B. The Adoption of the Rule of Law Conditionality Regulation: A Controversial Process

As briefly mentioned in the introduction, the possibility to introduce a new instrument allowing for the suspension of EU funding in cases, to put it generally, of rule of law problems in a Member State started emerging in at least 2017,Footnote ¹⁵ in the context of the first debates on the new MFF for the period 2021–27 and of the ongoing discussions provoked by the Hungarian and Polish crises.Footnote ¹⁶ Germany and Italy were among the first Member States to explicitly mention the idea of linking EU funds with respect for the rule of law in their positions papers on the future of cohesion policy and the MFF.Footnote ¹⁷ A reflection paper of the Commission of June 2017, despite President Juncker’s perplexities, offered a similar view.Footnote ¹⁸ From the very early phases, there was at least a degree of ambiguity in the real goal of those proposals: Protecting the EU budget and the sound financial management of EU resources—or rather ensuring respect for the rule of law tout court. But the latter objective was certainly prevalent in the public debate where creating a link between EU funds and the rule of law was seen as an instrument to tackle the Hungarian and Poland crises and break what has been defined as the EU “authoritarian equilibrium”Footnote ¹⁹ where EU funding helps sustain the same regimes that are threatening democracy and the rule of law.

B. The Rule of Law Conditionality and the Rise of Conditionality

Having discussed the steps that led to the adoption of the new “Rule of Law Conditionality Regulation”—although, as seen earlier, the concept of the rule of law does not appear in the title of the final Regulation—this article puts it in the broader context of the rise of conditionality as an instrument of EU governance. The idea of linking “EU money” and the rule of law did not come out of the blue. In fact, it is part of a broader trend of using the—still limited, at least before the NGEU—EU spending powers to achieve a wide range of policy and enforcement objectives, a trend which has accelerated in the last decade and will be discussed in the next pages.

Before doing that—and in order to analyze the rise of conditionality in the EU as a general phenomenon regarding the exercise of power in a multilevel legal context—we offer a brief definition of conditionality. We prefer to define conditionality in broad terms as the linking of benefits to the fulfilment of certain conditions or of a given behavior.Footnote ⁷⁶ The benefits in question are often economic, as was the case for EU financial assistance conditionality during the Eurocrisis, or for forms of “spending conditionality”,Footnote ⁷⁷ but not necessarily so. For example, in the EU enlargement conditionality, the key benefit available is EU membership, though financial “carrots” are also available throughout the accession process. Or in the context of the Cooperation and Verification Mechanism (CVM), it is Bulgaria and Romania’s participation to the Schengen area that has been made informally conditional upon progress in the areas monitored by the mechanism.Footnote ⁷⁸

Conditionality is thus a tool for the exercise of public power via other means than the traditional enactment of legal rules or the exercise of pure coercion, and where obedience is achieved thanks to the “power of the purse.” Just like other regulatory devices that have emerged in the last decades, such as nudging or soft law, conditionality departs from the classical “command and control” paradigm. The growing reliance on these instruments is an exemplary case of the need to think about new forms of governance in a context characterized by the metamorphosis of state sovereignty and the growing influence of international and supranational actors within the constitutional domains of States.

Conditionality proved to be popular in the international arena,Footnote ⁷⁹ as well as in federal systems,Footnote ⁸⁰ and even in the EU it has been used for decades. Originally, conditionality was mainly an external relations tool, where mechanisms of political conditionality have been deployed since the 1990s in trade agreements and development policies.Footnote ⁸¹ In the 1990s, the Union put in place a robust conditionality structure in its enlargement policy. Both membership itself and financial and technical assistance throughout the accession process have become conditional upon the candidate countries’ continuous progress under the Copenhagen criteria, including the political one, which demands respect for democracy, the rule of law, and human rights.Footnote ⁸² Still in the external relations’ field, the European Neighbourhood Policy (ENP) also contains conditionality elements.Footnote ⁸³

However, especially in the last decade, there has been a crucial shift in how conditionality is used by EU institutions. The EU has increasingly relied on conditionality tools also in the internal scene in relation to its own Member States. It has done so in several areas: To maintain the benefits of pre-accession conditionality—constant monitoring of the states concerned and the possibility of sanctioning lack of progress in the relevant areas—even after the moment of accession, for example, the EU designed conditionality clauses in accession agreements.Footnote ⁸⁴ Then, as already mentioned, it has informally linked Schengen membership to progress under the Cooperation and Verification for Bulgaria and Romania. While these conditionality mechanisms have a limited geographic scope and they are linked to the specific context of the enlargement process, the more generalized use of mechanisms of spending conditionality—which apply to all Member states without distinction—is even more significant.

