Unprecedented EU decision prevents Hungary from losing more funds

July 25, 2018, 5:13 am  english version Hungarian version  
It is important to recognise that the European Commission has taken an unprecedented measure to limit financial losses for member states and without these Hungary would also lose much more than 24% beyond 2020 compared to the current fiscal cycle, the Director-General, of the European Commission’s Directorate General for Regional and Urban Policy told Portfolio in an exclusive interview. Marc Lemaitre reminded that Hungary received the largest funding from the EU as a share of its GDP in both this cycle and the one before that, so the restriction will be particularly favourable for it. The DG denied that the new budget proposal of the Commission is aimed at penalising Hungary due to its stance in the migration crisis. He acknowledged, however, that they uncovered so serious problems in Hungarian programmes co-financed by the EU that the transfer of EU funds has been frozen for now, and that Hungarian authorities have been sent several written warnings to clarify the disputes as soon as possible.

Portfolio: Some experts and politicians in Hungary suggest the Commission’s proposal for the 2021-2027 EU budget is punishment. A sort of retribution for Hungary’s attitude and strategy in the handling of the migration crisis and also because the country did fairly well over the last five to ten years in terms of per capita GDP growth. What do you think about such criticism? Is there any truth to these or the reason is quite different?

Marc Lemaitre: The Commission certainly rejects outright notions of the punishment. The Commission is there to make the best possible proposals for the EU and for all Member States and this is what has driven us. The circumstances for these proposals were extremely challenging. The first reason is the foreseen exit of the UK from the EU, which means that the EU will lose 15% of its GDP, so the EU will be significantly poorer than before. And therefore it’s a challenge to adjust the budget to this new reality and to ask for more contribution from all other Member States to the budget. It’s not so easy.

The second significant difficulty we faced was that there were obvious new needs on the horizon. And you mentioned our migration policy, and how well ore badly we are equipped for that. The Commission is working day and night for a consolidated common approach by all Member States on the difficult question on how to handle the migration pressure, how to handle the asylum applications in the future, and I think we have make recently significant progress on that.

We are not saying that one Member State is right and other Member State is wrong on migration, because it’s a difficult question and we are working towards a consensus.

In our proposals we believe that we have developed the dimensions which are anyway consensual. We are enforcing the control of the external borders in collective means. We are supporting Member States in their efforts to return illegal migrants, the ones whose asylum claims, for instance, have been refused. And we are also trying to make a difference about the root causes of the migratory pressures by deploying investments in the regions of origin of the migration flows, which comes from Africa and Asia as well. So this is why we have proposed to reinforce the EU Budged needs into these different areas. So certainly there cannot be a suggestion that the Commission would be pursuing some kind of punishment or revenge for Member States’ positions.

As regards the question of a possible punitive action by the Commission, there’s also the progress Hungary has made. How would you comment on that?

Before our official proposal we had to see to what extent we can ask for more money from the Member States following Brexit, and to cover the new needs, and to what extent we also needed to ask some budgetary efforts from some present spending areas. The Commission’s proposal is a bit of middle way between the two. That means that we wanted to demonstrate that some of the needs we would cover by some restraint, especially in the Common Agriculture Policy and in Cohesion Policy. And this meant very specifically for the Cohesion Policy, that we would cut. The Cohesion Policy budget would be cut off in real terms by 10%. If we look it in nominal terms, the cut is much less.

Normally, Cohesion envelops are determined on the basis of GDP per head and this continues in the future. And Hungary had made progress as compared to seven years ago in terms of GDP per head. Hungary came closer to the EU average. There are some Member States which were hit in a dramatic way by the economic crises. Greece is the most prominent example, but Spain and Italy have lost very significantly as compared to the EU average as well. So we had to account these quite different developments, while trying not to have too brutal evolution from the present budget to the next budget. This is why we have proposed a safety net meaning that no Member State could lose more than 24% money in real terms between one budgetary period and the next.

It is important to recognise that this is an unprecedented measure because in the past Member States between one budget period and the next could lose much more than 24%, and were losing much more.

For example, Greece in the present period lost more than 30% as compared to the previous period. So we believe that we made the best from a very difficult situation.

When it comes to Hungary, I think it’s also important to look at the track record in the past in Cohesion Policy. Hungary was both for 2007-2013 period and for 2014-2020 period the No. 1. in terms of support as the share of its GDP among all Member States , among poorer Member States as well.

In 2007-2013 based on the definition which back then included rural development Hungary received 4% of its GDP in support. In the present period Hungary will receive more than 2.6% of its GDP under Cohesion Policy and that is again the highest percentage of all member States. And compared to this highest percentage of all Member States we would determine this maximum of minus 24%.

So even in the coming period this would result Hungary would receive again more in terms of support than the normal new-rule we would propose.

For a country like Hungary - and this would apply to Poland - the normal support level would be 1.55%, and Hungary - according to our rules, thanks to this protective measure - will still benefit form a support of 1.7%, so around 10 percent more than Poland.

You mentioned the national envelop which is calculated according to the development level of the Member States. Normally, the less developed countries belonging to the 60-65% range of GDP per capita of the EU average, but as far as I know, only Latvia will fall into this category in the next EU budget. Hungary, like Poland, is only 1-2 percentage points higher of this range so my question is this: Did the Commission have any intention to exclude Hungary from this range so that it would not have to give the country such generous funding from the next budget or is it just mathematics and there was no such intention behind the move?

