Cause and Effect in European Politics and Law

The EU Cuts Half a Billion Euros for Hungary because of the Deficit

Ralitsa Kovacheva, February 23, 2012

The European Commission has proposed to suspend 495 million euros of Cohesion Fund commitments for Hungary, because of the lack of measures the country to reduce the budget deficit. If the Council approves the proposal, the penalty will take effect from the 1st of January 2013. The amount represents 0.5% of Hungarian GDP and 29% of the country's Cohesion Fund allocations for 2013.

The unprecedented measure came after in early 2012 the European Commission concluded that Hungary had not complied with the recommendation for durable and sustainable deficit reduction, made under the excessive deficit procedure against the country since 2009. The Council endorsed the Commission's opinion and this is how it came to the sanctions. In fact, the country will end 2011 with a surplus of 3.6%. This surplus, however, is the result of the government's decision in 2010 to nationalise people’s contributions to private pension funds, thus filling a large hole in the state budget. However, 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."

"Today's proposal should be seen as a strong incentive for Hungary to conduct sound fiscal policies and put in place the right macro-economic and fiscal conditions to ensure an efficient use of Cohesion Fund resources. It is now for the Hungarian government to act before the suspension takes effect," EU Economic and Monetary Affairs Commissioner Olli Rehn commented. In other words, we do not punish them, we stimulate them. Obviously, after seeing that the carrot and stick principle does not work, the European Commission decided to use the threat of using a stick as a carrot.

In the case of Budapest it was high time for Brussels to show that its patience was wearing thin because Hungary had not responded to the repeated calls to put its finances in order, even when it had to request a loan from the EU and the IMF. Rather, the overall behaviour of the country demonstrated unperturbed self-confidence. However, nothing gives reason for that, taking into account that Hungary`s EU membership has been darkened recently not only by budgetary issues, but also by doubts about the country`s compliance with the rule of law and democratic values.

In January 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". A few days ago, the Commission has received 100 pages of explanations by the Hungarian authorities, which are to be analysed. If the infringement procedures get to the end, the result will be new sanctions against Hungary.

The situation in the country has also provoked the attention of the European Parliament, which held a heated debate and adopted a resolution, proposed by the Socialists, Liberals, Greens and United Left. During the debates, Fidesz`s (Hungary's ruling party) partners from the European People's Party expressed their support for Viktor Orban and his government. Other political groups, however, urged the Committee on Civil Liberties, Justice and Home Affairs (LIBE) to prepare a report based on Article 7 (1) of the EU Treaty (TEU), in which to answer unequivocally to the question whether there is a clear risk of a serious breach of European values.

This was stated in the Parliament`s resolution, which particularly insists Hungary to reconcile its laws with EU law to ensure the full independence of the judiciary and the central bank, media freedom and pluralism, compliance with European democratic standards and the principles of political pluralism in the new electoral law of the country, respect for religious rights and freedoms.