11 July 2022

Will the Commission Throw the Rule of Law Away in Hungary? 

The Hungarian government is publicly saying that it is nearing a deal with the European Commission to unlock the Recovery Funds that have been withheld because the Commission has not yet approved Hungary’s plan for spending those funds. Apparently, Hungary has agreed to four conditions that will allow the €7bn worth of grants and about €8bn in low-interest loans to be approved. But if those are any indication of the price that the European Commission will extract for comprehensive violation of the rule of law, the European Commission is making a colossal mistake. With each of the four conditions now publicly announced, the Commission would be walking into a Hungarian trap, trading European funds for precisely no progress on the rule of law.

According to the head of Prime Minister Viktor Orbán’s office, the Commission would now be satisfied if just four conditions were met.

Single-Bid Contracts

The first condition is that the Hungarian government agree to reduce the number of single-bid contracts involving EU funds. Single-bid contracts are, of course, one indicator of fraud – but this is an indicator that can be easily gamed. In fact, the Hungarian government has been gaming the numbers already.  Several Hungarian friends have explained to me how it happens. The government simply asks their favored contractors to prepare multiple bids to submit under different names. Or they get their loyalists to submit incompetent bids that could never possibly win. Almost everyone in Hungary knows people who have signed a fake bid that was submitted just in order to keep up appearances that there is a real competition going on in the spending of public funds. The practice is already widespread and there is absolutely no official control of it. 

As the Corruption Research Center Budapest shows in a March 2022 report, the number of single-bid contracts involving EU funds has already been steadily decreasing since 2015 which was when news broke in the Elios case involving 35 single-bid contracts worth €43.7 million that were won by the prime minister’s son-in-law. Single-bid contracts in 2015 accounted for about 30% of all contracts involving EU funds then, but the number decreased to about 17% in 2021. This doesn’t mean that Hungary has become less corrupt, however. At the same time as the number of single-bid contracts involving EU funds went down, the number of single-bid contracts involving funds of the Hungarian government increased by about one-third. If the EU insists that the number of single-bid contracts be reduced, the Hungarian government can do it by inventing fake additional bids and/or moving the corrupt contracts into the national budget without restoring the rule of law.

More crucially, the reason why EU funds are going into cronies’ pockets has little to do with the number of single-bid contracts. Instead, the procurement process is rigged; the public prosecutor is broadly unaccountable; the audit office is under the thumb of the finance ministry which is one of the largest managing authorities. Even if all single-bid contracts were eliminated, this would do nothing about the way corruption works in Hungary. Because the key institutions through which EU funds flow have been captured by loyalists, it will be easy for the Hungarian government to multiply empty bids that show up in the statistics to make the numbers look good while doing nothing about the autocratic capture of institutions through which EU funds are distributed. If the Commission thinks it can reduce corruption through decreasing the number of single-bid contracts, it is badly misinformed. 

A Proper Legislative Process

Since the Orbán government came to power in 2010, many international observers have commented on the way that the legislative process is often rushed and fails to include any consultation with the opposition parties, the ministries that will have to enforce the law, or the people who are affected. Bills are often passed into law so quickly that even parliamentarians who vote for them often have no clue what is in them. The Commission is apparently now demanding that the legislative process be slowed down and made more consultative. And the Hungarian government is ready to agree to this.

But of course, this too will change nothing. Since March 2020 and until a few weeks ago, Hungary was been in a state of “medical emergency” (and it was already and still is in the state of emergency declared in 2015 for the migration crisis). Orbán’s Covid emergency was originally declared along with the worldwide lockdown and allowed him to govern comprehensively by decree, up to and including overriding any statute at his whim. When he was criticized by the European Commission for leaving the Covid emergency in place for months after every other country had gone back to normal law, Orbán’s minions drafted an immense and technically complicated law that created a new state of Covid emergency that gave Orbán all the same powers – though in a legal form harder to understand so it has taken the world awhile to see that this new medical emergency completely guts constitutional government. This law was pretty clearly unconstitutional under the detailed sections on emergencies in the constitution (though the packed Hungarian Constitutional Court would never say so), so the law was followed by a constitutional amendment that made this emergency retrospectively legal. Many of the decrees issued over the last two and a half years had nothing whatsoever to do with the emergency.  