Spending conditionality tools link disbursement of most EU funding programs to the fulfilment of a wide set of rules and standards. The first mechanisms of spending conditionality were introduced already in the 1990s, in particular in the context of the Common Agricultural Policy where the EU linked funding to fulfilment of certain environmental objectives. Since then, spending conditionality mechanisms have greatly grown both in terms of their scope of application, in the sense that they apply to more funding programs and substantive content, as more and more conditionalities have been attached to funding disbursement. After the already significant steps taken under the previous “Common Provisions” Regulation (CPR)Footnote ⁸⁵ for the 2014–20 MFF,Footnote ⁸⁶ which introduced several ex ante conditions that Member States needed to fulfil in order to get access to EU funding, the new CPR,Footnote ⁸⁷ which was approved in Summer 2021, goes even a step further. It transforms the ex ante conditionality regime into an “enabling conditions” system, with four horizontal and sixteen thematic conditions to be monitored throughout the entire budgetary period, and the possibility to suspend funding at any stage of the process. It also reinforces conditions related to respect for fundamental rights in the use of EU funds.Footnote ⁸⁸

Conditionality was then a fundamental tool during the Eurocrisis.Footnote ⁸⁹ Memoranda of Understanding concluded by EU Member States experiencing economic and financial troubles in order to receive financial assistance were underpinned by a strong conditionality regime. Conditionality became also a defining feature of the European Stability Mechanism (ESM)Footnote ⁹⁰ and was officially sanctioned by the Court of Justice in Pringle.Footnote ⁹¹ Furthermore, it is in the specific field of macro-economic governance that conditionality has found its first formal recognition in the Treaties: Article 136(3) TFEU—amended in 2011—states that EU financial assistance should be made subject to “strict conditionality.”Footnote ⁹² More generally, in the field of Economic and Monetary Union (EMU) law conditionality has emerged “as the most effective tool for enforcing fiscal constraints.”Footnote ⁹³

If we look at the broader picture, we can see that today the use of conditionality in EU law is becoming systemic,Footnote ⁹⁴ “a well-established practice,”Footnote ⁹⁵ and has been defined even as a “defining element of the European integration … process.”Footnote ⁹⁶ In other words, and as Viță put it, we are in an era of “absolute trust in the conditionality’s promise to answer some of the deepest, most painful and pressing challenges touching the very core of the EU construction.”Footnote ⁹⁷ The rule of law conditionality system under discussion is an excellent example of the trend, but we have seen forms of conditionality introduced—or at least suggested—to deal with other open issues, such as migration, asylum challengesFootnote ⁹⁸ and the climate transition.

In particular, forms of “enforcement conditionality”Footnote ⁹⁹—conditionality mechanisms whose goal is to enforce other obligations of EU primary or secondary law—are often proposed for areas in which using other ordinary instruments of institutional or individual enforcement is not possible or will not produce adequate results, such as compliance with macro-economic requirements and now with the rule of law and the common values of Article 2 TEU.Footnote ¹⁰⁰ These are often questions with a strong “federal” dimension insofar as they concern the relationship between the two main levels of government in the EU, which once again the EU struggles to tackle with its traditional enforcement mechanisms, while at the same time still lacking other coercive instruments typical of federations. In these situations of limited authority, where a regulatory entity does not possess the power to make and enforce decisions over another subject authoritatively, conditionality provides a valid alternative form of exercise of public power and authority.

Yet, our argument is that the use of conditionality as a tool of EU governance is not simply a technical choice, but one that raises constitutional questions and that has an impact on key principles and paradigms of EU law—as we will explain in the next paragraphs. In this respect, a clear distinction must be drawn between “internal” and “external” conditionality. Reliance on conditionality in EU external relations can be considered a standard tool of foreign policy, which is used also by other international organizations as well as individual states. While also in this respect the use of conditionality has been challenged and criticized, both procedurally and in terms of the substantive conditions posed for example by the IMF and the World Bank,Footnote ¹⁰¹ it is when conditionality is used on the internal scene that real questions arise, as the relationship between the EU and third countries is in fact not governed by the same constitutional framework that is applicable to EU Member States’ relationship. So far however, the institutional and academicFootnote ¹⁰² debate seems to have overlooked the impact of conditionality on the basic principles and structures of EU law, and the EU still lacks a clear “conditionality doctrine,” in contrast with what happens in established federal systems.

To draw a quick comparison with the United States, for example, there the debate on conditionality has been vibrant and the literature is highly polarized on the constitutional status and legitimacy of this tool of governance.Footnote ¹⁰³ In general, the use of conditionality by the federal government finds its base in Article I, Section 8 of the U.S. Constitution and the “general welfare” spending power of the federal government.Footnote ¹⁰⁴ In the leading case on conditional spending, South Dakota v. Dole,Footnote ¹⁰⁵ the Supreme Court established a four-part test for assessing the constitutionality of spending conditions. First, the federal spending must be in the “general welfare.” This is because Congress has authority under Article I, Section 8, to spend for the “general welfare” and not to impinge on the States’ legislative competences. Second, the condition must be clear and unambiguous so that States can “exercise their choice knowingly cognizant of the consequences of their participation.”Footnote ¹⁰⁶ Third, the condition must be related to the purpose of the federal spending program. Finally, the condition cannot violate some other provision in the Constitution. For federalism purposes, the condition cannot violate federalism principles that the Court has read into the Tenth Amendment. In particular, the financial inducement offered by Congress might be so coercive as to pass the point at which “pressure turns into compulsion.”Footnote ¹⁰⁷ At this point, the program goes too far, and it is unconstitutional. While the Supreme Court’s decision has not closed the discussion, and the doctrine of unconstitutional spending conditions remains quite controversial—as the recent cases of NFIB v. Sebelius,Footnote ¹⁰⁸ and the Sanctuary Cities Litigation clearly showFootnote ¹⁰⁹—there is no doubt that the question of the limits to the use of conditionality and to the central government’s spending powers is very much present in the debate, and the Supreme Court has set a series of conditions that frame the discussion.