We have proposed to go back to the principle which existed in the 2007-2013 period which means the poorer you are the more you should receive, at least as the share of GDP. Of course, you might receive less in Euros per head. In the present period this principle didn’t exist. It was flat 2.35% for everyone, but Hungary and three Baltic States were exceptions for higher rates.

So we want to return to that logic of fairness and these five percent steps are in fact an inspiration for what existed already in the 2007-2013 period.

But obviously you have to look at your budgetary needs altogether. We have an overall 10% cut in the budget, and we wanted to ensure that the overall outcome for each and every Member States could be seen as fair.

Obviously, the notion of fairness depends on who is looking at the proposal but we see very objectively that our proposal is a very fair one overall. So we proposed these three categories for capping: one below 60%, one between 60% and 65% and one above 65% for all other Member States.

It is the first time in fact that a country like Latvia receives more than Hungary as a share of its GDP. Until now it always received less even though it was much poorer than Hungary.

So we see an element of justice in our proposal and certainly not an element of punishment or some way to treat one country or another in an incorrect way.

Do you see any chance that the Hungarian position could be a little bit better than what is in the Commission’s proposal? In other words, can the reduction to Cohesion Policy funds and Common Agricultural Policy funds be smaller than 24% in real terms?

Budgetary negotiations are just starting now and it’s extremely hard to predict the outcome of the very difficult negotiations. One determinant of the outcome for each and every Member State for Cohesion Policy and for Common Agricultural Policy will be obviously the overall level of the budget, and we know that many Member States don’t want to contribute that much. Consequently, there will be pressure to reduce the budget overall compared to the Commission’s proposals.

I think there will be an overall strong defence by Member States of the Common Agricultural Policy and of Cohesion Policy but ultimately we will have to see what the negotiations bring including the balance between Member States in different areas.

All I can say is that Hungary improved its position at least under Cohesion Policy as compared to the original Commission’s proposal. So it’s not something which hasn’t been seen in the past. But I certainly think that at this point it’s impossible to anticipate the dynamics and the ultimate outcome of the negotiations.

The Commission’s next budget proposal contains a new rule of law framework. It gives the EU executive the right to suspend funding for any Member State if problems with the rule of law are found there. Such decision can be overruled only by reversed qualified majority in the Council. Strictly speaking, if the Commission wants to enforce budget execution rules, it already has the means to suspend funds in the current programming period, as well. So, what would be actually new about this proposal? How do you think the new rule of law criterion could be affecting for Hungary, for instance?

The Commission is responsible for protecting the EU budget and for the sound financial management of the budget, but we came to the conclusion that there is an element that is missing from our toolbox. Many EU funds are managed by a shared management system, which means that the Member States’ national authorities do a lot of the individual decisions, e.g. what projects are selected and which receive funding, we need to ensure that if a potential beneficiary or a beneficiary feels that it’s rights have not been respected, than that beneficiary can benefit from a well-functioning national judiciary system where that party will be able to plea its case.

So we see this as a fundamental ingredient for a well-functioning system of ensuring the sound financial management of the EU budget.

And this is exactly what we are proposing that the Commission could suspend the Funds if the independence of the judiciary is put into question and not just by the Commission but also by international bodies, such as the Venice Commission, that analyse the situation.

So these would be the objective elements of this new framework that some Member States, Hungary among them, demands so strongly?

Yes, exactly. It would not just be the Commission’s view. The decision would be based on a number of converging elements that give rise to reasonable doubts that the independence of the judiciary system is not guaranteed. In such cases, the Commission would propose to suspend budgetary flows to certain Member States. As you’ve mentioned this would be subject to control by the Council, so the Member States themselves who could overrule the Commission if they are not convinced by the evidence provided.

This procedure should not be mixed up with the Treaty procedure which is under the Article 7 of the Treaty to protect the fundamental values of the EU.

This is a much broader Article and it is unrelated to the EU budget. This Article 7 procedure is ongoing in the case of Poland around issues of rule of law.

To my best knowledge, DG Regio and DG Employment have recently sent so-called warning letters to the Hungarian authorities. Why were these letters sent? What is the current situation and what can Hungary expect?

Cohesion Policy is largely managed by the Member States themselves through Managing Authorities which they set up, and Member States have control systems, and Audit Authority, etc. The Commission itself needs to make sure that all the rules are respected, so it also checks the Audit Authority. Sometimes it is the latter that finds weaknesses in the management system, while other times it is the Commission that discovers weaknesses which were not spotted by the national system overall.

Hungary’s case is not something extraordinary, it happens in other Member States too. We have, however, uncovered problems with several Operational Programmes in Hungary.

Some are related to public procurements, while others are related to the way the projects are selected outside public procurement. So in the normal way we address these issues.

We have now sent out so-called warning letters to the Hungarian authorities indicating to them the weaknesses we found and what should be done in order to remedy theses weaknesses. Today we agreed with the Hungarian authorities that we should intensify the analysis and the dialogue about these issues.

We started working on these today [Marc Lemaitre was in Budapest last week, the interview was conducted on 17 July] in order to resolve these questions as soon as possible, because it’s true that when we are faced with such a situation we cannot proceed with the reimbursements as we would normally do.

So it’s a common interest to try to resolve these issues as quickly as possible.

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