In Conversation with Antonia Baraggia: Using Money to Protect the Rule of Law?

On Monday 21 February, the Review of Democracy and the Bingham Centre for the Rule of Law co-hosted an event on the Court of Justice of the EU’s judgment on the budget conditionality regulation. An article co-authored by two of the panelists,’Linking Money to Values – the New Rule of Law Regulation and its Constitutional Challenges’, was cited by the Advocate General in the Opinion for the case. In this podcast, Oliver Garner and one of those co-authors, Professor Antonia Baraggia (Associate Professor in the Department of Italian and Supranational Public Law at the University of Milan), discuss the judgment and conditionality as a constitutional tool in more detail. 

Oliver Garner: Before we discuss the details of the judgment and its consequences, could you introduce your own research on conditionality as a mechanism within EU constitutionalism for our listeners?

Antonia Baraggia: I am working on conditionality as a tool for the exercise of public power in composite legal orders – in the EU, but also in federal legal systems like the US and Canada. In very recent times, the European Union has increasingly adopted conditional instruments to achieve precise goals, or announce specific values, not only for EU external relations, but also for internal matters vis-à-vis its Member States, as in the case of the Rule of Law conditionality, but also in the case of spending conditionality, and macroeconomic conditionality. So I am looking at the broader picture, and it is clear that today the use of conditionality in the EU is becoming systemic, and it has been seen as a defining element of the European integration process. In particular, forms of enforcement conditionality are often proposed for areas in which using other ordinary instruments of institutional or individual enforcement is not possible or will not produce suitable results, such as compliance with macroeconomic requirements. Now this is also the case with the Rule of Law and the common values of Article 2 TEU. 

These are often questions with strong federal dimensions, insofar as they concern the relationship between the two main levels of government in the EU.

The EU struggles to tackle such issues concerning levels of governance using its traditional enforcement mechanism. But, at the same time, it lacks other coercive instruments typical of federations. So the use of conditionality as a tool of EU governance is not simply a technical choice, but one that raises constitutional questions. 

I think that this has an impact on key principles of EU law. In this respect, my research makes a clear distinction between internal and external conditionality. Indeed, reliance on conditionality in EU external relations can be considered as a standard tool of foreign policy, which is also used by other international organisations, and by individual states. By contrast, when conditionality is used on the internal scene, constitutional questions arise because the relationship between the EU and third countries is not governed by the same constitutional framework that is applicable to the EU Member States. 

So far, however, the institutional and academic debates seem to have overlooked the impact of conditionality on the basic principles and structure of EU law, and the EU still lacks a ‘conditionality doctrine’ in contrast to what happens in some established federal systems, particularly the USA.

Indeed, in federal states, the intergovernmental relations between the central government and the states are often developed according to conditional schemes. The benchmark for such exploration is the United States, to which the EU is often compared. In my research, I am looking at the USA in comparative perspective, but also I look at the case of Canada in order to learn how classical federations have used conditionality, and how they have addressed the constitutional tensions generated by governance ‘with strings attached’. In the EU, the constitutional debate is far less advanced on these issues; I aim to address the normative and theoretical issues raised by the use of conditionality, responding to some research questions such as: What is the nature of conditionality as a mechanism to exercise power? What are the implications of conditionality for the distribution of power at the national level? And how can the democratic legitimacy and accountability of conditionality tools in composite constitutional legal orders be ensured? 

It is very interesting to hear about the comparative research you are doing on federal states, including the USA and Canada, because I suppose that can feed into these existential arguments over what the EU is and the resistance of some Member States saying that it should be purely a creature of international law, with other commentators saying it is constitutional. 

The Court of Justice, in its judgment on 16 February, dismissed Hungary’s and Poland’s claims and upheld the validity of the new budget conditionality regulation. Could you briefly outline for our listeners how the regulation will function, including the conditions that need to be fulfilled and the measures that the EU can take as a result?

The regulation clearly establishes the rules necessary for the protection of the Union budget in the case of breaches of the principles of the Rule of Law in the Member States. It provides for appropriate resulting measures, which means the suspension of payments and EU funds shall be taken where it is established that the breaches of the principles of the Rule of Law in a Member State affect or seriously risk affecting the sound financial management of the Union budget, or the protection of financial interests of the Union in a sufficiently direct way. As the Court also argues, the procedure for the adoption of these measures can be initiated by the Commission, but only where it finds that there are reasonable grounds for considering not only that there have been breaches of the Rule of Law, but in particular that those breaches affect or seriously risk affecting the sound financial management of the Union budget or the protection of the financial interests of the Union in a sufficiently direct way. 

So not any Rule of Law breach will offer the grounds to activate the regulation, but only those breaches which affect or seriously risk affecting the EU budget, with the consequence that those measures must also be lifted once the impact on the budget ceases, even though the breaches of the principle of the Rule of Law may persist.  

