Who can challenge the conditions attached to EU funding? This is the core question the European Court of Justice will decide in the pending Case C-555/24 P, Medel and Others v Council. In this appeal, several associations of European judges are challenging an order of the General Court’s Grand Chamber which had found that their action against the Council decision approving the Polish funding plan for the recovery funds was inadmissible because the associations lacked standing. This case sits at the intersection between a classic of EU Law – the question of standing in annulment actions – the increasingly important role of EU funding conditionalities and the rule of law jurisprudence of the Court. Moreover, the funding mechanism under scrutiny in Medel also informs the ongoing negotiations on the EU’s next long-term budget. Therefore, any finding of the Court could influence the understanding of the (future) financial relations between the EU and its Member States.
This contribution argues that the General Court should have found the applicants’ actions admissible. It highlights how the General Court’s reasoning relies on the logic of the EU as a “second order administration” to deny the associations standing. Here, the General Court did not in my view draw the right conclusions from its qualification of the reform conditions attached to the Polish funding plan as budgetary conditionality. The contribution draws on earlier case law on conditionality from another field to propose a two-fold test composed of (i) the mandatory nature of the conditionality and (ii) its specificity. This test could be applied on a case-by-case basis, to decide whether such conditions can be challenged via an annulment action. It could inform future similar cases and thus pave the way for a more coherent legal approach to the use of conditionality in the EU. By following the line of reasoning proposed here, the Medel case could be decided on appeal based on existing case law on Art. 263(4) TFEU without a specific exception to that provision for rule of law cases – something that had been proposed by the applicants. The very important rule of law arguments made by the applicants can thus be “saved” for a future ruling on the merits.
The Recovery Funds and the Problem before the General Court
Flashback to five years ago: To respond to the economic fallout from the Covid-19 pandemic, the EU adopted the Next Generation EU instrument, which allowed it to raise up to 750 billion EUR on the financial markets, to be disbursed to the member states through grants and loans. Most of the money is funnelled through the Recovery and Resilience Facility (“RRF”), an EU regulation which uses a new model of EU funding where conditionality takes centre stage (see here and here). In this framework, the Council approved Poland’s funding plan which is worth ca. 60 billion EUR in grants and loans. The plan includes a mix of investments and reforms – three of which involve reforming the Disciplinary Chamber of the Polish Supreme Court. The associations which also represented Polish judges had contested the Council’s Decision approving the plan, arguing those judicial reforms breach EU Law and the rule of law case law of the Court of Justice. Yet, the General Court found that the associations did not have standing in the sense of Art. 263(4) TFEU and thus did not proceed to a substantive review.
Capturing conditionality’s effects in legal terms
As argued by Viorica Viţă, conditionalities leverage EU benefits to make states or private actors adopt a certain behaviour. Examples stretch from the general regimes of rule of law conditionality set out in specific regulations to the sovereign debt programmes’ conditionality or environmental protection measures European farmers must comply with to gain access to funding. It is thus helpful to understand conditionality more generally as a governing tool, instead of a specific instrument created only for the rule of law crisis in the EU. Even though conditionalities do not necessarily create a legal obligation for the member state, one should not neglect their effect on recipients’ behaviour. Put simply for the present case, if Poland does not implement the reforms, it will not receive EU funding. The challenge then becomes how to capture this effect in legal terms.
In the case of Medel the specific issue was how to qualify the reform conditions under the direct-concern element of the admissibility criteria for annulment actions. Under the established case law, as the General Court recalled, these require that the contested measure, must first ”directly affect the legal situation of the individual” and, second, leave “no discretion to its addressees, who are entrusted with the task of implementing it, such implementation being purely automatic and resulting from Community rules without application of intermediate rules” (Medel, para. 62). Here, the General Court, in its judgement, struggled to grasp conditionality in legal concepts. It correctly qualifies the reforms as “budgetary conditionality” but concludes that their effects are limited to the disbursement of funds and therefore does not affect the judges represented by the applicants.
