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 EU subsidies can be withdrawn only if the Hungarian government transgresses EU laws.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.
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.
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.