Poland (A+/Stable) remains on a political collision course with the European Union (EU) on three fronts, sparking deeper divisions between budgetary net contributor and net recipient nations:

1. Tensions over Poland's controversial judicial reforms have deepened: after several years of legal disputes, the Polish government is ignoring EU concerns about violations in the application of the rule of law.
    
2. Poland opposes proposed funding cuts to the Cohesion Policy for the 2021-2027 period, in the context of a funding squeeze after Brexit, consistent with November 2019 declarations by the ‘Friends of Cohesion’, a group consisting of net EU fund recipients in southern and eastern Europe.
    
3. By refusing to implement the agreement by EU leaders of December 2019 that aims for EU carbon neutrality by 2050, the Polish government is blocking the EU’s green deal prospects.

Poland’s long-running disagreements with the EU over the ‘Rule of Law’ procedures are unlikely to subside.

“The Polish government’s push to reform its judicial framework despite warnings from Brussels has contributed to perceptions of deepened rifts between western and central European member states of the EU,” says Jakob Suwalski, Scope Ratings’ lead sovereign analyst for Poland.

In theory, the EU could try to remove Poland's voting rights within the EU by having member states vote on invoking Article 7 of the Treaty on European Union. However, sanctions require a unanimous decision by the European Council. Hungary has repeatedly said that were such a Council vote to occur, it would veto.

In the context of the next Multiannual Financial Framework (MFF) for 2021-2027, net contributor countries have suggested that future EU funding should be made conditional upon the upholding of democratic values, alongside a re-allocation of EU budgetary funds to new priorities such as climate change, at the expense of cohesion and agricultural policies. However, net beneficiaries from the EU budget, i.e. southern and eastern European member states, are insisting on unchanged funding levels for Cohesion Policy in real terms.

“The currently diverging interests of EU member states in the upcoming Multiannual Financial Framework 2021-2027 do not yet add up,” says Suwalski. “The difficult basis for negotiations around the MFF– which must be agreed unanimously – is further complicated by budgetary limitations in a post-Brexit world. Delays to the EU’s new long-term financial framework due to come into force at the start of 2021 would imply cuts to spending next year.”

“This constellation will feed into intense discussions within the EU, with the optionality to make funding conditional on the rule of law likely to become a bargaining chip in the negotiations surrounding the MFF 2021-2027,” adds Suwalski. Moreover, the Commission’s different approach to similar violations in Hungary has made it easier for Poland’s governing party to claim that it is being unfairly singled out. In Scope’s opinion, European Commission President Ursula von der Leyen has taken a step in the right direction by proposing an annual report on the state of the rule of law across all EU member states.

The World Bank’s Worldwide Governance Indicators show that between 2009 and 2018 the rule of law deteriorated in 17 EU member-states, with four countries (Bulgaria, France, Hungary and Poland) being assessed as being in a worse state overall in 2019 than in 2015. “While a member state’s lack of respect for the rule of law might pose a threat to its proper use of EU funds, it does not necessarily prove by itself corruption or the misallocation of EU funds”, Suwalski points out.

Still, the Polish government will likely modify current judicial reforms, partly due to the country’s reliance on EU structural fund inflows.

“Drastic measures like the elimination of EU voting rights for Poland remain unlikely, as it is in the interests of the EU to distribute continued funds to Poland, including, for example, for pan-European road networks and, particularly, railroads given the European Commission’s climate focus. As EU funds allocated to one member state benefit others by creating market opportunities, compromises between net beneficiary and net contributor countries are indispensable”, Suwalski noted.