(Bloomberg) -- The European Union may move in a matter of weeks to punish countries that don’t uphold the bloc’s democratic standards by withholding emergency pandemic aid as well as payments from the EU’s trillion-euro budget.
Poland, which has clashed with the EU on multiple rule-of-law fronts, stands to miss out on more than 130 billion euros ($149 billion) from the bloc’s seven-year budget. Hungary could lose more than 40 billion euros.
The EU has accused the governments in Warsaw and Budapest of illegal judicial revamps, corruption and refusing to adhere to the primacy of EU law, a key premise of the bloc’s founding treaty. The flow of billions of euros from Brussels has helped transform the two ex-communist economies, but the EU has become wary of funds being used by the governments to undermine democracy and to attack the bloc.
In a move last year condemned by both Poland and Hungary, the EU gained the power to withhold budget payments to countries accused of democratic backsliding. The European Commission, the bloc’s executive arm, may trigger this so-called conditionality mechanism as soon as early February, once the European Court of Justice has ruled on its legality, according to an official familiar with the plan.
The ruling could coincide with a Jan. 24 deadline for Hungary and Poland to respond to EU concerns that funds provided by the bloc could have been misused or that the bloc’s financial interests are at risk.
The bruising fight couldn’t come at a worse time for the eastern countries, with nationalist prime minister, Viktor Orban, facing Hungarian voters April 3 and Polish Prime Minister Mateusz Morawiecki returning to the ballot as early as next year.
If EU financing to Poland is withheld until the end of 2023, the zloty could lose more than 12% against the dollar, according to estimates by Oxford Economics. Growth in gross domestic product could be cut by a cumulative 1.4 percentage points over the next two years, with a total output loss through 2026 of 170 billion zloty, the equivalent to 8% of economic output.
The EU sees little chance for either Warsaw or Budapest to offer last-minute concessions that could prevent the conflict from escalating -- especially not before the general election in Hungary, said the official, who asked not to be identified because the plans are private.
The commission has asked Poland to dismantle a chamber it created to discipline judges, reinstate judges who lost their positions in disciplinary proceedings and reform the system, the official said.
So far, the Polish government has given the commission no details about how it intends to fix its controversial overhaul of the judiciary and bring it back in line with the bloc’s strict rule-of-law standards, according to the official.
Warsaw hasn’t budged, even after the EU’s top court slapped the country with a record 1 million-euro daily fine in October for failing to halt the disciplinary proceedings. That came on top of a 500,000-euro daily fine a month earlier for ignoring an order to close a coal mine near the Czech border.
The EU is now preparing to withhold some budget payments to Poland for failing to pay up. Its combined fines have grown more than 100 million euros and with no change in sight in Warsaw, the numbers will keep increasing.
Poland “gives no signs of improvements and judges continue to be under pressure,” the EU’s vice president in charge of values, Vera Jourova, wrote in a Jan. 11 Twitter post. “We will continue to do our duty to defend the rule of law and judicial independence.”
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