Could the EU fine Poland?

The European Commission this week set another deadline for Warsaw to show it is willing to rein in what Brussels deems its undemocratic tendencies before the arrival of new European Commission chief Ursula von der Leyen on November 1. The question remains, however, what teeth the bloc's executive body is willing to bare to achieve this and whether the costs outweigh the benefits.

The Commission has been embroiled in a legal battle with Warsaw over the integrity of Polish courts for two years and is undertaking an Article 7 procedure that could see Poland stripped of its EU voting rights.

Following a ruling from the European Court of Justice in June some of Warsaw's changes to the judiciary have been rescinded, including a contentious law that forced Supreme Court judges into early retirement, but the direction in which Warsaw is pointing still worries Brussels. 

Read more:  Who is Ursula von der Leyen, the new European Commission president?

Since coming to power in late 2015, the Law and Justice (PiS) ruling party has argued that changes to the judiciary have been necessary to remove judges who served during the communist era that ended in 1989.

Frustration with Warsaw

Some member states want to tie EU funding to the rule of law, a measure that could hit Poland, a net beneficiary of EU cash.

Inge Grässle, the chair of the European Parliament's Budgetary Control Committee, has said the EU has to date not had the capacity to monitor the use of funds in member states. A member of the Christian Democratic Union party in Germany, Grässle wants stronger instruments to enforce democratic norms in the next budget period.

Many in the richer Western parts of the EU are frustrated with Warsaw's and Budapest's reluctance to shift their stance on refugees and climate change, while fighting tooth and nail to keep EU cash rolling in. Commission Vice President Jyrki Katainen recently warned Poland against treating the EU as a "money machine."

The Commission earlier this year proposed cutting about one quarter of Poland's funding in the 2021-2027 budget as a starting point for talks.

Under the draft budget, Cohesion Policy and Common Agricultural Policy (CAP) cuts could reportedly be from 5% to 7%, while calculations by Poland's Ministry of Investment and Economic Development show that Poland might get up to 10% less in cohesion funds and 15% less in CAP.

The last negotiations between the net payers and the net beneficiaries for the 2013-20 budget period took over 29 months. The situation is more complicated this time as there will also be less cash on offer if Brexit goes ahead.

Facts and figures

In 2017, Poland was the largest net beneficiary in the EU, receiving just under $10 billion (€8.1 billion) more than it paid in.

In 2016, the biggest share of total contributions to the EU's budget came from Germany, at 19%, a net contribution of €12.8 billion. France, the UK and Italy all reached contribution shares higher than 10%.

The four Visegrad Group countries — Poland, the Czech Republic, Slovakia and Hungary — have received around €150 billion in net subsidies from the EU budget since 2007. For the budget period between 2014 and 2020, EU subsidies comprise 2.6% of Hungary's GDP, 2.4% in Poland, 1.8% in the Czech Republic and 2.3% in Slovakia. The Polish government in 2018 published an analysis of the impact of EU funds, concluding they had added at least 0.5 percentage point each year to GDP.

EU helped, but wasn't be all and end all

When the financial crisis hit almost all member states in 2008, Poland was for a moment the only country in the EU whose GDP did not shrink. But European funds were only one of the factors that helped Poland avoid the effects of the financial crisis. Retaining is own currency, the zloty, and maintaining a low exchange rate that supported exports, certainly helped too.

"All countries received the European funds then," Polish MEP, Zbigniew Kuzmiuk, told Euractiv. "But the most helpful to us was the fact that we were not a eurozone member. Our currency was our shock absorber. At that time, exports were the engine of the Polish economy," he added.

Undermining the EU project

Imposing penalties against Poland could take two forms, one more and the other less formal, Jan Mus, a Polish EU expert in Warsaw, said.

"The first would mean a formal penalizing of the 'black sheep' of European integration by, for example, denying access to some funds," he went on, adding that it was "unlikely, although not impossible, that the cohesion funds could be cut." 

But he went on, this scenario would seriously undermine the idea of EU solidarity and its position in the rest of Europe, for example in the Western Balkans, where the PiS government enjoys relative sympathy. 

On the other hand there are a number of other funds, "the reduction of which could be harmful to Poland and as such be useful as a penalty," Mus said.

"But in this case the EU would lose support in Poland and various other countries like Croatia or Hungary," Mus added.

Not the whole story

Some in Poland are annoyed by the failure of Brussels to see a wider economic picture.

Tenders for investments in Poland co-financed from EU funds, for example, often go to Western companies, many go which send profits back home via dividends to non-Polish shareholders, Mus said.

"We also need to remember that in the single European market, the EU funds circulate within the EU even if directly spent in one of the countries," he went on, noting for example that most of the money used for building roads in Poland returns one way or another to the net payers in the EU.

By joining the EU Poland also became a large consumer market on the doorstep and a place for cheap production of auxiliary industries serving the German market.

And perhaps above all, Poland saw a mass emigration and brain drain to countries like the UK.

"Taking away the funds is simple populism and penalizing Poland would be harmful to Poland and even more to the project of European integration," Mus said.

Deja vu, again?

The apparent powerlessness of the EU's executive to find an effective mechanism to rein in what it sees as PiS' anti-democratic ways will be a key test for von der Leyen, who has yet to reveal how she intends to handle upcoming negotiations on the bloc's next seven-year budget.

She has already had to face down suggestions she could be indebted to the governments in Warsaw and Budapest after emerging as a compromise candidate in part due to Poland and Hungary's opposition to Frans Timmermans, a Dutch socialist and harsh critic of PiS.