In the EU, the debate is much less advanced. Despite the severe critiques addressed to how conditionality was used during the Eurocrisis—mostly concerned with the substantive content of the conditions imposedFootnote ¹¹⁰ or with the opaque regime deployedFootnote ¹¹¹—EU institutions seemingly have continued to almost blindly trust conditionality with little reflection on whether and what limits may exist, or even on the real effectiveness of conditionality.Footnote ¹¹² Conditionality has been used in an expansive manner, often to expand the reach of the central level over areas where the competence of the EU is at the very least limited, and without considering the possible effects that the rise of conditionality has on the EU’s vertical—between the EU and the Member States—and horizontal—between EU institutions—balance of powers. There has been little attention also on its impact on key principles of EU law, including for example the principle of Member States’ equality,Footnote ¹¹³ or on how the “benefits in exchange of good behavior” logic may influence the idea of a Union governed by the principle of loyalty and solidarity, where Member States are asked to “mutually trust” each other. As for the Court of Justice—other than plainly sanctioning the use of strict conditionality in the ESM Treaty in its Pringle judgment and accepting the overall logic that it can improve compliance with EU lawFootnote ¹¹⁴—it has had very few opportunities to also reflect more broadly on the legitimacy of conditionality tools in the EU structure.

Against this background, we will argue in the next section that the legislative process that led to the adoption of the Rule of Law Conditionality Regulation has finally brought to light at least some of these concerns, in particular those related to the competence to adopt conditionality tools and to the concrete design of conditionality mechanisms. While the amendments adopted during the legislative process may have, regrettably, undermined the potential effectiveness of the instrument, the legislative process as well as the future involvement of the Court of Justice may stimulate the reflection on the use of conditionality in the EU constitutional framework that has so far been missing and help to identify the first clearer limits to the use of conditionality in EU law. As we will point out in Section E, in any event, even after the adoption of the Regulation significant questions on the use of conditionality in the EU remain and need to be addressed in the future.

C. The Regulation’s Legislative Process: Compromising on the Rule of Law or Addressing Real Concerns?

As noted in the first pages of this article, the outcome of the legislative process that led to the adoption of the Rule of Law Regulation and then—and even more strongly—the compromise of the European Council that ultimately gave the green light to the Regulation have been received very negatively in the academic debate. What prevails is a critical view of how the amendments adopted during the legislative process affected the bold Commission’s proposal, and the prevailing perception is that the final instrument lost much of its promises and will be less effective.Footnote ¹¹⁵ Ultimately, the compromises reached would be a further illustration of the EU institutions’ inability and, even worse, unwillingness to firmly tackle cases of constitutional backsliding in the Member States.

In this respect, we certainly agree that the amendments adopted led to the adoption of a Regulation that is weaker compared to the original proposal, or in other words that the rule of law conditionality lost some of its bite. Any decision to suspend funding is evidently more difficult—and arguably less likely—under the new Regulation, considering, first and foremost, that the Regulation now requires a qualified majority to vote in favor of the Commission’s proposal to adopt measures. The burden of sanctioning the Member State is shifted on its peers in the Council, and the events of the last decade have already demonstrated that the Member States are reluctant to act against their peers, most notably under Article 7 TEU. The system introduced, more politicized and less “technocratic” than the original proposal,Footnote ¹¹⁶ leave the key decision-making powers firmly in the hands of the Council and the Member States. Furthermore, the Commission will now be forced to demonstrate that there is a sufficiently direct link between the breach of the rule of law and the effect on the sound financial management of the EU budget or the EU financial interests. This is certainly a cumbersome requirement for the Commission.

Yet, our argument is that the Commission’s proposal, at a closer look, was problematic, as also pointed out by the Council Legal Service Opinion, and the next steps of the legislative process, while possibly limiting the effectiveness of the new tool, adequately addressed some of the questions and tensions that had been raised by that proposal. In other words, the negotiations should not be seen as a compromise “selling” the rule of law, but as a way to address real concerns generated by the Commission’s proposed Regulation. In particular, the Opinion of the Legal Service put on the forefront questions of conferral, legal basis, and compatibility with Article 7 TEU, which are a clear example of how conditionality may be used to expand the reach of the central level at the expense of the Member States.Footnote ¹¹⁷

The Commission’s proposal was based on an instrumental logic. The form of conditionality it suggested to introduce allowed to transform what is a fairly technical and specific legal basis—Article 322 TFEU—into a platform for a broad, horizontally-applicable rule of law protection mechanism. While, as the Council made clear, Article 322 TFEU is the correct legal basis for a general regime of budget conditionality, in the Commission’s proposal, the legal basis was used instead for creating a broad monitoring framework of national rule of law systems—covering even areas where the EU lacks any type of legislative competences, such as for example on rules concerning the independence of the judiciaryFootnote ¹¹⁸—and introducing a new tool for tackling breaches of this common value parallel to, but independent from, Article 7 TEU. It is difficult to maintain that these were truly “financial rules”—the type of norms that Article 322(1)(a) TFEU allows to create. As we noted earlier, there was an evident tension in the Regulation as proposed by the Commission. While presented as a tool to “protect the Union’s budget” and reinforced with references to the principle of sound financial management and the protection of the Union’s own financial interests, what the Regulation, as proposed by the Commission, actually aimed to do was to provide a system for protecting the rule of law implicitly meant to address crises such as the Hungarian and Polish ones.Footnote ¹¹⁹ Conditionality strategically supported this expansion of EU competences and could thus be critically seen as a platform for a possible “competence creep” on behalf of the EU institutions.

