Hungary could lose EU funds for good without deal by year-end

Highlights of today's press briefing:

• Loss of EU funds: Gulyás admitted that Hungary could lose EU funds for good if no agreement is reached with the European Commission by year-end.
• Olivér Várhelyi's candidacy: The government confirmed that Olivier Várhelyi will remain Hungary's only candidate for the EU enlargement commissioner position and denied that Ursula von der Leyen asked for his replacement by a female candidate.
• Border protection and János Bóka's task: János Bóka's task is to find a compromise with the European Commission on border protection / mammoth asylum fine, otherwise the transfer of asylum seekers to Brussels could be an option.
• Oil supply: Mol's agreement ensures the supply of oil to Hungary through the Transneft system, reducing the risks.
• Developing small and medium-sized enterprises: The government is preparing an action plan for the development of SMEs, to be launched next year.
• Minimum wage: The government will seek a multiannual agreement to increase the minimum wage, taking into account the expected inflation rate.
• Budget and family tax benefit: The government's planned increase in the family tax benefit is not dependent on the outcome of the US presidential election.
• Deficit reduction: The cabinet plans a significant deficit reduction of 2% this year and no increase in public debt in the process.
• GDP expectations: The government expects GDP growth to be close to 2% from below this year and above 3% next year.
• Business tax: The government does not plan to strip municipalities from the right to collect business tax.
• Government reshuffle: No government reshuffle is planned, and the prime minister will consult on the new central bank governor.
• Spar and price freezes: In a case between Spar and the Hungarian state, the Court of Justice of the European Union ruled that the price freeze was illegal, which also involved sanctions.
• Workers' credit: The introduction of the "workers' credit", which would provide preferential loans for young workers, is expected by the end of October.

Talks on massive EU asylum fine

The government has given a mandate to Hungary's Minister of EU Affairs János Bóka to negotiate with the European Commission on a massive fine the European Court of Justice imposed on Hungary for non-compliance with asylum regulations, said Gergely Gulyás, the Prime Minister's chief of staff. He said that Hungarians had earlier decided in a referendum not to let in illegal immigrants.

On 2 October 2016, Hungarian voters went to the polls to answer one referendum question: “Do you want to allow the European Union to mandate the relocation of non-Hungarian citizens to Hungary without the approval of the National Assembly?” Although 92% of those who casted votes and 98% of all the valid votes agreed with the government answering ‘no’ (6% were spoiled ballots), since the turnout was only 43.35%, the referendum is invalid.

Gulyás then labelled the outcome as a "sweeping victory". The EU’s plan was to relocate 160,000 asylum seekers from Italy and Greece among the other member countries. Hungary, a country with a population of less than 10 million, was slated to receive 1,294 of them, but Orbán long insisted his country would not be forced to take in migrants.

"In the lead-up to the vote, the government spent 16 million Euros of taxpayers’ money on a four-month long hate campaign, including thousands of billboards nationwide, booklets sent to 4 million households, and TV and radio ads spewing out both distorted facts and outright lies," Human Rights Watch reported.

As a first step, people crossing the border will be given the option of a one-way ticket to Brussels, Gulyás reiterated an earlier threat. He also confirmed the earlier announcement that the government would go to court to get €2 billion from the European Commission to cover the costs of protecting the external borders.

The European Commission indicated earlier this month that it considers the Hungarian government's claim to be unfounded and that the huge fine will be collected together with late payment penalties.

Commenting on Germany's decision on border closures, the minister said that the cabinet believes that immigration is destroying the Schengen area, which the Hungarian government predicted in 2015.

János Bóka's mandate will be to find a solution in negotiations with the European Commission that will enable the effective protection of external borders, Gulyás added later. If no such solution is found, then Hungary could resort to busing asylum seekers to Brussels.

The European Commission has sharply criticised the Hungarian government's latest threat to transport irregular migrants to Brussels from the Hungarian-Serbian border. Commission spokeswoman Anitta Hipper called the plan "unacceptable", saying it would be "in clear breach of EU law and the principal of sincere and loyal cooperation and mutual trust", and it would also "undermine the security of the Schengen Area as a whole".

The government counts with daily late payment fine of €1 million

EU Affairs Minister János Bóka is starting talks with the European Commission in order to reach an agreement on the €1 million a day fine imposed on top of the €200 million one-off lump sum fine for problems in Hungarian asylum procedures. But until there is an agreement, the fines will have to be paid, Gulyás said.

Next year's budget also on the agenda

The government discussed some of the areas for next year's budget. Minister of National Economy Márton Nagy has been authorised to negotiate with workers' and employers' representatives to raise both the minimum wage and the guaranteed wage minimum in 2025. The government is only an external observer, the representatives' agreement is expected, said Gergely Gulyás.

