The EU could go ahead with its Covid stimulus, despite Hungary and Poland’s veto

Ursula von der Leyen, president of the European Commission, delivers a speech during a special address on day two of the World Economic Forum (WEF) in Davos, Switzerland, on Wednesday, Jan. 22, 2020.

Bloomberg

LONDON — The European Union could implement its massive coronavirus stimulus plan without Hungary and Poland, are vetoing its budget, top EU officials have said.

Hungary and Poland have vetoed the EU budget plan for 2021 through 2027 because they oppose the link between disbursing EU funds and compliance to European vales, the so-called rule-of-law mechanism.

The dispute is not new; both nations are under investigation by Brussels for allegedly influencing the appointment of top judges and the freedom of speech. They deny wrongdoing.

However, the issue has become all the more important now, as it is preventing the release of much-needed financial help across the political bloc of 27 nations.

In an interview on Friday morning, the EU’s budget chief, Johannes Hahn, said that Budapest and Warsaw “cannot stop us from helping our citizens,” the FT reported.

It comes after the EU’s trade commissioner, Valdis Dombrovskis, told CNBC on Wednesday that the EU was looking at “different possible options,” when asked if Hungary and Poland could be side-lined. He added that the EU needed to resolve the impasse “one way or another.”

However, pushing the budget through without the two nations could have long-term consequences that most European officials will be keen to avoid.

‘Key for the EU’s credibility’

European Council President Charles Michel did not comment on the possibility of the 25 nations moving ahead without Hungary and Poland when asked by journalists on Friday. However, he said it was a “difficult” process and that “it is key for the EU’s credibility” to deliver the much-needed funds.

The EU surprised financial markets in July by agreeing to borrow 750 billion euros ($910 billion) jointly. It put an end to some longstanding political differences between northern and southern Europe, and has contributed to a reduction in borrowing costs for European nations.

The EU also agreed to spend an additional 1.074 trillion euros over the next seven years to support projects across the bloc.

However, the funds remain on hold for now. European heads of state were expected to greenlight the stimulus next week at an EU summit, but there is a lot of uncertainty as to whether the impasse with Hungary and Poland will be resolved by then.

“The market may be under-estimating the potential impact from a protracted delay or even a collapse in the EU’s Recovery Fund plans,” analysts at Rabobank said in a note on Monday.

Hungarian Prime Minister Victor Orban repeated on Friday morning that his country will keep vetoing the deal for as long as the funds remain linked to the rule of law. Both Hungary and Poland have argued that this is part of a wider attack against the them.

Polish Prime Minister Mateusz Morawiecki (L) and the Hungarian Prime Minister Viktor Mihaly Orban (R) attend a Visegrad Group meeting in the Berlaymont, the EU Commission headquarter on September 24, 2020, in Brussels, Belgium.

Thierry Monasse | Getty Images

“It would be fine if this really would be about the rule of law, but in fact it’s about politics. The government of Poland, the government of Hungary — we are conservative governments and we are constantly under attack from Brussels, from other European politicians,” Paweł Jabłoński, deputy foreign minister of Poland, told CNBC’s “Squawk Box Europe” last month.

However, the EU’s Council President said that respecting European values was at the core of the EU.

The issue is “key because it is linked to the DNA of the European project. The European project is based on this conviction,” Charles Michel said on Friday.

“I want to remain optimistic on this and I really hope over the next few days will be able to resolve those difficulties.”

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