EU plans leaked: Hungary seen losing huge funds

The European Commission plans to shift tens of billions of euros in EU funding away from central and eastern Europe, diverting money from countries such as Poland, Hungary and the Czech Republic to those hit hard by the financial crisis such as Spain and Greece, the Financial Times has learned on Monday. The paper has seen a draft policy paper on the EC’s 2021-2027 EU budget to be presented on 2 May.
The shift in the allocation of the funds could be particularly worrisome for Poland and Hungary due to a proposal announced by Budget Commissioner Günther Öttinger last week that would make cohesion funds - for the first time in the history of the EU - conditional on compliance with the rule of law in the next fiscal cycle.

Highlights of what the FT has learned:

  • The reforms will mark a “dramatic redesign" of the 350 billion euro cohesion policy that aims to support less developed parts of the bloc. Brussels wants to do away with the practice of distributing cohesion money almost exclusively on the basis of per capita GDP, replacing it with much broader criteria covering everything from youth unemployment, education and the environment to migration and innovation.
  • Conditions on eligibility to be tightened: The EC plans not only to revise the allocation of funds, it would also reinforce conditions on eligibility, including rule of law compliance (e.g. independence of courts), and applying more restrictions on how the funds may be used (the paper did not elaborate on this one). A draft policy paper seen by the FT puts the programme under a new “cohesion and values" heading — a clear signal about the expectations that come with EU funding. The paper noted that the overhaul will be “particularly worrying" for Warsaw and Budapest, two big beneficiaries of cohesion funds who have clashed with Brussels over the rule of law and democratic standards. Poland has warned that tough conditions for EU funding linked to judicial independence would cause “enormous problems" and encroach on sovereign rights.
  • While precise details of the reforms are still in the making behind the scenes, diplomats and officials expect the outcome to be a redirection of funds from Poland, the Czech Republic and Baltic states towards southern states such as Italy, Spain, Greece and even some regions of France. This would be kind of a compensation for a reduction of available funds at the expense of Southern European countries in a bid to boost the convergence of CEE economies after their accession in 2004. Poland secured about EUR 77 bn from the cohesion policy in the 2014-2020 budget period, Hungary EU 22 bn and Slovakia EU 14 bn, from a total of EUR 350 bn, the paper added.
  • This would only aggravate debates and tensions stemming from the Brexit-related funding gap, on top of which funding needs to found for new tasks, as well. Öttinger said reductions of 5-10% are necessary. The FT cited John Bachtler, an expert in cohesion policy at Strathclyde university, as saying that the budget negotiation could be “the most difficult in 30 years". He said: “All countries are likely to lose cohesion policy funding; the main question is how big the losses are for individual countries and regions."
  • While the budget is set to be reduced, the rules of EU fund distribution is expected to be conditional on the number of refugees taken in by the specific member states. The paper reminded that German Chancellor Angela Merkel and France’s President Emmanuel Macron have backed the idea of using the EU budget to provide financial support to regions hosting large numbers of asylum seekers, such as Germany and Sweden.
  • The Commission is also expected to tighten rules on which development projects are eligible for EU funding, which will lead to a rise in budget spending for the member states, i.e. the ratio of EU co-financing will drop. Currently, 85% of Operational Programmes in Hungary are financed by the EU.
  • The good news for Central European member states is that one of the key elements of the cohesion talks, at least according to diplomats, to be a “safety net" and a ceiling on gains made by any one member state. These would limit the potential changes in overall funding levels for both the winners and losers from the reforms, the FT said.

The FT article focuses on changes expected to be made to cohesion funds, i.e. it does not address the likely 5-10% cut to the agricultural budget and the related changes which are of key importance for Hungary. It neither does discuss several other issues, but the information presented already suggest that after a total of 14 years of massive funding, the CEE region is no longer in focus of EU funds. Hungary was given 14 years to close its gap to the existing member states with the help of EU money. On the basis of relative GDP trajectories we can state that the Czech Republic, Poland and Romania made much better use of the funds than Hungary, although Hungary’s GDP course was affected significantly not only by EU money but also by several other factors.

According to the draft policy paper seen by the FT, the Commission is trying to shift the focus back to Southern Europe that lost considerable EU funds upon the bloc’s expansion in 2004, and which suffered long-lasting and serious social-economic consequences due to the 2008-2009 crisis. As regards the latter, note the 30-40% unemployment among young generations (the respective figures for the 15-24 age group are 36% for Spain, 33% for Italy and 11% for Hungary) and the related problems. It is also evident that the EU is trying to incorporate into the joint budget the costs of the nearly three million refugees taken in since 2015, their support and efforts of their integration (institutions, raining, welfare system).
Front page photo by John Thys / AFP

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