An auditor’s perspective on rule of law conditionality
Max Gösswein, and Dieter Böckem, both from the investment for cohesion, growth and inclusion Directorate, and Marton Baranyi, Directorate of the Presidency.
A new Rule of Law Conditionality Regulation came into force in January 2021, and is applicable whenever breaches of the principles of the rule of law pose a potential risk to EU financial interests. The introduction of this new instrument to enforce the application of the rule of law means that the EU has created a new, legally binding link between the application of the principles of the rule of law, and the effective management of EU funds. The European Court of Auditors will ultimately need to reflect upon this for their audit work. Below, Dieter Böckem, Senior Administrator, Marton Baranyi, Institutional Relations Officer, and Max Gösswein, ECA trainee, analyse the conditionalities connected with the rule of law principle from an auditor’s perspective, highlighting the relevant dimensions and various challenges related to the auditing thereof.
Conditionality in EU finances, the emergence of the rule of law conditionality
Conditionality is a long‑standing governance tool, used in regulation as well as public revenue collection and spending. Its aim is to shape and influence various policy decisions and the behaviour of public and private stakeholders. Various types of conditionality already exist in EU policies, and they can be linked to different areas. In addition, EU finances are ‘conditional’ in the sense that all financial flows are subject to eligibility conditions. As the rule of law is one of the fundamental rights of the EU (1), its principles apply to all EU actions and finances. In addition, specific reference is made to the principle of the rule of law as a horizontal conditionality for the spending of the European Structural and Investment Funds (ESIF) (2) and the Resilience and Recovery Funds (3).
The conditionality introduced by the ‘Rule of Law Conditionality Regulation’ (4) applies whenever breaches of the principles of the rule of law pose a potential risk to EU financial interests. The novelty with this regulation is due to its applicability in the EU Member States themselves, thus complementing the existing mechanisms that are already in place to protect the rule of law in the EU. Examples include: temporary cooperation and verification mechanisms, preventive mechanism of the breach of values procedure — also known as Article 7 TEU, and infringement proceedings. Related to the existing procedures, the main feature is that based on this legal act, the Commission can act not only in response to specific irregularities, but also in the case of systemic rule of law deficiencies detected in the Member States. It therefore complements rather than replaces other existing instruments and processes that promote the rule of law.
As for the application of the new regulation, the Commission has been provided with a legal basis to carry out a thorough qualitative assessment of potential deficiencies as regards the rule of law in Member States, which must be objective, impartial and fair. In terms of auditing the rule of law conditionality, an important element is that EU action would only be applicable when there is a causal link between a breach of the rule of law and the sound financial management of the EU. The Commission published its guidelines on the application of the regulation at the beginning of March 2022
(5), which provide more details about how it will assess possible breaches.
Existing international indicators for rule of law and corruption
One approach for an objective rule of law assessment may include considering existing international indicators, which are published by various organisations. Each of these indicators has a different methodology and may cover sources that other indices do not cover. Therefore, assessing a country’s ranking within such an indicator may provide hints about the state of the rule of law or levels of corruption.
To assess the respect and application of the rule of law in a country, commonly used indicators include ‘World Governance Indicators — Rule of Law’ (published by the World Bank), the ‘Rule of Law Index’ (published by the World Justice Project), and the ‘Freedom in the World Index — Rule of Law Sub‑Index’ (published by Freedom House). The ‘Corruption Perception Index’ (published by Transparency International) and the ‘Control of Corruption Index’ (published by the World Bank) could serve as independent measures to determine specific levels of corruption. For all of these indicators for 2013‑2020, see below the highest, medium, and lowest country averages for the EU, as well as the three highest and the five lowest‑ranking countries individually.
The World Bank’s Rule of Law index (see Figure 1) assesses trust in societal rules, and the extent to which they are obeyed. Areas included are contractual enforcement, property rights, executive and legislative authorities, and overall criminal risks.
Figure 1 — EU extract of the World Bank Rule of Law index
With the aim of providing an index based on its own first‑hand data and surveys, the World Justice Project developed the ‘Rule of Law Index’ (see Figure 2). A country’s performance is measured by 44 indicators, covering a broad range of areas such as civil and criminal justice, fundamental rights, governmental power constraints, regulatory enforcement, or the absence of corruption. For the 2013‑2020 period, the indicator did not assess Cyprus, Ireland, Latvia, Lithuania, Luxembourg, Malta, or Slovakia.
