1. The first and second pleas, alleging that the European Union lacked competence to adopt the contested regulation

(1) The legal basis for the contested regulation

98 As a preliminary point, it should be borne in mind that, under Article 322(1)(a) TFEU, the Parliament and the Council, acting in accordance with the ordinary legislative procedure, and after consulting the Court of Auditors, are to adopt by means of regulations ‘the financial rules which determine in particular the procedure to be adopted for establishing and implementing the budget and for presenting and auditing accounts’.

99 Such rules are intended to regulate all aspects related to the implementation of the Union budget covered by Title II, entitled ‘Financial provisions’, of Part Six of the TFEU, relating to ‘institutional and financial provisions’ and, therefore, to regulate implementation in the broad sense.

100 Aside from the fact that Article 322 TFEU is found in Chapter 5, entitled ‘Common provisions’, of Title II, it should be noted that reference is made to that provision in Article 310(2) and (3) TFEU, which is found in the introduction to Title II, in the first and second paragraphs of Article 315 and in the first and second paragraphs of Article 316 TFEU, which are found in Chapter 3 of Title II, entitled ‘The Union's annual budget’, and in Article 317 TFEU, which is found in Chapter 4 of that title, entitled ‘Implementation of the budget and discharge’.

101 Articles 310 and 315 to 317 TFEU all relate to the implementation of the Union budget.

102 Article 310 TFEU states, in paragraph 1, that all items of revenue and expenditure of the Union are to be included in estimates to be drawn up for each financial year and are to be shown in the budget; it provides, in paragraph 3, that the implementation of expenditure shown in the budget requires the prior adoption of a legally binding Union act providing a legal basis for Union action and for the implementation of the corresponding expenditure in accordance with the regulation referred to in Article 322 TFEU, except in cases for which that law provides. Lastly, Article 310 TFEU requires, in paragraph 5, that the budget be implemented in accordance with the principle of sound financial management and that Member States cooperate with the Union to ensure that the appropriations entered in the budget are used in accordance with that principle.

103 The first paragraph of Article 315 TFEU provides that if, at the beginning of a financial year, the budget has not yet been definitively adopted, a sum equivalent to not more than one twelfth of the budget appropriations for the preceding financial year may be spent each month in respect of any chapter of the budget in accordance with the provisions of the regulations made pursuant to Article 322 TFEU; that sum is not, however, to exceed one twelfth of the appropriations provided for in the same chapter of the draft budget. Article 316 TFEU relates to the carrying forward to the next financial year of any appropriations that are unexpended at the end of the financial year.

104 Article 317 TFEU states, inter alia, that the Commission is to implement the budget in cooperation with the Member States, in accordance with the provisions of the regulations made pursuant to Article 322 TFEU, on its own responsibility and within the limit of the appropriations, having regard to the principle of sound financial management. It also requires Member States to cooperate with the Commission to ensure that the appropriations are used in accordance with that principle and states that regulations made pursuant to Article 322 TFEU are to lay down the control and audit obligations of the Member States in the implementation of the budget and the resulting responsibilities.

105 It follows that the financial rules which determine ‘in particular the procedure to be adopted for’ implementing the budget and for presenting and auditing accounts, within the meaning of Article 322(1)(a) TFEU read in the light of the provisions referred to in paragraph 101 above, cover not only the rules which define how expenditure shown in the budget is to be implemented as such but also, in particular, the rules which determine the control and audit obligations on the Member States when the Commission implements the budget in cooperation with them, and the resulting responsibilities. In particular, it is clear that those financial rules are intended, inter alia, to ensure observance of the principle of sound financial management, including by the Member States, when implementing the Union budget.

106 It is in the light of the above considerations that it is necessary to examine, in the present case, whether Article 322(1)(a) TFEU is capable of constituting the appropriate legal basis for the adoption of the contested regulation.

107 In that regard, it is settled case-law that the choice of legal basis for an EU measure must rest on objective factors that are amenable to judicial review; these include the aim and content of that measure (judgments of 3 December 2019, Czech Republic v Parliament and Council, C‐482/17, EU:C:2019:1035, paragraph 31; of 8 December 2020, Hungary v Parliament and Council, C‐620/18, EU:C:2020:1001, paragraph 38; and of 8 December 2020, Poland v Parliament and Council, C‐626/18, EU:C:2020:1000, paragraph 43).

108 In addition, to determine the appropriate legal basis, the legal framework within which new rules are situated may be taken into account, in particular in so far as that framework is capable of shedding light on the purpose of those rules (judgments of 3 December 2019, Czech Republic v Parliament and Council, C‐482/17, EU:C:2019:1035, paragraph 32; of 8 December 2020, Hungary v Parliament and Council, C‐620/18, EU:C:2020:1001, paragraph 39; and of 8 December 2020, Poland v Parliament and Council, C‐626/18, EU:C:2020:1000, paragraph 44).

109 In the present case, as regards, in the first place, the question whether the contested regulation, in the light of its purpose, falls within the scope of the legal basis of Article 322(1)(a) TFEU, Hungary, supported by the Republic of Poland, submits that the ultimate objective of that regulation is to enable the Commission and the Council to examine whether the principles of the rule of law are respected by the Member States and, if breaches of those principles are found, to impose penalties through the Union budget, an objective which is also apparent from the explanatory memorandum accompanying the Commission proposal which led to the adoption of that regulation.

110 In that regard, first, Article 1 of the contested regulation states that that regulation establishes ‘the rules necessary for the protection of the Union budget in the case of breaches of the principles of the rule of law in the Member States’. It is thus apparent from the wording of that provision that the contested regulation is intended to protect the Union budget from any effects that may result from breaches of the principles of the rule of law in the Member States.

111 Secondly, it follows from a combined reading of Article 4(1) and Article 6(1) of the contested regulation that the procedure laid down for the adoption of ‘appropriate measures’ for the protection of the Union budget can be initiated by the Commission only where it finds that there are reasonable grounds for considering not only that there have been breaches of the principles of the rule of law in a Member State, but, in particular, that those breaches affect or seriously risk affecting the sound financial management of the Union budget or the protection of the financial interests of the Union in a sufficiently direct way.

112 In addition, under Article 5(1) and (3) of that regulation, those appropriate measures consist, essentially, in the suspension of payments, of the implementation of legal commitments, of the disbursement of instalments, of the economic advantage under a guaranteed instrument, of the approval of programmes, or of commitments; terminations of legal commitments; prohibitions on entering into new legal commitments or entering into new agreements; early repayments of guaranteed loans; reductions of the economic advantage under a guaranteed instrument, of commitments or of pre-financings; and interruption of payment deadlines, and those measures must be proportionate, that is to say, limited to what is strictly necessary in the light of the actual or potential impact of breaches of the principles of the rule of law on the financial management of the Union budget or the financial interests of the Union.

113 Furthermore, in accordance with the second subparagraph of Article 7(2) of the contested regulation, the Commission is to propose to the Council that the adopted measures be lifted where the conditions laid down Article 4 of that regulation are no longer fulfilled and, therefore, in particular where the sound financial management of the Union budget or the protection of the financial interests of the Union is no longer affected or at serious risk of being affected, with the result that, as the Advocate General observed in point 185 of his Opinion, those measures must be lifted where the impact on the implementation of the budget ceases, even though the breaches of the principles of the rule of law found may persist.

114 The types of measures which may be adopted, the criteria relating to the choice and scope of those measures and the conditions for the adoption and lifting of measures, in so far as they all relate to an effect or a serious risk of an effect on the sound financial management of the Union budget or the protection of the financial interests of the Union, support the finding that the purpose of the contested regulation is to protect the Union budget during its implementation.

115 Furthermore, it is apparent from the wording of Article 5(2) of the contested regulation, read in the light of Article 5(4) and recital 19 of that regulation, that that provision is intended not to penalise a Member State for a breach of a principle of the rule of law, as Hungary, supported by the Republic of Poland, submits, but to safeguard the legitimate interests of final recipients or beneficiaries when appropriate measures are adopted under that regulation against a Member State. That provision thus sets out the consequences of such measures with regard to third parties. Accordingly, that provision is not such as to support the claim that the contested regulation is intended to penalise breaches of the principles of the rule of law in a Member State rather than to protect the Union budget.

116 Thirdly, as the Advocate General stated in point 130 of his Opinion, the recitals of the contested regulation confirm the objective pursued by that regulation, consisting, as apparent from Article 1 thereof, in the protection of the Union budget. Recitals 2 and 7 through 9 of that regulation indicate, in particular, that the European Council has stated that the financial interests of the Union are to be protected in accordance with the values set out in Article 2 TEU, that, whenever Member States implement the Union budget, respect for the rule of law is an essential precondition for compliance with the principles of sound financial management enshrined in Article 317 TFEU, that Member States can only ensure sound financial management if public authorities act in accordance with the law, if breaches of the law are effectively pursued and if arbitrary or unlawful decisions of public authorities can be subject to effective judicial review, and that the independence and impartiality of the judiciary and investigation and prosecution services are required as a minimum guarantee against unlawful and arbitrary decisions of public authorities that could harm the financial interests of the Union. Recital 13 of the contested regulation states that, in that context, there is therefore ‘a clear relationship between respect for the rule of law and the efficient implementation of the Union budget in accordance with the principles of sound financial management’, and recital 15 of that regulation specifies that ‘breaches of the principles of the rule of law, in particular those that affect the proper functioning of public authorities and effective judicial review, can seriously harm the financial interests of the Union’.

117 As regards recital 14 of the contested regulation, while that recital states that the mechanism provided for by that regulation ‘complements’ the instruments that promote the rule of law and its application, it specifies that that mechanism does so ‘by protecting the Union budget against breaches of the principles of the rule of law affecting its sound financial management or the protection of the financial interests of the Union’.

118 Fourthly, it is true that, in the explanatory memorandum accompanying its proposal which led to the adoption of the contested regulation, the Commission stated that wishes had been expressed in favour of the European Union's taking action to protect the rule of law and, consequently, adopting measures to ensure that it is respected. Nevertheless, in that explanatory memorandum, the Commission justified its proposal by the need ‘to protect the Union's financial interests from the risk of financial loss caused by generalised deficiencies as regards the rule of law in a Member State’.

119 In the light of the foregoing considerations, it must be found that, contrary to Hungary's submission, supported by the Republic of Poland, the purpose of the contested regulation is to protect the Union budget from effects resulting from breaches of the principles of the rule of law in a Member State in a sufficiently direct way, and not to penalise those breaches as such.

120 That purpose is in line with the requirement that the Union budget be implemented in accordance with the principle of sound financial management, laid down in particular in Article 310(5) TFEU, that requirement being applicable to all the provisions of Title II of Part Six of the TFEU relating to the implementation of the Union budget and therefore, inter alia, to Article 322(1)(a) TFEU.

121 In the second place, as regards whether, in the light of its content, the contested regulation falls within the scope of the legal basis of Article 322(1)(a) TFEU, Hungary, supported by the Republic of Poland, submits, in essence, that that cannot be the case for, in particular, Articles 2 to 4 and Article 5(2) of that regulation. First, Article 322(1)(a) TFEU does not enable either the concept of ‘the rule of law’ or that of ‘breaches of the principles of the rule of law’ to be defined. Secondly, the relationship between breaches of the principles of the rule of law and the Union budget is too broad and would, if accepted, enable any area of EU law and significant aspects of the legal systems of the Member States to be linked to it. Thirdly, Article 5(2) does not concern the Union budget or its implementation, but relates to the budgets of the Member States. Fourthly, Articles 2 to 4 allow the EU institutions to examine national situations and institutions which fall outside the scope of EU law.

122 In that regard, first, the parties to the proceedings agree that a ‘conditionality mechanism’, which makes the receipt of financing from the Union budget subject to compliance with certain conditions, is capable of falling within the concept of ‘financial rules’, within the meaning of Article 322(1)(a) TFEU.

123 However, while Hungary, supported by the Republic of Poland, takes the view that such a condition must be closely linked either to one of the objectives of a programme or of a specific EU action, or to the sound financial management of the Union budget, the Parliament and the Council, supported by the Kingdom of Belgium, the Kingdom of Denmark, the Federal Republic of Germany, Ireland, the Kingdom of Spain, the French Republic, the Grand Duchy of Luxembourg, the Kingdom of the Netherlands, the Republic of Finland, the Kingdom of Sweden and the Commission, take the view that such a mechanism can also entail ‘horizontal conditionality’ in the sense that the condition in question can be linked to the value of the rule of law contained in Article 2 TEU, which must be respected in all areas of Union action.

124 In that regard, it should be pointed out that, under Article 2 TEU, the European Union is founded on values, such as the rule of law, which are common to the Member States and that, under Article 49 TEU, respect for those values is a prerequisite for the accession to the European Union of any European State applying to become a member of the European Union (see, to that effect, judgment of 21 December 2021, Euro Box Promotion and Others, C‐357/19, C‐379/19, C‐547/19, C‐811/19 and C‐840/19, EU:C:2021:1034, paragraphs 160 and 161 and the case-law cited).

125 As stated in recital 5 of the contested regulation, once a candidate State becomes a Member State, it joins a legal structure that is based on the fundamental premiss that each Member State shares with all the other Member States, and recognises that they share with it, the common values contained in Article 2 TEU, on which the European Union is founded. That premiss is based on the specific and essential characteristics of EU law, which stem from the very nature of EU law and the autonomy it enjoys in relation to the laws of the Member States and to international law. That premiss implies and justifies the existence of mutual trust between the Member States that those values will be recognised and, therefore, that the EU law that implements them will be respected (see, to that effect, Opinion 2/13 (Accession of the Union to the ECHR) of 18 December 2014, EU:C:2014:2454, paragraphs 166 to 168, and judgments of 27 February 2018, Associação Sindical dos Juízes Portugueses, C‐64/16, EU:C:2018:117, paragraph 30, and of 20 April 2021, Repubblika, C‐896/19, EU:C:2021:311, paragraph 62). That recital also states that the laws and practices of Member States should continue to comply with the common values on which the European Union is founded.

126 It follows that compliance by a Member State with the values contained in Article 2 TEU is a condition for the enjoyment of all the rights deriving from the application of the Treaties to that Member State (judgments of 20 April 2021, Repubblika, C‐896/19, EU:C:2021:311, paragraph 63; of 18 May 2021, Asociaţia ‘Forumul Judecătorilor din România’ and Others, C‐83/19, C‐127/19, C‐195/19, C‐291/19, C‐355/19 and C‐397/19, EU:C:2021:393, paragraph 162; and of 21 December 2021, Euro Box Promotion and Others, C‐357/19, C‐379/19, C‐547/19, C‐811/19 and C‐840/19, EU:C:2021:1034, paragraph 162). Compliance with those values cannot be reduced to an obligation which a candidate State must meet in order to accede to the European Union and which it may disregard after its accession.

