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Mujtaba Rahman is the head of Eurasia Group’s Europe practice and a columnist for POLITICO Europe. He tweets at @Mij_Europe.
The relationship between Hungary and the European Union — never easy with mercurial Prime Minister Viktor Orbán — has been particularly strained this year, given the country’s opposition to sanctions against Russia, ongoing rule of law concerns and Brussels’ decision to withhold funding equivalent to 8.5 percent of the country’s GDP.
Yet, the two sides may well be on the cusp of an agreement that could thaw relations, and ultimately see the release of much of the funding Hungary is now due.
Orbán’s now showing a bit of ostensible willingness to begin addressing some of Brussels’ concerns over corruption and the rule of law — at least on paper.
And the reason is Hungary’s tanking economy.
Markets are jittery after headline inflation surged to 20.1 percent in September, up from 15.6 percent the previous month. And even more worrying, core inflation — excluding energy price increases — came in at 20.7 percent.
The government is clearly worried and has been trimming back expenses, limiting the temperature in state institutions to 18 degrees Celsius this winter and even imposing sharp cuts on spending for the prime minister’s office.
But with unions now demanding at least a 16 percent rise in minimum wage levels for 2023, as well as growing and unprecedented protests by frustrated teachers and kindergarten staff, Hungary’s inflationary spiral looks set to continue.
This is all increasing pressure on Orbán to comply with — or at least appear to comply with — the European Commission’s demands on rule of law and anti-corruption measures at the earliest opportunity, so as to unlock EU funds that could positively boost investor confidence and improve the grim outlook for the economy.
Negotiations between the two sides are now very intensive.
The discussions have two distinct legal legs — one relating to steps Orbán must take to unlock €14.9 billion in grants and soft loans from the Recovery and Resilience Facility (RRF), and the other relating to remedial measures the government must take to satisfy, what is known in EU parlance as, the “rule of law conditionality mechanism” to unlock €7.5 billion of EU cohesion funds.
These will ultimately come to form one political package, with the aim of serving one key political objective: protecting the financial interests of the EU’s budget and forcing Budapest to align more closely with the bloc’s treaties, norms and values.
Hungary’s Fidesz government has until November 19 to reply to the 17 concerns the Commission raised in its rule of law conditionality mechanism procedure and propose remedial measures to fix them. Most importantly, discussions between Brussels and Budapest are focused on the creation of an (supposedly) independent “integrity authority,” tasked with ensuring EU money isn’t misappropriated by Orbán and his allies.
The Commission then intends to use Budapest’s suite of proposals as the basis for reform milestones that underpin the RRF; and Orbán will need to implement these if money from the bloc’s coffers is to be disbursed. Once Orbán submits his plans, however, it’ll take at least an additional three months for Hungary to meet its milestones, and an additional few months to put together all of the operational and financial bureaucracy preceding a disbursement — making any actual money unlikely for Hungary until at least the middle of next year.
This point is key, and it’s often lost on critics who argue that Commission President Ursula von der Leyen is about to sign off on a grubby compromise. Approving the reforms Orbán’s proposing doesn’t mean EU funds will immediately flow. Rather, an agreement in the short-term will only preserve Hungary’s theoretical access to RRF money, as 70 percent of the RRF funds Hungary is entitled to would be lost if no in principle deal is reached by the end of the year.
Of course, wider considerations are also at play, such as geopolitics: The EU still wants to project a sense of unity over Ukraine, and Orbán’s support will still be needed in that regard, whether to finalize the bloc’s partial embargo on Russian oil or the potential need to implement other energy-related sanctions in the future. Already a proxy for Russian influence, senior officials worry that a very hard line over EU cash could further drive him closer to Russian President Vladimir Putin.
Given the state of Hungary’s economy, officials don’t exclude a financial crisis either. As one senior official says: “Even if we don’t pay them, we are still stuck with them, with no money, and a financial crisis. The alternative isn’t much better.”
But some member countries are likely to oppose Hungary’s reform plans no matter what Budapest commits to, so annoyed are they by Orbán’s ambivalent stance toward Ukraine and his spoiler tactics on other EU policies too.
Officials also remain deeply suspicious of his infamous one step forward, two steps back “peacock dance” with the EU. Despite the commitments the Hungarian government is now making, officials in Brussels are far from naïve and recognize the country’s leader will continue to implement backdoor measures to ensure insiders have legal access to state wealth.
Nonetheless, it seems likely that the EU’s conditionality mechanism will soon expire, and Orbán will, in principle, win approval over his Recovery reform plans. Though this will slightly ease relations between the two sides, whether it actually results in money flowing to Budapest remains to be seen.
