Why Hungary and Poland Block the EU Budget Deal

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Fellow for Central Europe at the German Marshall Fund of the United States

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The Hungarian and Polish governments are united in defending their autocratizing political models, whatever it takes politically. However, there is also a significant difference between Poland and Hungary. While Poland is largely free from large-scale, systemic corruption plaguing EU funds, the Hungarian regime’s political-economic model is based on state-led, centralized corruption structures and the deliberate misuse of EU funds.



Hungary and Poland blocking the EU’s historic EUR 1.8 trillion budget and coronavirus recovery deal, the European Union sank into a deep institutional crisis. At first glance, Warsaw and Budapest have identical reasons: both governments perceive the EU’s so-called rule of law conditionality regulation —that ties the disbursement of EU funds to the quality of rule of law —mas serious threat.

 

Poland and Hungary have been once the torchbearers of democratization in Central and Eastern Europe, but their governing parties—Poland’s Law and Justice (PiS) and Hungary’s Fidesz—have been pursuing the authoritarian transformation of the two countries for several years. While the rule of law conditionality regulation is not a per se existential threat for these autocratizing regimes, it could render their power strategies and modus operandi unsustainable.

 

For a simple reason, the Polish and Hungarian governments were not in the position to prevent the rule of law conditionality mechanism passed: according to the procedural rules of EU legislation, the regulation requires a qualified majority of votes in the EU Council. Hence Poland and Hungary blackmail the European Union where they have appropriate leverage: both the EU’s seven years budget, the so-called Multiannual Financial Framework (MFF), and the Own Resources Directive, the instrument required to the loans-based corona recovery package Next Generation EU, need the consent of the Member States.

 

By blocking the above financial instruments and the financial support desperately needed particularly by Southern EU Member States that suffered the most during the first wave of the corona pandemic, Poland and Hungary would like to extort concessions regarding the rule of law conditionality. They either want to scrap it entirely or watering it down and rendering it toothless.

 

Cutting in the Own Flesh

The Polish and Hungarian blockade is both surprising and self-explaining from the perspective that these two countries are one of the largest beneficiaries of EU cohesion transfers.

 

Poland is the largest net beneficiary of EU cohesion funds, while Hungary is close to being the primal beneficiary on a per capita basis. In the case of both countries, the share of EU financial transfers equals roughly 3 percent of the GDP.

 

Taking a look on the corona recovery facilities, it is difficult to argue that the Next Generation EU package has only secondary importance for Warsaw and Budapest.

 

Poland has been performing fairly well both in public health and economic sense during the first and second waves of the corona pandemic. The larger, the domestic consumption-oriented Polish economy is better shielded from corona induced market meltdowns like the small, export-oriented economies of the other Visegrad countries. However, under Next Generation EU Poland is entitled to a grant of EUR 23bn, excluding the sum of the available preferential loan, in the period of 2021-2023. That bulk of money amounts to one-third of Poland’s whole MFF allocation (EUR 75bn) for 2021-2027 and represents a sum that no country can allow leaving untouched.

 

Compared to Poland, Hungary’s economic situation is direr. The second wave of the pandemic hit the country especially hard, according to government officials the economy is expected to contract by 6 to 7 percent on an annual basis while the budget deficit is skyrocketing to 7 to 9 percent. However, while under such circumstances the Hungarian economy could make good use of the EUR 4.3 bn allocated to the country under the Next Generation EU package, the Hungarian government is playing with the idea of borrowing instead EUR 2.5 bn from undisclosed sources in order to increase its wiggle room in the recent conflict with the EU.

 

Apparently, both Poland and Hungary could benefit from fast access to the Next Generation EU. However, the two countries are deliberately delaying its launch. Poland and Hungary ultimately risk the potential exclusion from the corona recovery package, if other EU member states feel forced to establish the instrument without Warsaw and Budapest in order to circumvent their veto, either in intergovernmental format or as enhanced cooperation.

 

Same-same, but different

The Hungarian and Polish governments are united in defending their autocratizing political models, whatever it takes politically. They also stand united in the fear that the rule of law conditionality regulation may hamper their future access to EU funds which are essential to their political survival. That’s why Warsaw and Budapest are ready to lose fast access to Next Generation EU funds by their ongoing blockade.

 

Only a small core of Fidesz and PiS electorate supports the controversial illiberal identity and constitutional politics of the parties wholeheartedly, including the rejection of the rule of law conditionality proposal. A large chunk of Polish and Hungarian voters cast the ballot for the incumbents due to their social and economic policy performance.

 

In Hungary, the decade of Fidesz rule has been earmarked by solid economic growth and policies favoring the middle class, even if that went hand in hand with serious divestment from public services, primary health care, and education.

 

The economic demand induced by public projects financed through EU funds has been playing a pivotal role in maintaining that growth. In certain periods during the past decade, the share of EU funds among public investment in Hungary amounted to 50 percent. Losing access to this source of income could seriously undermine the output legitimacy of the two governments and threaten their electoral base.

 

Furthermore, uncertainty about the impact of the rule of law conditionality mechanism—how, when, and whether the countries can get access to the Just Transition Fund and what might be the scale of the financial sanction imposed due to systemic irregularities of the rule of law—may have a significant secondary effect. It may have an influence on investors’ decisions in sectors at the core of the EU’s digital and green transitions and highly dependent on public investments: digital and energy infrastructure, renewables, and green economy. The uncertainty can easily lead to losing policy momentum and thus to disadvantages for Poland and Hungary in the regional competition.