Furthermore, as the CLS also made clear, the proposal of the Commission was in clear tension with the Article 7 system. Article 7 TEU already contains a procedure for the adoption of sanctions in case of a rule of law breach, and those sanctions—considering the open formulation used in Article 7(3) TEU—which allows the suspension of “certain of the rights deriving from membership”—include the adoption of financial measures and the suspension of EU funds.Footnote ¹²⁰ The adoption of the Regulation as designed by the Commission would have amounted to the creation—via secondary law—of a parallel procedure to Article 7 TEU for sanctioning the same, or at least very similar, types of concrete problems—breaches of the rule of law—which could have possibly resulted in the same sanction, the suspension of EU funds.Footnote ¹²¹ Yet, the new procedure would have applied a different logic and envisaged a different role for EU institutions, bypassing entirely the Article 7 system,Footnote ¹²² escaping its strict boundaries and requirements.Footnote ¹²³

The main way in which these questions—use of the legal basis of Article 322 TFEU and compatibility with Article 7 TEU—were tackled was introducing the “direct link” criterion. It was the Legal Service of the Council that first stressed the need to ensure a “sufficient link” between the compliance failure—the rule of law breach—and the loss of entitlement—the suspension of EU funding. According to the CLS,Footnote ¹²⁴ if that sufficient link is ensured, then what is created is a genuine spending conditionality. If not, the loss of funding would actually be a new form of sanction, and in turn incompatible with the Treaties, as the Treaties provide an exhaustive list of procedures for remedies and sanctions against Member States. In order to reach this conclusion, the CLS referred to some of its previous opinions and to the case law of the CJEU, in particular in the area of the Common Agricultural Policy. In one of the few sets of decisions dealing with spending conditionalities, the Court had in fact already endorsed forms of conditionality, including same-sector conditionalities—that is to say conditionalities that link funding to fulfilling certain obligations that relate to the objectives and purpose of the funding at stakeFootnote ¹²⁵—or procedural horizontal conditionalities, where national authorities are required to show that they have sufficiently established conditions for the sound financial management of the EU budget.Footnote ¹²⁶ Crucially, the CJEU, in two joined cases concerning Italy,Footnote ¹²⁷ had also accepted that where there are indications of a breach of EU law, as for example a decision to open an infringement action, the Commission may decide to suspend funding when there is “a sufficiently direct link”Footnote ¹²⁸ between the alleged infringement and the operations to which the fund concerned relate.

According to the Legal Service’s reading of the CJEU case law, ensuring a direct link between the breach of EU law and the use of the funds is a necessary condition for any conditionality regime.Footnote ¹²⁹ In the case of the Commission’s Rule of Law proposal, however, that direct link was missing, according to the CLS, essentially for two reasons. First, the proposed Regulation did not show how respect for the rule of law was linked to sound financial management or the protection of the EU financial interest. Second, the fact that the measures to be adopted—i.e., the suspension of funding—were meant to be proportionate to the rule of law deficiency, rather than to the effect on the EU budget—as in the final text of the Regulation—showed how the real aim of the proposal was to create a sanctioning mechanism for rule of law breaches.Footnote ¹³⁰ To be clear, the Council Legal Service did not exclude that a general horizontal regime of conditionality could be created, but it could not simply be limited to an assessment of the Member States’ compliance with rule of law principles. For the regime to be introduced and measures to be adopted, it was necessary to show that the rule of law breach affected, or risked affecting, the sound financial management of EU funds or the protection of the financial interests of the Union.Footnote ¹³¹

Under the impulse of the Council—and as seen in Section B—the criterion of a sufficiently direct link was included in Article 4 of the final version of the Regulation. It now reads that measures shall be taken where a breach of the rule of law affects the sound financial management of the EU budget or the protection of the EU financial interests “in a sufficiently direct way,” borrowing the language of the CJEU cases.Footnote ¹³² The choice of the Council could not simply be ascribed to an alleged desire to water down the new instrument. If we look back at the original proposal of the Commission, it was evident that the link between the breach—then defined as a “generalised deficiency”—and the funds was much more tenuous and less direct in comparison to other forms of conditionality under EU law. For example, in comparison to macroeconomic conditionalities linked to financial assistance, where the certainly far-reaching measures required to Member States seeking assistance still showed a fairly robust and direct link to the purpose of the funding.Footnote ¹³³ Arguably, under the Regulation as proposed by the Commission, even a rule of law problem not directly connected with the use of EU funds could have nonetheless led to a Commission’s decision to initiate the process to suspend funding. The legal basis of Article 322 TFEU could hardly support such a measure. Introducing the direct link criterion, and more generally transforming the Regulation from an instrument to protect the rule of law via the budget, to an instrument that primarily aims to protect the budget via the rule of law, make it possible to rely on Article 322 TFEUFootnote ¹³⁴ and placates the concerns of conditionality becoming a platform for a significant expansion of EU competences. Cross-sector conditionalities may still be included, but the institutions need to show a sufficient connection between the objectives pursued by those conditionalities and the core underlying EU policy.

