- The Court confirms the validity of the conditionality regulation, in force since early 2021.
- The mechanism links the payment of EU funds to respect for the rule of law where this affects their management.
- For companies and beneficiary bodies, the key point is that final payments must not be interrupted by decisions beyond their control.
On 16 February 2022 the Court of Justice of the European Union dismissed the actions for annulment brought by Hungary and Poland (cases C-156/21 and C-157/21) against Regulation 2020/2092, known as the conditionality mechanism. The rule allows the EU budget to be protected when breaches of the principles of the rule of law in a Member State affect, or threaten to affect, the sound financial management of the funds.
The regulation entered into force on 1 January 2021, but its application was awaiting the Court’s view. The ruling clears the way for it to be triggered. It can end in the suspension of payments or commitments, or a reduction in funding, for a given State. It is a decision of political and legal weight that also interests anyone who receives EU money or works on co-financed projects. Hungary and Poland argued that the Union lacked a legal basis to link funds to the rule of law; the Court did not accept this.
How the mechanism works
The procedure starts with the European Commission, which must establish that breaches of the rule of law exist and that they affect, or put at risk, the management of the budget or the protection of the Union’s financial interests. It then proposes measures to the Council, which decides by qualified majority. Areas that can be examined include judicial independence, the fight against corruption and public procurement.
The regulation includes an important safeguard for those at the end of the chain: even if measures are adopted against a State, it remains obliged to pay final recipients, whether companies, universities, farmers or other bodies. The idea is that the consequences of a political failure should fall on the offending government and not on those taking part in a project with European funding.
Why it matters beyond two countries
The mechanism applies to the whole EU budget, including the Next Generation EU recovery funds, of which Spain is one of the largest beneficiaries. The Court has made clear that making EU money conditional on respect for the Union’s values does not encroach on national powers but protects an interest of the Union itself: that its budget be managed with safeguards.
For investors and companies with cross-border activity, the ruling reinforces the idea that respect for the rule of law has measurable economic consequences. An independent judiciary, transparent public procurement and effective control of corruption are part of what determines the security of contracts, payments and projects that depend on public funding. In practical terms, a delay or suspension of funds could translate into delayed calls for aid and uncertainty for suppliers and beneficiaries.
What to review
Companies with projects financed by EU funds, in Spain or elsewhere, should check who the final payer is, what justification obligations they have and which clauses govern delays or suspensions of payment. It is also worth knowing the complaint procedures against the authority that manages the aid.
Anyone dealing with public counterparties in countries under Commission scrutiny can strengthen their prior analysis, paying special attention to procurement and payment periods. Your adviser can help you review contracts and guarantees. The ruling does not by itself change the situation of any specific project, but it does change the framework in which future decisions will be applied.
The ruling confirms that the Union can link its money to respect for the values on which it is founded.
This article is general information. It is not legal, tax or investment advice, and it does not take anyone’s particular circumstances into account.
