EU’s latest challenge – rule of law

EU’s latest challenge – rule of law

As if the European Union didn’t have enough to worry about. Its latest concern is that the Polish and Greek governments may be flouting the rule of law.

The flood of refugees, the risk that Britain may quit the EU and the euro crisis are bad enough. But if countries in what is supposedly a club of liberal democracies undermine the rule of law, it contravenes a core value. What’s more, if people can’t rely on the rule of law, it is bad for investment.

The Polish situation has garnered the most headlines. Last week, the European Commission started a preliminary assessment of whether its new right-wing nationalist government was complying with the rule of law.

This was partly because the government passed a law in December requiring the country’s constitutional court to secure a two-thirds majority for most of its rulings, rather than a simple majority. Critics said this neutered the court as a check on government power.

Then, earlier this month, the government pushed through a law giving it the power to appoint the heads of state-run broadcasters. The next day it parachuted a former parliamentarian from its own party to run state television.

Poland seems to be following a playbook pioneered by Hungary, whose nationalist government cut the power of its top court and undermined the independence of its central bank earlier in the decade. Viktor Orban, the Hungarian prime minister, said last week he would block any sanctions against Poland.

The EU is founded on a series of principles that include democracy and the rule of law. When a country flouts these values, the Union can in extremis remove the government’s voting rights.

Although the Commission has only started a preliminary investigation, this has already provoked a war of words. One Polish minister compared EU “supervision” to the Nazi occupation in World War Two.

Investors have reacted badly. The zloty fell to a four-year low versus the euro on Jan. 15 after Standard & Poor’s cut the country’s credit rating, saying the government had weakened the independence of key institutions.

Now look at Greece. The chief executive of Piraeus Bank, the country’s largest, resigned on Jan. 15 after rumours that the leftist SYRIZA government had put pressure on him to quit via the head of the Hellenic Financial Stability Fund, the country’s bank holding company. The bank’s shares fell 22 percent in two days.

When these rumours started circulating, Paulson & Co, a hedge fund that owns more than 9 percent of Piraeus, wrote to the HFSF to complain. It said it had invested in the bank in last month’s rescue share issue on the understanding that Anthimos Thomopoulos, an executive it rated as “highly capable”, would stay as chief executive.

Paulson argued that the HFSF would not have the authority to request the chief executive’s resignation and that, if it had delivered such a request on behalf of the government, it “would clearly have been in violation of the laws governing the HFSF and, in particular, safeguarding its independence from political interference.”

The HFSF put out a statement on Jan. 14 denying it had made any such request. Later that day, the Eurogroup of eurozone finance ministers made clear that it wanted Greece to depoliticise its banks and public administration. Despite this, the following day Thomopoulos resigned.

Given that the eurozone has lent Athens vast sums of money (some of it to recapitalise Piraeus Bank) and the European Central Bank is now the bank’s supervisor, the creditors need to get to the bottom of what happened.

There are also other worrying signs that the Greek government of Alexis Tsipras may be flouting the rule of law. Last year, it sacked the head of the supposedly independent tax authority. It also passed a law giving the government more control over television.

Kyriakos Mitsotakis, who was elected leader of the opposition earlier this month, said there was an attempt “to control the justice system, to tamper with independent authorities, to stuff the state with friends and family, and to roll back reforms in education.”

When Tsipras fired the tax boss, Greece’s eurozone creditors barely murmured, despite the fact tax evasion is one of the country’s biggest problems. The European Commission seemingly didn’t want to be too harsh on the government because it wants to believe that its latest 86 billion euro bailout plan is working.

But respect for the rule of law is probably even more important for Greece’s economic future than balancing budgets and freeing up markets. It is also important for Poland’s economy.

The EU is in a quandary over how to respond. It doesn’t want to pick more quarrels when it is already fighting battles on multiple fronts. But if it turns a blind eye, bad behaviour could spread.

[Reuters Breakingviews]

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