Budget penalties allowed for rule of law breaches: CJEU

The EU Court of Justice has upheld a regulation which makes the receipt of financing from the EU budget subject to respect by member states for the principles of the rule of law.

A full court dismissed actions brought by Hungary and Poland (C-156/21 and C-157/21) against the “conditionality mechanism” which allows the Council, on a proposal from the Commission, to adopt measures such as the suspension of payments from the EU budget or the suspension of the approval of one or more programmes to be paid from that budget, as a response to breaches of the principles of the rule of law.

The two countries, the governments of which have pursued various measures regarded as hostile to the rule of law, sought annulment of that regulation. They claimed there was no legal basis for it in the EU treaties, excess of powers and a breach of the principle of legal certainty. They cited a confidential opinion of the Council Legal Service concerning the initial proposal which led to the regulation, which the court allowed to be disclosed, despite the Council’s objections, on the basis of the overriding public interest in the transparency of the legislative procedure. 

Ten other member states supported the EU institutions in defending the action, which was dealt with under an expedited procedure and heard by the full court in view of the fundamental importance of the issue raised. 

In its ruling the court began by noting that the procedure laid down by the regulation can be initiated only where there are reasonable grounds for considering not only that there have been breaches of the principles of the rule of law in a member state, but, in particular, that those breaches affect or seriously risk affecting the sound financial management of the EU budget or the protection of the EU’s financial interests in a sufficiently direct way. The regulation was intended to protect the EU budget from effects resulting, in a sufficiently direct way, from breaches of the principles of the rule of law and not to penalise those breaches as such. 

The court pointed out that compliance by the member states with the common values on which the EU is founded – which define the very identity of the EU as a legal order – such as the rule of law and solidarity, justifies the mutual trust between member states. Since that compliance is a condition for the enjoyment of the rights deriving from the treaties, the EU must be able to defend those values, within the limits of its powers.

Compliance with those values could not be reduced to an obligation which a state must meet in order to accede to the EU and which it may disregard after accession. And the EU budget was one of the principal instruments for giving practical effect to the fundamental principle of solidarity between member states, based on mutual trust in the responsible use of the common resources included in that budget.

Sound financial management of the budget and the EU’s financial interests might be seriously compromised by breaches of the principles of the rule of law committed in a member state, and a “conditionality mechanism”, such as that established by the regulation, was capable of falling within the EU’s power to establish “financial rules” relating to the implementation of its budget. The powers granted by the regulation did not go beyond the limits of the powers conferred on the EU. 

Regarding the argument around legal certainty, the court stated that the principles set out in the regulation, as constituent elements of the concept of the rule of law, had been developed extensively in its case law, and had their source in common values which were also recognised and applied by member states in their own legal systems. Consequently, member states were in a position to determine with sufficient precision the essential content and the requirements flowing from each of those principles. 

Furthermore, the regulation required a genuine link between a breach of a principle of the rule of law and an effect or serious risk of effect on the sound financial management of the EU or its financial interests, attributable to an authority of a member state and relevant to the proper implementation of the budget. The protective measures that might be adopted had to be strictly proportionate to the impact of the breach. Lastly, the Commission had to comply with strict procedural requirements including several consultations with the member state concerned. 

In those circumstances, the court dismissed the actions brought by Hungary and Poland in their entirety.

Access the judgment (in French) or the press release (in English).