Mind the gaps: The pending suspension of Hungary’s EU funds

The European Commission has proposed a €7.5 billion suspension of funding for Hungary. The proposal follows the commission’s decision to launch the European Union’s new rule of law conditionality mechanism against the country due to its alleged misuse of EU funds. The Hungarian government responded by at long last agreeing to a 17-step package of anti-corruption reforms. The prime minister, Viktor Orban, and his ruling Fidesz party now have until mid-November to convince the EU that the mismanagement of its funds is a thing of the past.

Corruption and – more broadly – the systematic demolition of democracy in Hungary have long marred the country’s relations with the EU. Following years of scrutiny and calls for reform, MEP Gwendoline Delbos-Corfield reported in September on the state of Hungarian democracy, noting that the country had deteriorated into an “electoral autocracy”. That is, Hungary is now a hybrid regime with a facade of democracy that disguises authoritarian tendencies in governance. It is, therefore, significant that the EU has managed to extract an agreement from Fidesz. Yet, the devil is in the detail.

The government’s proposed measures predominantly address the use of EU funds. They include an array of reforms and initiatives – perhaps most importantly the requirement for Hungary to set up an Integrity Authority and an anti-corruption working group. Although these would be significant steps, they fall short of addressing serious structural challenges. Crucially, they leave untouched the EU’s concerns about the independence of Hungary’s judiciary and state prosecutor – as these fall outside the scope of the rule of law mechanism. Reforms in these institutions, however, will be crucial if the EU is to effectively take action on corruption in the country. Moreover, through nepotistic practices, Fidesz has established an economic hinterland that it uses to funnel EU funds into the pockets of its cronies. It is highly unlikely that the 17-step package will help to correct this seriously distorted market competition. In short, the conditionality mechanism’s focus on EU funding means it cannot safeguard against democratic backsliding.

So, if Fidesz implements the new package, the results will equate to – at best – a difference in degree. Indeed, it would be unwise to assume that the Hungarian government will even go that far. Orban has been systematically undermining the rule of law for over a decade. And his government is accustomed to ruling by decree, including by overriding existing legislation under the pretext of various ‘emergencies’ over the past two years. The mere adoption of new rules and institutions guarantees nothing. And that Fidesz only agreed to the measures under threat of financial sanction does little to inspire confidence.

To ensure accountability, the European Commission should not merely tick off the adoption of each requirement. It also needs to monitor how the new legal frameworks and institutions function in practice. This is especially important given that the commission advised the Council of the EU not to make its decision on the suspension of the funds until 19 November, the deadline for Hungary to set up its Integrity Authority. At that point, however, the council will not have had time to assess how the authority operates and whether it is having the desired impact. It will therefore be fundamental to keep a close eye on its operation beyond November.

Monitoring, however, is useless without sanctions for non-compliance. It is positive that the commission can reopen the rule of law mechanism if necessary. But it would be even better to maintain steady pressure on the Hungarian government over a longer period. The council should suspend the funds and only lift that suspension – potentially even in a gradual manner – if Fidesz’s implementation of the reforms lives up to the commission’s expectations.

Furthermore, the Hungarian government is still in talks to access €5.8 billion in covid-19 recovery and resilience funds earmarked for the country. These have also been held back because of rule of law concerns, including corruption and the independence of the judiciary. Unless there is an agreement by the end of the year, Hungary will lose 70 per cent of these funds. And this would be a failure Fidesz literally cannot afford.

Hungary is facing serious financial difficulties caused by the aftermath of the pandemic, increasing fuel prices, and the government’s very own spending spree ahead of the election earlier this year. The Hungarian forint has sunk to new lows against the euro and the dollar. And, according to the Hungarian Central Bank, inflation stands at around 20 per cent (and rising). The government’s decisions, for example, to introduce extraordinary taxes and reverse its flagship policy of capping household utility prices reflect the severity of the situation.

In light of this, the European Commission has some strong cards up its sleeve to request reforms that go beyond the scope of those already agreed under the rule of law mechanism. Indeed, the commission should also take advantage of the time pressures on Hungary and now insist on judicial reforms as a condition to release the pandemic recovery funds. Tying the recovery fund to the sustained implementation of measures agreed under the conditionality mechanism could help ensure greater compliance.

The European Commission has more leverage than ever before to demand compliance with certain democratic principles in Hungary. The effects of this leverage are already showing in the Hungarian government’s seemingly cooperative steps – but there is absolutely no reason to take these steps at face value. The commission should hold onto this leverage and ensure it lasts. It should not trust, but verify.

Zsuzsanna Végh is an associate researcher at the European Council on Foreign Relations.