After more than two years of emergency governance, Hungary came under another round of international criticism for refusing to return to normal lawmaking. So again, the emergency was changed. Yet another constitutional amendment after the April 2022 election created an even newer form of state of emergency, this time to be declared in the event of a war in a neighboring country. And in late May, Orbán declared this new emergency due to the Ukrainian conflict and at the same time discontinued the Covid emergency. Observers could be forgiven for pointing out that changing the basis of the emergency made no difference; Orbán simply transferred many of the Covid decrees over so that they were still in effect under the new Ukrainian emergency. The new emergency gives him the same powers as the old emergency – the power to override any statute by decree or, for that matter, the power to do nearly anything by decree. Since March 2020, then, Hungary has been a country governed by decrees that depend on the whims of the prime minister and that involve no consultation – or for that matter legislation – at all. 

No wonder the Hungarian government can now agree to slow down legislation. For more than two years now, legislation has barely mattered because Orbán has been ruling by decree. Whether legislation takes a bit longer to pass will change little. In fact, this condition may make Orbán even more likely to govern by decree. So this demand of the Commission not only won’t fix the rule of law problems; instead, it might just make the rule of law problems in Hungary even worse. 

Appealing to a Court the Public Prosecutor’s Refusal to Prosecute

For more than a decade now, international critics have complained about the Hungarian public prosecutor’s office. It is too highly centralized and hierarchical, said the Venice Commission, an assessment repeated by GRECO (the Group of States against Corruption of the Council of Europe). Hungary has failed to follow many of GRECO’s recommendations for making the public prosecutor more effective at prosecuting corruption. OLAF files recommending prosecution have been ignored by Hungary. And it’s not that there is no corruption to prosecute: Hungary had the highest rate of financial “corrections” to its budget allocations under the last two Multi-Annual Financial Frameworks. It’s quite clear to all who know the Hungarian situation that the public prosecutor is simply not effective at rooting out corruption in government circles.

The Commission is apparently now suggesting that decisions by the public prosecutor to not prosecute be reviewable by a court so there is some check on the prosecutor’s power. That sounds fine in some ideal world, which is not the world we find in Hungary today. 

Since 2010, the Hungarian government has been steadily bringing the judiciary under its control. The way that the courts have been brought to heel is not as blunt and indiscriminate as in Poland, but it may be more effective. While there are still independent judges throughout the legal system in Hungary, they simply do not get the cases of special interest to the government. Instead, the government has put many government-friendly judges on the bench through the centralized system for appointing judges (headed by a political appointee) and has more crucially captured the court presidencies, in a system where court presidents assign specific cases to specific judges. As a result, the government has built safe pathways through the judiciary so that many cases are handled as they should be by independent judges, but any case of interest to the government can be tracked to a friendly judge who will guarantee the government gets its way. All cases go to the court presidents put in place under a centralized and politically controlled system for selecting judges, and those presidents ensure that only loyal judges get those cases to decide. 

Until January 2021, this system had a flaw. The Supreme Court was not fully under the government’s control, despite many tries. But a law passed in late 2019 changed the qualifications for the Supreme Court president and the government was able to drop its preferred candidate (who had spent his career mostly in the public prosecutor’s office with a stopover at the packed Constitutional Court along the way) into that job on 1 January 2021. At the same time, the 2019 law, supplemented by more changes in a 2020 law, gave the new president even more power to decide which judges would hear each case without the new Supreme Court president being bound by clear criteria either about the composition of judicial panels or about the assignment of cases to these panels. As a result, the judiciary in Hungary is now set up to ensure that any case that the government cares about can be channeled to judges who will reach the government’s preferred outcome.

If the decisions of the public prosecutor to not prosecute in a particular corruption case can now be appealed to a court, then these courts are ready to do the government’s bidding. No wonder that the government of Hungary has apparently eagerly agreed to this condition too. 

Energy Transition

The Hungarian government refused to budge on sanctions against Russian oil, so the European Commission worked around it by giving Hungary an exception. Now Hungary is refusing to even discuss sanctions on Russian gas, since Russia supplies 85% of the gas consumed in Hungary. The Commission is apparently now pressuring Hungary to move away from Russian fossil fuels more quickly by conditioning the use of the loans made under the Recovery Fund money for Hungary’s energy transition. Once again Hungary has agreed.

But here, too, does the Commission understand the implications of channeling money into Hungary’s energy sector? Since the Ukrainian war started, Hungary has speeded up expansion of the Paks nuclear power plant, a nuclear power plant that currently has four aging reactors but that will eventually have four refurbished and two new reactors. The catch, however, is that the whole project is being carried out by Russia – including the financing, the construction and the supply of nuclear fuel for the plant’s lifetime. The Commission can’t claim ignorance, having conducted a lengthy investigation into the possible violation of state aid rules for the project before it gave the project a green light in 2017. If the point of the energy transition support is to allow Hungary to join sanctions against Russia to further isolate it, then the focus on oil and gas alone isn’t going to accomplish that purpose. Instead, Hungary will not only continue to be dependent on Russia, but may it become even more so under an agreement in which Russia will control the supply of nuclear fuel as long as the Paks plant operates. 

