What EU sanctions await Hungary in the next EDP stage?

By the EC’s Wednesday decision Hungary has gotten closer to being sanctioned by Brussels via the freezing of EU funds. Such stringent disciplinary action has never been taken against any member state so far. The government has until the spring to convince the Commission that it can achieve a sustainable reduction in the budget deficit and so avoid a response ‘Access Denied’ when applying for EU funds.The key objective is not to get out of the EDP anymore but to keep EU funds flowing into the country, i.e. not to let the EDP reach the next stage.

The EC noted that the budget balance in Hungary is "heavily influenced by one-off revenues that do not result in a sustainable deficit correction."

Although in 2011, Hungary formally respected the 3% of GDP reference value, this is only thanks to one-off measures worth some 10% of GPD, this budgetary outcome masks, however, a severe deterioration in the underlying structural balance, it added.

"In fact, the structural budgetary position deteriorated in 2010 and 2011 by an estimated cumulative 2.75% of GDP in stark contrast to the recommended cumulative fiscal improvement of 0.5% of GDP. Also, in 2012, the general government deficit would remain below 3% of GDP only thanks to one-off revenues."

The deterioration of the structural balance was common knowledge already in 2011. It was a known fact also when the EC released its assessment on Hungary in November.

The only new element that has come to the open since was that the government was prepared to carry out a never-before-seen fiscal adjustment, aiming to improve the budget balance by HUF 1,500-1,700 billion.

In early 2011, when Hungary took on EU presidency for six months, Brussels was not so tough when it saw unsustainable budget processes. This time it would apparently not shy away from deploying every possible means in this regard. In view of this, yesterday’s announcement may be interpreted as a politically hued decision.

The EU will think twice before...

When it comes to reaching a final decision on moving the EDP against Hungary to the next stage Brussels will most likely consider that no member state has ever been disciplined in such a draconian way, i.e. by a freezing of EU funds. Hungary has also managed to avoid this stringent move so far although it has been under the EDP since its accession to the bloc in 2004. This means the EU would take an unprecedented measure.

But then one might argue that there is a first time for everything. If the EU just kept putting off implementing this severe punishment it would question its commitment to guarding and maintaining fiscal discipline. On this line of thought we can say that the Commission, which is repeatedly advocating fiscal rigour, may choose to set an example by striking down on Hungary.

The Commission’s decision to take the EDP against Hungary to the next phase makes it crystal clear that Brussels is trying to exert pressure on the government in this area too. As Hungary is seeking financial assistance not only from the IMF but also from the EU, the Commission has the upper hand.

But it would create a rather controversial situation if Hungary managed to strike a bailout deal with the IMF/EU and at the same time the EU would freeze its funds.Commission assessment

In July 2009, the Council recommended Hungary to bring the deficit below 3% of GDP by 2011 in a sustainable manner. According to the Commission's 2011 Autumn Forecast, Hungary was expected to reach a surplus of 3.6% of GDP in 2011 thanks to temporary measures. Assuming that no additional consolidation steps were taken, the budgetary outcome would swing into deficit again in 2012, estimated at 2.8% of GDP, including measures of a temporary nature, and reach 3.7% of GDP in 2013.

The 2012 budget (approved after the cut-off date of the 2011 Autumn Forecast) included additional expenditure and revenue measures compared to the draft. Moreover, the Hungarian authorities further specified their structural reform programme and adopted additional consolidation measures on 15 December 2011. On the same day, an agreement was concluded between the government and the banking sector on how to share the burden stemming from the support schemes for distressed mortgage borrowers.

Based on the Commission's assessment of these measures, on top of the 2011 Autumn Forecast, the general government deficit is projected at 2.75% of GDP in 2012 and 3.25% of GDP in 2013, even without taking into account the possible negative effects of a worsening in the macroeconomic scenario and the elevated level of yields.

Thus, the excessive deficit cannot be considered corrected in a sustainable manner.

Therefore, the Commission adopted a recommendation for a Council decision under Article 126(8) of the Treaty establishing that no effective action has been taken in response to the Council recommendation of July 2009.

At a later stage, subject to the Council's adoption of the recommended decision on no effective action, the Commission will adopt for Hungary a recommendation for a new Council recommendation under Article 126(7) of the EU Treaty with a view to bringing to an end the situation of an excessive deficit. This decision shall be taken by the Council within two months of the Council decision establishing that no effective action has been taken.

• Tags:
• edp,
• economy,
• cohesion,
• commission,
• excessive deficit procedure