EU leaders join fight to salvage billions in virus relief funds

Poland and Hungary have vetoed the EU's ambitious spending plans, even though they stand to benefit from the funds. Beneath the dispute lie deep differences over the rule of law, and what it means to be an EU member.

BRUSSELS (BLOOMBERG) - The European Union is facing what looks like a gruelling battle to persuade Hungary and Poland to row back threats endangering billions of euros of pandemic-relief and budget funds.

With much of the continent in lockdown amid a second wave of Covid-19 infections, the two eastern European countries say they'll veto a key plank in the bloc's jointly financed economic recovery package.

France says Poland and Hungary could be cut out of the rescue plan altogether.

The sticking point is conditionality linking budget transfers to the rule of law - a subject of frequent sparring between Brussels and the two nations for years.

While relaxing the new requirements would offer an easy way to bring them on board, many member-states see the stand-off as a fight for the EU's core democratic values.

A video conference among leaders on Thursday (Nov 19) offers the chance to address the hold-up in €1.8 trillion (S$2.87 trillion) of disbursements.

Poland's Prime Minister, however, talks about the spat in existential terms.

The rule-of-law stipulation has become a "propaganda" tool against countries that disagree with the bloc's mainstream and "risks the EU breaking apart", Mr Mateusz Morawiecki told Parliament on Wednesday in Warsaw.

"In a few years time, this mechanism can be used against someone else."

The escalating health crisis and risk of a double-dip recession makes timing critical.

"It's about so much money that so many countries need so urgently, that we need not only a solution but a fast one," German Foreign Minister Heiko Maas said on Tuesday.

An EU official, however, warned that a resolution will take time and is unlikely to be found on Thursday, when leaders were supposed to focus on the pandemic.

The EU agreed in July on its seven-year budget and a stimulus programme funded by joint borrowing.

But the requirement for unanimity on allowing that debt issuance gave Hungary and Poland the opportunity to block the entire package.

The two holdouts - both net recipients of EU financing - are being investigated by the bloc for undermining democratic values by curbing judicial independence and restricting the free press.

With punishments so far proving toothless, the rule-of-law provisions would add bite by restricting the financing that's helped transform their economies since communism fell.

At stake is at least €180 billion in grants for Hungary and Poland in the next seven years from the budget and recovery fund, according to Bloomberg calculations.

A weighted majority of EU member-states and the European Parliament has already agreed to tie disbursements to adherence to democratic standards.

Even if they exercise their vetoes, Poland and Hungary could lose tens of billions of euros pending from the current EU budget, should they be found to be in breach of conditions.

France said on Wednesday that the EU could circumvent veto threats by making the virus fund part of an inter-governmental agreement, though it stressed that this would be a last resort and that a deal is the priority.

The two wayward member states complain they're being unfairly singled out.

'Economic colonisation'

Hungarian Prime Minister Viktor Orban said it's a "grave mistake" to tie "political debates" to financial issues, claiming the process is a form of "blackmail" against countries opposed to migration.

He wants "objective" rule-of-law criteria, along with the possibility of legal remedy to any penalties.

Poland said this week that the provisions are a first step to forcing it to accept EU regulations on gay marriage, abortion, euthanasia and press freedoms.

"It's a means of political, cultural and ultimately economic colonisation," Justice Minister Zbigniew Ziobro said.

Highlighting the gaping divide, Dutch Prime Minister Mark Rutte called the current rule-of-law provisions the "bare minimum".

German Chancellor Angela Merkel has spoken with EU leaders in recent days, including Mr Orban and Mr Morawiecki.

In a sign there's unlikely to be a quick fix, she described negotiations as "extremely difficult".

With delays in doling out virus aid seemingly inevitable, it may be Brussels that bends first, according to Mr Daniel Hegedus, a Budapest-based fellow at the German Marshall Fund.

"This is one big poker game," he said.