There is then a second aspect of the outcome of the legislative process worth underlining. In addition to the legal basis and the compatibility with Article 7 TEU, another concern with the original Commission’s proposal was the lack of precision of the conditions triggering the activation of the mechanism.Footnote ¹³⁵ As explained earlier, the Commission used the notion of “generalised deficiencies” as a threshold for the possible application of measures. The draft Regulation only used a short definition of the notion of generalized deficiencies: “a widespread or recurrent practice or omission, or measure by public authorities … affects the rule of law.”Footnote ¹³⁶ When looking at the concept developed by the Commission, it was not clear, in the first place, how the notion differed from that of “systemic threat” to the rule of law that was used in the Commission Rule of Law Framework, or even “clear risk of a serious breach” that instead is the concept used in Article 7(1) TEU. Even more importantly, however, the use of such a vague clause left to the Commission a very wide discretion both in identifying the relevant national practices, omissions, and measures, and in determining whether they may affect the rule of law.^{Footnote 137} While it is true that in Article 3 of the draft Regulation the Commission was somehow more specific, identifying certain areas where its scrutiny would concentrate, those fields were presented as merely illustrative, and the same went for the examples of generalized deficiencies identified in the second paragraph of the article. The vague concept of generalized deficiency risked undermining legal certainty and even promoted a degree of arbitrariness.Footnote ¹³⁸ In more general terms, it seems to replicate again what has been a major concern in the design of conditionality schemes under EU law, and namely that the content of those conditions have not been designed following a democratically legitimate process.Footnote ¹³⁹ The Commission would have acquired a broad competence to determine the substantive content of the conditionalities, even in an area that is traditionally outside the conferred competences of the Union.

Even in this respect, the Council Legal Service expressed its objections, where it held that in order to qualify as a genuine—and legitimate—conditionality, the mechanism needed to “identify with sufficient precision the conditions that have to be complied with.”Footnote ¹⁴⁰ The Legal Service called therefore to identify clearly defined rules and explicit standards and criteria. The final version of the Regulation contains improvements in this respect, moving from an open list of general deficiencies to a closed list of breaches and the identification of specific areas that must be affected by breaches. First, the final version of the Regulation replaced the concept of generalized deficiencies with that of “breaches” of the rule of law, and in doing so it illustrated three situations that may indicate the existence of a breach, including endangering the independence of the judiciary, failing to prevent, correct, or sanction arbitrary or unlawful decisions by public authorities, and limiting the availability and effectiveness of legal remedies.Footnote ¹⁴¹ Then, in Article 4, it indicated that in order to potentially trigger the application of measures, the breaches must concern one of eight well-defined areas linked to the EU budget. The negotiations thus limited the discretion of the Commission and offered more clarity and certainty in terms of triggering conditions for the activation of measures. Doing so might actually contribute to make the Regulation more effective, as political science studies have shown that ensuring the “determinacy” of conditions may have a positive impact on the effectiveness of the conditionality.Footnote ¹⁴²

When considered all together, it is evident that the amendments approved by the Council and the EP narrowed down the scope of application of the Regulation and made the decision-making process more cumbersome. If analyzed from the perspective of the protection of the rule of law and the need to find urgent answers to the Polish and Hungarian crises, this might certainly be regrettable. At the same time, we should acknowledge that the original proposal raised several questions in terms of its legality and legitimacy, as the Council Legal Service—largely correctly—pointed out in its Opinion. The amendments adopted in the legislative process positively addressed those concerns by ultimately designing an instrument that, while more limited in scope, is more robust and better placed to withhold the scrutiny of the Court of Justice in the action for annulment that Hungary and Poland will bring.

For our discussion, what is crucial is that the legislative process finally started to bring to light the question of the limits to the design and use of conditionality tools. The Commission’s proposal implied a broad understanding of what may constitute a conditionality under EU law. According to the Commission, even using a specific legal basis like Article 322 TFEU, it was possible to condition EU money, in broad terms, to an objective external to the policy such as respect for the rule of law. The Legal Service of the Council kicked back by asking that this additional objective—respect for the rule of law—must be still linked to the concrete funding policy, and the introduction of the “sufficiently direct way” criterion successfully translates that point of view. The intervention of the Court in the first months of 2022 might help in clarifying, if indeed the criterion of the direct or specific link is a necessary condition for any-type of cross-sector conditionality, as argued by the CLS when it held that “a specific link between an identified deficiency and the inability to satisfy the objectives of a given measure is at the core of any conditionality attached to EU funding”.Footnote ¹⁴³ Furthermore, the legislative process and the CLS Opinion affirm another important principle: that conditionality cannot be used as a way to provide for alternative forms of sanctions when there are specific mechanisms provided by the Treaties. While forms of conditionality can contribute to the enforcement of Union law or EU values, they cannot pursue the same aim and purposes of other enforcement tools provided in the Treaties, in the context of the rule of law protection particularly of Article 7 TEU, but also the infringement procedure.

The debate is certainly not over, not least because the CJEU will still have to determine whether the new Regulation is ultimately compatible with the Treaties. Considering the growing trust in conditionality as an instrument of EU law, future discussion will arguably make clear whether the “direct link” criterion is a necessary element for introducing future conditionalities, as is also the case in the United States.Footnote ¹⁴⁴ Moreover, as the debate on the rule of law conditionality only concerned a form of “enforcement” conditionality, it will have to be seen whether similar logics apply for forms of “regulatory” conditionality, where the objective of the condition is not ensuring compliance with other obligations of EU law but introducing new policy goals. Furthermore, from a broader constitutional perspective, the desirability of the phenomenon we have defined as rise of conditionality is still to be addressed as regards the possible tensions we will investigate in the next section.

