EU readies economic sanctions against Hungary

Orban in EP.jpg

Hungary is set to become the first country hit by the EU's new economic sanctions as the European Commission prepares to announce proposals to suspend part of the country's regional funding for failing to correct its excessive deficit.

The Commission will propose on Wednesday (22 February) to suspend a share of Hungary's Cohesion Funds over its failure to take "effective action" to curb its excessive deficit.

The suspension will take effect from 1 January 2013, EURACTIV Slovakia reported, quoting EU sources.

Commission spokespeople contacted by in Brussels did not contest the information.

Last month, Economic Affairs Commissioner Olli Rehn said Hungary was the sole country on the Commission’s excessive deficit ‘caution list’ and warned that cohesion funds could be frozen if Budapest fails to trim its deficit.

Amadeu Altafaj, Commission spokesperson for economic affairs, told EURACTIV that the Cohesion Fund regulation allows a partial or total suspension of regional money committed as of the following year (in this case, 2013). He mentioned no figures, but stressed that according to EU legislation, the sanction has to be "proportionate".

If decided, this will be the first time that this provision is used, Altafaj said. He explained that since the entry into force of the 'six-pack' of economic legislation in December, the EU executive has "a wider and fairer scope for sanctions for countries that deviate from prudent fiscal policies".

The 'six-pack' can sanction countries with a fine worth 0.2% of their GDP (see background). In November, Belgian news media warned of a possible fine of €708 million for Belgium, a threat that was averted after the country finally succeeded to put in place a government and an austerity programme.

But Altafaj insisted that Hungary has still plenty of time before to bring its deficit back on track and avoid sanctions, which he said was precisely the aim of the 'six-pack' – "anticipate surveillance and effective, credible enforcement that can dissuade, rather than the punishment in itself".

In November, Hungarian Prime Minister Viktor Orbán requested 'precautionary aid' from the EU and the International Monetary Fund as "a kind of insurance policy" against possible future financing difficulties.

But Hungary severely strained its relations with the IMF last year, when Budapest rejected demands for tough measures to keep the budget deficit on target.

Moreover, Hungary is under the Commission scrutiny and may face infringement procedures, after Budapest passed controversial state reforms that are widely seen as undemocratic.

On 17 February, the Hungarian authorities provided written replies to the Commission request for amendments to be made to Hungarian laws. No further details were made available. 

The Excessive Deficit Procedure (EDP) implements treaty obligations for member countries to keep deficits below 3% of GDP and government debt below or sufficiently declining towards 60% of GDP.

According to the new EU economic governance, from 13 December 2011 onwards, financial sanctions will apply to euro members that do not take adequate action against excessive deficit.

In case a country does not respect its obligations, a financial sanction can be imposed by the Council on the basis of a Commission recommendation. Euro area countries placed in EDP will be requested to make a non-interest-bearing deposit worth 0.2% of their GDP and to take a course of corrective action as recommended by the Council. If a country fails to comply with the recommendation, the deposit will be converted into a fine.

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