Commission yet to approve payment of cohesion funds, Hungarian Parliament must act

In its Tuesday morning newsletter, Politico's Playbook reported ('EU billions for Putin's buddy') that the European Commission may release frozen cohesion funds for Hungary on Tuesday under pressure by Germany and France. However, the procedure over horizontal enabling conditions cannot be closed until a law is passed by the Hungarian parliament. This excludes even the theoretical possibility of unfreezing the funds.

Several sources in Brussels described Politico's report to Portfolio as a simple misunderstanding, a factual error.

In their view, the newspaper's false logic was that the European Commission's political college meets on Tuesday afternoon. And most decisions taken by the EU executive can only be taken here.

However, EU officials have told Portfolio that the procedure against Hungary is not on the agenda, and that they cannot act until Parliament has passed all the necessary legislation. (Given the ruling coalition's legislative majority this would be but a technicality, though). Thirdly, the full college is not even necessary, a decision by a commissioner on behalf of the college in writing is sufficient.

Hungarian MPs need to vote

As we have reported, a positive decision is expected in the horizontal enabling conditions procedure after the implementation of the judicial reform, although there could be a twist. The European Commission sent two clarifying questions to the cabinet led by Viktor Orbán in early November, the answers to which will determine whether payments are made.

One of them was about the allocation of cases in the Curia (Supreme Court), as the EC wanted guarantees that there would be no human interference - i.e. an automatic system would decide which chamber of judges could rule in certain hearings. On the second point, the right of Hungarian judges to apply directly to the Court of Justice of the European Union (CJEU) for preliminary legal advice was strengthened.

It was already made public two weeks ago, at a technical meeting of the Commission, that legislative amendments are needed in both cases.

As we reported last week, the Orbán government published a decision ensuring the independence of the Curia's case allocation system in the Official Gazette last week. However, this has not yet happened in the case of the CJEU requirement.

According to Parliament's agenda, Hungarian MPs will vote on this issue only on Tuesday evening in a package of sections 'hidden' in an omnibus bill. So the European Commission - which not only can demand member states to comply with rule of law principles, but is also bound by the same rules - cannot even decide on unblocking the funds for Hungary until the legislation has passed. (Although the law is more permissive on this, but basically Brussels would have to wait for the changes to be promulgated before it could act.)

The government has already consulted about the relevant amendments with the Commission, so if no changes have been made since then, the judicial reform requirements could be complete.

Long procedure, convergence of issues is mere coincidence

Hungary has been saying for weeks that it will veto an EUR 50 billion aid for Ukraine from the shared EU budget and does not want accession talks to start with the war-torn country. Speculation emerged that the Commission would offer the release of blocked funds to gain Budapest's support. EU officials, however, stressed formally and informally that it will simply not make such a political deal, partly because it is bound by its own rules.

"The fact is that the Hungarian government has been slow to answer the questions. Negotiations on judicial reform have been ongoing since the second half of July. The Commission has had a total of 90 days to assess, but the clock has stopped until the Hungarian side has answered a question.

The Orbán government has been slow to act on several occasions, so the two cases have overlapped, but there is no link between them,

a source with information about the talks told Portfolio, and this was backed up by various other sources.

We also spoke to an official who believes that the conspiracy theory that the government deliberately responded late to allow Ukraine's case and the rule of law procedure to overlap may have some truth in it. Others refute this, claiming that there were ongoing consultations and that the procedure of the Hungarian case "just happened" to go down like this.

According to our sources, the vote on the opening of accession negotiations with Ukraine and on the disbursement of aid to Ukraine will not be affected by the possible decision to release cohesion funds for Hungary.

There is no point for the Hungarian government to blackmail. We have made it clear several times that once we have the two pieces of legislation, part of the cohesion funds can be released,

said an EU diplomat, who is not optimistic about the summit starting on Thursday, saying he expects the Hungarian government to paralyse decision-making.

What funds to expect now?

So if everything goes according to plan, the earliest Hungary can expect a positive assessment of the judicial reform is Wednesday. This means that the Commission will declare that one of the horizontal enabling conditions has been met, and this will free up any cohesion resources that are not blocked by other issues. It is important to clarify, however, that there are a number of rule of law cases against Hungary, and only one of which would be settled now, and not even fully.

The Commission can also monitor the quality of implementation, so if they see irregularities or shortcomings in the judicial reform, they can take action again.

However, the approval will open the way for the payment of nearly €22 billion of cohesion funds that are not blocked by other procedures. On paper, this would free up €13 billion, but the payments would also have to meet thematic (policy and technical) conditions, where the Hungarian government still has deficiencies to resolve. These thematic criteria block a total of €7 billion, but this partly overlaps with the conditionality procedure.

As a result, only EUR 2.5-3 billion will be blocked due to thematic items, i.e. a total of EUR 10 billion can be drawn.

It should also be made clear that the rule of law procedure (which in practice is independent of the horizontal enabling conditions) is not closed. This process, known in Brussels jargon as the conditionality mechanism, still keeps €6.35 billion of Hungarian funds blocked, despite progress by the government towards meeting the 17 public procurement and anti-corruption conditions of the rule of law procedure.

The backstory is that due to a Council decision adopted in mid-December 2022 on suspending EU funds over rule of law issues, the Commission is obligated to make an assessment now, one year later, on the areas where progress has been made and where insufficient remedial action has been taken. Based on its findings it needs to recommend the Council the amount of cohesion funding to be withheld still.

According to our best knowledge, the EU executive is adamant that not a penny should be unblocked until all of the 17 conditions are fully met. That is why it is expected to recommend to keep EUR 6.35 bn of cohesion funds frozen. This is about 55% of the seven-year budget of three operational programmes, the Regional Development OP (RDOP), the Integrated Transport OP (ITOP) and the Environmental and Energy Efficiency OP (EEEOP).

The unblocking of the Recovery and Resilience Facility (RRF) is also still pending, as the Hungarian government has not met all 27 super-milestones agreed with the European Commission. This not only blocks €5.9 billion of the RRF, but also €4.6 billion of the RePowerEU chapter. Of the latter, 20% can be paid in two tranches as pre-payment, as decided at the European Council of Finance Ministers (Ecofin) on Friday.

The transfer of the €10 billion of cohesion funds will not start immediately. It will drag out for years as development invoices are sent by the Hungarian government to Brussels for payment. The Commission has 60 days to pay the first invoices from the date it declares that the judicial horizontal enabling condition has been met, so the first tranches should arrive by mid-February at the latest.

we understand that the Hungarian authorities have sent out some €500 million in development invoices to Brussels, so these could be paid first by mid-February.

Cover photo: EU