127 The values contained in Article 2 TEU have been identified and are shared by the Member States. They define the very identity of the European Union as a common legal order. Thus, the European Union must be able to defend those values, within the limits of its powers as laid down by the Treaties.

128 It follows that, in accordance with the principle of conferral of powers enshrined in Article 5(2) TEU and the principle of consistency of the European Union's policies laid down in Article 7 TFEU, the rule of law – a value common to the European Union and the Member States which forms part of the very foundations of the European Union and its legal order – is capable of constituting the basis of a conditionality mechanism covered by the concept of ‘financial rules’ within the meaning of Article 322(1)(a) TFEU.

129 In that regard, it should be noted, first, that the Union budget is one of the principal instruments for giving practical effect, in the Union's policies and activities, to the principle of solidarity, mentioned in Article 2 TEU, which is itself one of the fundamental principles of EU law (see, by analogy, judgment of 15 July 2021, Germany v Poland, C‐848/19 P, EU:C:2021:598, paragraph 38), and, secondly, that the implementation of that principle, through the Union budget, is based on mutual trust between the Member States in the responsible use of the common resources included in that budget. That mutual trust is itself based, as stated in paragraph 125 above, on the commitment of each Member State to comply with its obligations under EU law and to continue to comply, as is moreover stated in recital 5 of the contested regulation, with the values contained in Article 2 TEU, which include the value of the rule of law.

130 In addition, as recital 13 of the contested regulation states, there is a clear relationship between, on the one hand, respect for the value of the rule of law and, on the other hand, the efficient implementation of the Union budget, in accordance with the principles of sound financial management, and the protection of the financial interests of the Union.

131 That sound financial management and those financial interests are liable to be seriously compromised by breaches of the principles of the rule of law committed in a Member State, since those breaches may result, inter alia, in there being no guarantee that expenditure covered by the Union budget satisfies all the financing conditions laid down by EU law and therefore meets the objectives pursued by the European Union when it finances such expenditure.

132 In particular, compliance with those conditions and objectives, as elements of EU law, cannot be fully guaranteed in the absence of effective judicial review designed to ensure compliance with EU law; the existence of such review, both in the Member States and at EU level, by independent courts and tribunals, is of the essence of the rule of law (see, to that effect, judgment of 21 December 2021, Euro Box Promotion and Others, C‐357/19, C‐379/19, C‐547/19, C‐811/19 and C‐840/19, EU:C:2021:1034, paragraphs 219 and 222).

133 It follows from the foregoing that, contrary to Hungary's submission, supported by the Republic of Poland, a conditionality mechanism may also fall within the scope of the concept of ‘financial rules’ referred to in Article 322(1)(a) TFEU where it makes the receipt of financing from the Union budget subject to horizontal conditionality which is linked to respect by a Member State for the value of the rule of law, contained in Article 2 TEU, and which relates to the implementation of the Union budget.

134 Article 4(1) of the contested regulation establishes such a horizontal conditionality mechanism, since it provides that appropriate measures are to be taken where it is established that breaches of the principles of the rule of law in a Member State affect or seriously risk affecting the sound financial management of the Union budget or the protection of the financial interests of the Union in a sufficiently direct way.

135 Article 5(1) of that regulation sets out, exhaustively, the ‘appropriate measures’ that may be adopted, which are summarised in paragraph 112 above and which in fact all relate to the implementation of the Union budget.

136 As regards the condition laid down in Article 4(1) of the contested regulation relating to the existence of ‘breaches of the principles of the rule of law’, Article 2(a) of the contested regulation states that the concept of ‘the rule of law’ is to be understood, for the purposes of that regulation, as the ‘Union value enshrined in Article 2 TEU’ and that that concept includes the principles of legality, legal certainty, prohibition of arbitrariness of the executive powers, effective judicial protection, separation of powers and non-discrimination and equality before the law. That provision states, however, that the concept of ‘the rule of law’, as defined for the purposes of the application of the contested regulation, ‘shall be understood having regard to the other Union values and principles enshrined in Article 2 TEU’. It follows that respect for those values and principles – in so far as they form part of the very definition of the value of ‘the rule of law’ contained in Article 2 TEU or, as is apparent from the second sentence of that article, are closely linked to a society that respects the rule of law – may be required in the context of a horizontal conditionality mechanism such as that established by the contested regulation.

137 Furthermore, Article 3 of the contested regulation, which identifies cases which may be indicative of breaches of those principles, including a failure to ensure the absence of conflicts of interest, is intended, as the Advocate General stated in points 152 and 280 of his Opinion, to facilitate the application of that regulation.

138 As regards Article 4(2) of the contested regulation, it follows from that provision that, in order to come within the horizontal conditionality mechanism established in Article 4(1) thereof, breaches of the principles of the rule of law must concern the situations or the conduct of authorities listed in points (a) to (h) of Article 4(2), in so far as they are relevant to the sound financial management of the Union budget or to the protection of the financial interests of the Union.

139 It follows from the foregoing that Article 2(a), Article 3, Article 4(2) and Article 5(1) of the contested regulation are constituent elements of the horizontal conditionality mechanism established in Article 4(1) of that regulation, by laying down the definitions necessary for its implementation, by specifying its scope and by prescribing the measures to which it may lead. Those provisions thus form an integral part of that mechanism and therefore fall within the concept of ‘financial rules’, within the meaning of Article 322(1)(a) TFEU.

140 Secondly, that finding is not invalidated by Hungary's argument, supported by the Republic of Poland, that Articles 2 to 4 of the contested regulation allow the EU institutions to examine situations in the Member States which fall outside the scope of EU law.

141 As stated in paragraph 111 above, it follows from a combined reading of Article 4(1) and Article 6(1) of the contested regulation that the procedure it lays down for the adoption of ‘appropriate measures’ for the protection of the Union budget can be initiated by the Commission only where it finds that there are reasonable grounds for considering not only that there have been breaches of the principles of the rule of law in a Member State, but, in particular, that those breaches affect or seriously risk affecting the sound financial management of the Union budget or the protection of the financial interests of the Union in a sufficiently direct way.

142 Moreover, as noted in paragraph 138 above, it follows from Article 4(2) of the contested regulation that, in order to come within the horizontal conditionality mechanism laid down in Article 4(1), breaches of the principles of the rule of law must concern the situations or conduct of authorities listed in points (a) to (h) of Article 4(2), in so far as they are relevant to the sound financial management of the Union budget or the protection of the financial interests of the Union.

143 Such relevance can be presumed as regards the activities of the authorities implementing the Union budget and carrying out financial control, monitoring and audit, referred to in points (a) and (b) of Article 4(2) of the contested regulation. Regarding investigation and public prosecution services, the proper functioning of those services is caught, under point (c) of that provision, only in so far as it relates to breaches of EU law concerning the implementation of the Union budget or the protection of the financial interests of the Union. The same applies to the prevention and sanctioning, by national courts or administrative authorities, of the breaches of EU law mentioned in point (e). As regards the judicial review referred to in point (d), it is caught only in so far as it concerns the conduct of the authorities referred to in points (a) to (c). The recovery of funds unduly paid, provided for in point (f), covers only funds from the Union budget, which is also the case for cooperation with OLAF and the EPPO, mentioned in point (g). Lastly, point (h) expressly refers to any other situations or conduct of authorities that are relevant to the sound financial management of the Union budget or the protection of the financial interests of the Union.

144 It follows that, contrary to Hungary's submission, supported by the Republic of Poland, in the first place, the contested regulation allows the EU institutions to examine situations in the Member States only in so far as they are relevant to the sound financial management of the Union budget or the protection of the financial interests of the Union and, in the second place, appropriate measures can be adopted under that regulation only where it is established that such situations involve a breach of one of the principles of the rule of law which affects or seriously risks affecting that sound financial management or the protection of those financial interests of the Union in a sufficiently direct way.

145 Those situations, which are relevant to the implementation of the Union budget, not only fall within the scope of EU law, but, as found in paragraph 133 above, may also be caught by a financial rule, within the meaning of Article 322(1)(a) TFEU, in the form of a horizontal conditionality mechanism linked to respect by a Member State for the value of the rule of law.

146 Thirdly, contrary to Hungary's submission, supported by the Republic of Poland, the fact that a horizontal conditionality mechanism that meets the criteria identified in paragraph 133 above, relating to respect by a Member State for the value of the rule of law contained in Article 2 TEU and to the implementation of the Union budget, may come within the concept of ‘financial rules which determine in particular the procedure to be adopted for … implementing the budget’, within the meaning of Article 322(1)(a) TFEU, does not extend the scope of that concept beyond what is necessary for the proper implementation of the Union budget.

147 Article 4 of the contested regulation limits, in paragraph 2, the scope of the conditionality mechanism established by that regulation to situations and conduct of authorities that are related to the implementation of the Union budget and requires, in paragraph 1, that the adoption of appropriate measures be subject to the existence of breaches of the principles of the rule of law which affect or seriously risk affecting the sound financial management of the Union budget or the protection of the financial interests of the Union in a sufficiently direct way. The latter condition thus requires that a genuine link be established between those breaches and such an effect or serious risk of an effect.

148 It should be pointed out, in that regard, that the application of Article 4(1) and (2) of the contested regulation is subject to the procedural requirements laid down in Article 6(1) to (9) of that regulation, which mean that, as recital 26 of that regulation states, the Commission is under an obligation, when examining whether the adoption of appropriate measures is justified, to use an evidence-based approach and to respect the principles of objectivity, non-discrimination and equality of the Member States before the Treaties.

149 As regards, more specifically, the identification and assessment of breaches of the principles of the rule of law, recital 16 of the contested regulation states that that assessment should be objective, impartial and fair. Furthermore, compliance with all of those obligations is subject to comprehensive judicial review by the Court.

150 Fourthly, as regards the issue whether Article 5(2) of the contested regulation falls within the scope of the legal basis of Article 322(1)(a) TFEU, it has been pointed out in paragraph 115 above that the objective of Article 5(2) is to safeguard the legitimate interests of final recipients and beneficiaries where appropriate measures are adopted under that regulation against a Member State. It follows that that provision concerns the legal and financial effects of measures for the protection of the Union budget, within the meaning of Article 5 of the contested regulation, which themselves relate to the implementation of the Union budget, as stated in paragraphs 112 and 135 above.

151 Furthermore, as noted in paragraph 99 above, the financial rules which determine ‘in particular the procedure to be adopted for’ implementing the budget, within the meaning of Article 322(1)(a) TFEU, are intended to regulate all aspects relating to the implementation of the Union budget covered by Title II of Part Six of the TFEU and therefore to implementation in the broad sense.

152 A provision which, like Article 5(2) of the contested regulation, concerns the legal and financial effects of measures for the protection of the Union budget, within the meaning of Article 5 of that regulation, which are measures relating to the implementation of the Union budget, must be considered as itself relating to that implementation and can therefore be regarded as determining a procedure for implementing the Union budget.

153 In the light of all the foregoing considerations, Hungary's claims, supported by the Republic of Poland, alleging that the contested regulation has no legal basis, since it does not lay down financial rules within the meaning of Article 322(1)(a) TFEU, must be rejected.

154 However, it is still necessary to ascertain whether, as argued, in essence, by Hungary, supported by the Republic of Poland, financial rules such as those laid down by the contested regulation cannot be adopted by the EU legislature because they circumvent Article 7 TEU and Article 269 TFEU.

(2) Circumvention of Article 7 TEU and Article 269 TFEU

155 In the first place, Hungary, supported by the Republic of Poland, argues, in essence, that only the procedure laid down in Article 7 TEU grants the EU institutions the power to examine, determine the existence of and, where appropriate, impose penalties for breaches of the values contained in Article 2 TEU in a Member State, since, in particular, that power covers areas which fall outside the scope of EU law, such as the functioning of the authorities and institutions of the Member States, and the Member States have, as the authors of the Treaties, regulated all aspects of that procedure in the TEU. As the Treaties do not provide for any delegation of legislative power under Article 7 TEU, neither that provision nor any other provision of the Treaties authorises the EU legislature to establish a procedure parallel to that laid down in Article 7 TEU relating to the finding of breaches of the values contained in Article 2 TEU and setting out the resulting legal consequences.

156 In that regard, first, it should be borne in mind that the founding values of the European Union, common to the Member States, contained in Article 2 TEU, include respect for human dignity, freedom, democracy, equality, the rule of law and respect for human rights, in a society in which, inter alia, non-discrimination, justice, solidarity and equality between women and men prevail.

157 The preamble to the Charter states, inter alia, that the European Union is based on the principles of democracy and the rule of law and recognises the rights, freedoms and principles set out in the Charter. Articles 6, 10 to 13, 15, 16, 20, 21 and 23 of the Charter define the scope of the values of human dignity, freedom, equality, respect for human rights, non-discrimination and equality between women and men, contained in Article 2 TEU. Article 47 of the Charter and Article 19 TEU guarantee, inter alia, the right to an effective remedy and the right to an independent and impartial tribunal previously established by law, as regards the protection of the rights and freedoms guaranteed by EU law.

158 Furthermore, Articles 8 and 10, Article 19(1), Article 153(1)(i) and Article 157(1) TFEU define the scope of the values of equality, non-discrimination and equality between women and men and allow the EU legislature to adopt secondary legislation intended to implement those values.

159 It follows from the two preceding paragraphs that, contrary to Hungary's submission, supported by the Republic of Poland, in addition to the procedure laid down in Article 7 TEU, numerous provisions of the Treaties, frequently implemented by various acts of secondary legislation, grant the EU institutions the power to examine, determine the existence of and, where appropriate, to impose penalties for breaches of the values contained in Article 2 TEU committed in a Member State.

160 As regards, in particular, the value of the rule of law, certain aspects of that value are protected by Article 19 TEU, as Hungary indeed acknowledges. The same is true of Articles 47 to 50 of the Charter, contained in Title VI, entitled ‘Justice’, which guarantee, respectively, the right to an effective remedy and the right to a fair trial, the presumption of innocence and rights of the defence, the principles of legality and proportionality of criminal offences and penalties and the right not to be tried or punished twice for the same criminal offence.

161 More specifically, the Court has ruled that Article 19 TEU, which gives concrete expression to the value of the rule of law contained in Article 2 TEU, requires Member States, in accordance with the second subparagraph of Article 19(1), to establish a system of legal remedies and procedures ensuring that the right of individuals to effective judicial protection is observed in the fields covered by EU law (see, to that effect, judgment of 2 March 2021, A.B. and Others (Appointment of Judges to the Supreme Court – Actions), C‐824/18, EU:C:2021:153, paragraphs 108 and 109 and the case-law cited). Compliance with that requirement can be reviewed by the Court, inter alia in an action for failure to fulfil obligations brought by the Commission under Article 258 TFEU (see, to that effect, judgments of 24 June 2019, Commission v Poland (Independence of the Supreme Court), C‐619/18, EU:C:2019:531, paragraphs 58 and 59, and of 5 November 2019, Commission v Poland (Independence of the ordinary courts), C‐192/18, EU:C:2019:924, paragraphs 106 and 107).