D. Expanding the Conditionality Toolbox: Remaining Tensions and Possible Developments

The new Rule of Law Regulation has thus both expanded the EU “rule of law toolbox” and what could be defined as the growing “conditionality toolbox.” The adoption of the Regulation further showed that EU institutions continue to trust conditionality as an instrument to tackle complex challenges and key points of fractures of the Union’s legal order.Footnote ¹⁴⁵ Much suggests that conditionality is likely destined to play an increasingly important role in the EU architecture in the foreseeable future. In this sense, it is worth underlining again that the new Regulation applies not only to “traditional” EU funds, as in the Commission’s original proposal, but also to the new NGEU funds. Thus, while the scope of application of the regulation in terms of triggering conditions has diminished with the introduction of the direct link criterion, when it comes to the scope of funds covered, this was greatly expanded during the legislative process. In turn, the NextGenEU scheme itself makes use of conditionality-like tools, as the national recovery and resilience plans must be submitted to the Commission and ultimately approved by the Council and must be in line with the country-specific recommendations under the European Semester. Under the Recovery and Resilience Facility Regulation, the concrete disbursement of grants will depend upon fulfilment of specific milestones and tasks, and can be suspended in case a Member State is breaching EU macro-economic requirements.Footnote ¹⁴⁶ While it is true that these forms of conditionality differ from mechanisms of strict conditionality that were in place under the ESM,Footnote ¹⁴⁷ the package of NextGenEU and new rule of law conditionality regulation certainly “advance conditionality as a constitutional virtue.”Footnote ¹⁴⁸

Considering the growing relevance and popularity of conditionality, we believe a broader reflection on its impact on the EU constitutional framework and ultimately its legitimacy remains very much needed. The process that led to the adoption of the Rule of Law Conditionality Regulation that we have explored in this article is a first contribution to that process. In particular, it may have started drawing clearer boundaries to the use of conditionality under EU law. The Council Legal Service Opinion began elaborating on the criteria that make conditionality mechanisms compatible with other control and sanction mechanism under EU law—in the specific case, most importantly Article 7 TEU. A criterion the CLS elaborated is that the two procedures—conditionality and the “ordinary” sanction mechanism—must be governed by different rules and pursue different aims. Enforcement conditionality cannot simply bypass other enforcement and sanctioning mechanisms provided by the Treaties. Furthermore, the “direct link” criterion that the Council asked to introduce, following the Opinion of its Legal Service, may prove to be a crucial element for ensuring the legality of conditionality tools. Taken together, these two criteria may address some of the concerns related to the use of conditionality as a tool to expand EU competences, or in other words limit possible “competence creeps via conditionality”. As is well known in federal systems, in fact, the use of conditionality produces an almost inevitable expansion of central intervention, in the sense that it is always the central level of government who uses conditionality to influence the behavior and the policies of the other levels of government. Within the EU such centripetal effect may be highly problematic given the embedded tension between EU centralization and national powers in key policy fields that may be attracted via conditionality in the EU regulatory sphere. The Regulation under discussion, especially as proposed by the Commission, was a clear example as it concerned an area—national rule of law systems—where the EU has only limited competences and in any event no clear-cut legislative competences. The EU by virtue of Article 7 TEU undoubtedly has the power to oversee respect for the rule of law, but cannot adopt, for example, norms harmonizing the organization of the national judiciaries.

If competence concerns were at least partially tackled during the legislative process, from a more normative perspective broader issues with the possible transformative effects of conditionality on the EU constitutional order remain relevant. And it is crucial and necessary to identify criteria that may also guide future discussions on the introduction of new and other conditionality mechanisms. In the first place, reflection is needed on the impact of conditionality tools on the principle of equality between Member States.Footnote ¹⁴⁹ Spending conditionality is inherently an asymmetrical tool of governance and has a disproportionate impact in the Member States, in the sense that it has more bite over those Member States that receive larger amounts of EU funds compared to those states that are net contributors to the EU budget.Footnote ¹⁵⁰ After all, this was precisely the idea behind the rule of law conditionality proposal, although, for obvious reasons, it could not be made explicit in the Regulation: Forcing Hungary and Poland—two of the biggest receivers of EU funds—to comply with EU ‘rule of law demands’ by threatening them with the suspension of EU funding. In other words, while formal equality is always guaranteed because the Regulations containing conditionality clauses, including the Rule of Law RegulationFootnote ¹⁵¹ or the Common Provisions Regulation apply to all Member States, from the point of view of substantive equality the situation is different. Funds are distributed unevenly between Member States in order to fulfill their goals of promoting, inter alia, solidarity and cohesion,Footnote ¹⁵² and linking other objectives—for example, the protection of the rule of law, or compliance with macro-economic requirements—to those funds comes with some risks. In the first place, using EU funding in such an instrumental way might have ultimately led to a misunderstanding of what these funds stand for. They are not a form of charity from “Western” Member States towards “Eastern” Members, but a crucial support for the functioning of the internal market and for the balanced and fair functioning of economic governance.Footnote ¹⁵³ Furthermore, as noted by Goldner Lang, attaching additional objectives to those funds can “indirectly change and expand the objectives of EU funds” and could even contribute “to the continued lagging behind of underdeveloped regions, thus resulting in further divergence among EU Member States and regions—instead of promoting cohesion”.Footnote ¹⁵⁴ Measures suspending funds could therefore have even reached the completely opposite objective of the underlying policy, and further broadened the distance between more and less developed regions in the EU,Footnote ¹⁵⁵ ultimately undermining substantive equality between Member States.

