Top European Court Rules E.U. Can Freeze Aid to Poland and Hungary

BRUSSELS — Europe’s top court ruled on Wednesday that the European Union can withhold funding from member countries failing to uphold the rule of law, arming the bloc to step up its efforts to defend its core values.

The ruling shoots down a lawsuit by Hungary and Poland, the two countries most directly and immediately affected, whose governments the European Union has been increasingly at odds with, and opens a new chapter in the dispute that could see the countries losing out on tens of billions of euros in aid.

The European Court of Justice ruling, which is final, provides ample legal and political cover to the European Commission, the bloc’s executive, to flex its muscle and withhold vital aid to the two countries over what it has long seen as a pernicious and deliberate illiberal drift away from E.U. standards.

The timing of the ruling makes the court’s decision politically explosive. Hungary’s national elections are just weeks away, and the European Union is trying to close ranks in the face of Russian aggression against Ukraine, a major threat of war at its eastern borders, even though any actual funding cuts could be months away.

The court had been called upon to rule whether a European Commission mechanism that would tie disbursing funds from its budget to the condition that a recipient member state is upholding standards such as judicial independence and transparent fund expenditure, had a sound legal basis. The ruling cannot be appealed, but member states will be able to appeal a possible decision to have funds withheld, when and if that comes about.

For Poland, the biggest recipient of E.U. money, and Hungary, where the population is overwhelmingly pro-European Union, the ruling bites in both real and symbolic ways.

“The power of the E.U. is where the money is. And attaching some rule-of-law conditionality to E.U. funds is a very concrete way of making sure that the E.U. does not send money to the countries that actively promote rule of law breaches and destroy democracy, because otherwise, the E.U. is also supporting these kinds of policies,” said Sophie Pornschlegel, a senior policy analyst at the Brussels-based European Policy Center.

In the 2014-2020 E.U. budget, Poland received more funds than any of the 28 member states (Britain left the E.U. in 2020 and the bloc now has 27 members), with 104 billion euros — or $118 billion — in aid in total. Hungary, a much smaller country, got 40 billion euros, or $45 billion. The two would be eligible for even larger amounts in the five-year budget that ends in 2027.

Separately, the commission has frozen access for both nations to a special E.U. post-Covid stimulus package over concerns about corruption and the independence of the judiciary.

The use of this mechanism is the latest in a series of legal and political battles over what E.U. officials see as a deliberate attempt by the government of Hungary’s prime minister, Viktor Orban, to capture the state apparatus and funding to benefit himself and his allies. Poland’s case is quite different, but it is also in conflict with the E.U. over the government’s moves to control the judiciary and dismantle its independent function.

The ruling on Wednesday introduces real-world risks to Mr. Orban at a precarious time. He faces his stiffest challenge from a six-party coalition in Hungary’s national elections on April 3, and Hungary’s ability to draw on E.U. funding has significant implications for the country’s economic outlook.

Losing out on E.U. money is a very touchy subject for Mr. Orban, whose stewardship of Hungary since 2010 has produced dramatic qualitative declines in assessments of Hungarian democracy, rule of law, press freedom and corruption.

“They are waging a holy war, a rule-of-law jihad,” he said Saturday in an address to the nation. “And words, my friends, rarely help in the face of jihad. We must show strength! Let the Reconquista begin!”

Ever since joining the E.U. in 2004, Hungary has been the beneficiary of generous subsidies to help its economy close the gap with wealthier Western neighbors. But critics have long argued that since Mr. Orban returned to power in 2010, these funds have been used to underwrite his quest to transform Hungary into what he has proudly called an “illiberal state.”

While the Hungarian premier has used a vast propaganda machine to shield Hungarians from the nuances of his conflicts with the E.U., the strategy highlights a peculiar domestic constraint. “The Hungarian electorate is extremely supportive of E.U. membership,’’ said Balint Ruff, a Hungarian political strategist. “It’s at nearly an all-time high.”

Laurent Pech, professor of European law at Middlesex University in London, said, “there is more awareness of industrial-scale corruption, and it has become much more costly for European actors to ignore corruption in Hungary.”

“It would be easier for the commission to start with Hungary,” he added, calling it “a more clear-cut case.”

Poland, which wants European support as the risk of Russian aggression grows, is less clear cut, experts note, and the Ukraine crisis could take the edge off the ruling.

“The Ukraine crisis is already taking attention away from this, and there will be a very strong push to stand united if the situation with Ukraine escalates,” said Daniel Freund, a German member of the European Parliament with the Greens.

Mr. Freund said he also worried that the commission would try to find ways to blunt the impact of the ruling, to shield itself from accusations that it’s interfering politically in Hungary’s elections.

Any real impact on funding on the grounds of this decision would be months down the line, he said, so it was imperative that the commission took the first step to trigger the process as soon as possible after the court ruling.

“If I have to make a bet right now, I would fear that not much will happen before the Hungarian election,” he said, which is what Mr. Orban wanted all along, “so that he can be re-elected without anyone saying anything bad.”