In addition, I wonder if the Commission has taken on board what it will mean to put huge sums of EU money into Hungary’s energy sector, given that Viktor Orbán just put the whole energy sector under government supervision by emergency decree on 29 June. Sweeping broadly across the power sector to include oil, gas and mining, the decree also covers local heating firms as well as the industry associations in the energy sector. If the Commission relents and starts giving money to Hungary, it will go straight into a sector in which the government has already asserted control over virtually everything from producers through suppliers out to local utilities and the peak organizations that link them. Once the government has such an intrusive presence in this sector, it’s hard to imagine that this would not extend to determining which contractors snap up the contracts that are funded by the EU. In fact, I would even say that Orbán’s sudden grab for the energy sector just as the negotiations over the Recovery Plan were reaching this conclusion and just as it became clear how much EU money would be channeled to the energy sector probably shows that he is trying to position himself – as always – just where the money will go. This does not bode well for the sound financial management that EU funds requires. 

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I earnestly hope that these four conditions are not the ones – and especially not the only ones – that the Commission has settled on before it will release the Recovery Funds to Hungary. There is a reason why Hungary would agree to each one of conditions that have now been made public, and that is because the Commission’s conditions will either be completely ineffective or will be positively harmful to the rule of law. More crucially, if this is the direction that the Commission is going in before it releases all funds to Hungary, then it will have given up its best leverage for restoring the rule of law. 

It is also surprising that the Commission is bargaining over the shape of Hungary’s Recovery Fund plan when the Commission in late April invoked the Conditionality Regulation that would affect the distribution to Hungary of all budgeted funds – including the Recovery Fund and large funding streams like the cohesion and agricultural funds. So it’s worth recalling where we are in that process. In 2018, the Commission first proposed the Conditionality Regulation that would allow funds to be cut to Member States whose rule of law problems interfere with the proper spending of EU funds. The Hungarian and Polish governments, seeing themselves in the crosshairs of this Regulation, tried to block the adoption of the new European budget at the end of 2020 in order to leverage last-minute changes in the Conditionality Regulation that would make it impossible to use. The compromise, brokered in December 2020 by Angela Merkel under the Rotating Presidency at a cliffhanger European Council meeting, delayed enforcement of the Regulation until after the Court of Justice could opine on the Regulation’s legality (which meant in practice not enforcing it until after the 2022 Hungarian election). In February 2022, the Court of Justice issued two judgments, one with regard to Hungary’s arguments and the other with regard to Poland’s, upholding the Regulation in all its particulars and making a strong statement about the centrality of the rule of law to the functioning of the European Union. The European Commission then triggered the Regulation against Hungary after the Hungarian election at the end of April 2022, and the Hungarian government replied to the Commission’s case against it at the last possible moment at the end of June. Now the Commission has one month to respond to the Hungarian government’s submissions and decide what is to be done. So the race is on to determine whether Hungary can reform enough to allow European funds to flow. It appears from the public pronouncements on the four conditions discussed above that the Commission has been negotiating about the Recovery Plan in parallel with negotiations over the Conditionality Regulation.  

The Conditionality Regulation, as John Morijn, Dan Kelemen and I wrote in a report last year, was designed precisely to cover cases like Hungary in which sound financial management has been undermined across the board. To have come all this way only see the Commission throw away the opportunity to make a difference to ensuring that Europe really does honor its values would be more than discouraging. It would lend credence to the accusation that the Commission really does not care about the rule of law. 

My coauthors John Morijn, Dan Kelemen and I published a report on 5 July about what the Commission should do under the present circumstances. Examining the legal standards and Hungary’s long record of misspending EU funds, we argued that nothing short of a 100% cut in funds would realize the letter and spirit of the law. The Hungarian legal system is chaotic, with the law changing at the governing party’s whim and often by decree with no warning. The core institutions in Hungary – the procurement system, the public prosecutor’s office, the judiciary and the state audit office – are all now under the control of the governing party and have a stake in keeping corruption in place. The proper spending of EU funds relies on all of these institutions, so all of EU funds flow through them like water passing through lead pipes that make toxic everything that transits them. Our report was issued with the backing of the Greens, Renew, the Socialists and the European People’s Party in the European Parliament, parties that together account for nearly 70% of the seats. A short version of our report is here.

Given our analysis, the Commission should insist on replacing the lead pipes