162 The Court has also ruled that the second subparagraph of Article 19(1) TEU, interpreted in the light of Article 47 of the Charter, imposes on the Member States a clear and precise obligation as to the result to be achieved that is not subject to any condition as regards the independence which must characterise the courts called upon to interpret and apply EU law, with the result that it is for a national court to disapply any provision of national law which infringes the second subparagraph of Article 19(1) TEU, if necessary after obtaining from the Court an interpretation of that provision in the context of a reference for a preliminary ruling (see, to that effect, judgment of 2 March 2021, A.B. and Others (Appointment of Judges to the Supreme Court – Actions), C‐824/18, EU:C:2021:153, paragraphs 142 to 146).

163 It thus follows from the considerations in paragraphs 159 to 162 above that Hungary's line of argument to the effect that the value of the rule of law can be protected by the European Union only under the procedure laid down in Article 7 TEU must be rejected.

164 Secondly, as regards Hungary's claims, supported by the Republic of Poland, that only Article 7 TEU allows the EU institutions to review whether the Member States respect the rule of law in areas which fall outside the scope of EU law, including the functioning of the authorities and institutions of the Member States, it is sufficient to point out that the contested regulation authorises neither the Commission nor the Council to carry out such a review other than in respect of conduct of an authority of a Member State or a situation attributable to such an authority which relates to the implementation of the Union budget and which, therefore, falls within the scope of EU law.

165 As noted in paragraphs 141 to 145 above, first, the contested regulation allows the EU institutions to examine situations in the Member States only in so far as they are relevant to the sound financial management of the Union budget or the protection of the financial interests of the Union and, secondly, appropriate measures can be adopted under that regulation only where it is established that such situations involve a breach of one of the principles of the rule of law which affects or seriously risks affecting that sound financial management or the protection of those financial interests in a sufficiently direct way.

166 In the second place, as regards the claim that the contested regulation has the effect of circumventing the procedure laid down in Article 7 TEU and extending the powers of the Court laid down in Article 269 TFEU, Hungary, supported by the Republic of Poland, submits, in essence, that the procedure established by that regulation gives concrete form, in defined cases, to the procedure referred to in Article 7 TEU and therefore establishes a parallel procedure for determining, following a thorough analysis, the existence of breaches of the principles of the rule of law by the Member States. That regulation, it is claimed, enables legal consequences which are identical to those provided for in Article 7 TEU to be attached to such breaches, even though neither that provision nor any other provision of the Treaties authorises the EU legislature to do so. Thus, that regulation allegedly undermines the institutional balance as established in Article 7 TEU, Article 13(2) TEU and Article 269 TFEU by granting new powers to the Council, the Commission and the Court.

167 In that regard, first, it should be stated that the EU legislature cannot establish, without infringing Article 7 TEU, a procedure parallel to that laid down by that provision, having, in essence, the same subject matter, pursuing the same objective and allowing the adoption of identical measures, while providing for the involvement of different institutions or for different material and procedural conditions from those laid down by that provision.

168 However, it is permissible for the EU legislature, where it has a legal basis for doing so, to establish, in an act of secondary legislation, other procedures relating to the values contained in Article 2 TEU, which include the rule of law, provided that those procedures are different, in terms of both their aim and their subject matter, from the procedure laid down in Article 7 TEU (see, by analogy, judgment of 7 February 1979, France v Commission, 15/76 and 16/76, EU:C:1979:29, paragraph 26; order of 11 July 1996, An Taisce and WWF UK v Commission, C‐325/94 P, EU:C:1996:293, paragraph 25; and judgment of 11 January 2001, Greece v Commission, C‐247/98, EU:C:2001:4, paragraph 13).

169 In the present case, as regards the respective purposes of the procedure laid down in Article 7 TEU and that provided for by the contested regulation, it follows from Article 7(2) to (4) TEU that the procedure laid down in that article allows the Council, where the European Council has determined the existence of serious and persistent breaches by a Member State of the values contained in Article 2 TEU, to suspend certain of the rights deriving from the application of the Treaties to that Member State, including the voting rights of the representative of the government of that Member State in the Council, and to decide subsequently to vary or revoke measures taken in response to changes in the situation which led to their being imposed.

170 The purpose of the procedure laid down in Article 7 TEU is therefore to allow the Council to penalise serious and persistent breaches of the values contained in Article 2 TEU, in particular with a view to compelling the Member State concerned to put an end to those breaches.

171 By contrast, as is apparent from paragraphs 110 to 120 above, it follows from the nature of the measures that may be adopted under the contested regulation and from the conditions for the adoption and lifting of those measures that the purpose of the procedure established by that regulation is to ensure, in accordance with the principle of sound financial management laid down in Article 310(5) and the first paragraph of Article 317 TFEU, the protection of the Union budget in the event of a breach of the principles of the rule of law in a Member State and not to penalise, through the Union budget, breaches of the principles of the rule of law.

172 It follows that the procedure laid down by the contested regulation pursues a different purpose from that of Article 7 TEU.

173 As regards the subject matter of each of those two procedures, it should be pointed out that the scope of the procedure laid down in Article 7 TEU covers all the values contained in Article 2 TEU, whereas the scope of the procedure established by the contested regulation covers only one of those values, namely the rule of law.

174 Furthermore, Article 7 TEU allows the assessment of all serious and persistent breaches of a value contained in Article 2 TEU, whereas the contested regulation authorises the examination of breaches of the principles of the rule of law mentioned in Article 2(a) of that regulation only in so far as there are reasonable grounds to consider that those breaches have budgetary implications.

175 As regards the conditions for initiating the two procedures, it should be noted that the procedure provided for in Article 7 TEU may be initiated, as set out in paragraph 1 of that article, where there is a clear risk of a serious breach by a Member State of the values contained in Article 2 TEU, on the initiative of one third of the Member States, the Parliament or the Commission, the threshold being, initially, that of a clear risk of a serious breach of those values and, subsequently – as regards the suspension, under Article 7(2) and (3) TEU, of certain of the rights deriving from the application of the Treaties to the Member State in question – that of a serious and persistent breach of those values by that Member State. Conversely, the procedure established by the contested regulation may be initiated by the Commission alone where there are reasonable grounds to consider not only that breaches of the principles of the rule of law have occurred in a Member State, but also, and above all, that those breaches affect or seriously risk affecting the sound financial management of the Union budget or the protection of the financial interests of the Union in a sufficiently direct way.

176 Moreover, the only substantive condition required for the adoption of measures under Article 7 TEU lies in the European Council's determining the existence of a serious and persistent breach by a Member State of the values contained in Article 2 TEU. By contrast, as noted in paragraph 147 above, under Article 4(1) and (2) of the contested regulation, measures under that regulation may be taken only where two conditions are satisfied. First, it must be established that a breach of the principles of the rule of law in a Member State concerns one or more of the situations or forms of conduct of authorities referred to in paragraph 2, in so far as it is relevant to the sound financial management of the Union budget or the protection of the financial interests of the Union. Secondly, it must also be demonstrated that those breaches affect or seriously risk affecting that sound financial management or those financial interests in a sufficiently direct way; that condition thus requires that a genuine link be established between those breaches and such an effect or serious risk of an effect.

177 Regarding the nature of the measures that may be adopted under Article 7(3) TEU, those measures consist in the suspension of ‘certain of the rights deriving from the application of the Treaties to the Member State in question, including the voting rights of the representative of the government of that Member State in the Council’ and may, therefore, relate to any right deriving from the application of the Treaties to the Member State in question. By contrast, the measures that may be adopted under the contested regulation are limited to those listed in Article 5(1) of that regulation and summarised in paragraph 112 above, which are all budgetary in nature.

178 Lastly, Article 7 TEU provides for the variation or revocation of measures adopted only in response to changes in the situation which led to their being imposed. By contrast, the second and third subparagraphs of Article 7(2) of the contested regulation make the lifting and variation of measures adopted subject to the conditions for the adoption of measures referred to in Article 4 of that regulation. Accordingly, those measures may be lifted or varied not only where breaches of the principles of the rule of law in the Member State in question have been remedied, at least in part, but in particular where those breaches, despite persisting, no longer have an impact on the Union budget. That may be the case, inter alia, where they no longer concern one or more of the situations or forms of conduct of authorities referred to in paragraph 2 of that article, where those situations or conduct are no longer relevant to the sound financial management of the Union budget or the protection of the financial interests of the Union, where the breach no longer affects or seriously risks affecting that sound management or those financial interests, or where the link between the breach of a principle of the rule of law and such an effect or serious risk is no longer sufficiently direct.

179 In the light of the foregoing considerations, it is clear that the procedure laid down in Article 7 TEU and that established by the contested regulation pursue different aims and that each has a clearly distinct subject matter.

180 It follows that, contrary to Hungary's submission, supported by the Republic of Poland, the contested regulation cannot be regarded as establishing a parallel procedure which circumvents Article 7 TEU.

181 Secondly, as regards Hungary's line of argument, supported by the Republic of Poland, to the effect that the contested regulation undermines the institutional balance as established in Article 7 and Article 13(2) TEU, first, it has been held in the above two paragraphs that the procedure laid down in Article 7 TEU and that established by the contested regulation pursue different aims and each has a distinct subject matter, with the result that the contested regulation cannot be regarded as establishing a parallel procedure which circumvents that provision.

182 In those circumstances, Hungary, supported by the Republic of Poland, is not justified in maintaining that the contested regulation undermines the institutional balance established in Article 7 TEU.

183 Secondly, as regards the requirements of Article 13(2) TEU, under which ‘each institution shall act within the limits of the powers conferred on it in the Treaties, and in conformity with the procedures, conditions and objectives set out therein’, it is apparent from Article 6 of the contested regulation that the Commission is to conduct that procedure and that, where appropriate, the Council is to adopt, on a proposal from the Commission, an implementing decision adopting appropriate measures; despite the reference in recital 26 of that regulation to the European Council, Article 6 does not confer any role on the European Council in the procedure established by that regulation.

184 In that regard, first of all, in accordance with the first paragraph of Article 317 TFEU, the Commission is to implement the Union budget in cooperation with the Member States on its own responsibility, having regard to the principle of sound financial management, with the result that its role in the procedure established by the contested regulation is consistent with the powers conferred on it by that provision.

185 Next, as the Council correctly contended, the Council is able to act on the basis of Article 322(1)(a) and Article 291(2) TFEU, with the result that its involvement is not in breach of the power granted to the Commission under the first paragraph of Article 317 TFEU.

186 First, as noted in paragraph 99 above, the financial rules which determine ‘in particular the procedure to be adopted for implementing the budget’, within the meaning of Article 322(1)(a) TFEU, are intended to regulate all aspects related to the implementation of the Union budget covered by Title II of Part Six of the TFEU and therefore to implementation in the broad sense.

187 Thus, the horizontal conditionality mechanism established by the contested regulation forms part of a conception of budget implementation that goes beyond that which – being defined in Article 2(7) of the Financial Regulation as the carrying out of activities relating to the management, monitoring, control and audit of budget appropriations – falls within the Commission's powers in cooperation with the Member States, in accordance with the first paragraph of Article 317 TFEU.

188 Secondly, Article 291(2) TFEU allows, in duly justified specific cases, implementing powers to be conferred on the Council where uniform conditions for implementing legally binding Union acts are required. In that regard, it is apparent from Article 6(9) to (11) of the contested regulation that the measures that may be adopted by the Council under that regulation are implementing decisions, and recital 20 of that regulation states that implementing powers are to be conferred on the Council in order to ensure uniform conditions for the implementation of that regulation, in view of the importance of the financial effects of those measures.

189 Those factors support the finding that the conferral on the Council of a power to adopt the appropriate measures referred to in Article 5(1) of the contested regulation is duly justified.

190 Lastly, the fact that no powers are conferred on the European Council in the procedure established by Article 6 of the contested regulation is consistent with the powers conferred on it by Article 15(1) TEU, under which the European Council is to provide the Union with the necessary impetus for its development and define the general political directions and priorities thereof, but is not to exercise legislative functions.

191 While recital 26 of the contested regulation states that the European Council may, at the request of the Member State in respect of which the procedure conducted under Article 6 of that regulation has been initiated, discuss whether, during that procedure, the principles of objectivity, non-discrimination and equality of Member States before the Treaties have been respected, it is sufficient to note that such action by the European Council, taken on an exceptional basis, is not provided for in Article 6 or any other provision of that regulation. In those circumstances, in view of the fact that the preamble to an EU act has no binding legal force (see, to that effect, judgment of 19 December 2019, Puppinck and Others v Commission, C‐418/18 P, EU:C:2019:1113, paragraph 76 and the case-law cited), recital 26 cannot be relied on as a ground for derogating from the actual provisions of the contested regulation or for interpreting those provisions in a manner that is contrary to their wording.

192 Thirdly, in so far as Hungary, supported by the Republic of Poland, submits that the Court will be called upon to assess, in the context of the judicial review of a decision adopted by the Council under Article 6(10) of the contested regulation, the existence of breaches by a Member State of the principles of the rule of law, and argues that the power thus granted to it constitutes an infringement of Article 13(2) TEU and Article 269 TFEU, it should be pointed out that the wording of the latter article refers only to the review of the legality of an act adopted by the European Council or by the Council pursuant to Article 7 TEU.

193 In those circumstances, and having regard to the findings made in paragraphs 179 and 180 above, the review of legality which the Court may be called upon to carry out, in particular in an action for annulment brought under Article 263 TFEU, in respect of Council decisions taken under Article 6(10) of the contested regulation does not fall within the scope of Article 269 TFEU and is therefore not subject to the specific rules laid down by that article.

194 It follows that the contested regulation does not confer any new powers on the Court.

195 Lastly, it was noted in paragraph 165 above that the contested regulation allows the EU institutions to examine situations in the Member States only in so far as they are relevant to the sound financial management of the Union budget or the protection of the financial interests of the Union and, furthermore, that appropriate measures can be adopted under that regulation only where it is established that such situations involve a breach of one of the principles of the rule of law which affects or seriously risks affecting that sound financial management or the protection of those financial interests in a sufficiently direct way.

196 Since such situations relate to the implementation of the Union budget and therefore fall within the scope of EU law, Hungary, supported by the Republic of Poland, cannot maintain that the Court lacks jurisdiction to examine determinations made by the Council in decisions adopted under Article 6(10) of the contested regulation.

197 Accordingly, Hungary's claims, supported by the Republic of Poland, alleging circumvention of Article 7 TEU and Article 269 TFEU, must be rejected as unfounded.

