European Commission proposes suspending funds to Hungary

Well, it happened. For the first time in its history, the European Union has proposed initiating economic sanctions against a member country under the excessive deficit procedure (EDP). What does that mean? Treaty provisions oblige a member state to keep its deficit below 3% of GDP and government debt below or sufficiently declining toward 60% of GDP.

Hungary is not the only country that is currently under this procedure. It shares the honors with five other countries. Then why the threat of economic sanctions only against Hungary? Because never since Hungary’s accession to the Union has its budget deficit been under 3% of GDP and because the European Commission didn’t see in the last two years any serious Hungarian resolve to remedy the situation. Although it is allegedly true that last year’s deficit will be just slightly over 3%, it was achieved by one-time measures: “nationalization” of private pension funds, extra levies on financial institutions and other selected economic sectors including telecommunication companies. Without these revenues the actual deficit would be well over 6 percent. And since no structural changes were introduced, it is unlikely that the Hungarian government will be able to sustain a deficit under the required 3%.

The European Union’s fiscal governance was lax to say the least in the past years. But then came the 2008 financial crisis. In its wake the rules changed drastically. As of December 13, 2011 financial sanctions will be applied to EU members that do not take adequate action against an excessive deficit.

According to these new rules a country that belongs to the euro-zone will be required to make a non-interest-bearing deposit worth 0.2% of its GDP. If it is a country, like Hungary, outside of the euro-zone, it can be deprived of its so-called “cohesion funds” amounting to no more than 0.5% of its GDP or no more than 50% of its cohesion funds.

Deficit

What are the “cohesion funds”? These are infrastructure-development subsidies that are supposed to assist the less developed members of the EU in bringing their economies closer to the more prosperous western parts of the Union.

Although the Hungarian government tried to convince the population that such a procedure will not be launched against Hungary, apparently they strongly suspected the negative outcome for which they have been trying to prepare the ground. For example, only a few days ago the government introduced new austerity measures: fewer government subsidies on drugs and a cutback in subsidized public transportation travel.

Depending on final approval by the Economic and Financial Affairs Council (commonly known as Ecofin) that consists of the economic affairs and finance ministers of the member states, if Hungary doesn’t make major strides very quickly the suspension of funds will begin on January 1, 2013. According to most analysts of European affairs, it is very unlikely that Ecofin will go against the decision of the European Commission. Moreover, the weighting of Ecofin votes reflects the size of the country’s population, so if the large and prosperous countries that provide most of the subsidies to Hungary go along with the decision, Hungary is unlikely to be able to gather enough support to serve as a counterweight.

The “punishment” is severe: freezing 495 million euros ($656 million) worth of cohesion monies. That is exactly 0.5 percent of GDP–that is, the maximum amount of money that can be withheld according to the new rules. Although the suspension of funds will begin only on January 1, 2013, some projects that have not been approved but are under consideration must now be put on ice.

This is a very sizable chunk of the subsidies Hungary is slated to receive in 2013: 29% of infrastructure investment. The building of highway M43 and M3 or Metro4 in Budapest will not be affected because these projects have already been approved by Brussels. But some important Budapest development as well as the modernization of some railroad lines will not be able to go forward.

Ecofin meets once a month and the next meeting will take place on March 13. It is important to realize that even if Ecofin puts its stamp of approval on the Commission’s decision, Hungary still has until December to mend its ways. As Olli Rehn of the European Commission 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. It is now for the Hungarian government to act before the suspension takes effect.”

And this means more than staying within the magic 3%. Brussels expects serious structural changes. Whether taking in more money by making pensioners pay their fare in the morning hours or taking away subsidies on drugs will be considered “structural changes” I very much doubt.

Not surprisingly, the Hungarian government finds the suspension proposal unfounded, unfair, and legally questionable. Orbán’s government claims that it has already taken prudent steps and therefore the decision is unfounded. An official from György Matolcsy’s ministry even claimed that there was no “practical chance” that the funds would be suspended. Lajos Kósa, one of the deputy chairmen of Fidesz, who likes to use strong words, said that the decision will lead to “bad blood” and that the commission made “an exceptionally bad and irresponsible decision.” Music to Brussels’ ears!

EU officials don’t consider their action a “punishment.” It is only a warning, and “if the country takes effective action in time it will not face this consequence,” Olli Rehn said today.