He said they would prefer a multi-year agreement that links the raise of the minimum wage and the wage minimum for skilled workers to the gross average wage.

Later he reiterated that the government's intention is to have a predictable, multi-year agreement, as they see the rate of inflation for years ahead. And as it could drop below the the central bank's target (3% +/-1ppt), there is room for wage increases. He added that they expect employees and employers to agree on a large increase, but one that does not jeopardise jobs.

He declined to specify a desired percentage rate, nor did he confirm that the government wanted to apply a sectoral minimum wage system.

Workers' credit on its way

The government has agreed on the skilled workers' credit: it will certainly be decided by the end of October, but it could be decided at a government meeting in the near future. This would not just be a credit for skilled workers, but a kind of "workers' credit", giving young people the opportunity to borrow at a reduced rate.

It would be available for those that have been working since they were 17 or 18. The details are to be worked out by Economy Minister Márton Nagy, and the credit will be launched on 1 January 2025 at the latest,

said Gulyás.

Spar wins lawsuit over price freezes

The Court of Justice of the European Union has on Thursday ruled in favour of Spar Hungary versus the state. The legislation introduced in February 2022, in the context of the COVID-19 pandemic

prevents traders, without appropriate justification, from freely setting the selling prices and the quantities offered for sale of those products on the basis of economic considerations,

the ECJ ruled.

Gulyás said that "we are not surprised that if it had been up to Brussels, there would have been no price-cutting discount sales in Hungary and if it had been up to Spar, there would have been none either."

Gergely Gulyás added that the specific decision refers to a specific fine that Spar will not have to pay after the European Court of Justice's ruling.

The food price freeze
Hungary regulated, by Government Decree, the marketing of six basic products (certain types of sugar, wheat flour, sunflower oil, pigmeat, poultrymeat and milk). From November 2022, as a result of the war in Ukraine, the decree was amended and two other products were added to the list, namely eggs and potatoes. That Government Decree remained in force until 31 July 2023.

According to that decree, traders that had already marketed those products at a specified earlier date were required, on pain of a fine, to offer for sale a predetermined quantity – based on, initially, the average daily quantity offered for sale during a reference period and, subsequently, the quantity of the products at issue in stock during that reference period – at a regulated price.

In May 2023, the Hungarian authorities imposed a fine on the retailer SPAR Magyarország after finding that, in one of its shops, it had not respected the daily quantities in stock of five products referred to in the decree. SPAR brought proceedings before the Szeged High Court (Hungary) seeking annulment of the decision of the authorities.

The ECJ ruling says:

• "The Government Decree undermines fair competition, a fundamental component of the CMO ['common market organisation'] Regulation. The obligation to offer for sale agricultural products at regulated prices and in specific quantities prevents traders from freely setting their selling prices and the quantities they wish to sell on the basis of economic considerations.
• "The Court considers Hungary’s argument alleging that that restriction is justified by the objectives of combating inflation and protecting disadvantaged consumers by means of a guaranteed supply of basic foodstuffs at affordable prices.
• "The Court finds that, even if the contested Government Decree were appropriate for achieving those objectives, the measures that it entails are not proportionate. The undermining of free access by traders to the market in conditions of effective competition and the disturbance of the entire supply chain caused by the regulated prices and quantities imposed on those traders go beyond what is necessary to attain the objectives pursued by the decree.
• "In those conditions, the Court holds that the Hungarian Government Decree, including the system of fines provided for in that decree, is contrary to the CMO Regulation."

No government reshuffle planned

Responding to a question, Gulyás said they do not care about rumours and fake news, no matter how entertaining they are. Recent press reports have suggested that, for example, Foreign Minister Péter Szijjártó could replace Gulyás at the Prime Minister's Office, while Minister of the Interior Sándor Pintér would retire and administrative state secretary Marcell Bíró would take his place.

Regarding the possibility of Mihály Varga becoming Governor of the central bank (MNB) next spring after the mandate of György Matolcsy expires, Gulyás said.

the Prime Minister is not preparing for a reshuffle. I can tell you that the Prime Minister will consult everyone, including, according to the information given to the government, on the nomination of the central bank Governor.

