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10th Dec 2022

Hungary and EU approach year-end showdown on rule of law

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Hungary and the EU are approaching a year-end showdown over rule of law, with billions of euros and key EU policies, such as financial aid to Ukraine, at stake.

Hungary has until Saturday (19 November) to put in motion the 17 measures that the EU Commission asked for in September as a prerequisite for not suspending an estimated €7.5bn from the long-term EU budget over corruption and rule-of-law concerns.

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The commission is likely to make its assessment whether Hungary has fulfilled the conditions on 29 November, after which member states' governments will have until 19 December to decide about the possible suspension of funds.

It is the first time the EU is deploying a so-called "conditionality mechanism", where the threat of suspending EU funds is used to get a member state government to fight corruption.

The mechanism was adopted two years ago as part of the deal on the bloc's 2021-2027 budget, with the hope of having an effective tool that could ease Hungarian prime minister Viktor Orbán's grip on the judiciary.

With the commission likely to deliver its verdict only at the end of the month, the EU executive is giving very little time for national governments to study its assessment, with economy ministers — who are in charge — having their last physical meeting on 6 December.

What makes matters more complicated is that the commission has also withheld approval for Hungary's post-Covid recovery fund, worth €5.8bn, over rule of law concerns. The two sides also have to agree until the end of the year for Hungary not to lose 70 percent of the funds.

But in typical Brussels political poker, Hungary is also holding some cards.

Budapest has threatened to veto the joint financing of the €18bn of assistance to Ukraine, and the EU's approval of the global minimum tax, in what EU officials have called blackmail.

The solution could be a compromise in which all sides can claim victory.

"It is very hard to see a way out that will not be a classic EU fudge in the end," one EU diplomat said.

EU sources expect that the commission will pass the hot potato to governments, and will not make a clear decision on whether it thinks the 17 measures have been sufficiently implemented.

"We are a little bit worried that the commission might not come up with a clear statement, and will put the onus on the council on how to proceed," another EU diplomat, speaking on condition of anonymity, said.

For the council to withhold the funds, a qualified majority of governments would have to agree, which is unlikely to happen, even if some countries, such as the Benelux and Nordics, want to see assurances that the EU money is no longer in danger in Hungary.

"If the commission presents to the council that Hungary accepted all the 17 measures, then it is difficult for the council to say that we are going to withhold the money," the second diplomat said.

Another diplomat noted that governments that also rely on cohesion funds are ready to give the green light to Hungary, fearing they might become the target of the same procedure later.

Back in September, the commission pointed out "systemic irregularities, deficiencies and weaknesses in public procurement" as a key concern, particularly the high rate of single bidding procedures and low level of competition in procurement procedures.

Under the 17 measures, Hungary is setting up a new "Integrity Authority" to watch over EU funds, but the new body will not have the power to investigate or to prosecute wrongdoing. Hungary has also pledged to be more transparent with data concerning tenders.

Officials said the one way to keep an eye on Hungary and make those EU governments happy that think Orbán is getting off too easily, is to only distribute the money from the recovery fund under certain conditions.

The idea is to agree on the recovery fund now with the approval by member states, but only disburse the money if Hungary makes the judiciary more independent by having, for instance, a more effective and capable judicial supervisory body.

On Friday (18 November), under another, parallel sanctions procedure over democratic backsliding, called Article 7, Hungary's usually combative justice minister, Judit Varga, will brief EU affairs ministers.

"I fully expect a different tone from Hungary, [...] a charm offensive," the first diplomat said.

Hungary's government has been under economic pressure with 20 percent inflation, a weakening forint, and subsidising fuel and energy prices.

The government is also managing a ballooning budget deficit after a spending spree ahead of April elections. The central bank raised the effective policy rate to 18 percent last month.

MEPs unhappy

Meanwhile, key MEPs from the four major parties of the European Parliament, who negotiated the conditionality tool, argued on Thursday the Orbán government should not be let off the hook.

Centre-right Finnish MEP Petri Sarvamaa said that looking at the 17 measures, "it is impossible to come to the conclusion that this would erase completely the risk of affecting the EU budget and the sound financial management of the EU budget."

"If the commission now releases the funds to Viktor Orbán, [EU Commission president] Ursula von der Leyen will be personally responsible for turning Hungary into a swamp of corruption," German liberal MEP Moritz Körner said.

German Green MEP Daniel Freund said that the degree of corruption in Hungary is not comparable to any other member states, and "that it is coordinated, organised, protected by the prime minister Viktor Orbán".

"There is not a single measure in these 17 measures that makes prosecution more independent, [...] makes judges more independent, " MEP Daniel Freund said, adding that these institutions are politically controlled.

Hungary challenges new EU loan plan for Ukraine

The European Commission wants to raise some €18bn for Ukraine. But the proposal is already being challenged by Hungary, which remains unhappy it has yet to receive Covid-pandemic recovery funds from Brussels.

'Cosmetic changes' not enough on EU funds, Hungary warned

Critics point out that Hungary will continue to receive substantial inflows of EU funds since the proposed suspension applies only to around 22 percent of total EU subsidies earmarked for Hungary in the bloc's current budget for 2021-2027.

EU Commission proposes freezing 65% of funds to Hungary

The freezing, the first time in the EU's history using the conditionality mechanism linking EU subsidies to the respect of the rule of law, would suspend money from the bloc's cohesion funds under the 2021-27 long-term budget.

EU Commission to keep Hungary's EU funds in limbo

The EU executive, on the other hand, is expected to approve Hungary's recovery plan, worth €5.8bn, but only would disburse actual money if Hungary delivers on some 27 key reforms.

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Two extraordinary meetings of ministers, on gas price caps and migration, are expected, while the European Parliament will keep the heat on Hungary and the EU Commission over rule of law.

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