Decentralise financing to improve the rule of law

Niccolo Fantini // 12 October 2020

The new Commission report on the rule of law in the EU has found that ‘there are serious challenges, cases where the resilience of rule of law safeguards is being tested and where shortcomings become more evident’. This is especially true for both Hungary and Poland, where the independence of the judiciary has been slowly but steadily eroded, and where authoritarian tendencies have gained foothold. As an unprecedented package of grants and loans, prosaically dubbed ‘Next Generation EU’, is being approved by the block in order to face the dire consequences of the pandemic shock, the Commission is therefore ‘going for the wallet’ and pushing for rule of law conditionalities in the next budget. While this is the right direction, conditionality should be extended to all types of EU funding programs and sanctions should only hit those who are responsible.

EU leadership should respond to political manoeuvrings by Hungary and Poland with an eye towards liberal solutions. The preservation of the rule of law is a prerequisite of key programmes such as the Single Market and the free movement of people and capital. Member state governments that work actively to erode basic legal guarantees and, in this way, operate against the best interest of their citizens should not be entrusted with billions of euros. European taxpayers deserve better than propping up authoritarian wannabes. The EU should make sure their money is spent well.

Purposive action would require simultaneous movement on two fronts. The already existing dialogue between the Commission and member states to identify areas of improvement should be reinforced, by establishing regular periods of comprehensive and pan-EU investigations, on the model of the recent Rule of Law report. In addition, civil society actors and representatives should be included in this exchange, in recognition of the democratic basis of EU authority. It is ultimately the case that both the Hungarian and Polish governments are supported by a sizable majority of citizens.

For this same reason, the second front would involve a re-design of the current EU funding structure and governance. Individual businesses and NGOs are usually not responsible for the authoritarian drifts of their governments. It may be counterproductive for the EU to withdraw important investment and support from civil society. A solution could be for the EU to by-pass national governments and set-up alternative bodies for the distribution and management of funds. These would then liaise directly with local stakeholders, communities, firms and authorities, creating a network where specific funding requests are assessed for rule of law compatibility on a case-by-case basis. Such ‘regional networks’ could in theory expand beyond borders, especially so when the government in question is undergoing serious infringements of European values. This strategy would allow the EU to stress the responsibility of national governments and avoid blaming individuals.

This model has already been employed to manage EEA grants and loans and remove budgetary control from governments, not surprisingly eliciting the opposition of the latter. This strategy may even trigger a positive response in those countries that are falling in rule of law standards, since it might empower citizens vis-a-vis their increasingly authoritarian governments, support the Single Market and promote European integration at sub-official level. Moreover, it should be noted that many problems related to corruption and lack of transparency are caused by an excessive interference of the state in the economy. Exploiting this conditionality mechanism to limit the amount of agricultural subsidies critical governments can rely on, for instance, would further pull good reforms. While this may end up damaging the agricultural sector, these withdrawals may be compensated by an agricultural funding strategy that mirrors the CAP’s environmental sustainability measures.

The efficiency argument can be also be employed to advocate for a decentralised funding structure that bypasses national bureaucracy. As studies on EU structural funds have shown, there are considerable inefficiencies linked to the implementation and disbursement of these investments. In particular, the study finds that ‘management costs on the side of administration and project-holders were estimated to be as high as 15% of total costs’. A solution is therefore the transfer of budgetary and disbursement responsibility to directly affected and more locally placed stakeholders.

In brief, the EU should rethink its fight to protect the rule of law, in order to punish those who are responsible for its erosion and empowering those who are not. In practice, this would mean shifting the governance of funding structures towards more local and civil-society based networks, which may even be cross-national in design. Simultaneously, the EU should recognise the potential and contribution of civil society in these countries, promoting mutual engagement and constructive dialogue together with governments at European level.

EPICENTER publications and contributions from our member think tanks are designed to promote the discussion of economic issues and the role of markets in solving economic and social problems. As with all EPICENTER publications, the views expressed here are those of the author and not EPICENTER or its member think tanks (which have no corporate view).


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