BUDAPEST – After some delay, Poland’s government, controlled by the Law and Justice (PiS) party, has finally responded to concerns raised by the European Commission about its legislative attack on judicial independence. But, according to Frans Timmermans, the Commission’s first vice president, Poland is still refusing to cooperate, and has not announced “any concrete measures to address the issues raised.”
It remains to be seen if the European Union will use the political and economic tools at its disposal to sanction the Polish government. We believe it should – resolutely and swiftly. The PiS’s efforts to bring Poland’s courts under political control violate the EU’s fundamental democratic values and threaten its governance of the single market. At this point, continued inaction on the EU’s part could threaten the project of economic integration altogether.
Market integration among economies at different levels of development relies primarily on regulatory standardization. The single market works because an entrepreneur in the Netherlands and an entrepreneur in Poland can both expect to be governed by the same rules, regardless of whether they are selling goods or investing in Italy, Hungary, France, or Bulgaria. These agreed rules are enforced not just by EU courts and bureaucracies, but also by national courts in the member states.
The EU’s framework for enforcing common rules, however, does not automatically confer the same benefits to each member state. When market integration was pursued in earnest in the 1980s, it was agreed that member states with less developed economies would be entitled to transfers until they had caught up with the bloc’s average level of development. Today, such transfers represent about a third of the EU budget, and 2-5% of GDP in the recipient economies.
This arrangement was meant to reduce disparities among EU members to the point that transfers would no longer be needed. But it always had a crucial weakness: the EU has only limited authority to control the domestic institutions in charge of ensuring that recipient countries spend the funds appropriately. And a country’s judiciary is chief among those institutions.
We have researched how evolving state capacities affect economic development in 17 Central and Eastern European countries, and we found that autonomous judiciaries are of central importance. Capable, independent courts are the prime movers behind the development of a professional state bureaucracy. Without judicial oversight, there is no guarantee that supervisory agencies will monitor and enforce the rules of market competition effectively and impartially.
We have also found that increased judicial autonomy boosts economic development in countries even before they have joined the EU. When a country’s courts become more reliable and predictable, its exports tend to increase and become more technologically complex soon thereafter.
By the same token, judiciaries can hinder economic development if they are not independent or reliable. When domestic firms cannot count on courts to issue fair and consistent rulings, they will conclude that success depends less on entrepreneurship than on cronyism or loyalty to market incumbents. Accordingly, they will invest less, and shy away from innovation.
Hungary’s recent experience demonstrates that if incumbents do not fear judicial oversight, they will engage in predatory behavior toward weaker market participants, thereby capturing larger segments of the economy. This ultimately results in declining public revenue, which forces the government to look for other ways to finance basic public goods. To keep the economy afloat and remain in power, the government will become all the more reliant on EU transfers.
The Polish and Hungarian governments have turned the worst nightmare of the single market’s founding fathers into a reality. In both countries, the institutions that could help domestic actors to benefit from market integration are being undermined – to say nothing of citizens’ rights and opportunities – even as the illiberal regimes causing this erosion continue to receive EU funds.
This state of affairs has exposed the limits of EU-level control over how the bloc’s money is spent within member states; and it shows that the development of domestic institutions can be reversed all too easily. When the single market was created, many assumed that it would provide ample incentives for domestic firms and policymakers to develop sound national-level institutions, in order to capitalize on lucrative new opportunities. But that assumption’s flaws have now been laid bare.
The tragedy in Greece after the financial crisis a decade ago showed that incumbents will not necessarily take it upon themselves to develop strong institutions. And in Poland and Hungary today, we are learning that illiberal governments will even go so far as to weaken their own country’s institutions for political gain. The time has come for the EU to take bold action before other member-state governments try the same trick.
Laszlo Bruszt is Professor of Sociology at the Central European University in Budapest and at Scuola Normale Superiore in Florence. Nauro F. Campos is Professor of Economics and Finance at Brunel University London and a Research Professor at ETH-Zürich.