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Proposal for a Regulation on the protection of the Union's budget in case of generalised deficiencies as regards the rule of law in the Member States

In “A New Push for European Democracy”

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For a brief overview of the key points of the adopted text and its significance for the citizen, please see the corresponding summary note.

On 3 May 2018 the Commission put forward the proposal for a Regulation on the protection of the Union's budget in case of generalized deficiencies as regards the rule of law in the Member States, based on Article 322(1)(a) of the Treaty on the Functioning of the European Union and Article 106a of the Treaty establishing the European Atomic Energy Community.

The proposal lays defines generalized deficiencies as regards the rule of law as including in particular endangering the independence of judiciary, failing to prevent, correct and sanction arbitrary or unlawful decisions by public authorities, and limiting the availability and effectiveness of legal remedies. If the Commission finds in one of the Member States generalized deficiencies as regards the rule of law as described above, it may resort to protective measures including the suspension or reduction payments from the EU budget and the prohibition to enter into new legal commitments. The Council would be able to veto the Commission's ruling by a qualified majority, but Parliament would have no say.

Within Parliament, the proposal is dealt with by two associated committees - the Budgets Committee (BUDG) and the Budgetary Control Committee (CONT).The joint committee procedure applies,  as foreseen by Rule 55 of the Rules of Procedure. Furthermore, opinions have been sought from three other committees: the Civil Liberties, Justice and Home Affairs Committee (LIBE), the Constitutional Affairs Committee (AFCO) and the Regional Development Committee (REGI).

On 17 August 2018, the European Court of Auditors (ECA) delivered its opinion on the proposal, noting that the regulation would give the Commission a very broad margin of discretion and highlighting the lack of rules on specific stakeholder consultation and an impact assessment. ECA recommended that clear and specific criteria for defining what constitutes a generalized deficiency as regards the rule of law should be set and pointed to the need for protecting the legitimate interests of EU funds beneficiaries.

On 3 October 2018, the BUDG and CONT committee co-rapporteurs presented their draft report on the proposal, proposing a number of amendments, especially putting Parliament on the same footing with the Council when it comes to adopting or lifting measures.

On 13 December 2018 the report was voted in committee and on 18 December 2018 it was tabled to plenary. A plenary debate on the proposal was held on 16 January 2019 and on 17 January 2019 the Parliament adopted resolution T8-0038/2019, referring the file back to the BUDG and CONT committees for interinstitutional negotiations, pursuant to Rule 59(4), fourth subparagraph of the Rules of Procedure. On 4 April 2019 the Parliament adopted its first-reading legislative resolution on the proposal. The main changes to the original text include:

  • a new article defining what constitutes generalized deficiencies as regards the rule of law where they affect or risk affecting the principles of sound financial management or the protection of the financial interests of the Union, which includes five specific situations: (1) endangering the independence of judiciary, (2) failing to prevent, correct and sanction arbitrary or unlawful decisions by public authorities, withholding financial and human resources affecting their proper functioning or failing to ensure the absence of conflicts of interests; (3) limiting the availability and effectiveness of legal remedies, (4) endangering the administrative capacity of a Member State to respect the obligations of Union membership (5) measures that weaken the protection of the confidential communication between lawyer and client.
  • a generalized deficiency as regards the rule of law in a Member State may be established when one or more of the following, in particular, are affected or risk being affected: (1) the proper functioning of the market economy, (2) the proper functioning of the authorities carrying out financial control (3) the proper functioning of investigation and public prosecution services in relation to the prosecution of fraud, (4) the prevention and sanctioning of tax evasion and tax competition and the proper functioning of authorities contributing to administrative cooperation in tax matters; (5) the proper implementation of the Union budget following a systemic violation of fundamental rights.
  • the Rule of Law mechanism puts Parliament and Council on the same footing,
  • a special panel of independent experts in constitutional law and financial and budgetary matters will assist the Commission in evaluating the situation in a Member State.

The European Council held on 20 July 2020 underlined the importance of the protection of the Union´s financial interests and the respect of the rule of law. A regime of conditionality would be introduced, however without giving further details. The Commission was invited to propose measures in case of breaches for adoption by the Council by qualified majority. 

On 5 November 2020, in the framework of the negotiations on the future MFF, MEPs managed to strike a deal with Council on the rule of law conditionality. It will apply not only to cases of corruption or fraud, but also to fundamental EU values such as freedom, democracy, equality, and respect for human rights including the rights of minorities. It also clarifies the possible scope of the breaches by listing examples. Final beneficiaries will be protected. According to this new proposal the Council would adopt the measures by qualified majority. The agreed compromise still needs to be adopted formally by the Parliament and EU ministers.

However, on 19 November 2020, in Council, three countries – Hungary, Poland and Slovenia – opposed the rule of law mechanism, threatening to veto the whole package.

On 10 December, the European Council reached an agreement: according to the conclusions of the meeting, the Commission will adopt guidelines on the way it will apply the Regulation, including a methodology for carrying out its assessments. Member States' right to introduce an action for annulment of the Regulation is explicitly mentioned, and the Commission should not finalise its guidelines or propose measures under the Regulation until after the judgment of the Court of Justice on this matter. After the Council adopted its first-reading position, the Committees on Budgets (BUDG) and on Budgetary Control (CONT) voted 56 to 10 on 14 December to recommend Parliament approves the text at second reading. The Parliament voted on final adoption of the text during the December plenary session, on 16 December 2020.

The final act was published in the Official Journal of the European Union on 22 December 2020 and entered into force on 1 January 2021. On 11 March 2021 Poland and Hungary lodged actions before the European Court of Justice against this Regulation. The Commission has announced to propose guidelines, the European Parliament has adopted a report on these guidelines during its July plenary and urged the European Commission to implement the Regulation as soon as possible.

References:

  • Further readings:

Author: Karoline Kowald, Members' Research Service, legislative-train@europarl.europa.eu

As of 20/08/2022.
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