Ultimatum with consequences

Brussels seems to be losing patience in the dispute with Poland and Hungary over EU finances, including the EU Reconstruction Fund (NGEU). Instead of using the summit of heads of state and government on 10 and 11 December for negotiations, Budapest and Warsaw are supposed to give up their blockade attitude beforehand. As a means of exerting pressure, the Reconstruction Fund is being discussed as a multilateral construct without Poland and Hungary, if necessary. Both Central European states would then go away empty-handed for the time being. Up to now, they have mainly resisted the idea that both payments from the NGEU fund and regular EU budget funds should be tied to principles of the rule of law. While the principle of unanimity within the EU applies to financial issues, the remaining EU states could tie EU payments to conditions of the rule of law even against the will of the dissenters.
However, neither the Polish nor the Hungarian government has so far shown itself willing to give up its blockade attitude. The probability has thus increased that the ultimatum will initially pass without result. It is still possible that both sides will come closer afterwards, because Poland and Hungary are both beneficiaries of NGEU funds and net recipients of the regular EU budget. But even Brussels is unlikely to be interested in the fact that from January onwards, in the midst of the Corona pandemic, only an emergency budget will apply for the time being. Until a solution is found, however, it is quite possible that the EU will initially rely on a „Plan B“ and launch the reconstruction fund even without both countries.
The market for euro-denominated Polish and Hungarian government bonds has so far hardly reacted to the escalating conflict. However, if Poland and Hungary do not give in this week, spread widening would be quite possible against the background of the threatening fiscal consequences for both countries. In 2019 Poland received a net amount of around EUR 12 billion from the EU budget (around 2.5% of GDP), and in Hungary’s case the share of economic output is even higher at 4%. The subsidies planned under the NGEU would also probably amount to over EUR 30 billion for Poland and almost EUR 8 billion for Hungary.

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