The second order administration in EU funding
The General Court’s argumentation is grounded on the understanding of the EU level as an “authentic second order administration” (see here, p. 67). In this model of the EU’s composite administration, the Union administration addresses directly the member states which themselves interact with legal or natural individuals (ibid.). Applied to the RRF this means, that the Council’s approval of the funding plan is addressed to Poland and therefore its legal effect remains limited to the interaction of the EU with the member state. It is Poland which, in a second step, makes investments, for example buying new electric buses, or adopts laws like the contested judicial reforms (see for that argument ibid., p. 68). In this model, the EU administration, standing in the background, is mostly shielded from annulment actions via the standing requirements of Art. 263(4) TFEU. Instead, individuals must challenge the national measure, e.g. the results of national procurement procedures to buy electric buses, in a national court, which could eventually lead to a review of the EU measure by the Court of Justice via a preliminary reference (Art. 267 TFEU). This understanding of the role of the EU level indeed follows established case law in EU funding (see, for example, C-15/06 P Regione Siciliane v Commission and Joined Cases C-445/07 P and C-455/07 P Ente per le Ville Vesuviane v Commission). This is the underlying logic when the General Court argues that there is no “direct link between the act in question and its effects on the applicant” (para. 85 of the order) and that the conditions’ relevance is “confined to the process of releasing funds under the Facility” (para. 72). It follows from this reasoning that the situations of the judges “remained governed by the relevant provisions of Polish law”, without the reform conditions “directly altering the legal situation of those judges in the sense required by the fourth paragraph of Art. 263 TFEU” (ibid., para. 89). In short: there is some effect, but that effect is not legal and exhausts itself in the financial relation between the EU and Poland without any legally relevant effect extending to the judges.
This is a surprising finding as both the Court of Justice and the General Court itself have already in other judgments shown a more sophisticated understanding of the legal implications of conditionality in the context of the sovereign debt crisis which should have informed its order in this case.
The case law on conditionality (1): Mandatory conditionality
First, the Court of Justice has found that conditionalities can be mandatory. Case C-258/14 Florescu concerned a preliminary reference by a Romanian court regarding the Memorandum of Understanding (MoU) between the EU and Romania which conditioned its access to a five billion Euro loan. The Case and the Court’s reasoning revolved around the question if the implementation of Romania of conditionalities in the MoU falls within the scope of application of the Charter. In its judgment, the Court describes the MoU as giving “concrete form to an agreement between the EU and a Member State on an economic programme, negotiated by those parties, whereby that Member State undertakes to comply with predefined economic objectives in order to be able, subject to fulfilling that agreement, to benefit from financial assistance from the EU” (Florescu, para. 34). The Court found that the MoU is “mandatory but does not contain any specific provision requiring the adoption of national legislation” (ibid, para. 41). Thus, as will be further defined below, the specificity of conditions is a deciding element. However, crucially, the Court acknowledged the MoU‘s mandatory nature in principle and thus found that Romania is bound by the Charter when implementing it.
The case law on conditionality (2): Specificity and discretion
Second, the General Court has already decided on direct concern for conditionalities. In Case T-541/10 ADEDY and others v Council, the applicants, a Greek trade union association, contested a decision by the Council, adopted under the excessive deficit procedure, which included inter alia a reform of the pension system for the public sector employees (see for a discussion in a broader context here). While the comparison may seem far-fetched at first glance, the similarity to Medel is striking. Both, in ADEDY and Medel, EU resources are made conditional on reforms, in other words, the same governing technique of conditionality is used. The conditions include an objective to be achieved via national legislation, leaving varying degrees of discretion to the relevant Member State to comply with that condition. The General Court, applying the same criteria from settled case law as in Medel, denied direct concern in ADEDY. It found that the contested decision did not specify the group of civil service affected by the reform and that Greece had broad discretion in implementing it (ADEDY, para. 76). Thus, in essence, the General Court focuses on one factor to assess the direct concern of conditionality: the specificity of the conditionality, particularly regarding the categories of individuals affected (see also ADEDY, paras. 71 and 72) which determines the degree of discretion retained by the member state in achieving the set objectives. Together with the mandatory nature of conditionality, specificity could thus inform a twofold test for the admissibility of annulment actions against EU conditionality.