Figure 2 — EU extracts of the World Justice Project Rule of Law Index
Produced as part of the ‘Freedom in the World Index’, the ‘Rule of Law Sub‑Index’ (see Figure 3) assesses freedom in a country. The aspects considered in this sub‑index are wide‑ranging, from the independence of the judiciary, to due process in civil and criminal matters, protection from illegitimate use of force and war, and assessing whether the fair and just application of law is ensured for different population groups.
Figure 3 — EU extracts of the Freedom House Rule of Law Sub‑Index
In terms of corruption measures, the World Bank’s ‘Control of Corruption Index’ (see Figure 4) aims to represent the extent to which public power is misused for any form of private gain, through combining several corruption indicators in a coherent way. These sources can be grouped into four types. To calculate the score, data from commercial business providers, non‑governmental organisation data, and public organisation data, household and corporate surveys are taken into account.
Figure 4 — EU extracts World Bank Control of Corruption Index
The ‘Corruption Perception Index’ by Transparency International (see Figure 5) ranks countries based on how corrupt they are perceived to be. It is composed of various data from surveys and assessments from other institutions and experts.
Figure 5 — EU extracts of the Transparency International Corruption Perception Index
Data analysis shows that a certain number of similarities recur across the various indicators:
- The Member States ranked highest in one index tend to perform well in the others. Likewise, the lowest‑ranked Member States’ data display the same pattern.
- No single country is perfect. Even the leading Member States (e.g. Finland, Sweden, Denmark and Austria) seldom reach the highest possible score. This indicates that these Member States also face some (minor) deficiencies.
- The gap between the best and lowest performing Member States is very significant. For several indicators, the lowest performing countries sometimes only attain half of the EU‑best scores.
- Rankings tend to be stable over time, usually with only minor fluctuations compared with previous years.
Since the indicators described above are based on different methodologies and coverage, they can have certain drawbacks. For example, the Corruption Perception Index often faces criticism for not relating to the true, current level of corruption, since the index10 only shows the perceived levels of corruption. Others argue that the state of rule of law assessments performed by experts outweigh the importance of the legal perspective and draw too little attention to the citizens11 perspective. Essentially though, the rule of law discussion is a legal one.
A general disadvantage with the indicators is the time lag between the assessment phase and the date of publication; for some indices, this can take one to two years. Therefore, evaluating recent changes in an institutional setting can only be carried out ex post, and it is impossible to forecast.
Despite the disadvantages, one strong advantage of such indicators can be their political independence. The risk of creating a manipulated index is mitigated by consulting many different experts and sources. Furthermore, assigning values to qualitative aspects allows them to be analysed quantitatively.
The Commission has tackled the issue of providing country‑specific analyses with the Rule of Law Report, which has been published annually since 2020. The input for these reports is provided by various stakeholders (national authorities, independent bodies, etc.), the reports are compiled, and then discussed with the Council, the European Parliament and the respective national parliament. Monitoring covers the following areas: legal system, anti‑corruption framework, media pluralism, and other institutional affairs connected to checks and balances. The Commission can comment on reforms and structural institutional deficits by expressing ‘concerns’ or ‘serious concerns’, but of course also by highlighting positive aspects. In the Annual Rule of Law Report methodology, the Commission does not explicitly use quantitative, but rather qualitative assessment approaches12.
Existing ECA audit experience in the field of conditionality and the rule of law
Given that conditionality has been an integral part of EU finances as an important governance tool, the ECA has substantial audit experience in terms of auditing conditionality in general, but also in auditing rule of law aspects, in particular in EU external policies. As previously highlighted, rule of law conditionality first appeared in EU external policies. In 2012, the ECA issued special report 18/12 on EU assistance on the rule of law related to Kosovo, assessing overall progress in different areas of the rule of law. The ECA’s audit in 2015/16 on the Western Balkans (special report 21/2016) assessed several dimensions related to the rule of law (for example, effectiveness of pre‑accession assistance in the fields of public administration and the rule of law). In the recent special report 23/2021 on Ukraine, the ECA assessed whether EU support in Ukraine was effective at fighting grand corruption. Furthermore, the second report on the Western Balkans (special report 01/2022) assessed whether EU support for the rule of law in the six Western Balkan countries who hope to join the EU has been effective.
Challenges for the ECA in auditing the rule of law conditionality
Auditing conditionality with regard to the rule of law will include several challenges. As illustrated by the indicators, while differences between Member States with regard to the principles of the rule of law are clearly visible and significant, all countries have some deficiencies. In addition to these general deficiencies for applying the principles of the rule of law, there is a direct and serious risk regarding the financial interests of the EU. Although some examples of breaches are mentioned in the Conditionality Regulation, specific conditions where one of these deficiencies is so serious that the financial interests of the EU are directly and seriously affected, are not expressly defined by the EU’s legislative authorities. While the guidelines do provide further information, the ECA may need to determine whether the Commission has assessed the situation in an objective, impartial and fair manner, as required by the guidelines themselves.