 

However, there is also a significant difference between Poland and Hungary. While Poland is largely free from large-scale, systemic corruption plaguing EU funds, the Hungarian regime’s political-economic model is based on state-led, centralized corruption structures and the deliberate misuse of EU funds. In brief, in Hungary EU funds related corruption is not a deviation, but the systemic logic of the game.

 

In its annual report on 2019 the European Anti-Fraud Agency OLAF concluded that in the period 2015-2019 it identified financial irregularities in the management of EU funds amounting to 3.97% of EU payments, a figure ten times higher than the EU average (0.36%) and seven times higher than in case of the second-ranking country, Slovakia (0.53%). Hungary is the only EU member state where the value of irregularities already detected by the national authorities remains below the value of irregularities indicated by OLAF. The 3.97% financial impact was identified through merely 43 investigations conducted by OLAF in Hungary, which suggests that real financial impact may far exceed the official figure.

 

The misappropriation of EU funds in Hungary does not merely serve the enrichment of well-known political cronies, like the son-in-law of Prime Minister Orbán, István Tiborcz, or his gasfitter turned billionaire friend, Lőrinc Mészáros, just to mention two key beneficiaries of EU financed public tenders in Hungary. Through the system of politically controlled public tenders and cronies EU taxpayers’ money is turned to political resources in Orbán’s hands.

 

The governing party’s dominant position over the Hungarian media landscape was in large part established through the acquisition of myriads of private media outlets by cronies close to Orbán. In 2018, when Hungarian government-friendly media—more than 470 outlets—became consolidated under the Central European Press and Media Foundation (KESMA/CEPMF), with few exceptions all cronies simply stepped down from their former properties without compensation, clearly demonstrating that they have only served as strawmen in a political project and have never been real owners of these media outlets.

 

Against that background, it is obvious that Hungary fails to fulfill the requirements listed in Article 3 of the rule of law conditionality regulation: the proper functioning of the authorities carrying out financial control, monitoring and audit of EU funds as well as the proper functioning of investigation and public prosecution services in relation to the investigation and prosecution of fraud. Having said that, Hungary is in serious breach of the rule of law principle with obvious consequences for the EU’s financial interests.

 

Concerning Poland, while due to the lack of judiciary independence the breach of the rule of law principle is rather evident, the impact of this breach on the EU’s financial interest is less obvious. For many in Europe, the main question is whether this difference might offer an opportunity to divide Hungary and Poland, isolate Hungary, force Orbán to withdraw, and end the EU’s institutional stalemate that way. However, the answer is rather no.

 

Hungary and Poland are bound by a strategic partnership built on the existential commitment to safeguarding each other from potential EU sanctions imposed under the famous Article 7 procedure. This partnership is so rock solid that the two countries conflicting Russia policies were not able to distort it, although the importance of that topic for Warsaw is well known. It is unrealistic to expect that this bound could be loosened in a situation posing existential threats for both governments.

 

No Need for real Arguments

As a recently published Kantar survey showed, 72% of Poles and Hungarian agreed or tended to agree with establishing a conditionality link between the compliance with EU values and the disbursement of EU funds. In the same survey 48% of Hungarians and 44% of Poles admitted that the corona pandemic already had a negative impact on their personal financial situation.

 

Having these figures in mind, it is no wonder that the Polish and Hungarian governments don’t shy away from any measures that may divert the domestic discussion from the key issues of the conflict. Manipulative fake narratives of Brussel imposing gay marriage on Poland through the rule of law conditionality proposal or punishing Hungary for its anti-migration stands are spread actively by both governments.

 

The arguments used by Warsaw and Budapest in the European context also appear to be rather fictional from a legal perspective. While Poland and Hungary complain about the undefined, broad scope of the rule of law conditionality mechanism and about the lack of legal remedy against the decisions, in reality alone the scope of the mechanism (Articles 2 and 3) is regulated on one and a half pages. According to the regulation, only those breaches of the rule of law principle can be sanctioned which “affect or seriously risk affecting the sound financial management of the EU budget or the protection of the financial interests of the Union in a sufficiently direct way.” Hence the hint on the mechanism’s potential extended application to areas like the rights of sexual minorities is simply contra factual. Furthermore, against all sanction measures imposed under the mechanism Member States have the right to file an action for annulment lawsuits at the Court of Justice of the European Union, thus the EU Treaties provide a solid legal remedy.

 

Last but not least, Warsaw and Budapest now complain over the politicized nature of the mechanism’s decision-making scheme: a qualified majority in the EU Council. However, during the previous one and half years Poland and Hungary have actively preferred and fought for political decision-making in the Council, while they vehemently opposed the technocratic approach manifested in the Commission’s original proposal that only granted a veto right for the Council over the Commission’s decision.

 

These controversial, weak legal arguments demonstrate perfectly the political reasons behind the Polish-Hungarian blockade and the fears fueled by the prospect of a not completely toothless rule of law conditionality mechanism in the hearts and minds of the EU’s democracy-defying leaders.

 

Daniel Hegedüs is a Fellow for Central Europe at the German Marshall Fund of the United States.

 

The version in Polish is published at OKO.press.



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Fellow for Central Europe at the German Marshall Fund of the United States


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November 25, 2020

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