The European Commission is cracking down on Hungarian infringements

Many critics of the Orbán government complain bitterly that the European Union is utterly helpless and perhaps even uncaring when it comes to Viktor Orbán’s leading the country toward a practically one-party system. And, yes, it is true that the European Union can do little, aside from talking to the prime minister of Hungary, when it comes to politics. But let’s not forget about the European Commission’s mighty sword: money.

Naturally, there can be no direct link between “political sins” and “monetary punishment.” EU subsidies can be withdrawn only if the Hungarian government transgresses EU laws. Luckily or unluckily, depending on one’s perspective, the Orbán government violates these laws left and right. During the Barosso presidency the Commission rarely if ever applied monetary pressure on the Orbán government, but lately things have changed. I don’t know whether the change is due to the election of a new commission under the presidency of Jean-Claude Juncker or whether the Commission has simply gotten tired of Hungary’s repeated infringements of EU laws, but lately the Commission has come down hard on the Hungarian administration.

Here I will list some of the recent decisions of the European Commission that will seriously affect the Hungarian budget, at least in the short run. They may even have further repercussions.

Advertisement tax

An “in-depth investigation” was opened on March 12, 2015 into Hungary’s new advertisement tax, under which companies are taxed at a rate depending on their advertisement turnover. Companies with a higher turnover are subject to a significantly higher tax rate. The tax was designed in such a way that RTL Klub, Hungary’s most successful commercial television station, would have to pay such an exorbitant advertisement tax that its very presence in Hungary would be jeopardized.

Commissioner Margrethe Vestager, in charge of competition policy, said: “It is very important that we ensure a level playing field on media markets throughout Europe. Many media today rely on advertisement income to finance their operations. I welcome the signals from the Hungarian government that they intend to make changes to the advertisement tax. Our state aid investigation will look in detail both at how the advertisement tax applies currently as well as how it is amended, to make sure there is no unfair discrimination against certain media companies.”

RTL Klub decided to fight and on May 27, 2015 the Orbán government had to retreat a bit. A much lower but still progressive tax structure remained in force, which didn’t satisfy the Commission. After all, it was the progressivity of the tax to which Brussels objected in the first place. And while the “in-depth investigation” is in progress, the Hungarian government is unable to collect the taxes it levied on the media companies.

Suspension of development funds

In April the European Commission suspended the payment of $2.6 billion in development funds. This money was earmarked for three areas: innovative projects, economic development, and commercial infrastructure development. The reason given for the suspension was that Hungary’s competition requirements benefited only bidders close to the government. All of the cases that the Commission investigated were from the post-2010 period, not between 2007 and 2014 as the government first wanted us to believe.

Suspension of food chain inspection fees and the tobacco tax

Then, on July 15, 2015, the European Commission opened separate in-depth investigations “to examine whether two recent Hungarian measures with steeply progressive rate structures are in line with EU state aid rules.” One is the food chain inspection fee and the other is a tax on turnover from the production and trade of tobacco products. While these investigations are in progress, the Hungarian government will be unable to collect these taxes, the first installment of which was to be paid at the end of the month.

The original Food Chain Act was amended in such a way that it became “a steeply progressive” tax. Stores with low turnover pay either nothing or 0.1%, while stores with a higher turnover pay up to 6% of their turnover. The amended law was designed to favor the smaller Hungarian chains and disadvantage larger ones. The problem is not, the Commission said, that this tax in its present form raises “state aid” issues. But the progressivity of the tax “selectively favors companies with low turnover and gives them an unfair competitive advantage over others.”

In fact, it is no exaggeration to say that the real aim of the Orbán government is to drive away multi-national food chains. This inspection fee and another recently passed law, according to which retailers are prohibited from operating if for two consecutive years they don’t produce a profit, may have the combined effect of forcing foreign-based chains to leave the country. As the Commission points out, “such losses can be the result of the high food chain inspection fees some retailers would need to pay.” (Supermarkets have notoriously low profit margins. The figure often cited is 1%.) Apparently, the Commission’s letter to the Hungarian government hinted that in their opinion the food chain inspection fee and other restrictions on retailers are not compatible with “Treaty rules on freedom of establishment.”

The second EU investigation focuses on the tax on the sale of tobacco products. This is a new tax disguised as a “health contribution.” Again, the rates are steeply progressive. Small companies pay a tax of 0.2%, while large ones are taxed up to 4.5% of their turnover. Although the Commission welcomes measures that reduce tobacco consumption, “it has doubts that the effects of tobacco products on public health increase progressively with the turnover of companies selling them.” Here too, the Commission asked the Hungarian government for an explanation, but “so far, Hungary has provided no objective reasons that would justify a differentiated treatment between companies with different turnovers.” Of course, we know the real reason. The Orbán government wants to give an undue advantage to his favorite Hungarian tobacco company, Continental Tobacco Group, whose CEO is János Sánta, a friend of János Lázár, and whose factory is in Hódmezővásárhely, where Lázár served as mayor.

