Verhofstadt’s plan to save the rule of law in Poland and Hungary is doomed to fail

Guy Verhofstadt has reminded us that “under the 2014-2020 cohesion budget, which totalled over €350 billion ($424 billion), Poland and Hungary received €77 billion ($93 billion) and €22 billion ($26 billion) respectively, making them the largest and fourth-largest net beneficiaries of EU funds. And net budget contributors such as Germany, France, and the UK, it should be noted, heavily subsidize this largesse”. He then bitterly remarked: “And yet, rather than embracing the values that have inspired such generosity, Poland and Hungary’s authoritarian-minded governments have been actively undermining the rule of law and dismantling their judicial systems. If either country were to apply for EU membership today, their bids would be rejected.”

The leader of the European liberals is, strictly speaking, mostly right, although his remarks about Hungary come much too late, and many years ago Victor Orban went far beyond what Jarosław Kaczyński is doing now, with no harm coming his way. However, this is not about justice or proportions, but about challenges, risks, and remedies. Here we are talking specifics: “From 2020 onwards, it is critical that cohesion funds be disbursed on the condition that recipient member states uphold and enforce the rule of law”. So, if e.g. the famous Article 7 is triggered “all funds allocated to that country should be placed into a reserve fund. And until the Article 7 procedure is suspended or reversed, those funds should be redirected to support universities, research institutions, and other civil-society groups in that country”.

Let’s keep calm and think about it for a moment. What we see in our own backyard is very disquieting. At the same time, international pressure, especially within the context of a somewhat unconnected but acute crisis in US-Israel relations, seems to influence what the authorities are doing. The Law and Justice (PiS) government in Poland pretends to be ready to negotiate and seek compromise and, despite rebellious declarations, they seem wary of the consequences of the Article 7 procedure, should it be invoked. But this does not mean that those opposing the government and defending the rule of law should happily nod their heads to what Guy Verhofstadt is saying. Especially since he is not simply a lone old federalist making a plea, the ideas he has expressed are partly in line with the proposals that the European Commission announced on the 2^nd of May.

We don’t yet know all the details, and the 2021-2027 budget negotiations will certainly be a difficult and bloody battle. What we do know, however, is the general direction of the EU’s thinking. Cutting the cohesion and rural policies budget by several percentage points, and an increase of the migration policy, border and common defence policy budgets reflects, more or less, the new challenges that the EU is facing, but not necessarily our priorities. Poland will probably lose several billion euro from the Cohesion Fund and the European Social Fund, where funding will depend not only on GDP, but also on unemployment and migration rates.

Poland will probably lose several billion euro from the Cohesion Fund and the European Social Fund

55 billion euros would go exclusively to the monetary union countries and those on the ‘fast track’ to join the eurozone, which is a significant incentive for smaller Central European countries still outside it. It is also a step towards the common budget. It is not that much, but still it undermines an important EU rule; solidarity.

Other proposals, however, are much more significant, such as the possibility of the Commission freezing EU funding in cases in which Member States fail to uphold the rule of law and the appropriate management of funds. This proposal can now only be blocked with as much as 55% of the countries having 65% of the population in the EU Council. Significantly, if funding, for instance, for Erasmus scholarships, only affects the Member States (who would have to cover them from their own budgets), the loss of cohesion and rural funds will hit beneficiaries.

This is indeed a strange kind of logic that privileges the younger generation of elites at the expense of the rest of the society. But Verhofstadt spoke in the same vein when he suggested that non-disbursed funds should be channeled towards “universities, research institutions, and other civil-society groups”. Such a suggestion demonstrates incredible naivety in thinking that such a move will persuade citizens that it is their government which is being punished and not themselves.

This is absurd, not only because the “governments will thrive”, and cuts in EU funding for Central Europe will mean a drastic fall in public and private investment. It will be easy for the authorities to spin this by claiming that “the EU is taking away the money for roads and businesses and is funding a liberal fifth column” (since it is widely known which universities, research institutions and NGOs are going to get this money…).

In Poland, there is yet another important factor, structural funds are distributed at the regional level and spent mainly by the local authorities, which are now mostly in the hands of the opposition. The fall in investment may hit those who represent the pillar of pluralism in Polish political scene today the hardest.

Against the background of the conflict between the Law and Justice government and the European Commission, the wider context of this proposal is easily overlooked. Changes in the EU budget in fact mean shifting the funds to the South and, combined with the “rule of law criterion”, they make it possible to make available substantial additional funds for those EU regions and countries that are most at risk of a social crisis (which does not mean they are the least developed).

In Poland, structural funds are distributed at the regional level and spent mainly by the local authorities

The new budget and plans for the “rule of law criterion” are thus not only an attempt by the Commission to regain the role of the “guardian of the treaties” and show its power to those that stray away from the liberal mainstream. Let’s not forget that the eurozone crisis is on-going. The ambitious and controversial integration plans by president Macron (leaving aside the question of whether the liberalisation of the labour market will be successful, and whether it will indeed boost French competitiveness) require cooperation with Germany. Germany, meanwhile, doesn’t seem too keen on brave proposals.