198 It follows from the foregoing considerations that the first and second pleas must be rejected as unfounded.

1. The claim for annulment of Article 4(1) of the contested regulation

2. The claim for annulment of Article 4(2)(h) of the contested regulation

3. The claim for annulment of Article 5(2) of the contested regulation

4. The claim for annulment of the third sentence of Article 5(3) of the contested regulation

5. The claim for annulment of the fourth sentence of Article 5(3) of the contested regulation

6. The claim for annulment of Article 6(3) and (8) of the contested regulation

1. Arguments of the parties

63 By the first plea, the Republic of Poland, supported by Hungary, submits that the nature and extent of the competences conferred upon the Union by the Treaties do no allow the Council to establish a mechanism such as that provided for by the contested regulation, which allows the EU institutions to control the Member States’ observance of the principles of the rule of law and makes payment of funds from the Union budget conditional on observance of those principles.

64 It is true that the EU legislature may lawfully establish, on the basis of Article 322(1)(a) TFEU, a mechanism making payments from the Union budget subject to the Member States’ observance of the principle of sound financial management. However, it follows from that principle as defined in Article 2(59) of the Financial Regulation and from the clarifications set out in Article 56(2) of that regulation that the obligations incumbent on the Member States under that principle must be specific and stem from specific legal provisions showing a direct link between the requirements introduced and the principle of sound financial management of Union funds and protection of the Union's financial interests.

65 By the contested regulation, the EU legislature, as is apparent from Article 1 thereof, created a mechanism which makes payments from the Union budget subject not to the Member States’ compliance with specific obligations under EU law, linked to observance of the principle of sound financial management, but to observance of the principles of the rule of law.

66 The Republic of Poland considers that the establishment of such a mechanism does not fall within the competences conferred on the EU legislature by Article 322(1)(a) TFEU, even if Article 4(1) of the contested regulation provides that any established breach of the principles of the rule of law must affect or seriously risk affecting the sound financial management of the Union budget or the protection of the financial interests of the Union in a sufficiently direct way.

67 In the first place, according to the Republic of Poland, the EU legislature, in a regulation adopted pursuant to Article 322(1)(a) TFEU, can neither define the concept of ‘the rule of law’ nor determine the criteria for establishing breach of the constituent principles of that concept.

68 First of all, the principles of the rule of law stem from the constitutional and political traditions of the Member States and their content is specified in the case-law of the constitutional courts. While it is true that international organisations, in particular the Council of Europe, have drawn up certain criteria for assessing whether those principles have been observed, the specific embodiment of those principles is confined, in EU law, to mentioning the aims which they pursue. In view of the differences between the Member States as regards their national identities, their constitutional and legal systems and their legal traditions, the EU legislature cannot specify, for all the principles of the rule of law, the means by which the objectives which they pursue may be achieved. Accordingly, the obligation for the Member States to observe those principles is limited to the need to guarantee their essence.

69 Next, while the European Union is founded on the values contained in Article 2 TEU, the Treaties do not specify their content and do not confer any power on the EU legislature to define their scope in secondary legislation, not even under Article 19 TEU. That latter provision does not impose any specific obligation as regards the organisation of justice in the Member States, which falls within their exclusive competence.

70 Finally, according to the Republic of Poland, exceeding the powers conferred on it by Article 322(1)(a) TFEU, the EU legislature defined the concept of ‘the rule of law’ in Article 2(a) of the contested regulation by broadening its scope to other values also contained in Article 2 TEU. Similarly, in addition to the fact that Article 3 of that regulation sets out criteria that may be ‘indicative of breaches of the principles of the rule of law’, Article 4(2) of the regulation draws up a list of the situations or conduct of the authorities that must be concerned by a breach of the principles of the rule of law for the purposes of the same regulation, but without the EU legislature specifying the relationship existing between those provisions and that list being exhaustive, in the light of point (h) of that provision.

71 In so doing, the EU legislature also conferred on the Commission and the Council the power to specify further, when applying the contested regulation, the requirements relating to respect for the rule of law. Moreover, such a power must be exercised ex post, by assessing an existing situation in a Member State, thereby allowing those institutions to adapt the said requirements to the breach alleged of the Member State concerned and to apply them retroactively to the situation under consideration.

72 In the second place, the Republic of Poland considers that the EU legislature could not, on the basis of Article 322(1)(a) TFEU, establish a procedure alternative to those provided for in Article 7 TEU and Article 258 TFEU, respectively, by entrusting the Commission and the Council with the power to determine breaches by the Member States of the principles of the rule of law.

73 Such a breach can be determined only by the European Council, pursuant to Article 7 TEU. That exclusive power of the European Council may be derogated from only pursuant to Article 19(1) TEU and the obligation laid down in that provision to ensure effective legal protection in the fields covered by EU law, in which case breach of that obligation may then be determined by the Court in proceedings brought under Article 258 TFEU.

74 The European Council's exclusive power to determine, pursuant to Article 7 TEU, breaches of the principles of the rule of law is justified by the fact that review of respect for that value is discretionary and may depend on political considerations. Thus, according to the Treaties, it is for the representatives of the governments of the Member States to make such determinations and the latter are not subject to any substantive judicial review. In the absence of clear requirements, the Court cannot assess whether the European Council's determinations comply with the requirements stemming from that value. For that reason, Article 269 TFEU confines the judicial review carried out by the Court solely to the ‘procedural stipulations’ defined in Article 7 TEU, since that review cannot relate to the determination by the European Council of ‘a serious and persistent breach’ by a Member State of that value.

75 The question thus arises as to whether a Council implementing decision establishing, in accordance with the contested regulation, breach by a Member State of the principles of the rule of law could be subject to substantive judicial review without affecting the European Council's exclusive power, resulting from Article 7 TEU and Article 269 TFEU, to assess whether the Member States observe the values contained in Article 2 TEU.

76 In the third place, the Republic of Poland considers that, by establishing a mechanism for imposing financial penalties on Member States, the EU legislature exceeded the powers conferred on it by Article 322(1)(a) TFEU.

77 In that regard, the Republic of Poland, supported by Hungary, points out that, in the EU legal order, a horizontal and sectoral conditionality mechanism for the payment of funds from the Union budget must meet three requirements. First of all, it must define precisely the conditions for obtaining EU funds and the criteria for assessing compliance with those conditions. Next, the conditions for obtaining payments under the mechanism must have a ‘sufficiently direct link’ with the objective of the mechanism, such that failure to comply with the condition directly threatens the objective of the funding, sound financial management or the financial interests of the Union. Finally, the existence of a real link between the failure to comply with the condition and the loss of funding must be proved, in particular for the purposes of assessing the proportionality of the measure for protection of the Union budget.

78 It follows from those requirements that a conditionality mechanism cannot be used to sanction infringements of EU law which have no direct impact on the attainment of the objective of the funding or on the proper use of the funds.

79 The first requirement is not satisfied in this case. The principles of the rule of law cannot be covered by such a conditionality mechanism since neither the Treaties nor secondary legislation specify those principles or the specific obligations with which the Member States must comply in this respect.

80 The European Union, moreover, has no competence with regard to numerous aspects of the rule of law as defined in Article 2(a) of the contested regulation, including the requirement of a transparent, accountable, democratic and pluralistic legislative process. What is more, since Article 3 and Article 4(2) of that regulation are expressed in very general terms, a finding of breach by a Member State of the principles of the rule of law also does not require proof of the infringement of specific obligations and is the subject of a discretionary assessment. Consequently, it cannot be ruled out that that assessment is dependent on political considerations, that it is arbitrary or that it is carried out in breach of the principle of equality of Member States before the Treaties.

81 The second requirement is not satisfied, either. The cases of breach of the principles of the rule of law by a Member State, as are set out in Article 3 and Article 4(2) of the contested regulation, are expressed in general terms, are contained in a non-exhaustive list and do not lay down any precise legal obligation. Those various characteristics make redundant the obligation to demonstrate ‘the existence of a sufficiently direct link’ between the breach observed and the risk to sound financial management of Union funds. Thus, according to the Republic of Poland, that requirement which will, depending on the premiss applied, either automatically be fulfilled or impossible to demonstrate, will necessarily be the subject of a political assessment and will give the Commission and the Council full discretion to restrict Member States’ access to EU financing.

82 The third requirement of a conditionality mechanism is equally lacking, since it is impossible to demonstrate, in the context of an exclusively political assessment, that there is a real link between the failure to comply with the condition for obtaining financing, namely breach of the principles of the rule of law, and the loss of financing from the Union budget. Since the restriction of financing and the scope of that restriction can stem only from a political assessment, the Council's decision cannot be proportionate and disregards the requirements of Article 5(3) and recital 18 of the contested regulation.

83 In the alternative, should the Court consider that the legislature was competent to adopt the contested regulation, the Republic of Poland, supported by Hungary, takes the view, by the second plea, that that regulation ought to have been based on the third paragraph of Article 311 TFEU, which concerns the system of the own resources of the European Union, or on Article 312(2) TFEU, which concerns the multiannual financial framework.

84 In that regard, that Member State observes that that regulation will apply, in particular according to recital 7 thereof, not only to all the budgetary commitments made under the multiannual financial framework 2021-2027, but also to the resources allocated by Regulation 2020/2094 and to loans and other instruments guaranteed by the Union budget. Therefore, that regulation is directly linked to Decision 2020/2053 and the multiannual financial framework 2021-2027, and not to the various annual budgets of the Union.

85 Since the contested regulation is applicable to subsequent annual budgets of the European Union, only the third paragraph of Article 311 TFEU or Article 312(2) TFEU, which is the legal basis for multiannual financial frameworks, can constitute an appropriate legal basis for that regulation.

86 Consequently, the adoption of the contested regulation on the basis of Article 322(1)(a) TFEU by means of the ordinary legislative procedure allowed the procedural requirements stemming from Articles 311 and 312 TFEU to be circumvented, those provisions laying down special legislative procedures.

87 By the fifth plea, the Republic of Poland, supported by Hungary, submits that the contested regulation establishes a new mechanism for controlling the Member States’ observance of the principles of the rule of law, which is not provided for in the Treaties and circumvents the procedure laid down in Article 7 TEU.

88 The purpose of that mechanism, which is not a conditionality mechanism, is comparable to that of the procedure laid down in Article 7 TEU, that procedure and the procedure laid down by the contested regulation both seeking to control the Member States’ observance of the principles of the rule of law and to impose penalties in the event of failure to observe those principles. Those two procedures are also independent of each other, the mechanism established by that regulation not being subject to the opening of a procedure under Article 7 TEU.

89 Accordingly, first of all, while the European Council, acting by unanimity, is competent to determine the existence of a breach of the principles of the rule of law under Article 7(2) TEU, the contested regulation provides that it is first for the Commission to determine the existence of such a breach, the decision of the Council imposing the measures being adopted by a qualified majority and reflecting the Commission's assessment.

90 Next, while Article 7 TEU requires the determination of a ‘serious and persistent’ breach of the principles of the rule of law, the contested regulation merely requires the existence of a simple isolated breach, as is apparent from Article 4(1) of that regulation, read in the light of recital 15 thereof.

91 Finally, the procedure under Article 7 TEU comprises two decisions, the first, of the European Council, concerning the determination of a breach, and the second, of the Council, concerning the adoption of penalties, such that the determination of a breach does not necessarily lead to the imposition of a penalty. Conversely, the contested regulation provides for the adoption of a single decision, by the Council, concerning both the existence of a breach and the measures to be adopted for the protection of the Union budget.

92 The contested regulation, in setting procedural requirements that are less stringent than those provided for in Article 7 TEU, while allowing the same objective to be attained as the latter, deprives it of any useful effect.

93 The Republic of Poland states, in that context, that the procedure currently underway against it under Article 7 TEU has not yet given rise to a determination by the European Council of a ‘serious and persistent breach … of the values referred to in Article 2 [TEU]’, on the basis of paragraph 2 of that article, with the result that the Council may not, as things stand, adopt a penalty pursuant to paragraph 3 of the said article. Thus, the establishment of the mechanism provided for by the contested regulation is intended to circumvent the procedure laid down in Article 7 TEU.

94 In the absence of a revision of the Treaties under Article 48 TEU, the establishment of a mechanism for monitoring compliance with international commitments, which has no basis in the Treaties, constitutes a clear abuse of rights and a breach of the fundamental principles of international law, in particular the principles of sovereign equality of States and non-intervention in domestic matters, codified in the United Nations Charter and in United Nations General Assembly Resolution 2625 (XXV) of 24 October 1970, entitled ‘Declaration on Principles of International Law concerning Friendly Relations and Co-operation among States in accordance with the Charter of the United Nations’. By virtue of those principles, the procedures for engaging the responsibility of States for violations of their international commitments can arise only from norms of international law freely accepted by those States.

95 By the sixth plea, the Republic of Poland, supported by Hungary, claims that the Court, contrary to Article 7 TEU and Article 269 TFEU, could be called upon to examine the substance of the breaches of the principles of the rule of law alleged by the Commission, in the course of a judicial review of the Council decisions adopted under the contested regulation. In order to be able to carry out such a review, the Court would have to draw up criteria concerning the value of the rule of law, on the basis of a definition of that value resulting from secondary legislation, criteria which are then to be applied in proceedings brought under Article 7 TEU, even though the Court does not have jurisdiction to assess the substance of the complaints raised against a Member State under that procedure.

96 Article 7 TEU, however, plays a very specific role in the system of remedies provided for by the Treaties, since it exceptionally authorises the EU institutions to monitor compliance by the Member States with the fundamental values of the European Union in areas which fall within the exclusive competence of the Member States.

97 By the eleventh plea, the Republic of Poland, supported by Hungary, claims that the contested regulation is vitiated by a misuse of powers. It follows from the case-law that an EU act is vitiated by misuse of powers or abuse of process if it appears, on the basis of objective, relevant and consistent evidence, to have been taken solely, or at the very least primarily, for purposes other than those which it sets out or with the aim of evading a procedure specifically prescribed by the Treaty.

98 In the present case, admittedly, the stated objective of the contested regulation is, as is apparent from its title, the protection of the Union budget and recital 7 thereof states that, for the purposes of attaining that objective, compliance with the principle of sound financial management is necessary, which presupposes respect for the values of the rule of law. Similarly, according to Article 1 thereof, the purpose of the said regulation is to establish the rules necessary for the protection of the Union budget in the case of breaches of the principles of the rule of law in the Member States.

99 However, that stated objective does not correspond to the real purpose of the contested regulation. The Republic of Poland points out, in that regard, that the proposal which led to the adoption of the contested regulation stressed that ‘a number of recent events’ had demonstrated ‘generalised weaknesses in national checks and balances’, had ‘shown how a lack of respect for the rule of law [could] become a matter of serious and common concern within the European Union’ and had prompted ‘a clear request from institutions such as the European Parliament as well as from the public at large for the [European Union] to take actions to protect the rule of law’.

