14 November 2022

Are Hungary’s EU Funds Being Cut (or Not)?

Funding Confusions, Separate Tracks and What May Lie Ahead

The news about whether Hungary will receive EU funds (or not) these days is confusing. One day, we hear that the European Commission is proposing to lower the boom on Hungary by cutting a large chunk of its Cohesion Funds under the general EU budget. The next day, we hear that the Commission is nearing an agreement to approve Hungary’s Recovery Plan in order to greenlight the release of funds. Is the Commission using or surrendering its financial leverage to require that the Hungarian government honor the rule of law? Will the Hungarian government negotiate its way out of funding cuts by really loosening its autocratic grip on power, or would any reform be illusory?

The answer to both questions is that both sides want to appear to be doing something that they may not be doing. The answer is also confusing because negotiations, although governed by Regulations that point towards each other, are moving along two different tracks. Yet, these tracks will soon meet. That is why it is crucial to grasp their interrelation, as well as to look further ahead.

Apart Together? Two Separate Negotiating Tracks on EU Funds for Hungary

As a practical matter, the first thing to understand is that there are two parallel negotiating processes going on with the same goal in mind: determining whether Hungary will receive all of the money allocated to it in the overall EU budget. These two negotiating processes are proceeding under two different Regulations, have different points of contact in Brussels and different negotiators on the Hungarian side. And these two different tracks appear to have different conditions that the Hungarian government will have to meet to unlock different sources of EU money.

First, negotiations over Hungary’s funding under the Multi-Annual Financial Framework (MFF or simply, the normal EU budget) have been going on since April 2022, when the Commission triggered the Conditionality Regulation against Hungary, proposing to cut Hungary’s funds for rule of law violations focused on corruption. On 18 September, the Commission sent to the Council a recommendation to withhold 65% of the funding for three programs under the Cohesion Funds and forwarded to the Council a plan covering 17 changes aimed at fighting corruption, a plan to which the Hungarian government had agreed in order to avoid the proposed cuts. A two-month extension was approved by the Council on top of the usual one-month deadline to give Hungary time to enact the plan it proposed. The Council will need to make the final decision by 18 December on whether the Hungarian government has done enough to meet the Commission’s terms for fighting corruption.

For this procedure, the Commission point person is Budget Commissioner Hahn with the process run through DG Budget. He will put his recommendations assessing Hungarian progress vis-à-vis the 17 “reform” measures on the agenda of the meeting of Commissioners on 22 November. ECOFIN, with a meeting scheduled on 6 December, will formally have the final word at the Council (although the issue may end up on the European Council agenda of 15 and 16 December). The chief negotiator on the Hungarian side is the pugnacious Justice Minister Judit Varga.

Second, negotiations over the other source of EU funding – the special Recovery and Resilience Facility paid for by EU borrowing – have been going on in parallel with the Conditionality Regulation negotiations but with different players on both sides. The Recovery Fund set up by the Recovery and Resilience Facility is run under a different Regulation than the MFF.  It requires Member States to submit plans for how they will spend the money and the plans must be approved by the Commission before money can flow. These plans must take into account so-called country-specific recommendations adopted by ECOFIN under the economic reform program called European Semester. For Hungary, these recommendations included measures to fight corruption and, as for Poland, reforms to strengthen judicial independence.   It appears that the Commission will finally approve Hungary’s Recovery Plan soon in exchange for the Hungarian government agreeing to overhaul its judiciary. In the meantime, the anti-corruption measures have been the chief focus of negotiations over the Conditionality Regulation.

For approval of Member States’ Recovery Plans, the point person at the Commission has been President von der Leyen herself with SG-RECOVER as the supporting office. The Commission will probably have on its agenda deciding whether to approve Hungary’s Recovery Plan during the meeting on 22 November. If the Commission decides to proceed with Hungary’s Recovery Plan, the plan – with whatever conditions are agreed to between Hungary and the Commission – will then be forwarded to ECOFIN, which will then have on its agenda in that same meeting on 6 December an implementing decision to greenlight the plan. (Here again, it is far from inconceivable that this may end up on the agenda of the European Council of 15 and 16 December.) The chief negotiator for the Recovery Plan on the Hungarian side has been the former Hungarian EU Commissioner Tibor Navracsics.