The markets immediately reacted to the news. Reuters reported that Hungarian assets fell after the EU threatened to suspend some funds to Budapest. The Reuters article also talked about “the disconnect between Brussels and Budapest.”

While we are dissecting the “excessive deficit procedure” we mustn’t forget about the other matters under consideration in Brussels: questions about the media, the judiciary, the new constitution itself and all those complaints coming from the European Parliament concerning the undemocratic spirit that casts a shadow over the Orbán regime’s efforts at establishing a different kind of democracy.

While the government is struggling over the deficit, another 1.5 billion forints was allocated for government communication. Unfortunately communication itself is no remedy for bad governance and an unrealistic economic policy.

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Member

“Not surprisingly, the Hungarian government finds the suspension proposal unfounded, unfair, and legally questionable.”
And by that puerile, knee-jerk response we know the EUcracy’s main aim has been achieved. If it’s legally questionable, then question it in the EU’s courts and you will be surely slaughtered… but the Orbanists know that.
The EU top cats have a lot on their plate at the minute but they are not letting Hungary out of their sights because they know that once they do, their moral authority elsewhere will have a lot less impact.
The Regime’s whinge that they’re being picked on (pour encourager les autres) is justified to an extent- but, well, they haven’t exactly made it difficult for Brussels to victimise them have they? And anything which stops the regime from stamping its little autocratic feet and makes it remember it is not omnipotent has to be welcomed.

Paul
Guest

Good article, Éva – a very clear explanation of the situation.
But what on earth does the graphic mean?!

Member

Orban and Matolcsy thinks that the money form Brussel belongs to Hungary. It does not. THe EU do not trying to take away anything from Hungary that belongs to Hungary. THe simple message is that the EU would like to give some FREE money to HUngary if Hungary shows a responsible way to spend the money. THey do not give this money so Orban would have more money from Hungarians to give away for unreasonable wages for MPs, new offices, new cars for Orban’s insiders, and try to fill gaping wholes in Hungary’s budget with the FREE Union money. Orban’s actions so far does not show to the EU that Hungary can be trusted with such large sums.
My favourite quote today although is from Navracsics;
“We are still paying the price of Oszod, when we say something the [EU] wants three assurances in order to trust us.” – said Navracsics the the first man who was very much called a liar in the European Parliament (” this is NOT what you said in my office a few hours ago!”)

Eva S. Balogh
Guest

Paul: “But what on earth does the graphic mean?!”
I thought it might make the article more colorful. After all, it is about deficit and its reduction.

Eva S. Balogh
Guest

To Paul, No question. The Hungarians also received money. Of course, we will never know the full story. After all, they are not stupid to write things down.
But until the last cabinet meeting everybody thought that Hungary was buying the used American planes. Then came Viktor Orbán and according to a document just released he talked outside the room with the defense minister and with Matolcsy. They came in and the cabinet was told that it is Gripen Hungary is buying.
Of course, if we didn’t have Peter Polt the Hungarian prosecutors should have investigated the case. The Swedes said that they would give the documents to the Hungarians but naturally they were not interested.

cheshire cat
Guest
Sad but not unexpected developments. It is difficult to predict what the EU strategy will now be about Hungary, but it seems clear to me that they have got to know Orban’s mindset quite well, and he has done enough to make them begin to withdraw their good will. My haunch is that there are two possibe scenarios: either Hungarians realize that Orban is doing a really bad job and stop supporting him before more and more sanctions are introduced (=get rid of him). Or Orban carries out his threat to Schulz, and manages to “turn the opinion of Hungarians” against the EU. The europhobia stirred up by Orban, along with the sanctions, might eventually make Hungarians decide to leave the EU. In this case the EU might not mind letting Hungary go that much, because in some sense it would strengthen it: it would reinforce the message that you have to stick to European values and keep the rules if you want to be a member, and therefore prevent the Hungarian virus from spreading. Also, there seem to be quite a lot of people in Western Europe who think the EU should be somehow “restarted” without the southern and… Read more »
Member
chrshire cat: “The question is: would Hungarians be wise and sober enough to make the right decision? Or immerse in self-pity, destructive national pride and isolation? ” Almost on the weekly basis I have been the following comment in various forms, and I firmly believe this. THe person who owns the media has the power. I would not and can not blame Hungarians solely for what they voted for, and what they currently believe. THere are three groups here: the ones who directly or indirectly benefiting from Orban’s master mind, and have no reason to get rid off him. THey so tied up in this machinery that any changes would personally ruin them. THe second group contains the ones who are completely misinformed by the regime. Do not forget that most people wanted the changes in 1989 and Orban jumped into the mascot of Freedom. He started as a liberal and people fell in love with him and they believe whatever he says, never mind that Orban is not the same man who he made everyone believe he is in 1989. This group still buys into whatever Orban says, because he said so. If Orban says the grass is purple,… Read more »
Member

