Explainer: Europe cuts off funds for Hungary – what is at stake?

Victor Orban during the debate on the political situation in Hungary
Pietro Naj-Oleari/ European Parliament CC BY-NC-ND 2.0
Victor Orbán at the European Parliament in 2012.

What is the conditionality mechanism?

Adopted in 2020, the so-called rule of law conditionality mechanism allows the EU to suspend funding to a member state with serious deficiencies in the rule of law. 

The European Commission this autumn triggered the rule of law mechanism and proposed to freeze part of the EU funding to Hungary. This Monday, the member states adopted the decision, but gave Orbán a rebate.

What is at stake for Hungary and the EU after the Commission’s proposed funding cuts?

What is at stake for Hungary?

Regional funds 

The European Commission proposed to freeze 65%of the regional funds to Hungary for the years 2021-2027, which amounts to €7.5 billion. 

This sum amounts to around 20% of all EU funds foreseen for Hungary under the current seven year budget frame. 80% of EU funds to Hungary remained untouched.

The EU governments in their agreement on Monday lowered the funding suspension to 55% or €6.3 billion.

It is still a huge amount for Hungary, representing over 3% of the annual economic output of the country. (Hungary’s GDP was 182,8 billion euros in 2021.)

The Commission motivated the proposal with serious problems with corruption in Hungary, for example in public procurement, and the fact that the judiciary is not independent from political influence. Hungary has made some reforms, but they were not deemed enough for the Commission. 

Recovery fund

During the Covid pandemic, EU countries set up a joint recovery fund to support their ailing economies.

Hungary’s spending plan for €5.8 billion was finally approved by the European Commission in late November, as the last EU country. On Monday it got a go ahead by the EU governments.

But there are conditions: Budapest won’t receive any actual payments until it does more reforms to increase judicial independence and tackle corruption. These conditions are more or less the same as the ones on the regional funds.

What is at stake for the EU?

In the weeks before the decision to freeze the EU funds, Hungary had blocked a number of EU (and Nato) decisions that require unanimity among its member states. EU politicians and diplomats talked of political blackmail. 

Here’s what Hungary has unblocked:

Ukraine support package – 18 billion

On 6 December, the EU’s 27 finance ministers failed to adopt a support package for war-torn Ukraine, of €18 billion in cheap loans. The money to Ukraine is intended to keep the state afloat – pay out wages and pensions, and keep schools and hospitals running. The package was to be financed by joint EU loans, a decision which required unanimity. One member state said no: Hungary.

During the weekend, the EU governments instead took steps in adopting the support package outside the EU budget, circumventing the Hungarian veto.

On Monday, Hungary agreed to the Ukraine package.

International tax deal 

After many years of negotiations, last year, the world’s richest countries finally agreed on a common minimum corporate tax of 15%. The OECD deal seeks to stop a race to the bottom with ever lower corporate taxes and has been called historic. More than 130 countries have signed up to the plan. They account for 90% of the world’s GDP.

The EU was a party in the global negotiations. The done deal now has to be implemented in national laws. In the EU countries, this is done through a common EU law. But in adopting tax legislation, every EU member state has a veto. Hungary vetoed the decision, but finally agreed on Monday.

The global tax deal is of particular importance for France and Germany. But the whole EU’s reputation as a credible partner in global negotiations is also at stake.

Arms to Ukraine 

Since Russia’s invasion of Ukraine, the EU countries have sent weapons to Ukraine worth an estimated €7 billion to €8 billion. Around half of this will be reimbursed through a common EU fund, the European Peace Facility.

A decision to top up the fund with another €2 billion was briefly also held up by Hungary, as the only member state, but also agreed on Monday. 

And here is where Hungary still might block:

Sanctions against Russia

An oil tanker on the Northern Dvina River, Russia. | Credit: Flickr/CC BY-SA 2.0

Throughout the year, the EU countries have adopted several sanctions against Russia, in eight different packages. A ninth sanction package is currently under discussion among member states.

The Hungarian government has previously used its veto to stop some sanctions, including blocking sanctions against the leader of the Russian Orthodox Church Patriarch Kirill and threatening a veto for it to be exempt from an EU embargo on Russian oil.

The Hungarian government is currently conducting a national consultation on further EU sanctions against Russia.

Finland and Sweden’s Nato bid 

After the two Nordic countries applied for Nato membership this spring, all current Nato countries have ratified their applications except Turkey and Hungary. While Turkey has made its conditions for ratification clear, Hungary has not given any reason for the delay .

During autumn, Hungary’s ruling Fidesz party removed Nato ratification from the parliamentary agenda several times. The decision has now been postponed until next year.