So, this is a very narrowly tailored mechanism conceived really to protect the Union budget. Article 4 of the regulation offers a catalogue of several examples of breaches of the Rule of Law which may trigger the mechanism, for example, breaches affecting the proper functioning of the authorities implementing the Union budget, including loans and other instruments guaranteed by the Union budget, particularly in the context of public procurement or grant procedures, or breaches affecting the proper functioning of the authorities carrying out financial control, monitoring and audit, and the proper functioning of effective and transparent financial management and accountability systems and so on. When the Commission finds that it has reasonable grounds to consider that the conditions set out in Article 4 are fulfilled, it sends a written notification to the Member State concerned, setting out the factual elements and specific grounds on which it bases its findings. 

However, the regulation – and also the Court in its decision – envisages a kind of dialogical process in the application of the regulation. Indeed, the Commission is required to ensure, subject to review by the European Union adjudicator, that the information it uses is relevant and that the sources of that information are reliable. The Member State concerned has the option, in the course of the procedure, to submit observations on the information that the Commission intends to use in order to propose the adoption of the appropriate measure. Accordingly, it may challenge the probative. value of each piece of evidence relied on, and in any event the merits of the Commission assessment may be subject to review by the Court of Justice in the context of an action brought against a Council decision adopted under the regulation.

What we can expect is that the Member State concerned will start to challenge the Commission evidence piece by piece, so we can expect that the tension concerning Rule of Law conditionality will not end after the regulation is triggered.

Where the Commission considers that the conditions of Article 4 are fulfilled, it shall submit a proposal for an implementing decision on the appropriate measure to the Council within one month of receiving the Member State’s observation. In the end, the Council shall adopt the implementing decision within one month of receiving the Commission’s proposal. So even if the proposal of the Commission is adopted by the Council, the procedure is long and not immediately applicable to the Member State concerned.

Thank you for that clear overview. So it seems quite obvious that what we have here would be a process rather than just the imposition of financial sanctions for breaches of the Rule of Law. As you noted, there could well be further litigation for us to discuss. You mentioned in your first answer about how conditionality is really a feature of perhaps what Kaarlo Tuori calls the EU’s “macroeconomic constitution”. This concept has now been transposed into the EU’s Rule of Law toolbox through the connection to the EU budget in this regulation. 

Do you think that the Court of Justice presented the idea that the budget is a manifestation of the Article 2 TEU value of solidarity as a meant to achieve this constitutionalisation? Do you think that this could introduce some form of solidaristic welfare logic into future EU Multiannual Financial Framework discussions?

Antonia Baraggia: Let me just briefly mention the use of conditionality during the Eurozone crisis. We all know that conditionality was a fundamental tool used to manage the Eurocrisis.  The memorandums of understanding signed by the EU Member States experiencing economic and financial troubles in order to receive financial assistance were underpinned by a strong conditionality regime. Conditionality also became a defining feature of the European Stability Mechanism and it was officially sanctioned by the Court of Justice in the Pringle judgment. In the specific field of macroeconomic governance, conditionality was formally recognized in the EU Treaties for the first time in Article 136 TFEU, as amended in 2011. More generally in the field of EMU law, conditionality has emerged as one of the most effective tools for enforcing fiscal constraints. 

However, I would like to emphasize that conditionality is really a pervasive tool within EU governance, even outside of the macroeconomic field. For example, a generalized use of conditionality, which applies to all Member States without distinction, is the so-called spending conditionality tools, which link the disbursement of most EU funding programs to fulfilling a broad set of rules and standards. The first mechanisms of spending conditionality were introduced in the 1990s, especially for the Common Agricultural Policy, where the EU linked its distribution of funding to the fulfilment of certain environmental objectives.

Since then, spending conditionality mechanisms have grown greatly, both in terms of their scope of application as they apply to more funding programs, and their substantive content as more and more conditionalities have been attached to funding disbursement. This followed the already significant steps taken under the previous Common Provision Regulation for the 2014-2020 Multiannual Financial Framework, which introduced several ex ante conditions that Member States needed to fulfil to access EU funding. The new Common Provision Regulation, approved in June 2021, goes even further because it transforms the ex ante conditionality regime into an enabling conditions systems with four horizontal and 16 thematic conditions to be monitored throughout the entire budgetary period with the possibility to suspend funding at any stage of the process. The new Regulation also reinforces conditions related to respect for fundamental rights in the use of EU funds. 

During austerity, the use of conditionality was considered a symptom of a more radical shift in the EU constitutional culture from a legal order based on the keystone of loyalty, solidarity, and mutual trust to a legal order based on a new conditionality culture which introduced a kind of donor-recipient logic in the EU legal order. 

But the Rule of Law conditionality and the other forms of spending conditionality seem to confirm the growing expansion of the instrument of conditionality in EU governance.

On the other side, they seem to address some of the problematic features of fostering a conditionality regime, which is more in line with the clear principles and values of the EU composite constitution. This seems to be confirmed by the Court of Justice when it speaks about the principle of solidarity. 

The court says that the Union budget is one of the principal instruments for giving practical effect to the principle of solidarity mentioned in Article 2 TEU, which is itself one of the fundamental principles of EU law, and also that the implementation of that principle is based on mutual trust between the Member States in the responsible use of common resources, including in that budget.