100 In addition, that Member State submits, like what it has already claimed in its first plea, that the mechanism established by the contested regulation is not a conditionality mechanism designed to protect the Union budget, but a punitive mechanism designed to penalise breaches of the principles of the rule of law. That finding is corroborated both by the Biuro Analiz Sejmowych Kancelarii Sejmu RP (Bureau of Parliamentary Analysis of the Chancellery of the Lower Chamber of the Republic of Poland) and by the annual reports of the Court of Auditors, according to which the implementation of the Union budget and the management of the finances of the Union are improving. The percentage of errors, which amounted to 4.4% in 2014, fell to 3.8% and then 3.1% in 2015 and 2016. Thus, the need to protect the Union budget did not justify the adoption of the contested regulation.

101 Accordingly, the Republic of Poland agrees with the view expressed by the Council Legal Service in Legal Opinion No 13593/18 according to which the mechanism provided for in the proposal that led to the adoption of the contested regulation ‘does not show in what manner the respect of the rule of law … is linked to the sound implementation of the [Union] budget and the protection of the financial interests of the Union’. Although, in certain recitals of that regulation, the existence of such a link is mentioned, that link is not however made explicit, let alone proved.

102 The Republic of Poland infers from this that the real objective of that proposal is not so much to protect the Union budget as to protect the rule of law by means of measures pertaining to the Union budget. Moreover, a similar view was expressed by national parliaments and by the European Economic and Social Committee, the latter indicating that it regarded ‘the proposal more as a potential tool to protect all Article 2 [TEU] values through the vehicle of the [Union] budget’. That view is supported, moreover, by recital 14 of the contested regulation, which includes the mechanism provided for by that regulation among the instruments for protecting the rule of law.

103 The objective of that mechanism must therefore be regarded as being identical to that of the ‘political control procedure’ provided for in Article 7 TEU. In that regard, since neither Article 7(3) TEU nor any other provision of the Treaties contains substantive limits as to the rights of a Member State that may be suspended in the event of a serious and persistent breach of the values contained in Article 2 TEU, the measures for the protection of the Union budget that may be imposed on a Member State under Article 5(1) of the contested regulation could also correspond to those which the Council may take under Article 7(3) TEU when it decides to suspend ‘certain of the rights deriving from the application of the Treaties’.

104 Since measures of the kind provided for in Article 5(1) of the contested regulation could be imposed even before the entry into force of that regulation, under the procedure provided for in Article 7 TEU, recital 14 of the said regulation is wrong to state that the mechanism which it establishes complements existing legal instruments intended to combat breaches of the principles of the rule of law.

105 Furthermore, Article 7(4) TEU and the second subparagraph of Article 7(2) of the contested regulation, relating to the variation and lifting of the measures adopted, indicate that the objective of those mechanisms is to encourage the Member State concerned to respect the value of the rule of law. In not requiring a unanimous decision of the European Council, however, that regulation lays down a much less restrictive procedure for adopting penalties than that laid down in Article 7 TEU, thereby depriving the latter of its effectiveness.

106 In an opinion of 27 May 2014, the Council Legal Service indicated, first, that Article 7 TEU deliberately establishes a precise supervision framework with different phases, a high notional threshold to start the procedures, reinforced majorities within the Council and the European Council and a set of procedural guarantees for the Member State concerned, including the possibility of limited judicial review by the Court of Justice and, secondly, that that article does not provide a legal basis for further developing or amending that procedure. That position was expressly reiterated in Legal Opinion No 13593/18, which specifies, moreover, that secondary legislation may not amend or supplement the said procedure or have the effect of depriving it of its effectiveness.

107 Therefore, because the objective, principles and measures applicable are the same, the mechanism established by the contested regulation constitutes a clear and deliberate circumvention of the procedure laid down in Article 7 TEU.

108 The Republic of Poland submits that the present case displays certain similarities with the case that gave rise to the judgment of 17 December 2020, Openbaar Ministerie (Independence of the issuing judicial authority) (C‐354/20 PPU and C‐412/20 PPU, EU:C:2020:1033, paragraphs 57 to 60). It recalls that, in that judgment, the Court, relying on recital 10 of Council Framework Decision 2002/584/JHA of 13 June 2002 on the European arrest warrant and the surrender procedures between Member States (OJ 2002 L 190, p. 1), as amended by Council Framework Decision 2009/299/JHA of 26 February 2009 (OJ 2009 L 81, p. 24), held that systemic or generalised deficiencies so far as concerns the independence of the judiciary of the Member State issuing a European arrest warrant, however serious they may be, cannot justify a de facto suspension of the implementation of the European arrest warrant mechanism in relation to that Member State, until the European Council and the Council adopt the decisions envisaged in Article 7 TEU.

109 That recital 10 merely reflects the legal consequences flowing from Article 7 TEU. It is therefore apparent from the judgment cited in the preceding paragraph that rights deriving from the Treaties can be suspended in relation to a Member State, on account of the latter's breach of the values contained in Article 2 TEU, only by the Council pursuant to Article 7(3) TEU.

110 The Parliament and the Council, supported by the Kingdom of Belgium, the Kingdom of Denmark, the Federal Republic of Germany, Ireland, the Kingdom of Spain, the French Republic, the Grand Duchy of Luxembourg, the Kingdom of the Netherlands, the Republic of Finland, the Kingdom of Sweden and the Commission, dispute the merits of that line of argument.

2. Findings of the Court

111 By its first, second, fifth, sixth and eleventh pleas, the Republic of Poland, supported by Hungary, submits, in essence, first, that neither Article 322(1)(a) TFEU nor any other provision of the FEU Treaty could constitute an appropriate legal basis for the adoption of the contested regulation, in particular of Articles 2 to 4 thereof. It states, in the alternative, that, should the Court find that the EU legislature was competent to adopt the contested regulation, it ought to have been adopted on the basis of the third paragraph of Article 311 TFEU or Article 312(2) TFEU. It adds, second, that the procedure established by the said regulation circumvents that laid down in Article 7 TEU, which procedure is nevertheless exclusive for the protection of the values contained in Article 2 TEU, and adversely affects the limitation of the Court's powers provided for in Article 269 TFEU.

1. Arguments of the parties

230 In the alternative to the first plea, the Republic of Poland, supported by Hungary, submits that the contested regulation was adopted in breach of the consultation obligation arising from Protocol (No 2) on the application of the principles of subsidiarity and proportionality (‘Protocol No 2’).

231 The principle of subsidiarity, which applies in areas which do not fall within the exclusive competence of the European Union, requires the European Union to intervene only if, and in so far as, the objectives pursued cannot be sufficiently achieved by action by the Member States. Under Protocol No 2, national parliaments are to ensure respect for the principle of subsidiarity in accordance with the procedure provided for in the said protocol.

232 However, protection of the Union budget does not fall within the exclusive competence of the European Union, but within competences shared with the Member States. First, that protection is not mentioned in Article 3(1) TFEU and, second, Article 325(1) TFEU sets out a common obligation on the European Union and on the Member States to combat fraud and any illegal activity affecting the Union's financial interests.

233 The Commission is therefore wrong to take the view, in its proposal for a regulation which resulted in the contested regulation, that the protection of the Union budget is one of the areas which falls within the exclusive competence of the Union, meaning that that institution has not fulfilled the obligations incumbent on it under Protocol No 2. In particular, that institution did not forward that proposal to the national parliaments in all the official languages of the European Union, contrary to the requirements of the first paragraph of Article 6 of that protocol. In so doing, the Commission also infringed the first paragraph of Article 7 of that protocol, according to which that institution is to take account of the reasoned opinions issued by the national parliaments.

234 The Republic of Poland, supported by Hungary, takes the view that such infringements must be treated in the same way as infringements of the rights of the Parliament in legislative procedures. In that regard, the Court has stated that participation by the Parliament in the legislative process reflects the fundamental democratic principle that the people should take part in the exercise of power through the intermediary of a representative assembly, with the result that due consultation of the Parliament in the cases provided for by the FEU Treaty constitutes an essential procedural requirement disregard of which renders the measure concerned void. Since Protocol No 2 is intended, according to its preamble, to ensure that decisions are taken as closely as possible to citizens, infringement of the obligation to consult the national parliaments which it lays down must therefore, in the present case, result in the annulment of the contested regulation.

235 Such annulment is also justified by the fact that the Commission did not observe fully its obligation under the first paragraph of Article 4 of Protocol No 2, according to which it must forward its draft legislative acts and its amended drafts to national parliaments. It is true that it sent its initial proposal for a regulation to those parliaments, but that proposal was redrafted significantly in the subsequent stages of the legislative procedure, without those parliaments having been put in a position to carry out a fresh examination. It follows from the case-law of the Court that the Parliament must be consulted again whenever the text finally adopted, taken as a whole, differs in essence from the text on which the Parliament has already been consulted, since that fresh consultation is an essential formal requirement which carries a penalty of invalidity.

236 The Parliament and the Council, supported by the Kingdom of Belgium, the Kingdom of Denmark, the Federal Republic of Germany, Ireland, the Kingdom of Spain, the French Republic, the Grand Duchy of Luxembourg, the Kingdom of the Netherlands, the Republic of Finland, the Kingdom of Sweden and the Commission, dispute those arguments.

2. Findings of the Court

237 It follows from Article 5(3) TEU that the provisions of Protocol No 2 relating to the principle of subsidiarity apply only in the ‘areas which do not fall within [the] exclusive competence’ of the European Union.

238 In the first place, contrary to what the Republic of Poland, supported by Hungary, claims, Article 325(1) TFEU is not relevant for the purpose of determining whether the contested regulation falls within such an area.

239 It follows from paragraphs 112 to 189 above that the contested regulation is founded, rightly, on another legal basis, namely Article 322(1)(a) TFEU, since that regulation seeks to protect the Union budget against situations or conduct attributable to the authorities of the Member States which result from breaches of the principles of the rule of law and which affect or seriously risks affecting the sound financial management of the Union budget or the protection of its financial interests, in a sufficiently direct manner.

240 In the second place, the proposal for a regulation which led to the adoption of the contested regulation is right to state, under the heading ‘Subsidiarity (for non-exclusive competence)’, that the ‘financial rules governing the Union budget under Article 322 [TFEU] could not be adopted at the level of the Member States’.

241 In that regard, as the Advocate General observed in points 40 and 45 of his Opinion, a regulation such as the contested regulation, which contains financial rules determining the procedure to be adopted for establishing and implementing the Union budget, within the meaning of Article 322(1)(a) TFEU, falls within the exercise of a competence of the European Union relating to its functioning, which, by its nature, can be exercised only by the Union itself. Therefore, the principle of subsidiarity cannot apply.

242 Consequently, the Republic of Poland's argument alleging that the Commission failed to comply with its procedural obligations under the provisions of Protocol No 2 is unfounded, with the result that the third plea must be rejected.

1. Arguments of the parties

243 The Republic of Poland, supported by Hungary, claims that the statement of reasons for the contested regulation, as is set out in the proposal which led to that regulation, does not comply with the requirements set out in the second paragraph of Article 296 TFEU which requires that all EU acts contain a statement of the reasons which resulted in their being adopted.

244 The reasons for which it was necessary to adopt the contested regulation are not apparent from the statement of reasons set out in that proposal.

245 In addition, while the statement of reasons for that proposal referred to Article 322(1)(a) TFEU as being the legal basis for the contested regulation, that choice was neither ‘explained nor justified’, contrary to the requirements provided for in the first paragraph of point 25 of the Interinstitutional Agreement between the European Parliament, the Council of the European Union and the European Commission on Better Law-Making (OJ 2016 L 123, p. 1). Consequently, in the view of the Republic of Poland, it is not possible to review whether that regulation was adopted pursuant to an exclusive competence of the European Union or a competence shared with the Member States, which constitutes an infringement of essential procedural requirements and justify the annulment of the said regulation.

246 The Parliament and the Council, supported by the Kingdom of Belgium, the Kingdom of Denmark, the Federal Republic of Germany, Ireland, the Kingdom of Spain, the French Republic, the Grand Duchy of Luxembourg, the Kingdom of the Netherlands, the Republic of Finland, the Kingdom of Sweden and the Commission, dispute those arguments.

2. Findings of the Court

247 The Republic of Poland confirmed at the hearing that the fourth plea relates to the statement of reasons for the proposal which led to the adoption of the contested regulation and not to that of that regulation itself, as reflected in its recitals.

248 Since the present action seeks the annulment not of that proposal, but of the contested regulation, the line of argument put forward in support of that plea is ineffective, as the Parliament and the Council have rightly asserted and as the Advocate General noted in point 58 of his Opinion.

249 The settled case-law of the Court, according to which the statement of reasons for an EU measure, required by the second paragraph of Article 296 TFEU, must show clearly and unequivocally the reasoning of the author of the measure in question so as to enable the persons concerned to ascertain the reasons for the measure and to enable the Court to exercise its power of review (judgment of 11 December 2018, Weiss and Others, C‐493/17, EU:C:2018:1000, paragraph 31 and the case-law cited), refers to the statement of reasons for the measure whose legality is being examined.

250 While observance of the duty to state reasons must, moreover, be assessed by reference not only to the wording of the measure, but also to its context and to the whole body of legal rules governing the matter in question (judgment of 11 December 2018, Weiss and Others, C‐493/17, EU:C:2018:1000, paragraph 33 and the case-law cited), that context, which includes, inter alia, the proposal for the measure in question, cannot justify, in itself and irrespective of the statement of reasons contained in that measure, the annulment of the latter.

251 In any event, even if they related to the statement of reasons contained in the contested regulation, the complaints of the Republic of Poland as summarised in paragraphs 244 and 245 above would have to be rejected in the light of the considerations set out in particular in paragraphs 124, 130, 131, 134, 149, 159, 162, 163 and 165 above.

252 It follows that the fourth plea must be rejected as ineffective.

1. Arguments of the parties

253 The Republic of Poland, supported by Hungary, takes the view that no provision of the Treaties confers on the EU legislature competence to adopt the contested regulation, such that, in adopting it, it infringed the principle of conferral laid down in Article 4(1) and Article 5(2) TEU. In so doing, it also breached the obligation provided for in the second sentence of Article 4(2) TEU to respect the Member States’ essential functions.

254 The factors on the basis of which it should be assessed whether the Member States have infringed the principles of the rule of law referred to in Article 3 and Article 4(2) of the contested regulation concern areas which fall within the exclusive competence of the Member States and which are fundamental for the exercise of their essential functions, in particular those aimed at safeguarding territorial integrity, maintaining public order and ensuring national security. They concern not only the functioning of State bodies, such as the national courts, the authorities responsible for the award of public contracts and the financial control and investigation and public prosecution services, but also their organisation, including the provision of financial and human resources necessary for the proper functioning of those authorities, and the procedural rules applicable to them.

255 Contrary to what recital 7 of the contested regulation suggests, no competence on the part of the EU legislature in that regard can be inferred from the important nature of the principles of the rule of law for the EU legal order, in particular the principle of sound financial management falling within the scope of that principle, established in Article 317 TFEU.

