A dispute between Hungary and the European Commission about some EU-funded projects may not be settled this year which could delay payments from the EU, a Commission source told Reuters on Wednesday.
The disbursement of EU funds is a sensitive matter and the EU executive never make a habit out of sending messages about it through the press. A Commission source commenting on the matter, though, points out how crucial the situation is.
A delay in reimbursements of billions of euros has already increased Hungary's cash-flow budget deficit and a row over payments could worsen relations with the EU that has threatened to impose sanctions on a country it accuses of flouting EU rules on democracy, civil rights and corruption, the news agency said.
Article 7 proceedings against Hungary were officially opened yesterday. The EU parliament backed the launch of Article 7 after Dutch MEP Judith Sargentini wrote in a report that Hungary had breached various EU values, citing migrant abuse, restrictions on press freedom, corruption and conflicts of interest as well as "stereotypical attitudes" towards women. The motion, often dubbed the "nuclear option", could see the EU impose sanctions on Hungary and restrict its voting rights.
Hungary’s Prime Minister Viktor Orbán, a self-proclaimed defender of Christian values from unwanted migrants, dismissed what he described as "absurdities" in the report and had his cabinet contest the EP green-light in court.
The Commission source said that the Hungarian state was making "considerable advance payments" before recipients have issued bills for the projects.
As far as we know the Hungarian side did not present yet the bills (to the EU) to be reimbursed, and there is an ongoing discussion on irregularities. It may not be settled this year.
There are also questions over whether certain projects will be fully eligible for EU funding, the source added.
Hungary is one of the biggest recipients of EU development funds, which have helped boost investments and its economy.
The Finance Ministry and the government spokesman did not reply to emailed Reuters questions.
According Finance Ministry data, in the first eight months the cash-flow deficit widened to 1.646 trillion forints, exceeding the full-year target of 1.361 trillion in the 2018 budget.
By the end of August budget spending related to EU projects totalled HUF 1.388 trillion, while reimbursements were only HUF 183 billion, the Finance Ministry said in a statement earlier this month. 07/09/2018 12:09pm
Hungary records all-time high budget gap for January-August
While spending linked to EU-funded projects boosts the cash-flow deficit and needs to be financed from debt issuance, it does not affect the deficit calculated based on EU standards.
Hungary targets a budget deficit of 2.4% of GDP, below the EU's ceiling of 3%.
The Government Debt Management Agency (ÁKK) told Reuters in June that in the first five months it had already met its net financing issuance target for the full year.
It added that in the second half it would need to cover remaining debt expiries and any additional pre-financing of EU projects that boost the net financing need for 2018.
The cabinet will need to finance the cash flow deficit running to or over HUF 2 trillion, which means government security issuances. This could further tighten the fixed-income market and lead to a higher-than-expected public debt, and consequently a higher debt-to-GDP ratio than atd the end of 2017.
Given that a lot of reimbursements are expected to be made next year, the 2019 cash flow balance could possibly show a massive surplus, which means debt instruments may not have to be issued. Moreover, these could be "extracted" from the market, as a result of which public debt could correct back to its original trajectory after a jump this year.
As regards the EU funds that will be lost for good, these will persistently push the ESA gap, public debt and the debt-to-GDP ratio higher. Given that the source has not made any indication about the volume of the affected projects, it is impossible to have estimates in this respect. Front page photo by MTI / Press Office of the Prime Minister Balázs Szecsődi