It is not about the “transfer union”, i.e. moving towards common public debt of the eurozone Member States, but about reducing Germany’s  gigantic – totalling almost one quarter of a trillion (!) euros – export surplus, which for many years has been suffocating the growth of other eurozone members and generating imbalance in the monetary union. Reducing the surplus would necessitate increasing salaries in Germany, allowing higher inflation rates and ambitious infrastructure programs. We should add that Germany has a lot of money to spend (5 billion euro of budget surplus in 2017), and a lot to spend it on. The infrastructure in western regions is in poor condition, the care sector is hugely underfunded and salaries across the economy haven’t changed for years. Both employees and consumers advocate a salary increase, as do the IMF and the ECB, since higher inflation rates would create opportunities for normalising the monetary policy. Even the president of Bundesbank, an institution far from being pro-workers, supports the idea.

As far as salaries and inflation (i.e. domestic consumption) are concerned, there is hope; the new tariffs agreement assumes an increase in public sector salaries (2 million people) by 7.5% over the next two years. We can, then, count on the public sector providing a spark for the rest of the economy, which would be good news for the whole eurozone, as greater consumption by the Germans would mean greater demand and some relief for the economies of less competitive eurozone countries.

Unfortunately, the budget looks much worse. The Minister of Finance, Olaf Scholz (SPD), is behaving like minister ‘Schaüble 2.0.’, becoming yet another fiscal falcon. Nominal cuts in investments, a smaller share of defence spending in GDP, freezing the development aid funding at the level of 0.5% of GDP, smaller contribution to the EU budget, all this has a double objective; creating a budget surplus in 2019-2022 and reducing public debt to less than 60% as quickly as 2019. Wolfgang Münchau, writing for the Financial Times, compared this strategy to the fiscal iron grip of the late period of Nicolae Ceaușescu’s rule. In 1989, the Romanian dictator had a 9-billion-dollar budget surplus while society starved, an imbalance which paved the way for his own downfall. Obviously, Germany is not going to fall, or at least if they do, they will be the last in Europe to do so. The problem with such a budgetary policy is that the positive effect of greater consumption following higher salaries may level out. What is worse, the Germans, being fiscal puritans, may end up demanding that other Eurozone countries follow their suit, which will spell economic downfall for the South.

Which brings us back to the EU budget proposal. It can be seen as an attempt at dispersing the tensions that have begun to appear in the Bermuda triangle of the liberal (for France), but solidarity-oriented (for the Eurozone) plans by Macron on the one side, the falcon fiscal policy by Germany on the other, and the economic needs of the European South topping it all. If Germany, metaphorically speaking, does not wish to share, then someone has to lose (so that someone else could receive).

The EU’s axiological turn, described recently by Katarzyna Pełczyńska-Nałęcz, is deeply rooted and cannot be reduced to a cynical façade hiding a game of material interests. Unfortunately, within the current balance of power and in this historical moment, what is axiologically ‘right’ from the point of view of the EU centre (exerting pressure on countries that are infringing the rule of law and liberal constitutionalism) is getting very close to what is generally-speaking ‘cost effective’ (shifting funds, more or less, from the east to the south of Europe). What is ‘really’ undermining EU principles (the executive power meddling with the courts independence and dismantling constitutional safeguards in Poland, attacks on the independent press and science in Hungary), will at the same time justify quite ordinary transfers of (big) money from some pockets to the others’.

With Germany’s hard fiscalism this would only be a social patch, and not a boost for growth in the South, which (for the centre) is just as well. Cash shifted from eastern Poland to the south of Italy means a few more years of “time bought”, to quote Wolfgang Streeck, to be used to consolidate the eurozone and, possibly, in better times, the eurozone’s transformation. All the optimism I can still muster makes me believe that our government is not going to take a stance of “the worse it gets, the better it is” (i.e. if they cut our funding, the Poles themselves will want to leave this gender-sensitive, vegetarian pathology), and will not try to “buy time” for Poland, so that, over the next seven years, we can lay the foundations for growth that could be a little less peripheral.

In order to have the chance to do that, the government will have to strip the Commission of some of their aces – first of all, by backing off from the area of the courts’ independence, and by leaving local authorities and NGOs in peace. Even if the government finds coalition partners in the EU willing to block Article 7, and if the proposal to introduce the rule of law criterion finds no support among the EU Member States, it would be very easy to strip us – the “sick people of Europe” – of the money. But if the government decides to confront the Commission and the rest of the EU, Poland’s only hope for a better future in Europe will be changing those in power and electing a team that is ready to quickly change the European track and capable of coming up with a vision for Poland in the new Europe when there is no more going back to the old one. In 2019, we may all be facing a geopolitical and civilizational conundrum, and Poland’s future in the EU could be the core issue of this dilemma, even if the majority of voters are not yet aware of that.