Applying the test to Medel
Regarding the first element, it has been argued that the logic of the Florescu case law can be transferred to the funding plans under the RRF. These funding plans, like the MoU in ADEDY, set out objectives to be implemented by the member states as well as a detailed timeline and thus have a similar quasi-contractual nature (see here and here). In other words, they use conditionality as a governing technique which therefore can be legally qualified in a similar way. My argument is that the General Court should have accepted the mandatory nature of the conditionality in the funding plans, instead of claiming that these conditions only “imposed a condition to be fulfilled by the Member State in order to be able to receive funding” (para. 74 and 87). If conditionality is considered mandatory, the first step to capture its effect in legal terms is done: it could thus also legally affect an individual as required under the established case law for direct concern. However, the member state implementing the conditionality still stands between the EU level, which issues it, and the individual – the question of member state discretion remains. Therefore, in a second step, the specificity of the conditions should be analysed on a case-by-case basis.
Here two things stand out in Medel: there is a clear category of people concerned by the required judicial reforms and Poland had only limited discretion to implement them. The reforms clearly concern the judges who have or have had cases before the disciplinary Chamber. The (annex to the) Council Decision names this group explicitly, in other words the reform was tailored to the situation of those judges. Furthermore, the reform conditions prescribe specific requirements of central elements of the law to be passed by Poland. They require that a new review proceeding for those cases should be created and explicitly state the delay in which the hearings should take place (three months) as well as the maximum lengths in which such review proceedings should take (12 months). Finally, the conditions require the adjudication of all review cases, “unless in duly justified exceptional circumstances”, to access EU funding. This reduces the discretion of Poland in drafting its national law significantly. Thus, under the criteria from the General Court’s own case law on the admissibility of annulment actions against conditionalities the specific reforms in Medel directly concern those judges. The specificity of the group also answers the question of individual concern, the other element of the relevant standing conditions under Art. 263(4) TFEU which the General Court did not address in its order.
Conclusion: Towards a unified approach to EU conditionality
The applicants propose another way to go about admissibility relying on the specific circumstances of the case. In essence, their argument is that since the judges cannot initiate a preliminary reference in Poland anymore without being exposed to the risk of sanction, the EU’s complete system of judicial remedies fails them. Thus, it should exceptionally be possible for them to initiate an annulment action. It is quite plausible that the Court will follow this argument on appeal. At least, this is one way of interpreting the reports on the oral hearing. It could opt for this “rule of law solution” in particular in the context of possible future cases where the conditionalities are drafted more loosely and thus would not pass the test of mandatory nature and specificity proposed above. Indeed, this appears to be the case for many of the thousands of conditionalities included in the various national funding plans under the RRF.
Following the line of argument I propose here would be a less drastic solution that comes with clear merits. First, it would provide a legally sound solution for the case based on existing case law. Second, conditionality is a broader phenomenon in the EU which is not limited to the rule of law. While in Medel, the budgetary conditionality regards judicial reform, in another action brought by Lithuania under the same instrument, the contested condition regarded a tax reform (see the application in Case T-356/24 Lithuania v European Commission, withdrawn from the register). Drawing on case law on conditionality from fields other than the rule of law would acknowledge this. It would be a first step towards a unified approach to conditionality as a more general governing tool in EU Law.
Posted by Johannes Müller (PhD Researcher – European University Institute)
I am grateful to Filipe Brito Bastos, Deirdre Curtin, Tim Ellemann, Ilaria Gambardella, Jennifer Skipp and Julian Uhlenbusch for helpful comments on earlier drafts. All remaining errors are my own.