EU to cut Hungary’s regional funds over deficit

Hungary Budapest Parliament Picnik.jpg

The European Commission proposed yesterday (22 February) to suspend a third of Hungary's regional funds next year in an unprecedented move to sanction the country’s budget deficit. Hungarian politicians, including the EU’s employment and social policy commissioner László Andor, have criticised the move.

Brussels suggested freezing over €495 million beginning January 2013 if Hungary fails to take measures to bring its deficit below 3% of GDP.

According to Commission estimates, Hungary will see its deficit jump to 3.25% of its GDP in 2013 despite several warnings urging Budapest to contain it.

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Hungary’s deficit has stood above the benchmark for many years since it joined the EU in 2004.

The EU Council of Ministers, which represents the 27 EU member states, had endorsed the Commission’s warnings in January, and asked the EU Executive to issue a new recommendation to Hungary based on the so-called "excessive deficit procedure".

Despite the Council's backing, the Commission's move is highly controversial. Hungary’s budget deficit for 2011 and 2012 is broadly in line with EU requirements but only “thanks to one-off revenues,” such as a taxes on telecom firms, banks and junk food, which have raised eyebrows in Brussels.

Moreover, this would be the first time that the European Commission launched an infringement proceeding against a country on the basis of projected violations, and not on actual breaches of EU laws.

Hungarian backlash

The Hungarian government reacted angrily, describing the Commission’s decision as “unfounded and unfair”. Hungary’s deficit is currently among the lowest in the EU, and therefore does not deserve to be sanctioned, Budapest said in a statement.

It also claims that, following the Commission’s warnings, the government adopted measures that are expected to bring the deficit below 3% in 2013, putting it in line with EU laws. Even without this correction, the Commission's own estimate anticipates a deficit which is only slightly above the 3% threshold, it argues.

Andor, responsible for employment and social affairs, echoed these remarks in a letter sent to the college of commissioners ahead of yesterday’s decision. “We need to be able to explain why a country with a headline fiscal deficit expected to be only slightly above the 3% benchmark is being targeted under this procedure while there are many other member states with much higher headline deficits,” he said in the letter, seen by EURACTIV.

Andor, an economics professor in Hungary before joining the Commission in 2010 and appointed by the previous Socialist government, also questioned the credibility of the Commission’s economic forecasts. “We will need to be able to defend the robustness of our forecasts for 2013 at a time of extreme uncertainty,” he wrote.

The Commission will issue later today its biannual interim economic forecasts that will cover all EU member states and not only the seven biggest economies. Announcing the exercise last week, the Commission said such an exceptional forecast had become necessary “due to rapidly changing economic circumstances. ”

In his letter, Andor also called on the college of commissioners to ease the sanctions on Hungary. “The suspended commitments should be as minimal as possible, and definitely not exceed the level of 0.5% of GDP,” reads his letter. The proposed sanctions were set at 0.5% of Hungary's GDP.

The Council of member states will have to endorse the Commission’s proposed sanctions before they become law.

A different objective?

But the Commission's decision might in fact pursue a different objective.

In January, the EU executive issued a harsh statement against Hungary’s controversial changes to its constitution and basic laws. “As guardian of the Treaties, the Commission remains preoccupied that a number of the new provisions may violate EU law,” the statement says.

The main concerns relate to the independence of the Hungarian central bank, measures concerning the appointment of judges and rules affecting the independence of the news media.

Without “prejudging the final outcome of its analysis”, the Commission said it would “fully use all its powers to analyse the compatibility of national law with EU law and reserves the right to take any steps that it deems appropriate, namely the possibility of launching infringement procedures pursuant to Article 258 of the Treaty.”

Andor himself seemed to question the real target of the proposed sanctions. “I can see that the proposal will require an important communication effort to avoid a link that is very easy to be made with the ongoing infringement proceedings against Hungary and with overall political developments,” he said in his letter.

EU Economic and Finance commissioner Olli Rehn said: “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”.

Johannes Hahn, EU commissioner for Regional Policy, added: “It is now up to the Hungarian authorities to take the necessary measures without delay, in order to be able to reap the full benefit of the cohesion fund. Today’s proposal is proportionate and leaves the possibility to continue investments via the fund, whilst giving Hungary the chance and time to redress the situation.”

The Hungarian government replied with a vigorous complaint against Brussels’ decision: “It is unfathomable why the European Commission has ignored the facts: Hungary’s budget deficit was, for the first time since we joined the European Union in 2004, below 3% in 2011 and will remain so this year as well, which makes it the country with the eighth lowest deficit in the European Union.”

“In response to the European Commission’s forecast of a 3.25% budget deficit in 2013, we took further steps to reduce next year’s deficit by 0.4% of GDP so that it remains below 3% again,” the statement adds.

EU rules allow the European Union to suspend funds to any member state “in the case of an excessive government deficit and an absence of effective action to correct it,” but they have never been invoked before now.

Hungary has recorded an excessive deficit since it joined the EU in 2004, but recent budgetary improvements in the country made it seem that it could have avoided sanctions on economic grounds.

Hungary has been under Brussels scrutiny on other issues, including a new constitution which entered into force on 1 January. The European Commission believes it undermines the independence of the central bank, the judiciary and the media.

Critics also say that the new measures represent an assault on religious freedom by cutting down the number of recognised religious groups from 300 to 14.

Under its EU accession treaty, Hungary is obliged to adopt the euro as soon as it is ready. However, the new constitution makes the national currency, the forint, the country’s only legal tender.

  • The EU Council of Ministers, representing the 27 EU member states, will have to endorse the Commission’s proposed sanctions before they become law.

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