Is The EU's Pressure On Hungary Starting To Work?

On September 18, the European Commission proposed a suspension of 7.5 billion euros ($7.5 billion) from the EU budget earmarked for Hungary, a response to what the union sees as Budapest's poor record on human rights and the rule of law. The move is just the latest salvo in a years-long battle between Brussels and Budapest, and one that shows no sign of letting up any time soon.

Despite the commission's proposal, nothing has been decided and Budapest may well end up seeing the money. The European Commission has left the door wide open for compromise: It acknowledged that the government led by the right-wing Fidesz-party has promised serious reforms and, in some cases, prepared legislation during the summer months to address some of the EU's concerns about corruption and shortcomings in the Hungarian public-procurement system. If more progress is made in those areas by the end of this year, the money could still arrive

The three main aspects of this saga are all interlinked. Firstly, to threaten to hurt Hungary where it is most painful -- financially -- might be the most efficient way for the EU to coax a change out of Budapest. Secondly, Hungary, already feeling the economic effects of what is likely to be a long, cold winter, might be attempting to move closer to the EU again, And thirdly, while Hungary might be forced into a corner right now, there is still every chance that the government will manage to squeeze out while holding on to most of the financial windfall.

The "conditionality regulation," a mechanism that has been applicable from 2021, allows the commission to propose cuts to EU members' budgets if it feels that there is a systemic risk to how the money is being spent.

Not all EU member states were pleased with this new mechanism when it was discussed and agreed upon in the summer of 2020 during the negotiations of how the 1.8 trillion-euro EU budget for 2021-27 should be divvied up. Hungary and Poland even challenged its legality in the Luxembourg-based European Court of Justice -- and lost.

Those birth pangs have meant that the mechanism is somewhat limited. The European Commission could not simply target funds earmarked for a country and point to what it believed to be a decade-long undermining of the rule of law. It had to prove specifically that the shortcomings directly impacted how specific EU funds were spent.

To take a closer look at the Hungarian public-procurement system, usually through audits, was an obvious first step, especially with widespread reports of the misuse of public funds to enrich figures close to right-wing nationalist Prime Minister Viktor Orban. One startling statistic flagged by Brussels was that 50 percent of all public-procurement contracts involving EU money only had a single bidder in Hungary. In all the other 26 EU member states that figure was 15 percent or lower.

It therefore came as no surprise when, for the first time, the commission triggered the mechanism in April with Hungary. And while there were numerous exchanges between Brussels and Budapest, the latter could not do enough to allay the commission's fears.

What the European Commission proposed on September 18 was a suspension of 65 percent of the budget commitments for three operational programs under an EU policy framework. The funds from the programs, which dealt with environmental and energy efficiency, integrated transport, and regional development, amounted to 7.5 billion euros. It might sound like a lot, but if you consider that Budapest could still receive up to 50 billion euros from the EU over the next seven years, it doesn't seem quite so much.

That Hungary appears willing to risk losing around one-fifth of its EU funds will appear laughable to many, notably the European Parliament, which last week overwhelmingly passed a resolution calling the country a "hybrid regime of electoral autocracy," criticizing the independence of its judiciary and the freedom of its media. The resolution was nonbinding, however, and the parliamentary chamber has no say over EU funds.

Yet there is an alternative reading to this, one in which Hungary is not necessarily going down its own path. Something appears to be happening in Budapest. The European Commission has proposed that Hungary takes 17 concrete measures in order to secure the EU funds, including setting up an anti-corruption task force, applying the systematic use of data mining in public procurement, improving asset declarations, modifying the Criminal Code to allow judicial review of prosecutorial decisions, and, most importantly, setting up an independent authority with sweeping powers to oversee all these steps.

So far Hungary has either started working on or promised to implement all of these measures, something that would have been inconceivable at the start of 2022. Even the European Commission has acknowledged the growing goodwill from Budapest over the last few months.

Regardless of Budapest's true intent, one of the key aspects of the conditionality regulation is that it can't drag on forever. Once triggered there must be a final decision within nine months and, if necessary, the mechanism can be triggered over and over again.

The key date now is November 19, when the European Commission will assess how much progress Hungary has made. Then it's up to the Council of the European Union, which has the power to amend, approve, or veto commission proposals, and the 26 other EU member states to make a decision via qualified-majority voting. Like so many other things in Brussels, everything will come to a head just before Christmas.

Which way Hungary will lean largely depends on two things: how the economy is performing and how the war in Ukraine is going. With galloping inflation, an unstable forint, and enormous energy bills piling up, the government is certainly feeling the squeeze. Orban needs every euro cent he can get. And as Russia takes hit after hit in its floundering war with Ukraine and the EU is becoming increasingly suspicious of Chinese economic presence in Europe, Orban's room for maneuver could be shrinking.

As one EU diplomat, who wished to remain anonymous, recently pointed out to me, "Maybe, just maybe, this is the start of Orban's walk to Canossa," a reference to the humiliating submission of Holy Roman Emperor Henry IV to Pope Gregory VII in 1077. To reverse his excommunication from the church, Henry had to trek through the Alps and then kneel for three days in a blizzard at the gate of the Italian castle of Canossa.