted under the Regulation relate exclusively to the implementation of the Union budget and are all such as to limit the financing from that budget according to the impact of such a breach or serious risk on its management. Accordingly, the Regulation is intended to protect the Union budget from effects resulting, in a sufficiently direct way, from breaches of the principles of the rule of law and not to penalise those breaches as such.

In response to the argument of incompatibility with Article 7 TEU, the Court held that the procedure under the mentioned Article and the one established by Regulation 2020/2092 pursue different aims and have a distinct subject matter. Thus, there is nothing to prevent the use of instruments other than that in Article 7 TEU to protect the rule of law. As scholars pointed out, the ECJ explains that the EU legislator is entitled to establish additional procedures regarding Article 2 TEU values as long as these procedures complement and not seek to supersede primary law procedures. Not only, but like the AG, the Court’s reasoning clearly underlines the mistakes in the European Council’s compromise conclusions, where point 1 states that only Article 7 TEU may be used to “address the breaches of the Union’s values under Article 2 TEU”. This sentence is misleading, given the fact that multiple EU secondary law acts serve as instruments to review and sanction national violations not only of the rule of law but of every Article 2 TEU value.

As regards Hungary and Poland’s argument alleging a breach of the principle of legal certainty, in particular in so far as the Regulation does not define the concept of ‘the rule of law’, the Court stated that the principles set out in the Regulation, as constituent elements of that concept, have been developed extensively in its case-law. It further argued that those principles have their source in common values which are also recognised and applied by the Member States in their own legal systems. Consequently, the Court found that the Member States are in a position to determine with sufficient precision the essential content and the requirements flowing from each of those principles.

Thus, the ECJ dismissed the action, following the same lines as the Advocate General (AG)’s Opinions. However, there is a slight but significant difference between the two interpretations: whereas AG seems to bypass the role of rule of law, the Court, despite reiterating the protection of EU budget as the primary finality of the Regulation, dedicates several paragraphs to the rule of law value and its vital importance. It then underlines that the respect of these specific values is at the basis of the mutual trust and solidarity that there must be among Member States. In this regard, this value must be respected also in order to guarantee an effective functioning of the financial mechanisms in each Member State. Moreover, the Court reiterates the essentiality of the fundamental values enshrined in Article 2 TEU as principles that must guide the action as a prerequisite of Member States from their accession to the EU. It particularly states that “[c]ompliance with those values cannot be reduced to an obligation which a candidate State must meet in order to accede to the European Union and which it may disregard after its accession” (C-156/21, par. 126). This particular sentence seems to address the current “democratic backsliding” in the two States involved in the process and the actual loopholes of sanction mechanisms in exercising conditionality after the accession. This insight is strengthened by the following sentence, which states that “the European Union must be able to defend those values, within the limits of its powers as laid down by the Treaties”.

Thus, the judgement on one side repeated the AG’s words, that the main finality of the Regulation is to intercept those breaches in rule of law by Member States only in so far as they are relevant to the sound financial management of the Union budget or the protection of the financial interests of the Union. On the other, it seems that the Court does not want to take the issue of rule of law breaches lightly, or to make it appear secondary to the economic question. Contrarily, it highlights how much the principles of separation of powers, prohibition of arbitrariness of the executive powers, effective judicial protection and legal certainty are vital not only for the Member State as a single one, but in the name of solidarity and reciprocal trust. They are the basic principle of the life of a Union as such and for its consistency and credibility.

This ECJ’s judgement surely represents a clear stand against Hungary’s and Poland’s positions. Laurent Pech, Head of the Law & Politics Department at Middlesex University London, argues that partially a small victory for Orbán and Kaczyński has been achieved, that Regulation 2020/2092 is “yet to be formally activated although it officially came into force on 1 January 2021”. This has undoubtedly resulted in a missed opportunity to make earlier use of this new legislative instrument when infringements of the solidity of the rule of law have multiplied over the past year.

Precisely because of this urgency, the judgement will be soon debated in the European Parliament, where EU budget commissioner Johannes Hahn will stand in for Commission chief Ursula von der Leyen. The head of the conservative EPP bloc in the Parliament, Manfred Weber, declared that “[they] expect the European Commission to start putting the mechanism into action right away” and not looking for other compromises that may further delay its implementation.