Furthermore, spending conditionality lacks a mechanism to re-balance potential biases against less wealthy Member States that is present in the system of Article 260 TFEU, the provision which allows the CJEU to impose financial sanctions against those Member States that do not comply with a ruling of the Court after an infringement action. In the latter system, the richer Member States, in comparison, pay more if they do not comply with a Court’s decision: The Court of Justice determines the amount of the sanctions based on three criteria—duration of the infringement, seriousness of the infringement, and ‘ability to pay’—which are calculated on the basis of a combination of the Member States’ GDP and population. The system is designed precisely in order to promote equal treatment and avoiding punishing less wealthy Member States in a disproportionate manner.^{Footnote 156} In the case of spending conditionality, there is no mechanism to balance the impact of the funding suspension. Thus, the measures end up affecting in a stronger manner the less developed Member States, which receive a higher percentage of EU funds. Thus, while spending conditionality formally respects the principle of equality in the sense that it applies to all Member States, in substance it has a stronger impact on a specific class of members. This is possibly what former President Juncker had in mind when he defined the idea of a rule of law conditionality “poison for the continent,” pointing out the risk of bolstering divisions between different states and different parts of the continents, and most importantly between “Eastern” and “Western” Europe.^{Footnote 157}

To go even a step further, the widespread use of conditionality may be the symptom of a more radical shift in the EU constitutional culture: From a legal order based on the keystones of loyalty, solidarity, and mutual trust, to a legal order based on a new “conditionality culture,” which introduces a “donor-recipient” logic in the EU legal order, considering the inherent asymmetry of conditionality tools.Footnote ¹⁵⁸ Borrowing from the language used in the field of judicial cooperation, conditionality may contribute to the shift from mutual trust to mutual distrust between Member States.Footnote ¹⁵⁹ In this respect, Cremona suggested a neat distinction between internal and external conditionality: Before accession of a Member State, conditionality actually “underpins” the solidarity that can be expected once a candidate country becomes a Member State, in the sense that candidates need to show compliance with specified conditions and common values in order to then “deserve” post-accession solidarity.Footnote ¹⁶⁰ But that idea is based on limiting conditionality to the pre-accession phase, and excluding after it: “[O]nce accession has taken place, the benefits of membership are not conditional upon keeping the rules.”Footnote ¹⁶¹ Looking at 2004 acts of accession,Footnote ¹⁶² Cremona had criticized conditionality clauses therein contained as they challenged the EU integration framework: “The intrusive, one-sided and peremptory requirements of pre-accession conditionality can be justified precisely because, once a member, the candidate state will be a part of a community of solidarity, of mutual interdependence and trust.”Footnote ¹⁶³

The context of the Rule of Law Conditionality or spending conditionalities in general are not perfectly comparable to those accession clauses, as they apply to all Member States. Nonetheless, Cremona’s arguments show that the growing reliance on conditionality could bring trust within the EU system logics that were foreign to the Union method developed over the years. Participation in Union policies, including EU funding, has never been seen as a reward for good compliance and good behavior, but a key membership right. Furthermore, the Court of Justice has always rejected any logic of reciprocity, typical of the international law arena: under the traditional “community of law” framework, breaches of EU law do not lead to the suspension of membership rights or retaliation by other Member States,Footnote ¹⁶⁴ but are managed at the supranational level through legal proceedings before national and EU courts. Finally, financial sanctions are not a typical tool of enforcement of EU law, even if admittedly the use of sanctions is on the rise.Footnote ¹⁶⁵ In contrast, for example, to an international development bank, in the EU money is not the only tool to bring about change and compliance at the Member State level. The fact that it might now be necessary to use conditionality—that there might be “no alternative” to conditionality, to borrow a language often used during the Eurocrisis—might be a worrying sign for the integration process, showing a structure that struggles to keep Member States together: A community of economic interests, rather than a true Union of Values?Footnote ¹⁶⁶

Considering the picture sketched above, we believe that further reflection is needed on the position and role of conditionality among the EU regulatory tools, and the desirability of the shift towards conditionality we seem to be witnessing. It is evident that conditionality represents an appealing solution especially where ordinary tools of EU law enforcement cannot ensure adequate compliance with EU values, law and objectives, and it can contribute to ensuring the smooth functioning of key EU policies. At the same time, conditionality could exercise a divisive impact on the EU integration structure, and it also seems to push the EU back on the trail of international organizations rather than of a composite constitutional space. However, this is not the whole story. If the increasing use of conditionality has of course exacerbated its controversial effects, it has also marked new positive developments. The use of conditionality in the rule of law crisis but also in the new programs to deal with COVID-19 crisis envisage a new, more “positive” conditionality, inherently different—for example, from the bailout “austerity” conditionality deployed in the past.