I think financially this is not the end of the world. According to the EU press release they predicted the deficit to be 2.25% of GDP in 2012 and 3.25% of GDP in 2013 which is an increasing tendency. That’s why they recommended further actions. The other 4 countries, Belgium, Malta, Poland and Cyprus managed to show decreasing tendencies at least on paper. So this means another adjustments to the budget, probably around 0.5% of the GDP. They will squeeze it out with some other “nonexistent austerity measures”.
But even if the founds will be cut the effects will not be felt until after 2014 elections. So the freedom fight rhetoric will be kept warm. To Cheshire Cat I believe Hungarians won’t get rid of Orban neither will leave the EU. We’ll do what we do best: go with the flow and curse …
I’d like to know if this has any effect on the IMF “precautionary” funds negotiations. The 20 billion US that will be added to our debt in the name of the freedom fight to help them stay in power for 8 years is the real danger.

Member

Mutt Damon: “But even if the founds will be cut the effects will not be felt until after 2014 elections. ” This is exactly my worry. If Orban hoes down, he will behind the same mess as he left behind his first time around, and will restart his childish groups. “I told you so!” will be his slogan. It will be extremely hard for anyone after Orban to tell people how we need to keep out belts tight. If they will cut him off, and he will know that no way he will win in 2014, I can just imagine the spending spree. He would have to make sure that all his buddies will get a nice life-long pay off. If Hungarians and the EU think there is a problem now, they have no idea what will be coming.

Living with it in Hungary
Guest
Living with it in Hungary
Mutt, there are a couple of analyst now saying that the 3 pre-conditions on the table are just there to stall talks until there is compliance. Once the talks start, the EC doesn’t need these legalities as in those negotiations, it can ask for anything. They expect that EC will start to demand a fistful of changes. They will expect compliance without defiance. If Hungary goes to the EU courts w.r.t. the the so called cardinal laws, that will be looked upon as defiance and will result in further delays. If Hungary takes to the bond markets without the IMF it will look as if they’ve no intention of making the necessary changes and the markets will react accordingly. The EC finance committee meets once a month. The next meeting is March 13th. Comments from Government suggest that they won’t start working on changing things until mid-March so don’t expect the EC to vote to start talks on the 13th. If they happen to vote yes in the April meeting, something which I believe is unlikely, that would put the start of talks some time in May. If they vote no, we’re looking at June, July… depends upon how much… Read more »
Odin's Lost Eye
Guest

In all these budget discussions there is not an ‘elephant in the corner’. It is a Blue Whale!
It is the 500 odd cased before the ECHR over the matter of the ‘Nationalization’ of the ‘Pension Funds’.
At the moment the Judges have asked the plaintive if they will join together to form ‘Class Actions’ to save court time. If the plaintive win, this will open the doors for more demands for re-imbursements to be made. That is the money seized last year will have to be paid back into the trust funds. I think that this will have a disastrous effect on the current budget.
I look forward to reading the various judgements on this matter.
I dare say that the Viktator and his sidekicks will try to invent a new form of ‘Surreal Mathematics’ to overcome the budget problem.

Bowen
Guest

Whatever happens, Fidesz has (domestically at least) for a long time shown willing to present the EU as an enemy intent on punishing poor old Hungary. Like a street thug mugging a harmless old lady. It contains monsters like Nellie Kroes and Ulrike Lunacek, dripping with hate, who will lie through their teeth in order to see Hungary kneeling in the dust. As for what powers stand behind the EU – well, we all know who they are, don’t we (nudge, nudge, wink, wink).
Fidesz, therefore, will be able to ensure its survival by playing this game as long as necessary. Even if another government scrapes together enough votes to win in 2014 (assuming enough voters can be bothered to turn out this time), or a technocratic government installed, Fidesz can present them in terms of liars, traitors, anti-Hungarians. It’s crude, dangerous and counter-productive in the long-run, but it serves an immediate purpose. Fidesz can continue their tricks of walking out of Parliament, holding street protests, forestalling progress. The country will remain rendered split in sides and hostile to each other.

