By Nora T. Kalinskij

The EU Commission this week released its proposed budget for 2021-2027, and with it, likely another round of dissension between Brussels and two of the EU’s most rebellious members, Poland and Hungary. The budget, which will be hotly debated over the next few months, if not years, proposes linking EU cohesion funding – which supports economic development and investment in member states – to certain conditions such as the acceptance of refugees. The commission separately proposed another mechanism that would tie access to EU funds to countries’ respect for the rule of law. In recent years, Brussels has repeatedly accused Hungary and Poland of violating EU norms and regulations, and these new measures are meant to compel members to fall in line or face financial consequences. But the EU’s ability to implement them, and therefore compel members to comply, is limited. If anyone has the power to force members to change their behavior, it’s Berlin, not Brussels.

Unanimity Requirement

The discord between the EU and Poland and Hungary came to a head following Europe’s migrant crisis in 2015. In an effort to spread the burden of taking in large numbers of refugees, member states were assigned quotas for the number of refugees they had to resettle. Hungary and Poland, as well as the Czech Republic, refused to comply with the quota scheme. Poland stopped accepting refugees after December 2015; Hungary had refused to accept the quota system from the very start. In response, the European Commission referred all three states to the European Court of Justice late last year.

Brussels’ criticism of Poland and Hungary also involves some measures the two countries have taken over the past several years. Judicial reforms undertaken in Poland threaten the rule of law by allowing the government to interfere in the judiciary, or so Brussels has alleged. The EU has meanwhile criticized Hungary for violating freedom of expression for crackdowns on foreign-funded nongovernmental organizations and other institutions like the Central European University, which was threatened with forced closure.

If the EU wants to pressure these countries to change their behavior, threatening to cut funding, which is used for public investment in things like infrastructure and to support private sector development, is the best option at its disposal. Indeed, Poland and Hungary have both benefited from the EU’s structural funds since joining the union. In 2016, EU funds were 4.2 percent of Hungary’s gross national income and 2.1 percent of Poland’s. By the end of the 2014-2020 budget period, Poland is set to receive 100 billion euros ($120 billion) in structural, agricultural and other EU funds, the most of any EU member state.

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The problem for the EU is that its voting structure makes it difficult to pass punitive measures. The proposed budget for 2021-2027 requires unanimous approval, and Poland and Hungary are likely to vote against any measures that punish states for their refusal to accept refugee quotas. Taking this into account, the European Commission is also separately seeking the authority to halt future payments to member states whose judiciaries are deemed to lack independence, arguing that cases of fraud or wasteful public spending would be hard to investigate. This measure would require the support of a qualified majority in the European Council – 55 percent of member countries and 65 percent of the EU population. Yet even a qualified majority will be difficult to win because other member states that receive substantial EU funds will likely join Poland and Hungary in opposing the reform. With no other means of restricting access to structural funds, the EU’s options for reining in its disobedient members through regulation are limited.

The German Bet

But the EU may not need to use regulations at all. The EU’s de facto leader, Germany, has also been critical of the EU’s rogue members. Its economic well-being is dependent on the EU’s remaining intact, and it needs all members to fall in line to guarantee that that happens. And unlike the EU, Germany has substantial economic leverage over these states – except its hands aren’t tied by the unanimity requirement.

Germany’s leverage comes from the fact that the economies of Poland and Hungary are closely linked to Germany’s. In 2016, roughly a quarter of Poland’s and Hungary’s imports and exports came from and went to Germany. This is important, considering exports made up 52 percent of Poland’s gross domestic product that year and a staggering 89.5 percent of Hungary’s. Both countries are home to subsidiaries of German companies and are a key part of the German supply chain, mainly thanks to their relatively low labor costs. Germany is also a large investor in both countries. In 2016, 24 percent of foreign direct investment in Poland and 26.7 percent in Hungary came from Germany. If it wanted to, Germany could threaten to cut investment, strain business ties and reduce the volume of trade.

The problem, however, is that following through on such threats would be bad for Germany too. Cutting investment in Poland and Hungary would result in economic losses for Germany, and more important, it could increase support for euroskeptic movements in both countries, making them even more defiant than they already are. The Polish and Hungarian governments will try to exploit these threats by portraying themselves and their voters as victims of German coercion. Even voters who don’t support Hungarian Prime Minister Viktor Orban and Poland’s ruling Law and Justice party could turn on the EU for punishing the people for the deeds of a government they don’t back. It may not be a perfect solution, but Germany has few other options if it wants to hold the EU together. Chancellor Angela Merkel’s government must act carefully, using a combination of threats both at the bilateral and EU level to encourage Poland and Hungary to make concessions without pushing either out of the fold completely. (Complicating this situation is that the German government lost support in the election last September.)

The real confrontation here is not between Poland and Hungary on one side and the EU on the other. It is between Poland and Hungary on one side and Germany on the other. For Poland and Hungary, the threat of economic consequences for noncompliance is very real, but it comes not from Brussels but from Berlin.