Enter János Lázár

Hungary is not cowed, as was clear from János Lázár’s routine Thursday press conference, held a day after the press release announcing that the EU had placed a hold on the food inspection fee and the health contribution tax on tobacco companies. He was furious. Hungary will not back down. The government learned that it was the American Philip Morris tobacco company and the Dutch multinational retail chain Spar that were behind the EU’s action. Lázár vented his anger and threatened any company that dares to complain in Brussels:

We can say to Spar and to Philip Morris that if you’re not going to pay this tax, then you’ll pay another, but for sure you’ll pay. You can go complain to the EU, but then you’ll just pay more. And it’s going to be this way for every group that presses charges against a country where it wants to earn money.

Lazar Janos2

Some commentators considered Lázár’s outburst most unfortunate, feeling that it would not only hurt Hungary’s image but would also keep investors away from the country. Éva Várhegyi, a well-known economist, believes that the damage has already been done. It makes no difference what Lázár has to say. Foreign business leaders don’t even flinch any more. They are used to this kind of treatment. As it is, since the 2008 economic crisis more foreign businesses have been leaving Hungary than coming to set up shop. Those who are still in Hungary rarely decide to make additional investments.

So, the European Union has not been idle in the face of these latest infringements. Moreover, I don’t see how the Hungarian government will be able to convince the European Union that these taxes and fees conform to EU law. Yes, the Orbán government will undoubtedly respond with more tricks that they believe will work. But since the Hungarian administration’s policies are aimed at favoring Hungarian businesses and preferably ruining foreign ones, I don’t think they will succeed in convincing Brussels that their discriminatory policies are legal.

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July 23, 2015 7:48 pm
I had hoped that Juncker would make a difference (Barroso is one of the mishaps Merkel has to account for). Yet Juncker has been busy with the Greek crisis (also exacerbated by Merkel). Perhaps now we will see some determination in enforcing European standards. At least I hope so. The good thing about Lázár ist that he speaks his (and his master’s) mind. So there is no need for the equivalent of “kremlinologists”. Although we have a lot of silly political leaders elsewhere, the unabashed, lawless brutality of the Orbán regime is indeed breathtaking – as is the speed with which a formerly European country is drifting behind the periphery. BTW, although SPAR was a Dutch pre-war idea, I don’t think that it can be called a multinational, as most SPAR enterprise operate on an independent national platform. (German SPAR was even sold to Wal-Mart and then sold back to REAL.) Éva Várgegyi is probably right about the damage already done. If you look at Hungarian Telekom and its service you can only conclude they don’t give a damn anymore and stopped investing in hardware and personnel (but they hike prices with every other invoice). One example: Since June 2014,… Read more »
Lutra lutra
Lutra lutra
July 24, 2015 10:50 am

The Hungarian Spar company is owned by Austria Spar International AG, which holds the franchise in much of Central Europe, and is yet another reason for friction between the two countries. It is far more of a direct competitor to CBA (another company completely tied in with Fidesz) than Tesco, Auchan and Metro, so it’s hard not to believe that this unfair tax is directed at helping Orbán’s pals

July 24, 2015 12:05 am
Hungary has become a failed state… It is in simple terms a ‘mafia state’ run by people, who are no different from the criminals running Zimbabwe, etc… It may be true that the EU according to its charter cannot act and interfere directly with the actions of the Hungarian government, but if it took 5 years for the EU leaders and organisations to wake up and initiating punishing measures against the Orban regime, then it is too little and too late. It is too late for the hundreds of thousands of Hungarians who left the country, and too little for Orban and his regime to change their tune… This kind of incompetence may eventually result in the failure of the EU as a whole. Barrosso’s and Merkel’s appeasement policy towards Orban resulted only strengthening Orban’s hand in turning back 70+ years Hungary’s history. All those believing that there is a spark of democracy still have left in Hungary are deluding themselves. In reality Hungary has simply become a fascist state, just like Mussolini’s Italy used to be… Those readers who follow the writings of the Hungarian intellectuals can testify that the mood of the Hungarian citizens is centred on misery,… Read more »
July 24, 2015 3:06 am

“Hungary has become a failed state…”
Hungary is not so special that it can happen only in Hungary. Membership of EU does not protect against it.