M.J.
Guest

to Mutt Damon: good question, look at the bigger picture (excellent input from Living with it in Hungary).
Withholding EU funds is just another (and not major) step in the overall escalation path.
If he doesn’t get it and fold, quite soon Orban won’t be negotiating about a “precautionary credit line” from the IMF.

Paul
Guest

Interesting analysis/predictions from Living with it.
At the moment, it looks like OV has got the situation nicely back under control. The forint has recovered quite dramatically, bond rates are down, OV’s position is secure at home, and the PR seems to be working abroad – a very long way from the dark days of just two months ago.
But is this a genuine recovery or just the calm before the storm? If LwiiH’s timetable is accurate, it could be the calm before one hell of a storm.
Is OV vain and stupid enough to think that he can take the EU right to the line and win?
I fear he is.

Wondercat
Guest

As seen from Vienna: http://kurier.at/wirtschaft/4485864-eu-sperrt-ungarn-500-millionen-subvention.php
— a disappointingly calm and factual report of the latest stab-in-the-back from the international dark forces whose aim it is to make Hungary a colony.

Paul
Guest

OT, but well worth a read:
Whilst trying to find a response to yesterday’s pro-OV letter in the Guardian, I discovered something I missed from 2 weeks ago. The weekend Guardian published a full page feature on the plight of the Roma in Hungary, and this apparently caused quite a stir in Hungary. This is the Readers’ Editor’s response to the many complaints the Guardian received.
http://www.guardian.co.uk/commentisfree/2012/feb/05/story-of-prejudice-roma-hungary
There is a link in the text to the original article – well worth reading if you haven’t already seen it.

Joseph Simon
Guest

Twenty-five of the EU countries are in the same situation as Hungary. Ontario, the riches province of the richest country on earth, finds itself in a dire economic bind. Canada itself is proposing drastic changes to its old age pension, etc. In a desperately poor country, Orbán is trying to spur growth to counter a higher deficit. Not a bad strategy.

Member

@ Joseph Simon, Are you kidding me in comparing Ontario to Hungary? Now, Ontario I know a lot about, and it is ain’t Hungary Joseph. We can start from how gypsies or any minorities are treated by the system, to where education stands, the welfare system, AND do not forget the Private Retirement Savings Plan that has never been nationalized. How about the health care system here and in Hungary? You are totally irrelevant in your comparison. If you think Canada and Hungary are at pair, why don’t you trade with someone from Hungary who held the same job you did for the same length of time from Hungary. That would be a great reality show, a Fidesz supporter from Hungary lives like Joseph Simon in Canada for six months, while the Joseph Simon will fill his shoes in Hungary. WHere is the producer who a few weeks ago asked about the “music video”? He should produce this. I bet it would be a hit. ARe you in Simon? I have a whole bunch of connection to production companies, I can likely arrange it.

Guest
London Calling! Joseph Simon – I am stepping in here before you are – deservedly – eaten alive by Mutt. You are not the sharpest knife in the drawer as witnessed by your earlier posts, and you really do show a blind faith in your man OV. 1) Canada “The riches province of the richest country on earth” ? – You must be joking – please do a little homework on your posts before making such statements. You insult our intelligence; and some of your posts are not worthy of a response. 2) If you are saying that Canada is a ‘province’ of the USA (I’m trying to understand you?) then you will deservedly receive the wrath of the author of this blog. It shows woeful ignorance. 3) It is true that many countries are demographically getting older – and gives pension funds problems due to advances in medicine as their populations get older. They have not resorted to misappropriating private pensions to reduce national debt. 4) Most EU countries are attempting to stimulate growth and are doing it legally; most are wrestling with the problem of having stagnating economies – with no one to export to. Hungary’s economy has… Read more »
Living with it in Hungary
Guest
Living with it in Hungary

Today’s bond auction saw 17billion of 20billion HUF sold at 3 year yields of ~8.4%. This *way* above the 7% limit markets have set on the likes of Italy and Spain. Is Orban selling the future?

