01 December 2022

The Good, the Bad and the Ugly

The Commission Proposes Freezing Funds to Hungary

On November 30, the European Commission finally called on national leaders to use the EU’s enormous budgetary leverage to stand up to the Orbán regime in Hungary and protect EU funds against the regime’s systemic corruption. First, the Commission assessed that the Hungarian government had not fulfilled its promise to implement 17 anti-corruption measures, so it decided to recommend to the Council the suspension of €7.5 billion of Hungary’s Cohesion Funds. Second, and more confusingly, the Commission greenlit Hungary’s Recovery Plan, but also proposed to the Council to put a freeze on an additional €5.8 billion from Hungary’s 2022 allocation under the Recovery Fund, also due to corruption and rule of law concerns. None of this came as a surprise in Budapest, as the Commission had signaled its moves already. Now the ECOFIN Council will put both items on its agenda for final approval in December, likely on 6 December, but perhaps a little later.

The Commission’s actions today constitute both good news and bad news. They are also confusing and muddled. And the response from Budapest is ugly.

The Good

The good news is that the Commission is finally using the conditionality language built into both the general Conditionality Regulation that applies to all EU funds and the conditionality terms built separately into the Regulation on the Recovery and Resistance Facility. These tools give the Commission, working with the Council, the power to safeguard EU funds and protect them from governments that have rejected the basic values of the EU Treaties. The wording of the conditionality language in both regulations is nearly identical, and the instruments refer to each other – which is not surprising as they were going through the legislative process at the same time. The conditions attached to the freezes of the two different sources of EU money, as a result, overlap. But they are less similar than the language of the two regulations.

The Commission is attaching the same 17 conditions both to three targeted Cohesion Fund programs and to the disbursement of money from Recovery Fund, conditions that require Hungary to establish a strong anti-corruption program. But to get the cash under the Recovery Fund, Hungary must now also meet 10 additional conditions, including a set relating to judicial independence. Together these 27 (!) conditions constitute what the Commission is now calling “super milestones” (see Proposal for a Council Implementing Decision – para 56, and footnote 7; and Annex to the proposal – pages 161-166), meaning that all of them need to be fulfilled as part of the requirements to get even the first instalment of recovery cash. Put differently, rule-of-law related requirements are all front-loaded, and no recovery cash at all is supposed to flow before and until the Commission assesses that they have been implemented.

The confusing backstage negotiations over all of this resulted in two differing sets of conditions for funds to flow to Hungary under two similar regulations – as detailed in a piece two of us wrote here. Eventually, the Commission seems to have gotten to the right place but in an awkward way.

The Bad

In cheering the Commission’s decision, it is easy to miss the big picture, which is much less rosy than today’s plaudits suggest. The Commission’s announcements have led many to believe that it is proposing the suspension of two-thirds of Hungary’s EU funding under the MFF. This is wrong. It proposed the suspension of two-thirds of the funding of three specific cohesion programs for Hungary. But as a percent of Hungary’s overall allocation under the MFF (a.k.a. the general EU budget), the proposed suspensions amount to only around 20%. To be sure, that is not a negligible sum, but is a rather modest price to pay for constructing the EU’s first autocratic member government. Even if the Council endorses the Commission’s proposed suspensions, Orbán’s kleptocratic autocracy will still be heavily subsidized by the EU.

In assessing whether EU funds might be corruptly spent in Hungary under the Conditionality Regulation, Commissioner Hahn – who supervised that file – did not appear to look at the massive corruption in the distribution of Hungary’s agricultural funds, nor did his team appear to look beyond the three Cohesion Programs spotlighted for cuts even though all EU funds are at heightened risk of corruption. In the last two budget cycles, Hungary had the highest rates of “financial corrections” (that is, claw-backs of misspent money) of any Member State in the EU, and that is after the Commission acknowledged that many projects challenged for financial irregularities were often just removed from the EU’s purview because the Hungarian government suddenly announced it would pay for the projects out of their national budget so that those projects would not appear in the EU’s statistics. The Conditionality Regulation is supposed to apply to all funds, but the Commission evidently is not taking the scope of the regulation seriously.

