1.    Introduction

Regulation (EU) 2020/2092 on the so-called rule of law conditionality (hereinafter: RoL Regulation) has been applied, thus far, on a single occasion, namely through the 2022 Council decision ordering the suspension of €6.3 billion of European funds to Hungary. This decision exposed the lack of transparency and principles applicable to the procedure foreseen by Article 6 of the RoL Regulation that European institutions are required to observe for the purpose of safeguarding the financial interests of the Union.

The addressees of the decision found themselves without a specific mechanism to exercise their right of defence, because of the European Commission’s broad discretion in choosing the procedure to be initiated. Finally, their right to an effective remedy seems undermined by the limitations of the action for annulment provided for in Article 263 TFEU.

The purpose of this brief analysis is twofold. Firstly, it aims to highlight the limits to the Commission’s discretion in choosing which procedure to initiate. These principles have been reiterated by the two well-known European Court of Justice cases concerning the actions of annulment put forward by Hungary and Poland against the RoL Regulation. Secondly, it aims to highlight the gaps in the judicial protection provided for by Regulation 2020/2092.

2.    The uniqueness of the RoL Regulation mechanism

Regulation 2020/2092 introduces a form of conditionality that could be defined as spending conditionality. This is distinct from the political conditionality applied in the European Union’s external activities in that the former focuses on the domestic allocation of resources from funds guaranteed by the Multiannual Financial Framework (MFF).

The RoL Regulation clarifies that this type of conditionality consists of a mechanism aimed at protecting the Union budget by imposing an obligation to comply with the rule of law under Article 2 TEU. More precisely, the legal basis on which Regulation 2020/2092 is founded does not refer to Article 2 TEU, but rather to the need to harmonise between Member States “the procedure to be adopted for establishing and implementing the budget and for presenting and auditing accounts” (Article 322(1)(a) TFEU). The shift in focus from preserving the rule of law to protecting EU financial interests is further compounded by the fact that neither Article 2 TEU nor the TFEU empowers the European legislator to adopt measures for the implementation of the rule of law.  It follows that the main purpose of the RoL Regulation is to safeguard public spending.

In this sense, the significance of infringing the rule of law is related to the pivotal factor it represents that triggers the application of the measures referred to in Article 5 of Regulation 2020/2092. Thus, the spending conditionality mechanism embedded therein should be understood as a way to steer national administrative discretion in the allocation of resources.

The case of the Cohesion Funds, which were reformed in a unified manner with Regulation (EU) 2021/1060 (CPR), lends support to the hypothesis that the spending conditionality contained in the RoL Regulation is of a sui generis nature. In this regard, Article 97(1)(d) of Regulation 2021/1060 grants the Commission the power to suspend “all or part of payments (…) if (…) there is a reasoned opinion by the Commission in respect of an infringement procedure under Article 258 TFEU on a matter that puts at risk the legality and regularity of expenditure”. This provision is intended to ensure the regularity and legality of public spending incurred by Member States. However, notwithstanding the fact that both above-mentioned Regulation is intended to ensure the protection of the Union, the rationale behind the application of the suspension mechanism referred to in the Cohesion Funds Regulation differs from that of the RoL Regulation. In the former, it acts as a means of preventing litigation. By contrast, in the latter the restoration of the principles of the rule of law is a prodromal measure to prevent resources from European funds from being spent for purposes other than the common policy goals. The question that arises from this observation is whether the discrepancy in objectives, albeit within the same area – the protection of the Union budget – justifies the existence of two or more different procedures.

3.    The Wide Discretion of the European Commission

EU financial legislation and applicable sectoral legislations already provide, beyond the RoL Regulation, for a range of procedures to safeguard the EU budget, including that set out in the Regulation on Cohesion Funds.

Nonetheless, it should be noted that the effectiveness of these other procedures is not always guaranteed. In certain circumstances, the mechanism referred to in the RoL Regulation could be more effective in protecting the Union budget than, for instance, the procedures under Regulation 2021/1060. The Commission’s 2022 Guidelines on the application of the RoL Regulation, delineate two criteria that inform the evaluation of whether to open an administrative procedure under the RoL Regulation, as opposed to alternative courses of action.

