Hungary Faces EU funding Cut in Blow to Economy

Hungary may be the first European Union member state to see its funds frozen by the bloc over corruption concerns and repeated breaches of the rule of law. The government of Prime Minister Viktor Orbán could face the suspension of a third of Hungary’s budgetary funds if the European Commission’s proposal is accepted.

The European Commission proposed the suspension of an estimated EUR7.5 billion in European funds due to Hungary over accusation of corruption and numerous rule of law concerns. This is the culmination of years of disagreement between Budapest and Brussels over a range of issues.
At the same time, the EU Commission gave Hungary two months to implement legislation that would ensure that funds are spent in a fully legitimate manner. The EU executive said that if the government in Budapest provides the necessary guarantees, the EU’s “rule-of-law conditionality mechanism” would be brought to a close in mid-November and Hungary given access to the funds.

The proposed amount equals roughly 65% of the commitments for three operational programs under cohesion policy and about a third of cohesion funds the country received from the EU budget, according to Commissioner Johannes Hahn, in charge of Budget and Administration. Hungary has been allocated EUR 34 billion in the 2021-2027 budgetary period, including agricultural subsidies which are not affected by this conditionality process.

In addition, Hungary has been denied access to the EU’s EUR 672.5-billion Recovery and Resilience Facility (RRF), from which the country would be entitled to an allocation of 6 billion euros. The hold-up in funds from the RRF is an imminent danger to the Hungarian budget, as projects have already been approved and partly pre-financed by the state.
The Commission’s proposal is the next step in the rule of law mechanism process launched against Hungary in April. The mechanism allows Brussels to impose financial sanctions on member states "to protect the budget" if they are deemed to have breached core EU values.

Unanimous decision
The decision to propose a freeze in funds due to Hungary was taken unanimously by commissioners, Hahn said. He added that even though Hungary has proposed a number of measures to address the concerns raised by the EU, a risk for the EU budget still persists and Hungary has very little time left to implement legislation and required changes.
The Commissioner highlighted systemic irregularities in Hungary's public procurement laws, insufficient safeguards against conflicts of interest, weaknesses in effective prosecution and shortcomings in other anti-graft measures.
If Budapest fails to allay the concerns of the EU, the earliest the Commission could freeze funds would be 19 November. The European Council will also need to take a decision on the matter before a suspension is enacted. The decision at the Council will require a qualified majority and not unanimity, so no single country will be able to prevent the financial penalty on Hungary.
The Hungarian government is planning to submit 17 laws in an effort to convince the EU Commission and member states that EU funds would be spent in a transparent way and public procurements meet the required standards. One such measure is establishing an independent anti-corruption authority to oversee and control public procurement using EU money. Further steps include tighter oversight of politician’s asset declaration, an overhaul of higher education management rules, and the modification of the criminal code to allow judicial review of prosecutorial decisions.
Hungarian Development Minister Tibor Navracsics, in charge of negotiations with the EU, said Hungary would meet all of its commitments made to the European Commission to secure full access to EU funding.
"Hungary did not make commitments to befuddle the Commission," Navracsics said. "We have made commitments that we know can be implemented … therefore, we will not be facing a loss of funds."
The announcement on the proposed freeze of funds comes three days after the European Parliament declared that Hungary was no longer a fully functioning democracy but a "hybrid regime of electoral autocracy."