Indeed, in the case of the rule of law, the aim is to protect the core and funding values of the EU against the challenges posed by Member States, which are themselves implementing divisive and controversial reforms. As argued, conditionality may exert “a function different from that of its macroeconomic version, aimed at hopefully connecting together the dispersed paths of EU constitutionalism.”Footnote ¹⁶⁷ Even if we look at the conditions of the NextGenEU scheme, there is a clear shift beyond austerity conditionality, in the new programs “loans-cum-conditionality no longer represents the default option.”Footnote ¹⁶⁸ The Resilience Recovery Facility’s (RRF) conditionality is based on a system of conditional transfers according to a set of objectives and long-term policy priorities put down in the RRF Regulation. The nature of the objectives marks the difference with the austerity conditionality. The latter presented an inherent disciplining character—resembling the traditional conditionality schemes deployed by international financial institutions—and it was aimed at achieving medium term objectives dealing with the reduction of public expenditure and the sovereign debt restructuring. On the contrary, the regime of conditionalities envisaged by the new RRF Regulation aims at fostering the Member State’s action in key sectors—identified by the EU as priorities for the future of the EU itself. This application of conditionality is closer to the practice of federal states in managing federal grants with strings attached in the name of the general policy goals set by the central government.

Such “federalizing” force of conditionality can be seen also in a new interesting field of application. The recent Communication on the “Strategy to strengthen the application of the Charter of Fundamental Rights in the EU” has linked the implementation of EU funded programs with the respect of the relevant provisions of the Charter of Fundamental Rights. In particular, the proposal for the Common Provisions Regulation (CPR), which defines the rules for the next EU budget for 2021–27, contains an ‘enabling condition’ relating to the Charter, this means that for all programs supported by the EU funds covered by the CPR, there must be effective mechanisms in place to ensure their compliance with the provisions of the Charter.Footnote ¹⁶⁹ While the scope of this Charter conditionality is narrower than the horizontal rule of law conditionality clause, it is a further sign of how conditionality may not only be used as a disciplining tool, but as a key instrument for the protection and promotion of the EU “fundamentals.”Footnote ¹⁷⁰

The most recent applications of conditionality, therefore, on the one hand confirm the growing expansion of the instrument in the EU governance in sensitive issues, such as the rule of law and EU fundamental rights protection. On the other hand, they seem to address some of the problematic features of conditionality, fostering a conditionality regime more in line with the key principles and values of the EU composite constitution. Conditionality continues to serve as a “nexus” between solidarity and responsibility,Footnote ¹⁷¹ but compared to the Eurocrisis austerity conditionality, the new forms of conditionality better balance the two sides of the coin, perhaps even emphasizing solidarity over responsibility. This turn may pave the way for a new understanding of conditionality as an effective tool of managing conflicts and differences in a multi-layered constitutional system.

E. Conclusion

The picture emerging from the adoption of the new Rule of Law Conditionality Regulation is a complex one. There is no doubt that the compromises reached during the legislative process weakened the instrument as opposed to the original Commission’s proposal, and this is disappointing considering the urgency to find effective responses to the constitutional backsliding processes in Hungary and Poland. As described in Section B, while the original aim was the protection of the rule of law tout court, now the core objectives are the protection of the Union budget and the EU’s financial interests via the rule of law. At the same time, this more limited Regulation can still be seen as an important addition to the rule of law toolboxFootnote ¹⁷² that may contribute to increasing the credibility of actions to protect the founding values of the Union.Footnote ¹⁷³ All considered, despite its more limited scope of application, the Regulation remains far easier to use than Article 7, as it has—even after the amendments—significantly lower decision-making thresholds, but also has additional bite compared to Rule of Law Framework and other Rule of Law instruments of the Commission, and can nicely support infringement actions under Article 258 TFEU.

Furthermore, as we have argued in earlier sections, the limitations introduced during the legislative process cannot be simply seen as a sign of the Member States’ unwillingness to take action to protect the rule of law and as watered-down compromises. Some of the amendments adopted during the legislative process may have been crucial for ensuring the legality of the final Regulation, as also pointed out by the Opinion of the Legal Service of the Council. Introducing the direct link—between the breach of the rule of law and the impact on the EU budget and financial interests—criterion ensured that the new regulation represents a genuine conditionality and not a hidden sanctioning mechanism in conflict with Article 7 TEU, and addresses the concerns that conditionality can be used as an instrument for centralizing competences not conferred to the EU.Footnote ¹⁷⁴ The future intervention of the Court of Justice on the actions for annulment brought by Hungary and Poland will further contribute to identifying a clearer framework for the use of conditionality under EU law.

From a broader point of view, we have also pointed out the possible constitutional tensions emerging from the rise of conditionality in EU law, of which the rule of law conditionality is an excellent example. While conditionality is often an appealing answer to many of the key challenges facing the EU, it may also put the principle of equality between Member States under stress and introduce logics that are in contrast with traditional principles and structures of EU law. Our critical observations presented in Section E are not, however, meant to imply that all forms of EU conditionality are dangerous and should be abandoned. Different mechanisms of conditionality can be more or less legitimate and well designed and should be assessed on a case-by-case approach. As we have seen in Section E, it is, for example, positive that recent types of conditionalities seem better aligned with the basic values of the EU project and serve to protect and promote them. These critical considerations, however, point to the fact that a broader reflection on the use of conditionality in the EU legal system and its position among the EU regulatory tools is needed. To put it in clear terms, conditionality is not a panacea; it cannot be the one-size-fits all solution to any new challenge the EU is facing and cannot simply replace other enforcement mechanisms. Looking at the experience of federal states such as Canada or the United States where conditionality is also extensively used but often faces clearer constitutional limits could be beneficial for the EU.Footnote ¹⁷⁵ Considering that the spending powers of the EU are on the rise, also as a result of the NextGenEU plan, reflecting on the limits and legitimacy of conditionality linked to those spending powers is of paramount importance.