Varga's name has been circulating for months as the potential / likely successor of Matolcsy at the helm of the central bank. Orbán has recently announced plans to merge the Ministry of Economy and the Finance Ministry, adding that the minister leaving his government post could be the next MNB chief. The likelihood of Nagy staying and Varga leaving is greater than the other way around. Orbán had picked Matolcsy, whom he called his "right hand", to head the central bank when Matolcsy was Minister of the Economy, so in this sense the rumoured succession would not be a shocker. The question is what investors would think about the powers of Márton Nagy growing even further, as he would be responsible for fiscal policy too, including the financing of government debt (and the supervision of the Government Debt Management Agency, ÁKK), the planning of the budget, and tax policy.

No change in the collection of business tax

As for the municipalities' fear that the government might take away their right to collect business tax from them - which was also referred to by János Lázár, the Minister of Construction - Gulyás said that the European Commission has approved the business tax as a local tax, so the cabinet cannot change this.

Cabinet plans huge deficit cut

We are planning a 2%, i.e. huge deficit reduction this year, Gergely Gulyás said, adding that there is no need to increase public debt to reach this goal. With strong economic growth expected in 2025, the cabinet expects budget revenues to increase.

On the outlook for this year, he said that growth could be close to 2% from below, while next year GDP growth could be above 3%.

What will happen to the budget after the US presidential election?

We will definitely increase the family tax benefit, Gergely Gulyás said, adding that this commitment will not be affected by whether Donald Trump or Kamala Harris becomes the next US president.

The interesting thing about Gergely Gulyás' remark is that it implies that the rate of increase in the tax benefit has not yet been finalised. This means that the doubling of tax relief, as has been repeatedly stated, is not set in stone.

Gov't wants the situation of SMEs to improve

At Wednesday's cabinet meeting, the government discussed an action plan for the development of small and medium-sized enterprises, which will be launched next year and will be part of the budget. Details are still being worked out, the minister said.

On the programme, he said.

it is in an embryonic stage and it is too early to talk about details.

Hungarian oil supply secured

The government is optimistic, as thanks to the agreement signed by Mol, gas supplies to Hungary are now secured through the Transneft system. There is no obstacle to Transneft and Lukoil continuing to supply Hungary in the future, so the risks have now been reduced, said Gulyás, referring to the agreement Mol announced on Monday.

No other Hungarian candidate to replace Várhelyi

The nomination of Olivér Várhelyi was discussed in advance by Prime Minister Viktor Orbán with Commission President Ursula von der Leyen, said Gulyás. He refuted rumours that the European Commission had asked for a woman candidate to replace Várhelyi. The government is satisfied with the work of the enlargement commissioner.

Von der Leyen openly requested in a letter to EU leaders that they submit two names for each of the 26 commissioner posts for her to consider, one male and one female, rather than just one. Countries who let their outgoing commissioner stay on got an exception to this rule, though. That request appears to have backfired as most countries declined to heed von der Leyen’s request and sent in only one name (only Bulgaria has publicly nominated a man and a woman), Politico reported.

Three diplomats who spoke to Politico said that von der Leyen was pressuring at least five smaller EU countries, including Slovenia and Malta, to consider replacing the male candidates they’ve put forward with female replacements. In recent days, she convinced Slovenia and Romania to switch out male nominees in the process.  

Gulyás admits Hungary could lose EU funds at the end of the year

Although the Hungarian government believes that there is no valid reason for the suspension and some funds have already been released, there is still a risk that the country could lose money if no agreement is reached by the end of the year, Gergely Gulyás said.

As Portfolio reported, the cabinet could lose roughly €1 billion in frozen funds if do not get unblocked by the end of December.

Gulyás said that the "magnitude of the loss is exaggerated", but admitted that some of the funds could indeed be lost, but that the government's aim is to reach an agreement with the European Commission by the end of the year.

Competitiveness problems, especially in Germany

Although the Hungarian government has made it a priority to boost the competitiveness of the continent, Gulyás stressed that Germany's industrial decline is due to a forced policy of greening, which may be at odds with improving economic competence.

Germany is one of Hungary's most important economic partners, especially in the automotive sector, so a downturn in German industry could indirectly affect the Hungarian economy,

he said.

Gulyás pointed out that the Hungarian government has no influence on German decisions, but he finds it incomprehensible why a country with one of the world's best automotive and machinery industries is taking a big economic risk for the sake of the green transition, while the United States and China are responsible for the largest share of global pollution.

At the same time, the government is open to welcoming industrialists who relocate to Hungary because of the political and environmental constraints on the German economy, as this could strengthen the competitiveness of Hungarian industry.

Chinese credit conditions?

Gergely Gulyás reiterated that the Ministry of Finance has already taken the initiative to have the banking secrecy lifted in respect of the interest rate on a EUR 1 billion Chinese loan Hungary took out in April this year. However, the Hungarian government cannot disclose any details for the time being.

Cover photo: MTI Photo/Lajos Soós