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28th May 2022

Hungary feels the heat of new EU budget rules

  • Hungary may be the first EU country sanctioned for excessive deficits (Photo: Axel Buhrmann)

Finance ministers are on Tuesday expected to approve the freezing of €495 million in funds for Hungary if Budapest fails to bring down its deficit in the coming six months. - the first such move under the EU's strengthened budget rules.

A large majority of member states is said to favour the two formal proposals: One giving Hungary a six-month deadline for "sufficient corrective measures" slashing budget spending by 0.5 percent of the country's gross domestic product, the other setting a funding freeze from 1 January 2013 if the deadline is not met.

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According to a commission draft proposal tabled to finance ministers on 6 March and seen by this website, the Hungarian authorities "should put an end to the present excessive deficit situation by 2012." The paper sets 13 September as a deadline "to take effective action and to specify the measures that will be necessary to progress towards ensuring a durable correction of the excessive deficit."

If Budapest's actions are not deemed "sustainable" enough or if the deadline is not met, Hungary will be the first EU country to be sanctioned for excessive deficits under the strengthened budgetary discipline rules capping deficits at three percent of GDP.

Official figures show that Budapest is running a budget surplus this year, but the commission has deemed that "one-off measures", such as the nationalisation of a private pension fund, are not enough to keep the deficit down. Hungary has been in the so-called excessive deficit procedure ever since it joined the EU, in 2004.

Relations between Budapest and Brussels have soured since centre-right Prime Minister Viktor Orban came to power two years ago with a super-majority in the parliament allowing him to make controversial constitutional changes touching upon media freedom, independence of the judiciary and the central bank.

Even though the commission officially maintains that excessive deficit procedures are not linked to the other areas in which the Hungarian government may face legal action for breaching EU law, diplomats concede that the issues are intertwined.

On top of that, the standoff risks aggravating Hungary's economic outlook as it has delayed by three months talks on a loan from the EU and the International Monetary Fund.

"We estimate Hungary's gross borrowing needs for 2012 at 16 percent of GDP (€15 billion), which is the highest in Central and Eastern Europe," Moody's ratings agency said in a note to investors on Monday, noting that the stand-off with Brussels has delayed the EU-IMF talks, making external borrowing "challenging" and at increased interest rates.

Commenting on the proposed funds freeze last week, Orban said that it was an "extremely stupid policy".

“How is the EU going to emerge from the crisis if it represents this bad management mentality of supporting the bad and punishing the good?” Orban said at the Hungarian Chamber of Commerce and Industry conference.

He said Hungary’s budget deficit this year and in 2013 would be around the eighth lowest in the European Union, while at the same time the public debt was also on a downward course.

Other indicators paint a less rosy picture, however. According to the latest Eurobarometer, seen by MTI news agency on Sunday, two-thirds of Hungarians did not travel for their holidays last year due to financial restraints.

Hungary was the third out of 34 countries surveyed where the percentage of people who claimed they could not afford a holiday was highest, the poll showed.

EU to freeze millions for Hungary over deficit

Hungary on Wednesday was given less than a year to lower its public deficit or have a third of its EU subsidies slashed, amounting to €495 million. It is the first time the EU commission takes such an action.

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The EU commission on Wednesday gave Hungary a one-month deadline to change its controversial laws or face court cases in Luxembourg, just as Budapest is struggling to secure a loan from international lenders.

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