On Monday evening (December 12), the EU suspended cohesion funds to Hungary, at the same time approving pandemic recovery grants to Budapest, but with serious rule of law conditions – in return, managing to unblock Hungary’s veto on a global minimum tax and joint EU aid to Ukraine.
In a historic move, EU ambassadors have suspended 55% of EU cohesion funds from Prime Minister Viktor Orbán’s government due to rule of law and corruption concerns, which is below 65% recommended by the European Commission.
This is the first time that the EU has used this new tool, the so-called conditionality mechanism, which links EU funds to the functioning of the rule of law in a Member State, and it is the first time Brussels sanctions Orbán for his limitation of the judicial system and the widespread embezzlement of EU funds.
It has been a long night for the ambassadors and it has taken heavy economic pressure on Orbán over the past few months to get things moving so that the remaining 26 member states can agree.
The four interrelated issues have formed a complicated whole in recent weeks – and threatened to overtake EU leaders’ summit on Thursday in Brussels.
The key came on Monday evening when Hungary no longer blocked the EU’s adoption of a new comprehensive minimum tax and joint financial aid of 18 billion euros in 2023 to Ukraine.
“It’s hard to believe it,” quipped a European diplomat at the end of the evening.
Czech EU Minister Mikuláš Bek warned earlier on Monday that “Hungary’s position on Ukraine will decide which scenario develops.” The Czech Republic currently holds the rotating presidency of the EU for a period of six months.
“If Hungary agrees on Ukraine, it could pave the way for a more positive debate on a possible reduction of the sanctions proposed by the European Commission on cohesion policy,” Bek said.
EU governments have agreed to suspend €6.3 billion of EU funds from the 2021-2027 Cohesion Fund to Hungary.
However, they also approved the country’s €5.8bn stimulus package, but with 27 so-called ‘super milestones’ meaning Hungary will only get the funds if it implements 27 reforms to strengthen judicial independence and fight corruption.
This means that Hungary, for now, will not get any of these funds, but could get them all if it implements the measures demanded by other EU governments and the Commission.
The Monday evening agreements will have to be approved by so-called written procedure on Tuesday, with the official decision to be taken in the Council of Ministers.
Part of the agreement is that, according to MTI, the Hungarian news agency, Budapest can join the global minimum tax without a tax increase, because it had obtained an agreement according to which the Hungarian business tax would be included in the tax. overall minimum tax (the Hungarian corporate tax rate is only nine percent). The proposed global minimum corporate tax will be 15%.
In a classic EU solution, both sides can claim victory.
Orbán can be pleased that Hungary has managed to reduce the amount to be suspended (which is still largely hypothetical, as payments from the EU budget do not start to flow until years later) and to obtain approval stimulus fund.
Other EU countries can claim that Orbán, who has been a constant thorn in the side of the bloc for restricting judicial independence, media freedom and the centralization of power, has been sanctioned.
“The EU autocrats will now see their European funds frozen. This decision is historic. Viktor Orbán’s attempts to blackmail have not succeeded,” said German Green MEP Daniel Freund.
The Hungarian economy has been under immense pressure: inflation reached 22.5% in November and is expected to rise further after the government removed the fuel price cap, which is now the highest in the EU.
“Orbán really feels the heat of his economy collapsing,” an EU diplomat said.
In a rare move, the country’s central bank governor György Matolcsy, an ally of Orbán, sharply criticized the government’s economic policy last week.