EU Could Deploy Spending Threats in Fight with Warsaw

By Laurence Norman in Brussels and Drew Hinshaw in Warsaw Features Dow Jones Newswires

Poland's new prime minister visits Brussels on Tuesday for talks about his country's place in the European Union, just as the bloc gears up for a fight over money that risks inflaming tensions.

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The EU's executive last month initiated an unprecedented punishment of Poland over judicial overhauls the EU considers undemocratic. However the sanctions, which could strip Poland of some voting rights and impose financial penalties, are likely to be blocked by some EU member states.

The EU has a potentially more potent stick: The bloc is preparing a budget overhaul that could slash spending on the EU's newer, eastern members--especially Poland.

The EU annual budget of roughly EUR140 billion ($167 billion) faces increasing pressure from Britain's decision to quit the bloc. EU Budget Commissioner Guenther Oettinger said Monday that Brexit will leave an annual budget gap as wide as EUR13 billion in coming years.

That hasn't stopped the EU from pledging large sums in areas ranging from agriculture and scientific research to handling the migration crisis and boosting common defense spending. The European Commission, the EU executive, in May will present its blueprint for the next budget to take effect when the current seven-year budget period ends in 2020. Jockeying and lobbying have already begun.

To balance EU books, calls have grown for changes to large transfers from mainly richer western European countries, under so-called cohesion policy, to easterners including Poland, Slovakia and Hungary, who joined the bloc in 2004.

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Poland was the single biggest beneficiary. Last year it received EUR7.1 billion more in EU support than it contributed to the bloc's budget. For the 2014-20 budget period, such fund transfers to Europe's poorer regions are expected to total EUR325 billion.

Those numbers will loom large when Polish Prime Minister Mateusz Morawiecki arrives for a dinner meeting with Commission President Jean-Claude Juncker. That's because one of the most controversial ideas circulating is to tie EU spending explicitly to net-donors' priorities. Those includes upholding rule-of-law and judicial independence, the issue on which Brussels has challenged Poland.

A German government paper last spring proposed freezing cohesion funding for countries breaching the bloc's legal standards. Others have said that payments to eastern countries should depend on their showing solidarity with the bloc's refugee challenges. Poland, Slovakia, Hungary and the Czech Republic have largely refused to accept EU refugee quotas.

"The European Union is not only an ATM when you need support," Belgian Prime Minister Charles Michel said last month.

Mr. Juncker and Mr. Oettinger on Monday both opposed such an explicit link of policy and payments. But European capitals will have the final say. Mr. Oettinger said Monday that while cohesion spending remained vital for the EU, he could envision a cut of between 5% and 10%. He also hinted funds should target the poorest regions, which would exclude most of Poland.

Fights over a judicial overhaul by Poland's ruling Law and Justice party have dominated its EU relations since the nationalist government took office in late 2015. The government says the changes, which include purging more than one-third of the Supreme Court, aim to expel Communist sympathizers from the justice system. Opposition politicians say Law and Justice is seeking to turn the courts into a political instrument.

For months, Polish authorities have appeared confident that they hold the upper hand, prompting frustration in Brussels that talks on the issue were not serious. Hungarian Prime Minister Viktor Orban, a frequent critic of Brussels, pledged to block any sanctions against Warsaw.

Mr. Morawiecki, a Western-trained former banker who until last month served as the government's finance minister, is seen by some as a potentially moderating force. In response to the EU sanction move last month, he tweeted: "Poland's sovereignty and the idea of United Europe can be reconciled."

Mr. Morawiecki is expected to introduce a new cabinet Tuesday. Analysts were watching closely to see what kind of foreign minister Mr. Morawiecki would sign on, and whether the new minister's views on Europe reflected the party's longheld skepticism toward EU integration.

While the new Polish premier will hope to protect Poland from steep spending cuts, there are limits to Brussels' budget leverage.

EU spending in Poland, while exceeding any other country, is a fraction of Poland's $470 billion gross domestic product. The growing economy might feel modest direct pain from EU cuts. More importantly, the move could scare off some private, multinational investors who have played a much larger role in Poland's post-communist growth.

Cuts wouldn't bite for many years and could play into Law and Justice's hands. The party has spent its two years in power telling Poles that they are in a pitched battle for their nation's sovereignty against an overbearing, German-dominated EU.

Most Poles tell opinion surveys they see the EU in a favorable light but views are shifting and many say Brussels is bullying their country. "This is the beginning of a domino effect," said Marcin Duma, president of Warsaw-based polling firm IBRiS. If the EU "pushes a little bit more or longer, they will start to change their minds."

(END) Dow Jones Newswires

January 09, 2018 06:46 ET (11:46 GMT)