I think that the court suggests that conditionality continues to serve as the nexus between solidarity and responsibility. But compared to the Eurocrisis austerity conditionality, these new forms of conditionality better balance the two sides of the coin, perhaps even emphasizing solidarity over responsibility. This term may pave the way for a new understanding of conditionality as an effective constitutional tool for managing conflicts and differences in a multi-layered constitutional system such as the EU.

It’s very interesting to hear about that transition in terms of how conditionality was regarded during the Eurozone crisis, and how now there’s more of a  constitutional logic and language. Perhaps in that regard, it is salient that solidarity is mentioned in the same breath as “identity” by the court. There’s been lots of discussion about this idea of an EU “constitutional identity” being enforced and protected through this judgment. 

Zooming in on the more specific aspects of the application of the Regulation, the judgment states that protective measures in response to breaches of the Rule of Law affecting the EU’s financial interests may target actions and programs other than those affected by a breach where this is strictly necessary to protect the Union budget as a whole. 

Do you think that this dictum means that, in practice, there could actually be quite a broad scope of application for the Regulation? More concretely, could the current situation regarding judicial independence in Poland be sufficient to fulfil these conditions?

I do not think that there will be a broad scope of application of the regulation. I think that the court, in the first part of the decision, wants to give a constitutional tone to the issue at stake, defining the constitutional scene with reference to the principle of identity, solidarity, and mutual trust. Moreover, I think that the court states an important principle regarding the use of conditionality vis-à-vis the EU Member States. 

Respect for EU values is a prerequisite for the accession of any European states, as Article 49 TEU states. But we all know that one of the limits of accession conditionality was the lack of any mechanism to ensure respect for EU values the day after the accession. 

So, at paragraph 126, before the important statement about the EU’s identity, the Court of Justice argues that compliance with those values cannot be reduced to an obligation which a candidate state must meet in order to accede to the EU and which it may disregard after its accession. In this context, the conditionality mechanism appears to be a key constitutional tool, establishing a horizontal condition to protect the Rule of Law. 

However, after providing this constitutional picture of conditionality, the court underlines the specific and narrow character of the regulation, which is conceived to protect the EU budget and EU financial interests. So, I think that this is an inevitable statement in order to confirm the legality of the instrument without infringing the principle of conferral. The court argues that, under the regulation, it must be demonstrated that the breaches affect or seriously risk affecting the EU financial interests in a sufficiently direct way. That condition requires that a genuine link be established between those breaches and such an effect or serious risk of an effect. 

With regard to the case of the Polish judiciary, I think that it will not be so easy nor so straightforward to demonstrate that the breaches of the Rule of Law affect the financial interests of the EU in such a sufficiently direct way.

The consideration on the case of Hungary might be different and easier, but with specific regard to the Polish case, I think that the application of the regulation is not so easy to achieve.

It seems that this definition of a “genuine link” will be incredibly important for the practical application of the regulation. Most of the debate following the judgment, and indeed in the RevDem/Bingham Centre event on Monday 21 February, has focused on whether it is necessary for the Commission to adopt guidelines for the application of the regulation, as it committed to do so in the controversial European Council conclusions in December 2020, or instead whether the Commission could and should simply start applying the regulation straight away. 

Although it seems that there is no legal obligation to adopt such guidelines, do you think the European Commission could be regarded as acting in political bad faith if it reneges on this commitment made between the Heads of State or Government of the Member States? Or were these European Council conclusions themselves an illegitimate attempt to alter the application of legislation?

I do not think that the controversial conclusions were an illegitimate act. They were a political statement – the expression of a political compromise. So, my position is quite nuanced on the legality of these conclusions. 

However, I think that at this stage the Commission’s guidelines for the application of the regulation would be quite redundant. I think that the Court of Justice clearly defined the rules of the game.

So, I do not think that the guidelines will be indispensable to trigger the mechanism.

It’s very interesting to hear that the practical need for guidelines may have been obviated by the Court of Justice, but perhaps there are political considerations that the Commission is engaging in in terms of drawing this out a little bit longer. On that theme, for our final and perhaps most simple question, if the regulation is indeed applied and EU financing to Hungary and/or Poland, or any other Member State breaching the conditions, is suspended do you think that this would have any effect at all on these government’s strategies and policies?

This is indeed a very hard question. The rule of law crisis is strictly intertwined with the political context of each of the countries at stake of Poland and Hungary. For sure, the application of the regulation will have an impact on these governments’ strategies. But for example, with regard to the case of Hungary, I think that the situation is really sensitive. 

Hungary will have its elections in April, and I think that any intervention by the EU institutions might be instrumentally portrayed as undue interference into the domestic political system. 

So, I see a risk of the Hungarian government engaging in an instrumental use of the EU reaction.

That is probably a good closing thought. Such a regulation probably won’t be a silver bullet for solving the Rule of Law crisis; it is limited, as stated in the CJEU judgment, to protecting the EU’s financial interests. It is the democratic processes, through elections, that would change the complexion of the political landscape in these countries.

This transcript has been edited for clarity and length.

In collaboration with Teodora Miljojkovic.

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