Court ruling raises risk of EU funding cuts for Hungary and Poland

2 Mar 22

A Court of Justice Decision to allow the European Union to withhold money from countries that fail to meet democratic standards has been named as a threat to Hungary and Poland.

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European Court of Justice

The European Court of Justice. Image © iStock

The two countries, whose challenge to the so-called conditionality mechanism led to the decision last month, have both been accused of democratic backsliding by the EU in recent times.

Analysts at rating agency S&P Global have now said the ruling has created a “higher risk” of funding cuts, which could be severe.

Large amounts of money are earmarked for each country over the course of the current seven-year EU budget period, representing about 29% and 34% of GDP for Poland and Hungary respectively, according to S&P estimates.

The decision “raises doubt about the timely and full accessibility of EU funds for Hungary and Poland and could ultimately have implications for our sovereign ratings on the two countries,” the analysts said in a note.

S&P said the ruling itself does not change its assumption that EU funding will be forthcoming and will support GDP growth, which it expects to average 4% for the next three years or so, and even if there are cuts their impact will likely not be felt until next year.

But the EU took the first steps for initiating the mechanism for Hungary in November 2021 and Poland in January 2022, with the national governments being given three months to respond.

Any resulting measures, such as withholding funds, will be decided by the Commission, but will need to be supported by at least 55% of member states that comprise at least 65% of the EU population.

“There are some concrete signs Hungary could be subject to the mechanism, but it is less clear with Poland,” S&P said in the report.

“In the case of Hungary, the timeline is more impending and the political climate in Budapest has also become more confrontational ahead of April general elections.”

Conversely the report noted “signs of de-escalation” in the case of Poland.

Already on hold, but unrelated to the conditionality mechanism, are nearly €1bn for Hungary and €3bn for Poland from the EU’s Covid-19 recovery fund, with the European Commission citing rule-of-law concerns including corruption and the independence of the judiciary.

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