Cause and Effect in European Politics and Law

Brussels Aims at Hungary because of the Central Bank and the Judiciary

Ralitsa Kovacheva, January 18, 2012

The European Commission has launched three accelerated infringement procedures against Hungary because of the new legislation that came into force at the beginning of the year under Hungary's new constitution. According to the Commission, the Hungarian legislation "conflicts with EU law by putting into question the independence of the country's central bank and data protection authorities and by the measures affecting its judiciary".

Undoubtedly, the most disturbing is Budapest's attempt to put its central bank under political control, moreover at a time when the country is on the verge of bankruptcy and is trying to get a loan from the IMF and EU. Both institutions have already warned that the issue of central bank independence would be crucial in the negotiations. Last week, after meeting Hungarian representatives IMF Managing Director Christine Lagarde said that "before the Fund can determine when and whether to start negotiations for a Stand-By Arrangement, it will need to see tangible steps that show the authorities’ strong commitment to engage on all the policy issues that are relevant to macroeconomic stability. Support of the European authorities and institutions would also be critical for successful discussions of a new program."

The problem must be solved, so we can start negotiations for financial assistance requested, EU Economic and Monetary Affairs Commissioner Olli Rehn said in plain text on Tuesday (January 17).

"The independence of the central bank is one of the cornerstones of the Treaty. Governments must refrain from seeking to influence their central bank. The new MNB law and certain provisions in the new Constitution are in breach of these principles. I urge the Hungarian Government to ensure full independence of the central bank. This implies reviewing all relevant legislation, including the Constitution."

The new Hungarian legislation directly conflicts with Article 130 of the Treaty on the functioning of the European Union (TFEU), which states:

"... Neither the European Central Bank, nor a national central bank, nor any member of their decision-making bodies shall seek or take instructions from Union institutions, bodies, offices or agencies, from any government of a Member State or from any other body. The Union institutions, bodies, offices or agencies and the governments of the Member States undertake to respect this principle and not to seek to influence the members of the decision-making bodies of the European Central Bank or of the national central banks in the performance of their tasks."

As well as with Article 127 (4) stating that "the European Central Bank shall be consulted [...] by national authorities regarding any draft legislative provision in its fields of competence."

The new ‘Magyar Nemzeti Bank’ (MNB) law allows the government to directly influence the work of MNB, as the Minister can participate in the meetings of the Monetary Council and the agenda of MNB meetings has to be sent to the government in advance. According to the Commission, the new law creates conditions for financial and political pressure on the Governor and the members of the Monetary Council ("even the Parliament can propose to dismiss a member of the Monetary Council"), the EC believes.

There is another conclusion that may sound familiar to the Bulgarian public as it akin to some habitual practises in Bulgaria: "The frequent changes of the institutional framework of the MNB raise doubts, for instance via the increase in the number of Monetary Council members together with the possibility of increasing the number of deputy governors without due consideration of the MNB’s needs." A provision in the new constitution is also problematic, related to the possible merger of the MNB with the financial supervisory authority. Although the merger itself is not a problem, the problem is that the MNB Governor would become a simple deputy chairman of the new structure, which would undermine its independence.

Doubts related to the independence of the judiciary

are the reason for the second infringement procedure against Budapest. The Commission wants to obtain more information about the new legislation on the organisation of courts. It gives the president of the new National Judicial Office all the power regarding the operational management of the courts, human resources, budget and allocation of cases. "One person alone now makes all important decision on the judiciary, including as regards the appointment of judges."

"Only actual changes to the legislation in question, or their immediate suspension, will be able to accommodate the Commission's legal concerns," EU Justice Commissioner Viviane Reding said.

Another Commission's concern is related to the decision of the Hungarian authorities to reduce the retirement age for judges and prosecutors from 70 to 62 years from 1 January. The Commission considers that there is discrimination against judges and prosecutors, but also something more: "In Hungary's case, the Commission has not found any objective justification for treating judges and prosecutors differently than other groups, notably at a time when retirement ages across Europe are being progressively increased and not lowered. The situation is even more legally questionable because the government has already communicated to the Commission that it intends to raise the general retirement age to 65.”

Playing games with the pension system has already caused enough problems to the Hungarian government. In 2010 it nationalised contributions to the private pension funds, thus filling a large hole in the state budget. As a result, the country will end 2011 with a surplus of 3.6%. But it could not get away with that. Already in June 2011 the European Commission noted that this measure, although having a ‘prettifying’ effect on national finances "increases the long-term liabilities and so may deteriorate the long-term fiscal sustainability."

Finally, last week, the Commission concluded that Hungary has not complied with the recommendation for durable and sustainable deficit reduction, made under the excessive deficit procedure against the country since 2009. The Commission recommends the Council to proceed to the next stage of the excessive deficit procedure, which means new recommendations by the Commission and eventually – sanctions. The same end threatens the country also in case it fails to align its legislation with the European one and infringement procedures get to the end.

The more serious problem, however, is the example of Hungary for others, especially in a crucial moment for the EU. While member states and the European institutions are fighting to bring the fiscal compact on the eurozone governance in line with European law, Hungary (which so far has not been willing to sign the treaty) demonstrated exactly the opposite. The European Commission will be relentless in the Hungarian case, moreover given that Budapest is expecting financial assistance from the EU and the IMF. However, it is already apparent that saving any European country would cost dearly. Viktor Orban is likely to share the fate of Silvio Berlusconi and George Papandreou, but not for being inconvenient to Brussels, rather because he would cost too much to his own citizens.

However, Hungary, like other former socialist countries, has already paid dearly for its freedom and democracy to afford to lose them easily. The authoritarian affinities of Viktor Orban, though seductive role model for other leaders of the new EU members, have no place in the European Union. This was demonstrated clearly enough during the debates on the controversial media law, adopted at a time when Hungary was holding the EU Presidency. Obviously, the government in Budapest did not draw the necessary lessons. Only this time the game gets tough.