Together Apart? When the Two Negotiating Tracks Merge

So, the two tracks will finally come together, first on 22 November inside the Commission and then on 6 December in the Council. To some extent this is a belated connection, because legally the connection existed all along. Both the Conditionality Regulation and the Recovery Regulation, enacted at the same time in December 2020, have nearly identical language about linking EU financing to rule-of-law-related requirements. In fact, the Recovery Regulation refers explicitly to the Conditionality Regulation (article 8), whereas the Conditionality Regulation states explicitly that Member States are bound by its standards when implementing budget from the EU Recovery Instrument (recital 7) – which is the financial vehicle from which the Recovery and Resilience Facility draws its money. One might therefore have expected that the conditions that the Commission would ensure that Member States have to meet to access EU funds under these two different regulations would be the same. But because the negotiations have been carried out in parallel with different teams of negotiators, this is not the case.

One of us has discussed extensively on the Verfassungsblog some of the measures that the Hungarian government has put in place in order to avoid suspension of Cohesion Funds under the Conditionality Regulation. Clearly, in our view, these reforms do not fulfil the letter and spirit of the deal, which is that Hungary actually do something consequential to avoid such a suspension. The Commission would do well to conclude that what Hungary has done so far is not enough and recommend that Hungary’s funds be cut when it reports to the Council the outcome of its 22 November meeting. Otherwise, if the Commission ignores the evidence that the new laws hurriedly enacted in Hungary are deemed sufficient, the Council should come to the conclusion that the reforms are fake on its own motion. Under the Conditionality Regulation, the Council can ignore the Commission’s recommendation with regard to the amount of suspension and amend it (article 6(11)). A clear bad faith effort by the Hungarian government, after the Council generously extended the one-month deadline to three months to allow Hungary to put meaningful reforms in place, merits a higher amount of suspension than the Commission has already recommended.

The negotiations over the Hungarian Recovery Plan are a step or two behind where negotiations have gotten with the Conditionality Regulation. The Commission initially held up approval of Recovery Plans for both Poland and Hungary, pending progress on strengthening rule of law in each Member State. With rare public internal dissent around approval of the Polish plan as five Commissioners registered their objections and four European judicial associations sued the Council because its implementing decision didn’t require Poland to honor Court of Justice judgments, the Commission and Council attached “milestones” to Poland’s plan in June, milestones that Poland had to meet before actually receiving the funds. Now it appears that the Commission is on the verge of going down the same road with Hungary, apparently planning to approve Hungary’s Recovery Plan by setting milestones that Hungary will have to meet to get the money.

The milestones that have leaked so far, in the Hungarian case as in the Polish case, also focus on restoring judicial independence. It appears that the Commission will require the Hungarian government to roll back some of the changes it has enacted in the last decade to bring the judiciary under intensified political control. Here again, we will have to assess whether Hungary’s actual reforms stand a chance of achieving what the Commission has demanded, once the detail of those reforms is announced. If those reforms are like the ones we have already seen on the anti-corruption front, however, the Commission should not give Hungary the money.

Because of deadlines hard-wired into the Recovery Regulation, if a Recovery Plan is not approved by the end of 2022, Hungary stands to lose €6 billion flat-out, just from missing the deadline. If the plan is approved, at least in theory, then the funds stand ready to be drawn once the conditions for approving the plan are met. But even if the Commission and Council approve Hungary’s plan now with conditions, it doesn’t mean that Hungary will actually get the money any time soon as the flow of funds will surely depend, as was the case with Poland, that the promised reforms are actually put in place.

This, in short, is why the news is confusing. The Conditionality Regulation was explicitly designed to apply to all EU funds and not just the MFF. But because Hungary’s Recovery Plan was not approved at the time that the Commission triggered the Conditionality Regulation, there were no greenlit funds under the Recovery Facility to subject to scrutiny under the Conditionality Regulation. So the Conditionality Regulation procedure went forward just scrutinizing MFF funds while the Recovery Fund’s conditions have been negotiated in a parallel procedure. Hence, there are two different tracks with different requirements at this stage.