Kim Lane Scheppele
Guest
To Odin’s Lost Eye — Thanks for mentioning all of the cases in Strasbourg on the nationalization of pension funds. If the European Court of Human Rights starts to levy large fines in conjunction with these cases, the Orban government has already figured out what it will do. It will pass these fines through to the general public as a “general contribution” (read: special tax). Why do I think this? On 30 December, the Parliament passed the Act on Transitional Provisions to the Constitution which — according to the government — amended the new constitution in may ways. One provision in that law says the following: Article 29 (1) As long as the public debt exceeds 50% of the Gross Domestic Product, if the Constitutional Court, the Court of the European Union, another court or other law applying that body’s decision requires the state to pay a fine, and the Act on the central budget does not contain necessary reserves to pay the fine, and the amount of the fine cannot be allocated from the budget without undermining a balanced management of the budget or no other item from the budget may be eliminated to provide for the fine, a… Read more »
Kingfisher
Guest

I can’t remember if I’ve posted this before, but I’m 99.9% certain that Orbán abstained in the EU accession vote in Parliament (he simply didn’t turn up to vote.) No one in the Hungarian press remarked on it at the time but I predict one day he will actually remind us of this, when he feels the time is strategically ripe.

Eva S. Balogh
Guest

Kingfisher: “I can’t remember if I’ve posted this before, but I’m 99.9% certain that Orbán abstained in the EU accession vote in Parliament (he simply didn’t turn up to vote.)”
You remember correctly.

Member
I just do not see the point here regarding the accession vote of Orban. Plain and simple, he has to hold a referendum on staying or quitting the EU.I do not think anyone would miss Hungary at this point if they decide to quit. THe only thing I am afraid of, that people still do not understand the implications of leaving the EU. Orban portrays the money that the EU generously have been providing to Hungary, as something that belongs to Hungary. There is not a fair and square T-chart out there to say, how much Hungary paid into the EU and how much we got back. People are mislead and even the opposition press is doing an awful job to get the facts out there. With all due respect to Ms Scheppele, all of her concerns and all concerns coming from any academics is a great info for people who do understand the lingo, but the regular Joe and Mary (Jozsi es Mari) only listens to plain talk. THe plain talk now is that the EU is taking away money from Hungarians, that Hungary is still paying the price for the mistakes the MSZP has done, THe Eu wants… Read more »
Guest

London Calling (2)
Re the ‘Punishment’ tax
Presumably this apples to the losses the Banks are making on the foreign currency loan conversions?
They are on record as saying that they are 95% certain that they will get the compensation.
So civil war then? The citizens who benefitted from the conversion having their mortgages paid by the poorer citizens?
Regards
Charlie

Joseph Simon
Guest

That red graph produced here is more like the phallic representation of the drastically falling birth rate in Hungary and indeed in all of the EU.

Odin's Lost Eye
Guest

Kim Lane Scheppele.. I was aware of the outline of the law on EUC/ECHR fines, not its details. Knowing the way in which the ECHR thinks I dare say their ‘Legal Eagles’ are even now looking at the details of that law as probably are the E.U.
The three ‘complaints’ that the EU has brought against the Hungarian Government are ‘holding charges’. This gives them time to look at everything and throw the book at Hungary.

Living with it in Hungary
Guest
Living with it in Hungary

Sorry Eva, I couldn’t resist. 😉
Sándor Pörzse on Ferenc Gyurcsány’s “year in review”
BY ALL HUNGARY NEWS
“If the rule of law truly existed in Hungary, then Ferenc Gyurcsány would have provided his opinion to CCTV cameras from inside a maximum security prison.”

Erik the Reader
Guest

Everyone forgets that Hungary is rather a net payer for the European budget and always has absorbed through the so called projects less then the contributions payed to Brussels.
(Anyone can check the absorption figures.)
If the European Commision suspends funds to Hungary, Hungary also will suspend any payment to the EU budget. That is so simple.

GW
Guest

Erik the Reader: You’re full of baloney (or should we say párizsi?) Hungary has always been a net recipient of funds and net EU transfers to Hungary reached a record high in 2011 of 4.37 bn Euros. http://www.bbj.hu/economy/net-eu-transfers-to-hungary-reach-all-time-high-in-2011_62446

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