EU funds 14 December 2023, 8:59am

European Commission unblocks €10.2 billion of cohesion funds for Hungary

Portfolio

The European Commission decided on Wednesday afternoon that the Hungarian judicial reform meets the horizontal eligibility criterion, so Brussels will no longer block the payment of Hungarian cohesion funds. However, due to other obstacles related to the rule of law, only €10.2 billion will now be released for Hungary. As the Hungarian government has already indicated that it will tie decisions on Ukraine to the €30bn in all entitlements at the summit starting tomorrow, this could also change the dynamics of the EU summit that starts in the coming days. However, early Wednesday evening, the Commission confirmed in a Communication that the four-element judicial reform fulfils the horizontal conditionality and therefore some €10 billion will be released under the Cohesion Fund, but as the Hungarian government has not fully complied with the rule of law procedure, €6.3 billion is still suspended and Hungary will not yet have access to the recovery funds, except for the advance. The Commission's Communication therefore states that around €21 billion remains blocked for Hungary, in addition to the €10.2 billion that has now been unblocked.

After nearly a year of negotiations, the Hungarian government has successfully released cohesion funding, although in practice this means that it only has access to part of the total budget. Just before Christmas last year, the European Commission suspended all Cohesion Fund payments for failure to meet the horizontal eligibility criteria for payments under the MFF.

In the process, the EU executive has demanded four judicial reforms that strengthen the independence of the Hungarian judiciary, blocked the right of appeal by public authorities and introduced democratic barriers to the selection of the highest judiciary. The Hungarian government voted in favour of the necessary reform in May, which came into force in early June, and in the second half of July it initiated a European Commission inquiry into the fulfilment of the horizontal eligibility criteria.

Brussels had 90 days for the procedure, but every time a clarification question was put to the Hungarian government, the clock stopped, and we have now reached the point where the Commission has almost no time left for evaluation. However, they have been in constant consultation with Viktor Orbán's cabinet, so they have managed to agree that only two legislative steps are expected. One of them was already fulfilled last week: the government ensured that the case allocation system of the Curia was free of human interference.

The law was published in the Hungarian Official Gazette on Wednesday, and, as government and Commission sources informed Portfolio, the Budapest side informed Brussels by letter in the early afternoon. After an assessment, the Brussels body concluded that it would

lift the ban blocking the disbursement of all the cohesion funds, which amount to nearly €22 billion.

This decision was officially confirmed by the Commission shortly after 17:30.

However, this does not mean that all of this will be available to the Hungarian budget: other rule of law procedures, such as the conditionality procedure, continue to block €6.35 billion, and certain thematic conditions for payments are still missing. The former identifies problems such as the rights of persons belonging to sexual minorities not being guaranteed, the law on the protection of children not being in line with the Charter of Fundamental Rights, and insufficient legislation to guarantee academic freedom.

A total of €10.2 billion is now available for mobilisation.

This amount is equivalent to roughly 3 years of cohesion funds, and will be paid out gradually over several years on the basis of invoices submitted and accepted by Hungary. So far, the Orbán cabinet has sent accounts for €500 million. The first payments for these could be made by the end of February at the latest, as the Commission has 60 days to check the invoices.

That the Commission will delay the payments until after 10 January is likely because that is what the presidents of the four major political groups in the European Parliament asked for in a letter reported by Portfolio. The new composition of the National Council of the Judiciary remains to be seen.

In an unexpected twist, the Hungarian government on Tuesday set new conditions for not vetoing the start of Ukraine's EU accession negotiations and for the financing programme for Ukraine to be financed under the multi-annual financial framework (MFF). Under the new conditions, the Hungarian government is demanding all the funds for the reconstruction programme, as well as the remaining blocked part of the cohesion funds.

For the time being, the government will not yet have access to the €5.8 billion Recovery and Resilience Facility (RRF), the €3.9 billion loan tranche of the RePowerEU chapter, the €0.7 billion grant leg of the RRF, and the cohesion slices blocked by the other procedures mentioned above. For the RRF and RePowerEU, the Commission expects the 27 super-milestones to be fully met, but the Council must also decide on the approval of the first payments.

Several Portfolio sources expect the completion of the conditionalities process and the RRF super-lands to be completed early next year.

According to an EU official who spoke to Portfolio, this could also change the dynamics of the Council, as member states may see it as a way to wait the 2-3 months until the rule of law procedure can be concluded with the Viktor Orbán-led cabinet, if it is indeed willing to vote on the MFF review of the €50 billion in aid to Ukraine in exchange for €30 billion in EU money (as the Prime Minister's political director Balázs Orbán announced on Tuesday evening).

A financial agreement could be reached now, mainly because it would be cumbersome for the 26 other member states to work out a plan B in which all countries pay their fair share through enhanced cooperation. Moreover, the payment could take until March for Ukraine.

Other member state diplomats he spoke to said it was an "unfair request" from Hungary that all EU funds be released to it in a political deal. The diplomat thus does not rule out the possibility that they might instead "seek an alternative way of financing Ukraine, because it could provide a lifeline against Russian aggression."

Another EU diplomat said the situation could be presented as a success in the Hungarian government's political communication, reducing pressure to veto Ukraine-related issues. However, they still expect that the enlargement process will certainly not be agreed.