What May Lie Ahead: The Arc of Procrastination Is Long but It Bends Towards Rule of Law Protection

Would all be lost if our advice were ignored, and Hungarian reforms were deemed sufficient to greenlight the money under both procedures? The answer is firmly: No. For several reasons.

First, with regard to the milestones, the situation with Poland has demonstrated that these milestones can in fact be “hard.” After it agreed on its milestones, the Polish government quickly showed that it had no intention of doing what it had promised. The Commission has then firmly blocked funds from reaching Poland. Of course, it might also be the case that the Commission decided to interpret the milestones more strictly than it originally intended after the protests from both inside and outside the Commission. In any event, no recovery monies have been released so far to Poland. Milestones similarly agreed for Hungary may also be subject to truly strict interpretation at the Commission and approval of a plan doesn’t mean that Hungary gets the money.

Second, when proposing measures under the Conditionality Regulation in September, Commissioner Hahn already announced in his press conference that, even if Hungary would formally put in place its 17 measures and even if they were deemed enough for now by both the Commission and the Council, Hungary would not be off the hook. He said a number of times that the Commission would continue to monitor spending of EU monies in Hungary and would not hesitate to restart the Conditionality Regulation procedure if the paper promises made no difference. In other words: once the fog of the Russian aggression in Ukraine has lifted, and Hungary’s political leverage on unanimity files in that area dissipates, both measures that counsel the Council to go easy on Hungary for now, the Conditionality Regulation may well be once again invoked against Hungary. In a second round, it could be invoked in a single procedure both with regard to the regular EU budget and also with regard to the Recovery Funds if they were already issued. So there may be a second, or even a third, chance to get this right if EU institutions cave in to Hungary this time.

Thirdly, and perhaps most significantly, it is crucial to realise that the two Regulations discussed here have simply come on top of other previously existing funding conditionality provisions. In particular, the so-called Common Provisions Regulation (CPR), which governs how Cohesion Funds must be spent once Member States have submitted detailed plans as to how they will spend them, contains a crucial article 9(1) which is worth quoting to feel the full force of its simplicity and obviousness:

Member States and the Commission shall ensure respect for fundamental rights and compliance with the Charter of Fundamental Rights of the European Union in the implementation of the Funds.

This is reportedly the basis under which billions of euros of regular EU funds are now also being blocked from being distributed to Poland, though the Commission has not made the legal basis for its alleged actions clear. The reasoning appears to be that non-compliance with the milestones for release of Recovery Funds also means non-compliance with Article 47 of the Charter (which also implicates judicial independence). The CPR therefore justifies non-approval of release of Cohesion Funds when there are rule of law violations, as it has for years.

The impact for Hungary is clear. If it agrees on strengthening judicial independence as part of its own milestones to get access to €7 billion from the Recovery Fund, it is also at the same time agreeing that any future release of all Cohesion Funds (worth many times that amount) will be subject to the same conditions down the road but via a different route, the CPR. And the catch with the CPR is that the Commission can act alone, within its discretion without needing a qualified majority in the Council to approve its decisions, as is necessary for using both the Conditionality and Recovery Regulations. In fact, going the CPR route may be Commission’s unstated strategy behind the salami-tactics-approach of slicing off different pieces of rule of law enforcement across different legal instruments. In the end, the Commission’s strategy may well give it additional leverage in the future.

The Limits to Wishing Away the Law

Figuring out exactly what conditions Hungary will have to meet to receive EU funds is indeed confusing to those who are not following closely. But make no mistake: all of the conditionalities point in the same direction. Eventually Member States will only be assured of a stable EU cashflow if they consistently comply with binding EU standards as laid down in Union law as interpreted by the Court of Justice. That is the how the rule of law should work in a Union governed by law. That message applies to the EU institutions. However, just as much as it applies to the Member States. EU institutions should now apply the law they have before them, which is why they should act now to withhold funds from rule-of-law violating Member States rather than postpone the day of reckoning when the rule of law will surely be in even worse shape than it is now.

SUGGESTED CITATION  Scheppele, Kim Lane; Morijn, John: Are Hungary’s EU Funds Being Cut (or Not)?: Funding Confusions, Separate Tracks and What May Lie Ahead, VerfBlog, 2022/11/14, https://verfassungsblog.de/are-hungarys-eu-funds-being-cut-or-not/, DOI: