While conflict and drama are not uncommon during negotiations for the EU’s seven-year budget, this week’s round of negotiations were notably tense. The stakes were higher and the implications of deadlock more consequential than ever, with the EU’s largest ever budget and historic Covid-19 recovery fund hanging in the balance.

What is the issue with the plan?

The €1.1 trillion budget, along with the €750 billion recovery fund, has been vetoed in the European Council. Hungary and Poland have blocked the historic deal, which required multiple rounds of negotiation with the European Parliament, due to the budget’s rule of law conditionality mechanism. This aspect of the budget has birthed protest from the two countries, who insist that their regimes operate democratically. They claim the EU’s rule of law requirements are extremely vague, and that linking them to EU funding “jeopardises trust” within the bloc.

In reality, both governments are opposed to the clause because it ties the receipt of EU funding to the EU’s rule of law requirements which, to varying degrees, Hungary and Poland are both in breach of. The two countries are currently being investigated by the EU for undermining the independence of courts, the press and NGOs within their borders. If the rule of law mechanism is implemented, it could cost them billions of euros in EU funding.

How have they blocked the budget?

The EU’s long-term budget is initially formulated by the European Commission. Then, it is usually amended by the European Council, who send it to the European Parliament for debate and approval. If it is rejected in Parliament, the Council make further amendments. Once approved in Parliament, the final draft of the budget must be approved unanimously by the European Council, before being sent off for ratification in national parliaments.

The clause was initially accepted by the European Council, because only a qualified majority was required to link rule of law adherence to EU funding. However, the budget needs unanimous approval in the Council to be passed. Every country in the EU has the power to veto legislation under this voting system, which has famously caused problems in the past. Poland and Hungary have withheld their consent to sign off on the finalised legislation.

What does rejection of the budget mean?

Most significantly, it means that an agreement is unlikely to be reached before January. The Parliament will not offer any more opinion on the rule of law mechanism, declaring it an internal Council dispute.

This news comes at a time where EU funding is desperately needed. EU economies have been significantly damaged by a second wave of Covid-19, and the support brought by the Covid-19 recovery fund in January would be warmly welcomed. Quite ironically, Poland and Hungary are two countries who could benefit the most from the fund being promptly distributed, particularly if they do adhere to the rule of law, as they claim.

Significantly, the dispute is likely to affect other EU policy areas. The most immediate example is the likely delay of the EU finalising its climate change plan. Talks are due to take place from December 10-11, but a plan cannot be made without the financial stability that a finalised long-term budget will bring. Again, Poland is ironically set to be the biggest beneficiary of the EU’s €17.5 billion Just Transition Fund, designed to help economies deal with the shift from fossil-fuel to renewable energy dependent economies.

However, EU leaders have said that they will continue to insist on linking EU funding to rule of law adherence. Angela Merkel also assured the EU that talks with Poland and Hungary would push forward and find a way to overcome the Council’s deadlock. Hungary’s Prime Minister, Victor Orbán, too is confident that the issue will be resolved, indifferently stating that this is “how it [EU negotiation] usually goes”. He is likely correct, but time is of the essence.