30th Sep 2023

Hungary risks losing EU funds, ministers say

  • Hungary's economic problems are piling up (Photo: Alex)

EU finance ministers on Tuesday (24 January) warned Hungary it may lose EU funds if it fails to fix its excessive deficit, a problem since 2004.

"Hungary cannot face sanctions under the excessive deficit procedure as it is not a member of the euro area. But for beneficiaries of the EU's cohesion fund, such as Hungary, failure to comply with the Council's recommendations can lead to the suspension of cohesion fund commitments," the ministers said in their conclusions on Tuesday.

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EU economics commissioner Olli Rehn explained that the suspension of EU funds is "equivalent" to the automatic sanctions that can be imposed on eurozone members if they repeatedly fail to bring their deficit below three percent of gross domestic product.

The total sum that could be frozen, starting in January 2013, amounts to €1.7 billion - about ten percent of what Hungary is expected to request from the International Monetary Fund if talks kick off.

Speaking to journalists on Tuesday, economics minister Gyorgy Matolcsy said that he is "quite optimistic" the funds freeze can be avoided since Brussels itself estimates the deficit will bounce "only" by 0.25 percent above the three-percent threshold in 2013.

But, according to the council conclusions, "the deficit is projected to deteriorate again in 2013, to 3.7%, mainly on account of the one-off revenues expiring, while planned structural reforms are insufficiently specified."

The nationalisation of private pension funds in Hungary brought the state budget into surplus last year, but the EU commission said these kind of short-term, 'one-off' measures do not deal with the core of the problem.

Meanwhile, on the same day, Hungarian Prime Minister Viktor Orban had a series of meetings with top EU officials as he sought to tone a simmering row with the European Commission over controversial changes to domestic law.

The changes last week prompted the commission to start legal proceedings citing concerns about the independence of the central bank, the judiciary and data protection issues.

"I don't expect this meeting to come with any decision ... but it is an opportunity to exchange in a political way what the concerns are," Commission President Jose Manuel Barroso said ahead of the meeting which was not followed by any press conference.

"A political meeting ... cannot replace the formal due process," he added.

Speaking alongside him, European Parliament chief Martin Schulz, who had already met Orban earlier in the day said they had "open-minded and tough discussions".

A clean bill of health from the EU commission on the question of the central bank's independence will also be relevant for starting official talks on a 'precautionary' loan from the IMF.

Hungary received a €20bn EU-IMF bail-out in 2008, but when Orban's came to power in 2010, the programme was terminated as the new leader sought to solve the country's economic problems by taxing banks and re-nationalising assets.

The policy failed, with ratings agencies downgrading Hungary's sovereign-debt-repaying capacity to 'junk' status as public debt rose to 83 percent of GDP last year.

In December, Orban agreed to seek EU-IMF assistance. But exploratory talks broke off just days later when the Hungarian government refused to revoke a draft law limiting the independence of the central bank by appointing government officials to its board and by requiring the central governor to pledge allegiance to the country's constitution.

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When the EU found the political will to act on rule of law

In 2012, it was against Orbán's Hungary that the EU first proposed to suspend cohesion funds under strengthened budgetary rules, after Budapest failed to step up efforts to end the country's excessive government deficit. Then Orbán toed the line.

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