256 The EU legislature thus adopted the contested regulation in accordance with the logic of a ‘spillover effect’, namely a process at the end of which action pursuing a precise objective results in a situation in which the initial objective can be achieved only through new actions. In the present case, that spillover effect involves inferring from the legitimate objective of protecting the Union budget the need to recognise the Union's competence to assess both the procedures and the financial and staffing needs of the investigation and public prosecution services of Member States, even though such competence has no basis in the Treaties.

257 The competence of Member States to organise their investigation and public prosecution services is inextricably linked to essential State functions, such as the maintenance of law and order, which the European Union must respect, and to national security, which, according to Article 4(2) TEU, is the sole responsibility of each of the Member States.

258 The Council Legal Service moreover adopted a similar position, indicating in Legal Opinion No 13593/18, first of all, that Article 2 TEU does not confer any material competence on the European Union but lists the values that the EU institutions and Member States must observe when they act within the limits of the powers conferred on the European Union by the Treaties, next, that an infringement of the values of the European Union, including the rule of law, may be relied upon against a Member State only where that Member State is acting in an area in which the European Union has competence, and lastly, that respect for the rule of law by the Member States cannot, according to the Treaties, be the subject of an action or review by the EU institutions, regardless of whether there is a specific material competence under which that action falls, subject solely to the procedure described in Article 7 TEU.

259 The Parliament and the Council, supported by the Kingdom of Belgium, the Kingdom of Denmark, the Federal Republic of Germany, Ireland, the Kingdom of Spain, the French Republic, the Grand Duchy of Luxembourg, the Kingdom of the Netherlands, the Republic of Finland, the Kingdom of Sweden and the Commission, dispute those arguments.

2. Findings of the Court

260 By the seventh plea, the Republic of Poland, supported by Hungary, submits that the EU legislature, in adopting the contested regulation and thereby establishing, on the basis of the principle of sound financial management laid down in Article 317 TFEU, a review of the Member States’ observance of the principles of the rule of law in areas of sovereign action of those Member States, which fall within their exclusive competence and are fundamental to enable them to assume their essential functions, deprived of their effectiveness both the principle of conferral set out in Article 4(1) and Article 5(2) TEU and the obligation laid down in the second sentence of Article 4(2) TEU to observe the Member States’ essential functions.

261 In that regard, first, as has been held in paragraphs 112 to 189 above, the EU legislature was entitled to base the contested regulation on Article 322(1)(a) TFEU, such that the Republic of Poland's argument that, by adopting that regulation, the EU legislature wrongly inferred its competence from the principle of sound financial management established in Article 317 TFEU cannot succeed.

262 Secondly, as has been stated in paragraphs 124 to 138, 152 to 157 and 208 to 219 above, it is apparent from the aim and the content of the contested regulation that, contrary to the Republic of Poland's assertions, that regulation authorises the Council to adopt not penalties, but only measures to protect the Union budget and the Union's financial interests.

263 Thirdly, as has been pointed out in paragraphs 142 to 145, 168, 169 and 179 above, the duty to respect the principles mentioned in Article 2(a) of the contested regulation constitutes an obligation as to the result to be achieved on the part of the Member States, which stems directly from the commitments which they have undertaken vis-à-vis each other and with regard to the European Union, and which that regulation merely implements as regards action by the national authorities relating to expenditure covered by the Union budget.

264 In that regard, it must be borne in mind that Article 2 TEU is not a mere statement of policy guidelines or intentions, but contains values which, as has been set out in paragraph 145 above, are an integral part of the very identity of the European Union as a common legal order, values which are given concrete expression in principles comprising legally binding obligations for the Member States.

265 Even though, as is apparent from Article 4(2) TEU, the European Union respects the national identities of the Member States, inherent in their fundamental structures, political and constitutional, such that those States enjoy a certain degree of discretion in implementing the principles of the rule of law, it in no way follows that that obligation as to the result to be achieved may vary from one Member State to another.

266 Whilst they have separate national identities, inherent in their fundamental structures, political and constitutional, which the European Union respects, the Member States adhere to a concept of ‘the rule of law’ which they share, as a value common to their own constitutional traditions, and which they have undertaken to respect at all times.

267 Fourthly, the Republic of Poland's argument, supported by Hungary, that the assessment of the breach by the Member States of the principles of the rule of law concerns areas which fall within the exclusive competence of the Member States, has already been rejected in paragraphs 162, 163, 220 and 221 above, on the ground that that regulation allows only for the assessment of situations and conduct of authorities relating to the implementation of the Union budget or the protection of the Union's financial interests.

268 Admittedly, it cannot be ruled out that such situations or conduct may be attributable to an authority which a Member State considers to be involved in its sovereign action in areas fundamental to the exercise of its essential functions. The fact remains that, where such a situation or conduct adversely affects or seriously risks affecting the sound financial management of the Union budget or the protection of the Union's financial interests, the European Union cannot be criticised for implementing, in defence of its identity, which includes the values contained in Article 2 TEU, the means necessary to protect that sound financial management or those financial interests by adopting appropriate measures which, in accordance with Article 5(1) of the contested regulation, relate exclusively to the implementation of the Union budget.

269 It should be recalled in that regard that, according to settled case-law, while the Member States are free to exercise their competences in all their reserved areas, they are nevertheless required do so in compliance with EU law, since they may not disregard their obligations deriving from that law (see, to that effect, judgments of 27 November 2012, Pringle, C‐370/12, EU:C:2012:756, paragraph 69 and the case-law cited; of 19 September 2017, Commission v Ireland (Registration tax), C‐552/15, EU:C:2017:698, paragraphs 71 and 86; of 20 April 2021, Repubblika, C‐896/19, EU:C:2021:311, paragraph 48 and the case-law cited; and of 15 July 2021, Commission v Poland (Disciplinary regime for judges), C‐791/19, EU:C:2021:596, paragraph 56 and the case-law cited).

270 Moreover, by requiring that the Member States thus comply with their obligations deriving from EU law, the European Union is not in any way claiming to exercise those competences itself nor is it, therefore, arrogating them (see, to that effect, judgment of 24 June 2019, Commission v Poland (Independence of the Supreme Court), C‐619/18, EU:C:2019:531, paragraph 52).

271 In the light of those considerations, it must be held that the claims of the Republic of Poland alleging breach of the principle of conferral and of the duty to respect the essential functions of the Member States are without foundation.

272 Consequently, the seventh plea must be rejected as unfounded.

1. Arguments of the parties

273 The Republic of Poland, supported by Hungary, takes the view that the application of the contested regulation will be the source of infringements of the first sentence of Article 4(2) TEU, according to which the European Union is to respect the equality of the Member States before the Treaties and their national identities, inherent in their fundamental structures, political and constitutional.

274 In the first place, according to recital 16 of the contested regulation, identification of breaches of the principles of the rule of law requires a thorough qualitative assessment by the Commission, based on relevant information from available sources and recognised institutions, including the conclusions and recommendations of the Venice Commission. That commission stated, in its report on judicial appointments, adopted at its 70th plenary session, that it was necessary to distinguish between States which are ‘older democracies’ and those which constitute ‘new democracies’, that distinction being such as to give rise to a serious risk of the Commission treating Member States differently under that regulation.

275 The Republic of Poland, supported by Hungary, also states that the Court of Auditors, in its Opinion No 1/2018 on the proposal for a regulation which resulted in the contested regulation, criticised the fact that that proposal did not set any precise criteria as regards, inter alia, the conditions for initiating the procedure or the choice and scope of the measures to be adopted, which cannot ensure a consistent application of the relevant provisions of that regulation or, therefore, guarantee equality of the Member States before the Treaties.

276 In the second place, the Republic of Poland, supported by Hungary, submits that the introduction, in the contested regulation, of a penalty mechanism compelled the EU legislature to choose a procedure for adopting measures for the protection of the Union budget which directly breaches the principle of equality of the Member States before the Treaties. It is apparent from Article 6(10) and (11) of that regulation that decisions concerning those measures are to be adopted by the Council by the qualified majority defined in Article 16(4) TEU, which implies the participation of the Member State concerned.

277 The adoption of such punitive measures by qualified majority, with the participation of the Member State concerned, leads to direct discrimination against small and medium-sized Member States, since that majority requires the votes of at least 15 Member States representing at least 65% of the population of the European Union. The larger Member States, representing a greater percentage of the population of the European Union, are thus favoured in votes involving the adoption of measures for the protection of the Union budget, particularly of those which concern them directly, compared to small and medium-sized Member States, representing a lower proportion of the population. While such a correlation cannot be disputed as regards the adoption of normative acts having effects in all Member States, the situation is different as regards penalty measures intended to have effects on a single Member State, like those which may be taken under the contested regulation.

278 Furthermore, the provisions of the Treaties which authorise the EU institutions to impose penalties on the Member States systematically exclude from voting those Member States referred to in the proposal for an act imposing penalties. In particular, that is the case for Article 126 TFEU, relating to the excessive government deficit, and for Article 7 TEU and Article 354 TFEU, regarding the procedure referred to in Article 7 TEU.

279 The Parliament and the Council, supported by the Kingdom of Belgium, the Kingdom of Denmark, the Federal Republic of Germany, Ireland, the Kingdom of Spain, the French Republic, the Grand Duchy of Luxembourg, the Kingdom of the Netherlands, the Republic of Finland, the Kingdom of Sweden and the Commission, dispute those arguments.

2. Findings of the Court

280 By the eighth plea, the Republic of Poland, supported by Hungary, claims that the application of the contested regulation will be the source of breaches of the principle of equality of Member States before the Treaties and their national identities, which the European Union is required to respect under the first sentence of Article 4(2) TEU. Those breaches result, first of all, from the Commission's taking into account of opinions and studies from the Venice Commission, secondly, from the lack of precision in the criteria relating, in particular, to the conditions for initiating the procedure laid down in that regulation and the choice and scope of the measures to be adopted and, lastly, from the voting rule laid down in Article 6(11) of the said regulation as regards the decisions to be taken by the Council under Article 6(10) of the same regulation.

281 In that regard, in the first place, as regards the Commission having taken account of relevant information from the Venice Commission, it must be recalled that the value of the rule of law which is at the heart of the horizontal conditionality mechanism established in Article 4(1) of the contested regulation is directed at observance of the principles referred to in Article 2(a) of that regulation.

282 As has been recalled most recently in paragraph 263 above, that obligation to observe those principles constitutes an obligation as to the result to be achieved on the part of the Member States, which flows directly from their membership of the European Union, pursuant to Article 2 TEU, which no Member State may disregard and which the contested regulation merely implements as regards action by the national authorities relating to expenditure covered by the Union budget.

283 It follows from paragraphs 265 and 266 above that, although the Commission and the Council must make their assessments taking due account of the specific circumstances and contexts of each procedure conducted under the contested regulation and, in particular, taking into account the particular features of the legal system of the Member State in question and the discretion which that Member State enjoys in implementing the principles of the rule of law, that requirement is in no way incompatible with the application of uniform assessment criteria.

284 In particular, as the European Union respects the national identities of Member States, inherent in their fundamental structures, political and constitutional, it is for its institutions to take account of the characteristics of the constitutional and legal systems of those Member States, when they verify whether the Member States satisfy the obligations as to the result to be achieved which arise directly from their membership of the European Union, pursuant to Article 2 TEU.

285 In that regard, the Commission must ensure that the information which it uses is relevant and that its sources are reliable, subject to review by the EU judicature. In particular, Article 6(3) of the contested regulation does not confer any specific or absolute probative value and do not attach specific legal effects to the sources of information to which it refers, nor to those indicated in recital 16 of that regulation, with the result that that provision does not relieve the Commission of its obligation to carry out a diligent assessment of the facts.

286 In addition, as has been recalled in paragraph 202 above, the assessments of the Commission and the Council are subject to the procedural requirements specified in Article 6(1) to (9) of the contested regulation. Those requirements imply in particular, as stated in recital 26 of that regulation, the obligation for the Commission to follow an evidence-based approach and to respect the principles of objectivity, non-discrimination and equal treatment of Member States before the Treaties when it conducts proceedings under that provision. As regards the identification and assessment of breaches of the principles of the rule of law, those requirements must be understood in the light of recital 16 of that regulation, according to which that assessment must be objective, impartial and fair, compliance with all of those obligations being subject to full judicial review by the Court.

287 The Commission thus remains responsible for the information it uses and for the reliability of the sources of that information. Furthermore, the Member State concerned has the option, in the course of the procedure provided for in Article 6(1) to (9) of the contested regulation, to submit observations on the information which the Commission intends to use with a view to proposing the adoption of appropriate measures. Accordingly, it may challenge the probative value of each piece of evidence relied on, and the merits of the Commission's assessments may, in any event, be subject to review by the EU judicature in the context of an action brought against a Council decision adopted under that regulation.

288 In the second place, as regards the alleged lack of precision in the criteria applicable to the conditions for initiating the procedure and the choice and scope of the measures to be adopted, it follows from a combined reading of Article 4 and Article 6(1) of the contested regulation that, as has been stated in paragraph 125 above, the Commission may initiate that procedure only where it finds that there are reasonable grounds for considering that at least one of the principles of the rule of law referred to in Article 2(a) of that regulation has been breached in a Member State, that that breach concerns at least one of the situations attributable to an authority of a Member State or at least one instance of conduct of such authorities referred to in Article 4(2) of that regulation, in so far as those situations or that conduct is relevant to the sound financial management of the Union budget or for the protection of the Union's financial interests, and that that breach affects or risks seriously affecting that sound management or those financial interests, in a sufficiently direct way, by a real link between those breaches and that effect or serious risk of effect.

289 So far as concerns those principles, it follows from the findings made in paragraph 169 above that the Republic of Poland cannot claim that it does not have specific and precise knowledge of the obligations as to the result to be achieved binding on it due to its accession to the European Union, in terms of respect for the value of the rule of law.

290 In that regard, while it is true that Article 2(a) of the contested regulation does not set out in detail the principles of the rule of law that it mentions, nevertheless recital 3 of that regulation notes that the principles of legality, legal certainty, prohibition of arbitrariness of the executive powers, effective judicial protection and separation of powers, referred to in that provision, have been the subject of extensive case-law of the Court. The same is true of the principles of equality before the law and non-discrimination, which are also mentioned, as is apparent in particular from paragraphs 94 and 98 of the judgment of 3 June 2021, Hungary v Parliament (C‐650/18, EU:C:2021:426) and from paragraphs 57 and 58 of the judgment of 2 September 2021, Belgian State (Right of residence in the case of domestic violence) (C‐930/19, EU:C:2021:657).

291 Those principles of the rule of law, as developed in the case-law of the Court on the basis of the EU Treaties, are thus recognised and specified in the legal order of the European Union and have their source in common values which are also recognised and applied by the Member States in their own legal systems.