July 24, 2015 1:47 pm

Dear dos929,

You are absolutely correct.

The stupid citizens under Horthy made the same mistakes.

The champion ignoramuses were the industry and banking leaders of Hungary then and now.



July 24, 2015 1:01 am

What is the endgame here – do you think those in charge will simply collect as much as they can and then flee to Switzerland, leaving the country completely bankrupt? At the end of the day, isn’t foreign money where the big amounts of money are in Hungary? By pushing out foreign investment aren’t they simply cutting off their own source of income – or do they simply not need any more money? I clearly do not have the right mindset to really understand this.

July 24, 2015 5:45 am

Fascinating how Hungary is fashioning its relationships particularly with the EU and the United States. Conflict appears to be its major highlight. Which is it perhaps? A country determined to free itself of the apparent chains binding it to a democratic consortium? Or a country ultimately showing its weakness in assessing the needs development of states on the global stage in the 21st?

Hungary appears to be making choices and changes which are perilous to her future welfare. An absence of needed perspicacity will perhaps draw her closer to an implosion. Where are her seers?

July 24, 2015 6:13 am

Várhegyi is pretty much correct. The limited amount of FDI seems to be around automotive and other manufacturing industries that have so far been insulated largely from Govt. interference. Hungary has fallen so behind other countries in region due largely to Govt policies, weak economic fundamentals and even poorer L-T growth prospects. Of course, the cost of labor is increasing rapidly in Cz and Poland, and so maybe Hungary could be again a source of cheap manufacturing labor vis-a-vis other countries in region, except of the dire shortage of skilled workers and completely untrustworthy regulatory and tax environment. Sad part is that I believe many in FIDESZ understand this all too well, and could not care less.

July 24, 2015 11:46 am

Migrants to the contiguous Schengen area of Europe, first half of 2015.

Entry country
1. Hungary: 67,444
2. Italy: 67,261
3. Spain: 5,542 (January through May only)

Entries to Greece: 83,322


July 24, 2015 12:17 pm

@tappanch: The majority of those don’t want to stay in the country of entry.

The solidarity shown by most northern EU member states is appalling. And the Dublin agreement should be abolished.

July 24, 2015 12:12 pm

Can someone please make a conprehesive list of all the companies which are closely affiliated to Orbán?

So far, all I know is that CBA, and all the “national” tobacco stores are in his pocket.
Lately I have heard that the smaller CooP and ABC corner shops are too, as well as MOL petrol stations.

I boycott all of these, even if it means going further to do my shopping.

As we all know, the only reason for unfair taxes and rules and limitations for competitive markets, is in order to make Orbán and his gang richer, as well as the even more sinister one of pro-actively destroying government critics and opposition, which they have blatantly and loudly declared is one of its intentions.

Surely, if everyone stops shopping at any stores which have close ties with the ruling mafia, it will have an impact?

July 24, 2015 3:35 pm

Many people don’t have a choice – there’s only one CBA and one tobacco shop near by, so if you don’t have a car you got no other opportunities …

A friend of my wife (she died from cancer now, but the hospital tried everything – they really were good) always read the Tesco and Interspar ads and asked us to bring her coffee, mineral water, detergents, some special offers etc – all those heavy packages she couldn’t transport and which were also too expensive at the local shop.
Including those “500 HUF back if you shop for 5000” etc I would calculate that Tesco etc are at least 30% cheaper than the small shops – and that’s a lot of money!
But if you can’t reach them – tough luck!

July 24, 2015 6:36 pm

Instead of boycott, let us write letters of approval and rejection to the industry leaders.

Further, we, the people could picket the homes and businesses of the worst industry owners.

Let us see, if tv and radio stations will pick up the demonstrations.

July 24, 2015 7:06 pm

Re: ‘Surely, if everyone stops shopping at any stores which have close ties with the ruling mafia, it will have an impact?’

Kind of reminds me of Havel’s ‘power of the supposed powerless’….has to start somewhere with ‘one’ going in a different direction. That ‘one’ adds up.

July 24, 2015 8:06 pm

Tesco’s does home deliveries, at least in Budapest.

And to help those who do not have a car, why not coordinate shopping orders with a pool of car owners?

Groceries could be delivered to a convenient central location, to be collected by those without cars. Or even delivered to homes for a small extra fee to cover cost of petrol.

There are hundreds and thousands who oppose this unimaginable regime, and if even just half of these people engaged in a serious and coordinated boycott, even just for a week, the immoral, unethical, greedy and selfish Fidesz businesses might get the message and feel the pinch.

July 25, 2015 2:14 am

These are really excellent ideas! When do we start?