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28th Jan 2023

EU secures deal with Hungary, unblocks joint aid to Ukraine

  • Hunary's prime minister Viktor Orbán. The interlocking four issues threatened to derail EU leaders’ meeting on Thursday in Brussels (Photo: Council of the European Union)
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The EU late on Monday (12 December) suspended cohesion funds to Hungary, at the same time approving pandemic recovery subsidies to Budapest but with serious rule-of-law conditions attached — in return, managing to unblock Hungary's veto on a global minimum tax and joint EU aid to Ukraine.

In a historic move, EU ambassadors suspended 55 percent of EU cohesion funds to prime minister Viktor Orbán's government because of concerns over the rule of law and corruption — lower than the 65 percent recommended by the EU Commission.

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It is the first time the EU has used this new tool, the so-called conditionality mechanism, which links EU funds to the functioning of rule of law in a member state, and it is the first time Brussels has sanctioned Orbán over his curbing of the judiciary and widespread misuse of EU funds.

It was a long night for ambassadors, and it took heavy economic pressure on Orbán over recent months to make a move, so the remaining 26 member states could agree.

The four interlocking issues formed a complicated package in recent weeks — and threatened to overtake the EU leaders' summit on Thursday in Brussels.

The key came on Monday night when Hungary no longer blocked the EU's adoption of a new global minimum tax, and the joint financial assistance of €18bn in 2023 to Ukraine.

"We can hardly believe it," quipped an EU diplomat at the end of the night.

Czech EU minister Mikuláš Bek had warned earlier on Monday that "Hungary's position on Ukraine will decide which scenario will develop". The Czech Republic currently holds the rotating six-month EU presidency.

"If Hungary agrees on Ukraine, it could open a way for more positive debate on maybe reducing the sanctions proposed by the EU Commission on cohesion policy," Bek said.

EU governments agreed to suspend €6.3bn worth of EU funds from the 2021-2027 cohesion funds to Hungary.

However, they also approved the country's €5.8bn recovery plan, but with 27 so-called "super milestones" attached, meaning Hungary will only get the funds if it delivers on 27 reforms to strengthen judicial independence, and fight corruption.

It means Hungary, for now, will not get any of these funds, but could get all of them if it implements the measures demanded by other EU governments and the commission.

Monday evening's agreements will have to be approved by so-called written procedure on Tuesday, as the official decision needs to be made by the council of ministers.

Part of the deal is that, according to MTI, Hungary's news agency, Budapest can join the global minimum tax without a tax increase, as it had secured an agreement that the Hungarian business tax be included in the global minimum tax (the Hungarian corporate tax rate is just nine percent). The proposed global corporation minimum tax will be 15 percent.

Win-win?

In a classic EU solution, both sides can claim victory.

Orbán can celebrate the fact that Hungary managed to cut the amount to be suspended (which is still largely hypothetical, as payments from the EU budget only start flowing years later), and secured approval for the recovery fund.

Other EU countries can claim that Orbán, who has been a constant thorn in the bloc's side for curbing judicial independence, media freedoms and centralising power, has been sanctioned.

"Autocrats in the EU will now have their EU funds frozen. This decision is historic. Viktor Orbán's attempts at blackmail were not successful," German Green MEP Daniel Freund said.

Hungary's economy has been under immense pressure: inflation hit 22.5 percent in November, and is likely to climb higher after the government scrapped a fuel-price cap, which is now the highest in the EU.

"Orbán is really feeling the heat of his economy crumbling," said one EU diplomat.

In a rare move, the country's central bank governor, György Matolcsy, an Orbán-ally, sharply criticised the government's economic policy last week.

EU countries struggle to crack Hungary's vetos

Hungary will be in the spotlight on Tuesday as EU governments struggle over suspending EU funds to prime minister Viktor Orbán's government — despite rule of law concerns — and unlock key EU policies which Budapest has been blocking.

EU Commission proposes suspending billions to Hungary

Prime minister Viktor Orbán's government has to implement 27 measures "fully and correctly" before any payment from the €5.8bn recovery fund can be made, or the suspended €7.5bn of cohesion funds can be unblocked.

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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