Orban's bluffing on a rule-of-law mechanism - here's why

In the Council of member states - under strong pressure from countries potentially subjects of such sanctions - the German EU presidency presented a "compromise" proposal, with several concessions to the opponents.

Hungary and Poland blackmail the European Union with vetoing the budget and/or the recovery package, and Germany seemingly tends to take this threat seriously.

But I have serious doubts how far Hungarian PM Viktor Orbán would go with this threat.

Hungary has been one of the member states most-dependent on EU funds, which represented between two to five percent of the country's yearly GDP already - before the Covid-19 crisis.

Between 2010 and 2019 GDP-growth varied from -1.7 to +4.9 percent, and EU money transfers generated a fair share of this growth.

And the pandemic hit the country more than the European average.

GDP fell by 13.6 percent in the second quarter of 2020, and the expected yearly data is around seven percent.

The deficit in the state budget is already five times bigger then was predicted for the whole year, and might amount to nine-percent of GDP by the end of the year. Consequently, public debt increased by four-percent in the first half of the year, to over 70-percent of GDP.

Even a previous trick of the Orbán government backfired this time.

To intensify GDP-growth in the past years, the government tried to speed up contracting and disbursement of EU funds in the first half of the 2014-2020 period.

Projects in the next three years could still be accounted into the EU funds, but Hungary had already used up 99-percent of EU funds before the Covid-19 crisis, and no substantial sources are left to soften the economic havoc of the pandemic.

Empty coffers

As a result, Hungary desperately needs EU money to keep the economy alive and to buffer the devastating effects of the coronavirus.

And this money should come from the next budget, and the recovery package, as no other sources are left.

Just take a quick look on the amendments Fidesz MEPs tabled to the Recovery and Resilience Facility (RRF) file – the recovery fund's main moneybag – in the European Parliament.

Three elements appear in their amendments.

First, to transfer competencies from the EU Commission to the EU Council as much as possible.

Second, to channel RRF funding to infrastructural projects.

Finally, to shorten the deadlines and to speed up the payments.

The message of those amendments is this: there is no money even for basic infrastructural investments, so RRF funds are planned to be allocated to finance them instead of targeted post-Covid recovery measures, such as saving jobs, giving a helping hand to small and medium-sized enterprises (SMEs) in trouble and restarting the economy in a transformative, green manner.

In contrast with investing in SMEs, innovation or job-saving, infrastructure projects are highly-compatible with corrupt practices, which makes them the perfect channels to finance the always-hungry oligarchs and government politicians.

The scarcity of resources already threatens the very fundaments of Orbán's system, the loyalty of its cronies, and quick RRF payments are essential for the government to feed them.

Bluff, not threat

Hungary's veto is more a bluff than a real threat. Orbán needs the money much more than most of his colleagues in the council.

That's precisely the reason for his blackmailing: he knows very well that a properly functioning rule-of-law mechanism could easily lead to suspension of some of the desperately-awaited EU resources.

The poker player with low cards can throw them on the table or could start to bluff.

Orbán is not the kind of person to give up. And he can easily bluff, as the whole issue is much less critical to the other player in this game of who-blinks-first: the European Union.

For the EU, and for several member states, to get immediate access to EU funds and to launch the recovery programs have higher importance than the rule-of-law issue.

They will blink first, and Orbán wins one more fight with the EU. But all this could be different this time.

As the Hungarian government – despite the aggressive tone they use in communication – is highly and strategically vulnerable in this situation, the EU should stand firmly behind its original rule-of-law proposal.

If there are no rule-of-law or corruption issues in Hungary, as the Budapest government claims, they shouldn't be afraid of this mechanism. And we can set in motion the new budget and the recovery package to support Hungary's struggling economy together.

Suppose Orbán blocks the recovery effort, despite all of this?

That would be an implicit confession about the real situation in the country. And no EU-money should be spent to finance oligarchs and stabilise an illiberal state.

Then let's play this game till the end: most probably the access to EU funds is more urgent to Orbán.

In the meantime, the EU should build a structural alternative to filling Orbán's hands and his oligarchs' pockets with EU funds.

Direct-funding schemes to keep the money flowing to the final recipients (cities, NGOs, SMEs), even in case of suspension of EU funds for the Hungarian government have already been proposed in the European Parliament. City networks have been lobbying for this for years now.

The aces are more in the EU's hands now. Perhaps, now it is time to call the bluff.