- Leonardo N. S. Chammas
The principal-agent problem within the EU: an analysis of financial sanctions against Poland
*Este material, seus resultados e conclusões são de responsabilidade dos autores e não representam, de qualquer maneira, a posição institucional da Fundação Getulio Vargas / FGV Direito Rio ou do FGV Jean Monnet Centre of Excellence on EU-South America Global Governance.
According to article 2 of the Treaty on European Union (TEU), the core values of the EU are “respect for human dignity, freedom, democracy, equality, the rule of law and respect for human rights, including the rights of persons belonging to minorities”. In the event of a Member-State disrespecting one or several of these principles and failing to fulfil its legal obligations, the organisation, through its normative sources, offers some legal mechanisms.
There are essentially four repressive tools that deal with this type of situation. The first one is the Rule of Law Framework, which provides for a “structured dialogue” between the Member-State and the European Commission (EC), the politically independent executive branch of the EU. If the first alternative does not work, the article 7 TEU establishes a procedure granting the authority to sanction Member-States who systematically violate the foundational values established in article 2 TEU to the European Council (EUCO), a collegiate body who defines the overall political orientations of the EU. As a third instrument, the infringement procedure, set out under articles 259 and 260 of the Treaty on the Functioning of the European Union (TFEU), can be launched by the EC if a country fails to apply the EU law. It may lead to referral by the Court of Justice of the European Union (CJEU) and may result in financial penalties if the Member-State does not comply with the Court’s judgment. The fourth mechanism is the Conditionality Regulation recently adopted by EUCO, that, through its article 5, allows the organisation to block funds directed to Member-States because of violations in the rule of law.
This subject is becoming especially important as some countries seem to deliberately defy the EU's authority. By exploring the case of Poland and its judicial branch, the purpose of this article is to understand what is behind this phenomenon, as well as the reason for the apparent inability of the organisation and its sanctioning mechanisms to fight it, in the light of concepts of the Economic Analysis of Law.
The analysis of financial sanctions against Poland
The Polish example is particularly relevant because all of the above-mentioned measures were taken against the country. Actually, the first activation in History of the article 7 TEU procedure was due to rule of law violations in Poland. In short, the accusations are regarding the instrumentalisation of the judicial branch and the suppression of its impartiality for political gain, specially by placing judges loyal to the ruling party PiS (Law and Justice) and by chasing political opponents via the Disciplinary Chamber of the country’s Supreme Court. There are several judgments of the CJEU and the European Court of Human Rights (ECtHR) concerning this matter. In the Case C-791/19, for example, the CJEU understood that Poland, in a broader analysis, has failed to secure the independence of the entire Judiciary and “to fulfil its legal obligations under the second subparagraph of Article 19(1) TEU”. Recently, the CJEU also imposed a €1 million daily fine until the nation suspends the activities of the Disciplinary Chamber. The European Parliament, in turn, adopted a resolution calling the EC into action to withhold Polish’ access to the general EU budget and to the country’s slice of the coronavirus recovery fund.
However, contrary to what one might expect, even after these severe punishments, Poland did not stop defying the EU. One interesting case about it is the recent “abolition” of the Disciplinary Chamber and its replacement by the Chamber of Professional Responsibility, which shares very similar characteristics with the old one. According to some critics, it was merely a cosmetic change. Also, Jarosław Kaczyński, the Polish de facto ruler, stated that Poland “had no reason to fulfil its obligations towards the EU”, since the organisation would have allegedly “broken an agreement” after applying the Conditionality Regulation. It is interesting to notice that such a hard financial blow does not change at all the confrontational attitude of the Polish government.
In order to investigate why this is happening, it is important to understand the desired effects of a sanction. Basically, sanctions are conceived as non-military means of convincing or compelling another State to disengage from acts violating international law and are considered by scholars and policymakers a useful tool to stigmatize and isolate their targets. Nevertheless, past experiences show that sanctions are often ineffective and, quite paradoxically, in some cases, targeted regimes can even react to them with policies that amplify its harmful effects.
In the case of Poland, it is crystal clear that sanctions are not reaching their full potential, since the nation is still engaged in unlawful acts. A Law and Economics approach may perceive this phenomenon through the lens of the principal-agent model, which is “a heuristic tool that helps to explain the reasons, modalities, and consequences of the delegation of authority in social as well as political contexts”. In this model, at first, there is a principal who delegates authority to an agent. Then, the agent executes the delegated task on behalf of the principal. In the functioning of the EU, one can cognize the existence of a principal-agent relationship because of its multilevel governance structure, whereby different responsibilities are shared between Member-States and the supranational stage.
The problem is simple: the agent’s interests are not always aligned with the principal’s interest. The principal-agent problem usually occurs when the principal depends on an agent to perform a costly task for the agent himself, whose supervision is difficult to perform. Even though there are mechanisms designed to align the interests of the agent in solidarity with those of the principal (such as daily fines or the freezing of funds), in many cases, it remains difficult for the principal to ensure that the agent’s behaviour is in accordance with its interests.
The question that emerges is: why, even after these harsh financial sanctions, does it remain so difficult for the principal in this case (the EU) to ensure that the Polish rulers' behaviour is in accordance with its core values? The answer lies in the difference between wealth and utility. In summary, while wealth corresponds to the abundance of material resources, utility is the measure of personal satisfaction of individuals in a society. Since there is no objective method for determining one’s level of satisfaction, money is an alternative parameter commonly used to measure it. However, money is a measuring scale of wealth, not of utility. This use may cause significant distortions when interpreting reality in some cases.
To politicians like Kaczyński, under a strictly monetary point of view, it is obviously harmful for the country’s finances to receive these sanctions, since they are losing resources that could be used, for instance, to invest in new technologies or in providing humanitarian help to Ukrainian refugees. Besides, financially speaking, it is not very expensive to place impartial judges in Courts. Nevertheless, of course, one cannot properly analyse this entire conjuncture in a purely financial way, as it does not take into account the perspective of utility.
On the one hand, non-compliance certainly brings negative consequences for the ruling political elite. For instance, by disrespecting the CJEU, not only the government may lose potential political support, since the daily loss of €1 million could be used for the benefit of the Polish people - what would tend to increase the PiS popularity -, but also it may increase criticism and ignite internal opposition.
On the other hand, though, compliance costs of promoting reforms in the Judiciary are a lot higher to Polish rulers in a consequentialist analysis. Seriously attempting to reform the judicial branch would demoralize and weaken these politicians in a way that it is simply more rational to keep engaging in unlawful acts. The Disciplinary Chamber was literally conceived to combat corruption and to de-communize the courts. Its effective dismantlement would mean throwing away relevant political power and going against the party’s own right-wing and anti-corruption discourse used to attract voters. Moreover, the PiS gets political sustenance precisely by weaponizing a populist and confrontational approach towards the EU. Compliance, in these terms, could symbolize contradiction and fragility in the eyes of the electorate.
Any attempt to align the agent’s interest with the principal’s in this case, therefore, must try to reverse this balance, i.e., to increase non-compliance costs and to decrease compliance costs. A possible solution is to escalate the daily fine to a very significant extent - observing, of course, proportionality considerations -, attempting to transform long-term permanence of Poland in the organisation financially detrimental or, at least, not so advantageous. This would possibly force the Polish leaders to make a final decision: respecting the EU’s authority or leaving it, just like the UK.
One may argue that if Poland and other Member-States go through ultranationalist political waves and decide to leave in the next decades, the EU may get very weakened and even more distant from promoting its core values across Europe. Nonetheless, efforts in this direction should be put forward, otherwise it would mean giving up on the organisation’s ambitious ideals.
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