While the proposed suspensions are significant and the Hungarian government will feel them, they are not far-reaching enough to properly protect the EU budget. If Hungary’s government cannot be trusted to spend EU funds properly because the whole system is corrupt, then why should it still be given the vast majority of its allocated MFF funds to misspend?     As always, the Commission does too little, too late. Cutting 75% – or better yet 100% – of the funds is what Hungary’s track record warranted.

In addition, we must keep in mind that because the proposed measures are “freezes” of funds and not cuts, the Orbán government could eventually receive all the money. The key question will be how strict the Commission and Council are about implementation of the “milestones” they are insisting that Orbán must meet to unfreeze the funds. Perhaps the Commission believes that it gains maximal leverage on Hungarian reforms by promising to dole out money in exchange for improvements, instead of just taking the money away for good. The latter would have been easy; the Commission could have deprived Hungary of €5.8 billion permanently under the Recovery Funds simply by not proposing that the Council approve Hungary’s Recovery Plan by the end of 2022. But instead, by approving this plan with “milestones” that Hungary must meet to receive cash, the Commission anticipates that satisfying them would be enough to trust Hungary with EU money. This is true even though none of these conditions would by themselves address the fact that Hungary is not a democracy any longer (as the European Parliament recently declared).

If the Council approves the Commission’s recommendations, then, Hungary will have two checklists to address. The problem is that checklists don’t work because they are easily gamed. We have already seen the first round of gaming as Hungary has already tried to pass off cynical and ineffective “reforms” as serious responses to the Commission’s first checklist of anti-corruption measures. The Commission needs to be on its guard for a second round.

The announcement today with the two different checklists also leads us to anticipate some legal complications down the road.  Will the Commission really release these docked Cohesion Funds and all other MFF funding into a system with a compromised judiciary because the judicial independence conditions attach only to a different funding stream, i.e. recovery monies?  If Hungary is determined to appear to satisfy the anti-corruption milestones but does little to improve judicial independence, that would seem to be the legalistic outcome.    At that stage, the Commission could do what it is (apparently) doing now with Poland, which is to withhold MFF funds on the grounds that the Recovery Fund conditions are not met. Though it hasn’t announced the legal basis it is using to withhold Poland’s MFF funds, we suspect that the Commission is finally using the Common Provisions Regulation provision (now article 9(1)) that two of us have been saying for years they could have always used to create conditionalities even before the Conditionality Regulation passed.

In short, the Commission could have put economic pressure on rogue states in the EU much earlier. Ultimately, the Commission may fall back on powers it always had but didn’t use when it might have prevented the consolidation of autocracy in the first place. And why did we have to wait this long for the Conditionality Regulation to finally work only to have it cover a small part of the money with only some of the necessary conditions to restore the rule of law in Hungary?

The Ugly

The Hungarian government is declaring victory because it portrays today’s announced “cuts” not as a loss but as a postponement. Indeed, it has already announced that it anticipates receiving the funds in 2023. To its domestic audience, the Hungarian government has been treating the Commission’s decision as if the funding cuts are about as serious as failing to get the proper stamps on official forms to solve some trivial bureaucratic problem rather than as a judgment that the Hungarian government is too corrupt to receive and properly spend EU money.

The Commission needs to get its message out to Hungarians loud and clear that it is trying to fight corruption in Hungary so that EU money can be used to benefit the Hungarian people and not just Orbán’s circle of cronies. Hungarians would definitely appreciate that if they knew it. But the Commission’s press release today has been drowned out by Orbán’s use of state funds to flood the zone with his message that the Commission doesn’t care about the Hungarian people and is responsible for all of the economic pain they feel.

Anticipating that these cuts would come, the Hungarian government is now acting to protect its inner circle by dumping the pain on the general population. Amid the flurry of inadequate anti-corruption laws passing through the Hungarian Parliament in these last weeks was a huge bill that will allow the government to abandon nearly all social support for Hungarians. Under the new law, responsibility for the well-being of individuals will now legally fall first on themselves, then on their families, and only last upon the state with the assistance of churches which will be pressed into service to make up for the anticipated shortfalls of public funding. In short, the government plans to get out of the social benefits business except in desperate cases in order to leave room in the budget for its ongoing corruption.

