Hungary inks deal with EU to lower fund freeze

Hungary struck a mega deal with the European Union this week to reduce the amount of funds the bloc proposed to freeze. In return, the Hungarian government lifted its veto on the financial aid package for Ukraine.

Monday night brought a temporary resolution to Hungary’s biggest standoff with the European Union. Member states approved Hungary’s national plan that was a prerequisite for the country gaining access to EU funds. “Following … the fulfilment of 27 ‘super milestones’ regarding institutional reforms to strengthen the rule of law, Hungary will be able to use the facility’s funds up to a total allocation of €5.8 billion in grants. This financing will enable Hungary to foster its economic recovery from the COVID-19 pandemic and finance the green and digital transitions,” the European Council said in a written statement. These funds have been withheld by the EU on concerns of democratic backsliding. The Council statement noted that Hungary’s plan includes a comprehensive set of key institutional reforms to strengthen the rule of law. These reforms address the country-specific recommendations addressed to Hungary in relation to the rule of law and serve to protect the financial interests of the Union. They are expected to improve the efficiency and resilience of the economy by reinforcing the fight against corruption, promoting competitive public procurement and strengthening the independence of the judiciary.
Brussels stressed, however, that the approval was conditional and Hungary must fully and correctly implement the 27 milestones related to the rule of law before any payment can be made.

Funding freeze reduced
The European Commission recommended freezing EUR 7.5 billion in EU funds destined for Hungary over concerns of rampant corruption. The government of Prime Minister Viktor Orbán refuted all concerns raised by the EU and stressed repeatedly that Budapest was complying with EU rules. Taking matters a step further, Hungary recently vetoed a EUR 18 billion EU aid package for Ukraine and blocked the adoption of a minimum global corporate tax rate.
On Monday, EU ambassadors recommended that the Council suspend EUR 6.3 billion euros, less than the EUR 7.5 billion initial EC recommendation. They acknowledged the work done by the Hungarian authorities but decided that its remedial measures “do not sufficiently address the identified breaches of the rule of law and the risks these entail for the EU budget.”
Despite the favorable decision, Hungary may still lose billions in EU funds should the government fail to fulfill its pledge to adopt the 27 rule-of-law reforms needed to unblock the pandemic recovery money and to unfreeze regular EU funds. Hungarian Minister for Regional Development Tibor Navracsics stated at a press conference that Hungary can sign its agreements with the EU within days and added that the government has so far completed everything to the day, with one last package of laws to be passed at the end of March to get the EU funds. The suspension could be lifted in April or May, he said.

Relief for Ukraine
Following the deal, the EU can proceed with its financial aid package intended for Ukraine. The European Commission initially pledged to give Kyiv EUR 18 billion to help cover budget shortfalls in 2023, a plan that was eventually vetoed by Hungary. With Hungary lifting its veto, the EU can start disbursements to Ukraine in January.
The deal with Hungary also means that the EU will be able to ratify its part of a global corporate tax deal meant to stop multinational corporations from skipping out on tax bills. Over 130 countries, including EU members, have now signed the pact.
EU ambassadors reached an agreement to implement the minimum taxation component, known as Pillar 2, of the OECD’s reform of international taxation at EU level. Hungary has been against this decision and only agreed to support it with a condition. The Hungarian business tax is included in the global corporate minimum tax, therefore Hungary does not have to raise taxes. Minister Navracsics also stressed that the deal on the global minimum corporate tax will not lead to tax increases in Hungary.