Following an evaluation as to whether a breach of the rule of law does seriously affect the EU’s financial interests, the Commission’s countermeasures should be proportionate. Aspects to consider might be whether the measures do indeed reduce the risks related to the financial interests of the EU, and whether they are able to help to remedy the breach of the rule of law as such. Other EU objectives and basic principles (e.g. human dignity, freedom and democracy) might also need to be taken into account when assessing the appropriateness of measures taken by the EU. The ECA has to ensure, as in the previous reports mentioned above, that for such highly sensitive topics, its assessment is based on clear and objective criteria. Therefore, any specific audit on the respect of the rule of law principle and its relation to the financial interests of the EU has to clearly define the audit criteria and ideally agree on them with the potential stakeholders. This will be a challenging task at the beginning of any audit in this area.
The ECA must check the legality of payments in view of the annual Statement of Assurance. In this respect, the impact of conditionalities related to rule of law principles in different areas still has to be assessed by the ECA.
Another challenge might be connected to implementing an ECA audit. The assessment and evaluation of rule of law deficiencies in any Member State might involve, for example, checking possible deficiencies in the legal systems of that Member State. It is not yet clear whether the ECA’s mandate is sufficiently broad to carry out its own audits in areas where no EU funds are currently spent, but where the financial interests of the EU may potentially be affected.
The way forward — overview of planned ECA audit work on the rule of law
Since the rule of law is one of the EU’s founding values, and the EU has given clear signals that its implementation is important for securing its financial interests, the ECA will have to deal with this issue of conditionality in the future. Indeed, it is already present in the ECA strategy (2021‑2025), which explicitly refers to the rule of law as one of the areas on which to focus audit work. This is also due to the fact that the rule of law is an area of significant interest to the ECA’s key stakeholders.
So far, the ECA’s adopted work programme includes one rule of law‑related task on the implementation of the rule of law conditionality in the area of cohesion, which is due to start in 2022. Nevertheless, taking into account both the importance of the rule of law principle and stakeholder expectations, it is possible that the ECA will assess various facets of the rule of law conditionality in the near future. Such audit tasks could take various forms for example, performance audits or reviews. They could also possibly cover the assessment of the coordination and division of responsibilities between the wide range of institutional stakeholders involved with the rule of law, or assess the effectiveness of EU funds for strengthening the rule of law. We anticipate decisions from the ECA in the future, in terms of the what, when, and how with regard to its audit activities addressing the rule of law conditionality.
(1) See Article 2 of the Treaty on European Union (TEU).
(2) See Article 15.1 of Regulation (EU) 2021/1060 (Common Provision Regulation).
(3) See Article 8 of Regulation (EU) 2021/241 (Recovery and Resilience Facility).
(4) Regulation (EU, Euratom) 2020/2092 on a general regime of conditionality for the protection of the Union budget.
(5) Guidelines on the application of the Regulation (EU, EURATOM) 2020/2092 on a general regime of conditionality for the protection of the Union budget; C (2022) 1382 final.
(6) Kaufmann D., Kraay A., & Mastruzzi M., The worldwide governance indicators: Methodology and analytical issues, (World Bank Working Paper 5430), 2010.
(7) World Justice Project (2021). Rule of Law Index. Retrieved from https://worldjusticeproject.org/our-work/research-and-data/wjp-rule-law-index-2021/current-historical-data.
(8) Freedom House (2022). Freedom in the World. All Data, FIW 2013‑2022. Retrieved from https://freedomhouse.org/report/freedom-world.
(9) Transparency International, Corruption Perception Index. Full Data Set, 2021. Retrieved from https://www.transparency.org/en/cpi/2020.
(10) Cieślik, A., & Goczek, Ł, Control of Corruption, International Investment, and Economic Growth — Evidence from Panel Data. World Development, 103, 323‑335, 2018, doi: 10.1016/j.worlddev.2017.10.028.
(11) Hertogh, Marc, Your rule of law is not mine: rethinking empirical approaches to EU rule of law promotion. Asia Europe Journal, 14(1), 43‑59, 2016, doi: 10.1007/s10308–015–0434-x.
(12) European Commission: European Rule of Law mechanism: Methodology for the preparation of the Annual Rule of Law Report.
This article was first published on the 1/2022 issue of the ECA Journal. The contents of the interviews and the articles are the sole responsibility of the interviewees and authors and do not necessarily reflect the opinion of the European Court of Auditors.