When those social spending cuts hit, you can already see that the Orbán government will try to place the blame on Brussels and its funding cuts. Never mind that the funds to be cut by the Commission could never have been spent on social programs of the sort that Orbán is destroying. Never mind that the Hungarian budget this year has mandated austerity for everything except defense, policing and intelligence, spending for which have increased more than 50% in this year’s budget compared with last year’s. Orbán will keep his corrupt machinery running by shifting funds from social welfare programs into oligarch enrichment, and the Hungarian people will be the losers. Orbán will blame these austerity measures on Brussels as Hungarians brace for the coming cuts to public pensions, unemployment insurance and what’s left of the social safety net.

The Commission therefore needs to get out ahead of this with a firm message that it is fighting corruption and attempting to restore judicial independence in Hungary. It needs more than a press release to explain why these cuts today are being meted out. And then the Commission needs to hold out for real improvement so that the Hungarian people can see that the Commission really did have its interests at heart.

Will Orbán survive this day of reckoning from Brussels? Cutting social programs and boosting programs to benefit autocrats through a greatly augmented defense and intelligence sector doesn’t sound like a recipe for democratic success. But Orbán is very adept at hanging onto power and of course he’s not a democrat. Cuts of the size that the Commission proposed today will be inconvenient for him but not fatal, especially not if he pretends to comply with the conditions and the Commission decides that appearances are enough so that the money is only postponed and not axed altogether. Orbán is clearly pivoting to keep his oligarchs onside while deflecting punishing cuts onto the Hungarian people, who will not have a chance to kick him out of office for four more years since the next general election is scheduled only in 2026.  And that’s a lifetime in politics.

Appeasement does not work

Given what is playing out now, we can see the costs of the dirty deal German Chancellor Angela Merkel brokered with the regimes in Budapest and Warsaw back in 2020 over the MFF and the Conditionality Regulation. The deal compromised the Conditionality Regulation by requiring the Council to approve Commission recommendations by a positive QMV vote (instead of keeping the lower hurdle in the draft proposal which required a QMV vote to reject the Commission’s recommendations).

In addition, the Council conclusions from that December 2020 meeting effectively instructed the Commission to wait in bringing any enforcement action until after the ECJ ruled on the legality of the Conditionality Regulation. Of course, we can now see that what Orbán got in that deal was the postponement of actual cuts until after Hungarian election in April 2022. Now Orbán has a four-year window in which he does not have to face voters again, which gives him time to handle the inconvenience of postponed funds. And somewhere in that four years, Orbán may get a windfall of EU money if the Commission (the current one, or the next) decides that its measly conditions are met.

In short, while we welcome the fact that the Commission is finally doing something, the cuts are simply not big enough to inflict a serious blow on the Orbán government, which could only be deeply challenged if he could no longer subsidize his oligarchs with EU funds and they withdrew their support from him.  The conditions set by the Commission also don’t ask enough to really uproot autocracy in Hungary and we worry, based on our observations of the Commission over the years, that they will settle for the mere appearance of compliance and hand him all the frozen funds in 2023.

If the conditions are meaningfully enforced, however, they can make conditions in Hungary slightly better. But what the Commission is asking for is not enough to restore democracy – or the rule of law – in Hungary.

The Commission’s decisions of 30 November are just one step in the long saga to get the EU to stop funding autocrats.   It is something to celebrate, briefly, before continuing the campaign to bring democracy and the rule of law back to Hungary.


SUGGESTED CITATION  Scheppele, Kim Lane, Kelemen, R. Daniel; Morijn, John: The Good, the Bad and the Ugly: The Commission Proposes Freezing Funds to Hungary, VerfBlog, 2022/12/01, https://verfassungsblog.de/the-good-the-bad-and-the-ugly-2/, DOI: 10.17176/20221