The first criterion is purely prospective and predictive in nature, since it “relates to the scope of the effect on the Union budget and/or the extent of risk the breach of the principles of the rule of law may entail for the efficiency of its sound financial management or the protection of the financial interests of the Union.” (Guidelines, para. 42). Conversely, the second criterion “relates to the types of remedies available and their suitability to different situations.” (Guidelines, para. 43). In the latter case, the Commission compares the effectiveness – in terms of the degree to which the selected procedure is better suited to prevent the adverse effects on sound financial management and the financial interests of the Union – of specific sectoral measures, on the one hand, and the suspensive or prohibitive measures provided for in the RoL Regulation, on the other.

Therefore, given the ambiguity and breadth of the assessment criteria regarding the most appropriate procedure to be initiated for the effective protection of the Union budget, the Guidelines grant the Commission broad discretion in deciding whether to apply “the Conditionality Regulation alongside or following the adoption of sector-specific or financial measures” (Guidelines, para. 40). This context would result in a preferential approach to the procedural framework set out in the RoL Regulation, because of its generality and horizontality “at protecting the Union budget and the financial interests of the Union” (Guidelines, para. 40). It would be speculative to delve into the potential consequences of the Commission’s decision to employ one administrative procedure over another in the context of safeguarding the Union budget, considering the fact that no such case has been reported yet. However, should the Commission opt to initiate the procedure embedded in Regulation 2020/2092 as opposed to an alternative, this could potentially lead to an expansion of its scope to encompass cases that do not necessarily fall within its purview.

In light of the RoL Regulation’s lack of a precise definition of the rule of law – multiple principles with a very broad scope are encompassed within Article 2(1)(a), although Article 3 provides an understanding of the rule of law principles only from the breaches perspective, narrowing down its relevance to the circumstances that may trigger the application of the coercive measures  – the Court of Justice has provided some clarifications by identifying “the link between respect for the rule of law and sound financial management of the Union budget” (para. 130).  Therefore, the interpretative clarifications provided by the Court of Justice should be viewed as constraints on the application of the spending conditionality procedure.

4.    Conclusions on an open question: What legal protection for the recipients of RoL Regulation’s executive decisions?

It is evident that, despite the absence of an explicit reference in Article 6 of Regulation 2020/2092 to a mechanism of legal protection, the addressees of the above-mentioned Council decision may challenge it by means of an action of annulment under Article 263(2) TFEU. The sole instance of a challenge to an implementing decision adopted by the Council under the RoL Regulation pertains to the matter of the above-mentioned suspension of funds to Hungary on 15 December 2022, wherein six Hungarian universities filed the same action for annulment under Article 263 TFEU before the Court of First Instance. It is important to note that the 2022 implementation decision does not target universities directly; rather, it is directed at the State of Hungary. Nonetheless, despite the fact that these universities are merely indirect recipients of the decision, they assert that they have a legitimate expectation of being able to utilise the funds that have been suspended by the 2022 decision.

In the appeal filed by the University of Debreceni, the 2022 Council implementing decision has been classified as a regulatory measure that should be challenged under Article 263(4) TFEU, provided that the contested decision was of direct concern to the appellant, as they do not fall into the category of legislative acts. This is because they were not adopted in accordance with the ordinary legislative procedure described in Article 294 TFEU or under a special legislative procedure as defined in Article 289(2) TFEU.

The Court’s interpretative rulings, aimed at clarifying the procedures for challenging measures referred to in the RoL Regulation, highlights the absence of any specific judicial protection in Regulation 2020/2092 with even greater clarity. Furthermore, the Court’s pronouncements carry the potential to assume a thaumaturgical character in view of the potential extension of the spending conditionality procedure to a wide array of rule of law breaches. In this particular context, the implementation of Article 47 ECFR would not obligate the European legislator to establish a bespoke protection mechanism for each individual administrative procedure. This is further compounded by the Court of First Instance’s abovementioned preliminary holding, which underscores that the provisions of the Treaty are inherently remedial in nature.

Hence, does the procedure under the RoL Regulation have the potential to become the general procedure for the protection of European financial resources, especially in light of the Court’s interpretative rulings? Although it is premature to make any definitive statements, such extension is indicative of the growing awareness of the need to protect the values of the Union, including through rigorous oversight of the allocation of European funds by Member States in the context of ‘integration through money’.

—

Posted by Marco Bevilacqua (Lecturer in Law at University of Tuscia (Viterbo, Italy); PhD in Administrative Law, University of Pisa (2023))