292 In addition, recitals 8 to 10 and 12 of the contested regulation mention the principal requirements stemming from those principles. In particular, they shed light on the cases which may be indicative of breaches of the principles of the rule of law, set out in Article 3 of that regulation, and on the situations and conduct which those breaches must concern, described in Article 4(2) of that regulation, for the adoption of appropriate measures within the meaning of Article 4(1) of that regulation to be justified.

293 Lastly, the assessments of the Commission and the Council are subject to the procedural requirements recalled in paragraph 286 above.

294 As regards the situations and conduct of the authorities referred to in Article 4(2) of the contested regulation and their relevance to the sound financial management of the Union budget or to the Union's financial interests, it has been noted in paragraphs 171 to 177 above that they are sufficiently precise for the Republic of Poland to be able to identify in a sufficiently specific and foreseeable manner, the situations and conduct referred to in that provision.

295 As regards the concepts of ‘sound financial management’ and ‘protection of the financial interests of the Union’, the former is also referred to, inter alia, in Article 310(5) TFEU and in the first paragraph of Article 317 TFEU and is defined in Article 2(59) of the Financial Regulation as the implementation of the budget in accordance with the principles of economy, efficiency and effectiveness, while the latter falls within Article 325 TFEU and, according to Article 63(2) of the Financial Regulation, covers all legislative, regulatory and administrative measures designed, inter alia, to prevent, detect and correct irregularities and fraud in the implementation of the budget.

296 In that regard, Article 2(1) of Regulation No 883/2013 defines the ‘financial interests of the Union’ as ‘revenues, expenditures and assets covered by the budget of the European Union and those covered by the budgets of the institutions, bodies, offices and agencies and the budgets managed and monitored by them’. In addition, Article 135(1), (3) and (4) of the Financial Regulation provides that, in order to protect the financial interests of the Union, the Commission is to set up and operate an early detection and exclusion system.

297 The Court has also held that the concept of ‘financial interests of the Union’, within the meaning of Article 325(1) TFEU, encompasses not only revenue made available to the Union budget but also expenditure covered by that budget (judgment of 21 December 2021, Euro Box Promotion and Others, C‐357/19, C‐379/19, C‐547/19, C‐811/19 and C‐840/19, EU:C:2021:1034, paragraph 183). That concept is therefore relevant not only in the context of the measures to combat irregularities and fraud referred to in that provision, but also to the sound financial management of that budget, since the protection of those financial interests also contributes to that sound management.

298 The prevention of effects such as those referred to in Article 4(1) of the contested regulation therefore supplements the correction of such effects, which is inherent both in the concept of ‘sound financial management’ and in that of ‘protection of the financial interests of the Union’ and must therefore be regarded as a permanent and horizontal requirement of EU financial legislation.

299 What is more, that provision requires that the breaches of the principles of the rule of law which have been found must ‘seriously’ risk affecting the sound financial management of the Union budget or the financial interests of the Union and requires, therefore, that it be demonstrated that that risk has a high probability of occurring, in relation to the situations or to the conduct of authorities referred to in Article 4(2) of the contested regulation, and, moreover, appropriate measures may be adopted only on condition that a sufficiently direct link, namely a genuine link, is established between a breach of one of the principles of the rule of law and that serious risk. Furthermore, in adopting those measures, it is also necessary to comply with the procedural requirements referred to, most recently, in paragraph 286 above.

300 As regards the sufficiently direct link between a finding of a breach of the rule of law and the protection of the budget or of the financial interests of the Union, it is sufficient to refer to paragraphs 178 to 180 above.

301 Lastly, the choice and scope of the measures which may be adopted pursuant to the contested regulation are limited, in so far as, as has been pointed out in paragraph 153 above, Article 5(1) of the contested regulation exhaustively enumerates the various protection measures that may be adopted.

302 In accordance with Article 5(3) of that regulation, such measures must be proportionate and determined in the light of the actual or potential impact of the breaches of the principles of the rule of law on the sound financial management of the Union budget or the financial interests of the Union. The nature, duration, gravity and scope of the breaches of the principles of the rule of law must be duly taken into account and must, in so far as possible, target the Union actions affected by those breaches. It follows that the measures taken must be strictly proportionate to the impact of the breaches of the principles of the rule of law found on the Union budget or on the protection of the financial interests of the Union.

303 In the light of the foregoing considerations and the procedural requirements referred to, most recently, in paragraph 286 above, the line of argument of the Republic of Poland, supported by Hungary, alleging a lack of precision in the criteria concerning, in particular, the conditions for initiating the procedure and the choice and scope of the measures to be adopted, is without foundation.

304 In the third place, as regards the claim based on the alleged incompatibility with the principle of equality of Member States before the Treaties of the voting rule laid down in Article 6(11) of the contested regulation for the adoption of decisions by the Council under Article 6(10) of that regulation, it must be noted, first, that that claim is based, in part, on the argument that the measures which may be adopted under that Article 6(10) are penalties by nature, for the adoption of which the Treaties exclude the Member State in question from voting.

305 As has been stated in paragraphs 112 to 229 above, the measures which may be adopted pursuant to the contested regulation are aimed not at imposing penalties on a Member State on account of breaches of the principles of the rule of law, but solely at protecting the sound financial management of the Union budget or the financial interests of the Union.

306 Furthermore, a Member State can be excluded from the qualified majority voting procedure only in situations where it is expressly provided for by the Treaties and in which, consequently, a qualified majority is determined in accordance with Article 238(3) TFEU.

307 Second, while it is true that the EU legislature has the ability to have the provisions implementing the basic regulations adopted according to a procedure different from that followed for the adoption of the basic regulation (see, to that effect, judgment of 18 June 1996, Parliament v Council, C‐303/94, EU:C:1996:238, paragraph 23 and the case-law cited), the fact remains that, as the Advocate General observed in point 96 of his Opinion, the voting rule laid down in Article 6(11) of the contested regulation, namely that of qualified majority with participation of all the Member States, is the rule in which Article 16(3) TEU provides for the application by default during Council deliberations, except where the Treaties provide otherwise.

308 It should be added that not only is that voting rule provided for in the Treaties themselves, but it also does not breach the principle of equality of Member States before the Treaties.

309 In particular, the fact that the interests of the Member States may diverge and that, depending on whether all the Member States or only certain of them participate in the vote within the Council, a blocking minority is relatively easy to achieve following that vote, in accordance with Article 16(4) TEU, is in no way specific to the procedure established by the contested regulation and is fully compatible with the choices made by the authors of the Treaties. In accordance with the value of democracy contained in Article 2 TEU, that provision seeks to ensure that the Council's decisions are sufficiently representative of both the Member States and the population of the European Union.

310 In the light of the foregoing considerations, the eighth plea must be dismissed as unfounded.

1. Arguments of the parties

311 The Republic of Poland, supported by Hungary, submits that the provisions of the contested regulation do not meet the requirements of clarity and precision arising from the principle of legal certainty, since that regulation does not clearly define the requirements to be met by the Member States to be able to retain the financing from the EU budget that has been granted to them and affords the Commission and the Council too much discretion.

312 First, the concept of ‘the rule of law’, as it is defined in Article 2(a) of the contested regulation, presents a difficulty in that respect. That concept cannot, as a matter of principle, be given a universal definition since it contains a non-exhaustive number of principles whose meaning may differ from one State to another, depending on the constitutional features or legal traditions specific to the State in question. In addition, that definition unduly extends the scope of that concept as a value of the European Union, which is but one of the values contained in Article 2 TEU, among the other values set out in that provision.

313 Secondly, the criteria for assessing observance of the principles of the rule of law set out in Articles 3 and 4 of the contested regulation do not satisfy the requirements of clarity and precision, since the application of those principles presupposes that specific expression has first been given to them. In the absence of a universal definition of those principles and having regard to the very limited competences of the European Union to give specific expression to them, those principles have no specific substantive content in EU law. While it is true that the Court of Justice and the European Court of Human Rights have clarified certain aspects of the value of the rule of law, they have not yet, however, defined the content of the other values contained in Article 2 TEU or their relationship with the principle of respect for the national identities of the Member States found in Article 4(2) TEU.

314 Admittedly, in its judgment of 27 February 2018, Associação Sindical dos Juízes Portugueses (C‐64/16, EU:C:2018:117, paragraph 32), the Court made reference to the value of the rule of law contained in Article 2 TEU, but it stated that specific expression was given to that value in Article 19 TEU. Consequently, in order to become applicable, the values contained in Article 2 TEU must be given specific expression in other provisions of the Treaties. However, as the values other than the rule of law, unduly incorporated into that latter concept by the contested regulation, are not clearly defined, the Court would be called upon to clarify, in particular, the concepts of ‘pluralism’, ‘non-discrimination’, ‘tolerance’, ‘justice’ and ‘solidarity’. The binding interpretation of those concepts by the Court, during the judicial review of decisions taken under that regulation, thus exceeds the competences conferred on the European Union.

315 The lack of precision in Article 3 and Article 4(2) of the contested regulation, in that they use expressions such as ‘the proper functioning’ of ‘authorities’ or ‘services’ and ‘the proper functioning of effective and transparent financial management and accountability systems’, as well as the non-exhaustive nature of the lists set out in those provisions, are thus going to permit the Commission and the Council to define them when applying the contested regulation, which will have the effect, in essence, of enabling the standards thereby defined to be applied retroactively.

316 Thirdly, among the sources of information which the Commission is obliged to use under Article 6(3) of the contested regulation when finding a breach of the principles of the rule of law are the ‘conclusions and recommendations’ of EU institutions, other relevant international organisations and other recognised institutions, when, under EU law, those sources are not binding on the Member States. The contested regulation cannot therefore make them binding. Even the indicative list in recital 16 of the said regulation does not sufficiently define the ‘decisions, conclusions and recommendations’ referred to therein.

317 The Parliament and the Council, supported by the Kingdom of Belgium, the Kingdom of Denmark, the Federal Republic of Germany, Ireland, the Kingdom of Spain, the French Republic, the Grand Duchy of Luxembourg, the Kingdom of the Netherlands, the Republic of Finland, the Kingdom of Sweden and the Commission, dispute those arguments.

2. Findings of the Court

318 By the ninth plea, the Republic of Poland, supported by Hungary, submits that the contested regulation breaches the principle of legal certainty and grants too broad a discretion to the Commission and the Council on account of the lack of precision of (i) the concept of ‘the rule of law’ as it is defined in Article 2(a) of that regulation, (ii) the criteria in Article 3 and Article 4(2) of that regulation, and (iii) the sources of information on which the Commission is required to base its assessments in accordance with Article 6(3) of the same regulation.

319 According to the Court's settled case-law, the principle of legal certainty requires, on the one hand, that the rules of law be clear and precise and, on the other, that their application be foreseeable for those subject to the law, in particular, where they may have adverse consequences. That principle requires, inter alia, that legislation must enable those concerned to know precisely the extent of the obligations imposed on them, and those persons must be able to ascertain unequivocally their rights and obligations and take steps accordingly (judgment of 29 April 2021, Banco de Portugal and Others, C‐504/19, EU:C:2021:335, paragraph 51 and the case-law cited).

320 However, those requirements cannot be interpreted as precluding the EU legislature from having recourse, in a norm that it adopts, to an abstract legal notion, nor as requiring that such an abstract norm refer to the various specific hypotheses in which it applies, given that all those hypotheses could not be determined in advance by the legislature (see, by analogy, judgment of 20 July 2017, Marco Tronchetti Provera and Others, C‐206/16, EU:C:2017:572, paragraphs 39 and 40).

321 Consequently, the fact that a law confers a discretion on the authorities responsible for implementing it is not in itself inconsistent with the requirement of foreseeability, provided that the scope of the discretion and the manner of its exercise are indicated with sufficient clarity, having regard to the legitimate aim in question, to give adequate protection against arbitrary interference (see, to that effect, judgments of 17 June 2010, Lafarge v Commission, C‐413/08 P, EU:C:2010:346, paragraph 94, and of 18 July 2013, Schindler Holding and Others v Commission, C‐501/11 P, EU:C:2013:522, paragraph 57).

322 It is in the light of those considerations that it is appropriate to assess, in the first place, the line of argument based on the imprecise and overly broad nature of the concept of ‘the rule of law’ defined in Article 2(a) of the contested regulation.

323 In that regard, first, that provision is not intended to define that concept exhaustively, but is limited to setting out, for the sole purposes of that regulation, a number of the principles which it covers and which are, according to the EU legislature, the most relevant in the light of the purpose of that regulation, which is to ensure the protection of the Union budget.

324 Second, contrary to the Republic of Poland's submission, supported by Hungary, the principles mentioned in Article 2(a) of the contested regulation do not exceed the limits of the concept of ‘the rule of law’. In particular, the reference to the protection of fundamental rights is made only by way of illustration of the requirements of the principle of effective judicial protection, which is also guaranteed in Article 19 TEU and which the Republic of Poland itself acknowledges to be part of that concept. The same is true of the references to the principles of non-discrimination and equality. Although Article 2 TEU refers separately to the rule of law as a value common to the Member States and to the principles of equality and non-discrimination, it is clear that a Member State whose society is characterised by discrimination cannot be regarded as ensuring respect for the rule of law, within the meaning of that common value.

325 That conclusion is supported by the fact that, in its Study No 711/2013 of 18 March 2016 adopting a ‘Rule of law checklist’, referred to in recital 16 of the contested regulation, the Venice Commission stated, inter alia, that the concept of ‘the rule of law’ requires a system of certain and foreseeable law, where everyone has the right to be treated by all decision-makers with dignity, equality and rationality and in accordance with the laws, and to have the opportunity to challenge decisions before independent and impartial courts through fair procedures. Those characteristics are specifically reflected in Article 2(a) of that regulation.

326 Thirdly, in the light of what has been set out in paragraphs 289 to 293 above, the line of argument of the Republic of Poland, supported by Hungary, according to which the principles of the rule of law mentioned in Article 2(a) of the contested regulation do not have any specific substantive content in EU law must be rejected as entirely unfounded.

327 Fourthly, as regards the relationship between those same principles of the rule of law with that of respect for the national identities of the Member States set out in Article 4(2) TEU, it is sufficient to refer to paragraphs 282 to 286 above.

328 Fifthly, so far as concerns the line of argument according to which, in order to become applicable, the values contained in Article 2 TEU must be given specific expression in other provisions of the Treaties, first, it has been noted in paragraphs 192 to 199 above that the Treaties comprise numerous provisions, frequently implemented by various acts of secondary legislation, which grant the EU institutions the power to examine, determine the existence of and, where appropriate, to impose penalties for breaches of the values contained in Article 2 TEU committed in a Member State. On the other hand, it has been held in paragraphs 112 to 189 above that Article 322(1)(a) TFEU constitutes a legal basis enabling the EU legislature to adopt provisions concerning the finding of breaches of the value of the rule of law and the legal consequences of those breaches, in order to protect the Union budget and the financial interests of the Union where such breaches affect or seriously risk affecting that budget and those interests.

