Transfers to Countries That Violate the Rule of Law Have No Economic Value

Against strong opposition from Poland and Hungary, the German presidency of the Council of the European Union has proposed a procedure that would cut off EU funds to countries that violate the rule of law. As a response, both governments have threatened to block the 750-billion-euro coronavirus recovery package of the EU. A recently published report found deficits in Poland and Hungary regarding judicial independence, the fight against corruption and media freedom. Professor Friedrich Heinemann, head of the Research Department “Corporate Taxation and Public Finance” at ZEW Mannheim, comments on this matter.

“The EU is right to cut off funding from the Brussels budget if countries do not uphold the high standards of the rule of law. These sanctions cannot only be justified from a political, but also from an economic standpoint. Empirical research shows that EU transfers are most likely to have a positive impact on economic development when they are allocated to countries with high-quality institutions. If judges are subject to political control in countries like Poland, or if there are only a few independent media outlets – as is the case in Hungary, – this opens the door to favour favouritism and corruption in the allocation of cohesion and coronavirus funds. The weaker the rule of law, the more likely it is that EU funds are wasted and have no economic value.

The threat of Poland and Hungary to veto the coronavirus recovery fund is not credible. Relative to the size of their economies, these two countries stand to benefit the most from the coronavirus support measures – despite the fact that the economic consequences of the pandemic were less pronounced compared to other countries. Eastern European countries have benefited greatly and are now seeing increasing benefits from EU funding. However, these transfers can only be justified if the EU is able to enforce effective rules to control how these funds are used. In addition to these efficiency arguments, there are also other reasons why it is dangerous to transfer EU funds to countries that violate the rule of law: It undermines acceptance for European integration among the taxpayers in countries that contribute most to the EU budget.”