Limiting the COVID-19 Recovery Plan to EU-25 Can End Veto Power of Poland and Hungary


ZEW Economist Friedrich Heinemann on the Poker for the Rule of Law

Hungary and Poland vetoed the EU’s 1.8 trillion euro budget plan for the years 2021 to 2027. The bone of contention has been a new mechanism under which Member States can lose EU funds for violating the rule of law. Professor Friedrich Heinemann, head of the Research Department “Corporate Taxation and Public Finance” at ZEW Mannheim, comments on this matter.

”In the entrenched conflict of Poland and Hungary with the European Parliament and the majority of the Member States, the side for which a blockade of EU finances is more costly will ultimately have to give in. Hungary and Poland have an ace up their sleeves: Because Italy and Spain are threatened by financial collapse without EU aid, the Eastern European states are betting on Europe to come out on the short end. For Hungary and Poland, on the other hand, the short-term damage resulting from a blockade is far less severe. Although with their veto they are blocking their own funds, they are less affected by the COVID-19 recession than Southern European states and have lower national debts to shoulder. Time is therefore on Orbán’s and Morawiecki’s side. Without a strategic game changer, the two will win this poker game.

There is, however, a way to prevent the rule of law mechanism from becoming toothless: The EU COVID-19 recovery plan ‘Next Generation EU’ can be established through a treaty of the remaining 25 states since it must be ratified by the EU Member States anyway. For that matter, it is also conceivable to reach an EU-25 agreement on Next Generation EU without the two countries. Differentiation has been a feature of European integration for decades, juts think of the euro, the Schengen Agreement or EU tax policy. In financial terms, limiting the COVID-19 plan to 25 states would even make its implementation easier as the high transfers to Poland and Hungary would be eliminated. This would allow for a reduction of the financial burden on net contributors, making a 25-member solution highly credible.

With an ‘EU minus two’ COVID-19 recovery plan, the veto threat from Warsaw and Budapest would come to nothing. Hungary and Poland could still block the regular EU budget plan. This would, however, be only a weak bargaining chip since without an agreement, the budget may continue at previous year’s level. The mere announcement of this credible ‘plan B’ would shift the bargaining power away from Hungary and Poland. Both countries would lose their threatening potential and would ultimately have to give in. It is high time for Germany’s presidency of the Council of the EU to put this plan B on the table.”