329 Sixthly, even assuming that the Court were called upon to interpret, in an action for annulment of a decision adopted under the contested regulation, the concepts of ‘pluralism’, ‘non-discrimination’, ‘tolerance’, ‘justice’ or ‘solidarity’, contained in Article 2 TEU, in so doing, it would, contrary to the arguments of the Republic of Poland, supported by Hungary, exercise only the powers conferred on it by the Treaties, in particular by Article 263 TFEU.

330 In the second place, as regards the alleged lack of precision in the criteria used in Article 3 and Article 4(2) of the contested regulation, it follows, first, from paragraph 155 above that that Article 3 does not set out obligations for the Member States, but merely cites situations which may be indicative of breaches of the principles of the rule of law and thereby aims to facilitate the application of that regulation, by explaining the requirements inherent in those principles.

331 Secondly, as regards the allegedly imprecise concepts in Article 4(2) of the said regulation, it must be recalled, first of all, that the concept of ‘authority’ has been examined in paragraphs 175 and 176 above and that the concept of ‘services’ covers solely ‘investigation and public prosecution services’.

332 Next, as regards the ‘proper functioning’ of public authorities, including law-enforcement authorities, implementing the Union budget and responsible for supervising, monitoring and conducting financial audits, as well as investigative and public prosecution services, referred to in Article 3(b) and Article 4(2)(a) to (c) of the contested regulation, it follows from recitals 8 and 9 of that regulation that that expression refers to the ability of those authorities properly and effectively to execute their relevant functions for the sound financial management of the Union budget or the protection of the financial interests of the Union.

333 Finally, the expression ‘effective and transparent financial management and accountability systems’, used in Article 4(2)(b) of the contested regulation, refers to the concept of ‘financial management’, which falls within the concept of ‘sound financial management’ found in the Treaties themselves, in particular in Article 310(5) and the first paragraph of Article 317 TFEU, and defined in Article 2(59) of the Financial Regulation as the implementation of the budget in accordance with the principles of economy, efficiency and effectiveness. The expression ‘financial accountability’, for its part, reflects in particular the financial control, monitoring and audit obligations mentioned in the said Article 4(2)(b), while the expression ‘effective and transparent … systems’ implies the establishment of an ordered set of rules which ensure in an effective and transparent manner the said financial management and accountability.

334 Thirdly, the line of argument based on the non-exhaustive nature of the list of situations or conduct set out in Article 4(2) of the contested regulation has been rejected in paragraphs 171 to 177 above and, as regards the situations which may be indicative of breaches, cited in Article 3 of that regulation, it has been noted in paragraph 171 above that a specific definition of the concept of ‘breach’ is no way necessary for the needs of a horizontal conditionality mechanism such as that established by the said regulation.

335 Fourthly, as regards the discretion afforded by those provisions to the Commission and the Council, it follows from the foregoing considerations that the expressions criticised by the Republic of Poland, supported by Hungary, satisfy, as such, the requirements of the principle of legal certainty recalled in paragraphs 319 to 321 above. In addition, in order to justify adopting appropriate measures under the contested regulation, those institutions must establish in a specific manner all the conditions most recently identified in paragraphs 286 and 288 above.

336 In the third place, as regards the argument that Article 6(3) and (8) of the contested regulation does not define in a sufficiently precise manner the sources of information on which the Commission may rely, some of which is not binding on the Member States and which that regulation cannot make binding, it should be noted that, under that provision, when the Commission assesses whether the conditions set out in Article 4 of that regulation are satisfied and assessing the proportionality of the measures to be imposed, it is to take into account relevant information from available sources, including decisions, conclusions and recommendations of EU institutions, other relevant international organisations and other recognised institutions.

337 In that regard, in accordance with Article 4(1) of the contested regulation, it is for the Commission to establish that the conditions set out in Article 4 of that regulation are fulfilled.

338 In addition, under Article 6(1) of that regulation, the Commission is required to set out, in a written notification to the Member State concerned, the factual elements and specific grounds on which it based its findings that there are reasonable grounds to consider that those conditions are fulfilled.

339 It follows that the Commission is required to carry out a diligent assessment of the facts in the light of the conditions laid down in Article 4 of the contested regulation. The same is true, in accordance with Article 6(7) to (9) of that regulation, as regards the requirement of proportionality of the measures, laid down in Article 5(3) of that regulation.

340 Recitals 16 and 26 of that regulation state, moreover, that the Commission must conduct a thorough qualitative assessment, which should be objective, impartial and fair, should respect the principles of objectivity, non-discrimination and equality of Member States before the Treaties and should be conducted according to a non-partisan and evidence-based approach.

341 It follows that the Commission is required to ensure, subject to review by the EU judicature, that the information it uses is relevant and that the sources of that information are reliable. In particular, those provisions do not confer any specific or absolute probative value and do not attach specific legal effects to the sources of information to which they refer, nor to those indicated in recital 16 of the contested regulation, with the result that they do not relieve the Commission of its obligation to carry out a diligent assessment of the facts which fully satisfies the requirements set out in the preceding paragraph.

342 In that regard, recital 16 of the contested regulation explains that the relevant information from available sources and recognised institutions includes, inter alia, judgments of the Court of Justice, reports of the Court of Auditors, the Commission's annual Rule of Law Report and EU Justice Scoreboard, reports of OLAF, the European Public Prosecutor's Office and the European Union Agency for Fundamental Rights, and conclusions and recommendations of relevant international organisations and networks, including Council of Europe bodies such as GRECO and the Venice Commission, in particular its rule-of-law checklist, and the European networks of supreme courts and councils for the judiciary.

343 The Commission thus remains responsible for the information it uses and for the reliability of the sources of that information. Furthermore, the Member State concerned has the option, in the course of the procedure provided for in Article 6(1) to (9) of the contested regulation, to submit observations on the information which the Commission intends to use with a view to proposing the adoption of appropriate measures. Accordingly, it may challenge the probative value of each piece of evidence relied on, and the merits of the Commission's assessments may, in any event, be subject to review by the EU judicature in the context of an action brought against a Council decision adopted under that regulation.

344 In particular, the Commission must communicate, in a specific manner, to the Member State concerned, once the procedure under Article 6(1) of the contested regulation is initiated and periodically throughout that procedure, the relevant information from available sources on which the it intends to base the proposal for an implementing decision on the appropriate measures which it will submit to the Council. Moreover, contrary to the assertions of the Republic of Poland, supported by Hungary, no binding character is conferred on the recommendations which may be taken into account by the Commission, in accordance with Article 6(3) and (8) of that regulation.

345 In the light of all of the foregoing considerations, the ninth plea must be rejected as unfounded.

1. Arguments of the parties

346 The Republic of Poland, supported by Hungary, argues that the EU legislature, by the conditionality mechanism established by the contested regulation, breached the principle of proportionality, since there are other provisions of EU law intended to protect the Union budget. It states that, according to Article 6(1) of that regulation, the Commission is to apply that mechanism unless it considers that other procedures set out in EU legislation allow it to protect the Union budget more effectively. It adds that recital 17 of that regulation states that EU financial legislation already provides for various possibilities to protect the Union budget. The EU legislature did not explain why those possibilities are ineffective or how that regulation makes up for alleged inadequacies.

347 In particular, the reason why the protection of the Union budget was made subject to the finding of breaches of the principles of the rule of law and was not directly linked to observance of the principle of sound financial management – that principle already being defined in Article 2(59) of the Financial Regulation, clarified in Chapter 7 of that regulation and laid down in Article 56(2) thereof as an obligation for the Member States – is not clear. The EU legislature could thus have specified in the Financial Regulation the obligations of the Member States concerning observance of the principle of sound financial management of Union funds.

348 The reason underpinning the approach followed by the contested regulation thus appears to be the desire of the Parliament, the Council and the Commission to circumvent the restrictions in the Treaties concerning their competence to examine observance by the Member States of the principles of the rule of law. By adopting that regulation, the EU legislature conferred on the Council and the Commission an unlimited right to assess, from a political perspective, observance of the principles of the rule of law and to link any identified breach of those principles, in a general manner, to the principle of sound financial management of Union funds.

349 By failing to demonstrate the added value of the mechanism established by the contested regulation and its link with the other provisions intended to protect the Union budget, the EU legislature therefore breached the principle of proportionality.

350 Furthermore, the finding of breaches of the principles of the rule of law on the basis of political factors and in the absence of specific provisions prevents compliance with the requirement of proportionality of the measures adopted under Article 5(3) of the contested regulation. The same is true of the examination of the nature, duration, gravity and scope of that breach. It is therefore impossible to observe the principle of proportionality, which is all the more serious given that breaches of the principles of the rule of law to be understood according to Article 3 and Article 4(2) of that regulation are systematic in nature. It is difficult to accept in practice that the ‘proper functioning of the authorities’ is relevant only to expenditure under a specific fund or programme. The systematic nature of breaches established and the absence of any criterion guiding the choice and scope of the measures to be adopted enables the Commission and the Council easily to justify the adoption of extensive measures with heavy financial consequences.

351 The Parliament and the Council, supported by the Kingdom of Belgium, the Kingdom of Denmark, the Federal Republic of Germany, Ireland, the Kingdom of Spain, the French Republic, the Grand Duchy of Luxembourg, the Kingdom of the Netherlands, the Republic of Finland, the Kingdom of Sweden and the Commission, dispute those arguments.

2. Findings of the Court

352 By the tenth plea, the Republic of Poland, supported by Hungary, submits that the contested regulation breaches the principle of proportionality on the grounds, first of all, that the EU legislature has not demonstrated, having regard to the pre-existing means to protect the Union budget, the need for its adoption, next, that that adoption reveals the desire of that legislature to circumvent the limits set by the Treaties on the competence of the EU institutions to examine observance of the principles of the rule of law by the Member States and, lastly, on account of the lack of precision in the criteria set out, in particular, in Article 3, Article 4(2) and Article 5(3) of that regulation.

353 As a preliminary point, it should be recalled that, according to settled case-law of the Court, the principle of proportionality, which is one of the general principles of EU law, requires that acts of the EU institutions be appropriate for attaining the legitimate objectives pursued by the legislation at issue and do not go beyond what is necessary in order to achieve those objectives; when there is a choice between several appropriate measures, recourse must be had to the least onerous, and the disadvantages caused must not be disproportionate to the aims pursued (judgment of 6 September 2017, Slovakia and Hungary v Council, C‐643/15 and C‐647/15, EU:C:2017:631, paragraph 206 and the case-law cited).

354 In the first place, as regards the appropriateness of adopting the contested regulation, the Court has accepted that the EU legislature must be allowed a broad discretion which applies not only to the nature and scope of the measures to be taken in areas in which its action involves political, economic or social choices, and in which it is called upon to undertake complex assessments and evaluations, but also, to some extent, to the finding of the basic facts, with the result that the criterion to be applied is not whether a measures adopted in such an area was the only or the best possible measure, since its legality can be affected only if the measure is manifestly inappropriate having regard to the objective which the competent institution is seeking to pursue (judgments of 3 December 2019, Czech Republic v Parliament and Council, C‐482/17, EU:C:2019:1035, paragraphs 77 and 78, and of 8 December 2020, Poland v Parliament and Council, C‐626/18, EU:C:2020:1000, paragraphs 95 and 97).

355 In the present case, as the Republic of Poland itself has noted in its arguments relating to the fourth and eleventh pleas, the explanatory memorandum accompanying the proposal which led to the contested regulation stated that ‘a number of recent events have demonstrated generalised weaknesses in national checks and balances and have shown how a lack of respect for the rule of law can become a matter of serious and common concern within the European Union’, in particular for ‘institutions such as the … Parliament’.

356 In addition, it follows in particular from recitals 7, 8 and 17 of the contested regulation that the EU legislature considered that there could be situations resulting from breaches of the principles of the rule of law mentioned in Article 2(a) of that regulation, that existing legislation aimed at protecting the sound financial management of the Union budget or the financial interests of the Union could not address adequately.

357 The Republic of Poland has not put forward any evidence capable of demonstrating that the EU legislature exceeded the broad discretion available to it in that regard, when it thus considered it necessary to alleviate, by means of the contested regulation, effects or serious risks of effects on that sound management or on the protection of those financial interests that may result from breaches of the principles of the rule of law.

358 In the second place, as regards the alleged circumvention of the powers of the EU institutions to examine observance of the principles of the rule of law by the Member States, it must be stated that the EU legislature in no way conferred on the Council and the Commission an unlimited right to assess, in the light of political considerations, observance of the principles of the rule of law or to link any identified breach of those principles, in a general manner, to the principle of sound financial management of Union funds. It made the initiation of the procedure subject to all the criteria set out in paragraph 288 above, which, as has been pointed out in paragraphs 112 to 189 and 200 to 203 above, ensure that the assessments of those institutions fall within the scope of EU law and are of a legal rather than political nature.

359 In the third place, as regards the alleged lack of precision in the criteria determining the choice and scope of the measures to be adopted, provided for inter alia in Article 5(3) of the contested regulation, it has been noted in paragraphs 301 to 303 above that those criteria are sufficiently precise and that, in particular, it follows from the first to third sentences of that paragraph that the measures taken must be strictly proportionate to the effect of the breaches which have been determined of the principles of the rule of law on the Union budget or on the financial interests of the Union.

360 That provision specifies, in its first sentence, that the measures taken are to be ‘proportionate’, in its second sentence, that they are to be ‘determined in light of the actual or potential impact’ of the breaches of the principles of the rule of law on the sound financial management of the Union budget or the financial interests of the Union and, in its third sentence, that the nature, duration, gravity and scope of the breaches of the principles of the rule of law are to be ‘duly taken into account’.

361 As Advocate General Campos Sánchez-Bordona noted, in points 177 and 178 of his Opinion in Hungary v Parliament and Council (C‐156/21, EU:C:2021:974), it follows from the order of those sentences and from the terms used therein that the proportionality of the measures to be adopted is ensured, decisively, by the criterion of the ‘impact’ of breaches of the principles of the rule of law on the sound financial management of the Union budget or on the protection of the financial interests of the Union. As regards the criteria based on the nature, duration, gravity and scope of those breaches, they may be ‘duly taken into account’ only in order to determine the extent of that impact, which may vary depending on the characteristics of the breaches found, as illuminated by the application of those criteria.

362 Finally, in so far as the Republic of Poland, supported by Hungary, submits that breaches which have been determined of the principles of the rule of law are liable to prove to be systematic in nature, such that they also affect areas other than those relevant to the sound financial management of the Union budget or to the protection of its financial interests, it has been pointed out in paragraphs 267 to 270 above that, where such a breach is also liable to affect or seriously risk affecting the sound financial management of the Union budget or the protection of the financial interests of the Union, the Union cannot be criticised for implementing the means necessary to protect that sound management and those financial interests.

363 In the light of the foregoing considerations, the tenth plea must be rejected and, accordingly, the action must be dismissed in its entirety,