Budapest Softens Tone
Also — Eurogroup, Green Taxonomy
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Budapest Wants Its Stash of EU Cash
Hungary and Poland have taken very different paths since the beginning of the war in Ukraine, with Budapest being seen as increasingly isolated among the 27 EU Member States. However, the Hungarian government seems willing to make concessions in the ideological-cum-legal duel with the European Commission over the rule of law.
GUARANTEES • On July 7, Viktor Orban said everything was ready for an agreement to be reached with the Commission, the FT reports.
Four areas are central for the Commission: public procurement, the judicial system, public consultations prior to legislative changes, and the financing of Hungary's energy diversification strategy with EU funds.
STATE OF PLAY • Hungary has still not received funds from the NextGenerationEU recovery plan, which the European Commission has refused to release because of fundamental disagreements over the rule of law in Hungary. Budapest is expected to benefit from €7 billion in grants and €8 billion in loans at very low rates.
In addition — and this is a different procedure — on 27 April the Commission activated the Conditionality Mechanism, which allows the Commission to suspend EU funds from Hungary. In an editorial for the Hungarian independent media Telex, John Morjin of the University of Groningen explains:
"New legislation that links disbursement of EU funds to rule of law standards came into force on 1 January 2021. It lays down the notion that EU Member States only get EU cash if there ensure rule of law compliance. If there is a risk that sound financial management is affected in a sufficiently direct way by problems with independence of the prosecutor or judges, the Commission can start an investigation. If it establishes the Member State concerned does not convincingly address issues, the Commission can put a proposal to the Council to stop EU funding until these issues are solved. The Commission has now triggered this procedure against Hungary and is also holding up funding to Hungary under the recovery and resilience funds for similar reasons. It is now essential that these instruments are made and remain effective. If they work, they can be a gamechanger".
INSTITUTIONAL GAME • The European Parliament, which has taken a firm position with Hungary, particularly at the instigation of the Greens, would undoubtedly take a dim view of too much leniency on the part of the Commission. MEPs do not want to let the Commission make too liberal use of the conditionality mechanism, or even validate the NGEU recovery plans.
On 6 July ,Green MEP Daniel Freund presented to the European Parliament a legal opinion on the issue, drafted by Professors Daniel Kelemen (Rutgers), John Morijn (Groningen), and Kim Scheppele (Princeton). The report calls for the suspension of 100% of EU funding to Hungary:
"All EU funding pots are affected by corruption and thus contribute to the dismantling of democracy in Orban's system. A complete suspension of payments to Hungary is logical. The EU Commission has no room for manoeuvre here: either it recognises the realities in Hungary and acts according to the existing legal situation. Or it proposes sanctions that don't do justice to the problem, delay the procedure and contradict the existing legislation and guidance on the suspension of funds".
The report has aroused the irony of some. Rodrigo Ballester, director of the Centre for European Centre at the Mathias Corvinus Collegium (Budapest), strongly attacked the report. He told Hungary Today :
"As a former EU official, I am ashamed that some Members of the European Parliament and allegedly renowned academics are ready to trample on intellectual honesty for the sake of a political crusade. It is shameful, but not surprising, as those same scholars (commissioned by the same MEP) already published in July 2021 a very similar report at odds with minimum academic standards".
CASH IS KING • Hungary's currency, the forint, has been taking the hit since the beginning of the war in Ukraine. The exchange rate fell from 355 forints per euro on the eve of the war to 407 forints per euro on 11 July, a drop of more than 10%.
In a context of rising interest rates, the very low-interest loans of the EU recovery plan are a prized debt resource. The lack of progress on NGEU funds partly explains the poor performance of the forint against other currencies of European countries that are not members of the euro zone. Hungary's central bank raised its key interest rate by 200 basis points from 7.75% to 9.75%.
VETO • With these figures in mind, it is difficult not to see the threat of using the Hungarian veto on European sanctions on Russian oil as a quit or double for the Hungarian economy. Hungary is heavily dependent on Russian oil delivered by onshore pipeline. After a threat of Hungarian veto on the sixth package of European sanctions, Orban obtained at the Council of 30-31 May that oil — crude and refined — continues to flow by pipeline to countries like Hungary.
VETO, AGAIN • Another tricky topic for Budapest is the agreement on the minimum tax on multinationals. While Warsaw threatened to use its veto against an EU-wide signature to this international agreement to introduce a minimum taxation of 15% of multinationals, it was finally Budapest that issued its veto in the Council on 17 June. A directive is necessary for the EU to implement the tax in question. When it comes to a tax issue, unanimity is the rule. This last-minute veto prevents the EU from acceding to a treaty already signed by 140 countries.
Officially, the Hungarian veto was used to maintain the competitiveness of Hungarian companies — the corporate tax rate was lowered to 9%. But many see it more as a lever for negotiations with the Commission in the context of the discussions on NGEU and the Conditionality Mechanism. Its use, shortly after the Hungarian veto threats against the sixth package of sanctions against Russia, is fuelling the debate on the end of the unanimity rule, particularly in tax matters. Bruno Le Maire had said that the agreement would be implemented with or without Hungary, if necessary through enhanced cooperation.
On 6 July MEPs adopted in plenary a resolution for the end of unanimity on tax matters, with 450 votes in favour, 132 against and 55 abstentions.
"MEPs reminded Member States that unanimous decisions within the EU require a very high level of accountability, in line with the principle of sincere cooperation as enshrined in the EU Treaty. In the longer term, Member States should take into account the advantages of qualified majority voting procedures, and the Commission should relaunch discussions to gradually introduce majority voting on tax matters" — Press release
Above all, the Hungarian veto does not go down well in the United States — the Biden administration carries the text politically. On July 8, the US Treasury announced that it would end the tax treaty that bound the United States, where corporate tax is 21 percent, and Hungary for 43 years, as reported by Telex.
WARSAW IN ALL THIS • Discussions are more complicated with Budapest than with Warsaw — the Commission has not triggered the conditionality mechanism with regard to Poland. In the latter case, the Commission focuses its complaints on the independence of the judiciary, a subject which is certainly important but which is more difficult to link to the financial interests of the Union than proven cases of corruption in the context of public procurement.
In Case You Missed It
EUROGROUP • Eurozone economy and finance ministers met on Monday 11 July for a eurogroup meeting. Discussions focused on the macroeconomic situation, with a reaffirmation of the need to coordinate the fiscal policies of the euro area countries:
"In light of the current circumstances and as reflected in the country-specific recommendations, the Eurogroup considers that supporting overall demand through fiscal policies in 2023 is not warranted, the focus being instead on protecting the most vulnerable, while maintaining the agility to adjust, if needed. Fiscal policies in all countries should aim at preserving debt sustainability, as well as raising the growth potential in a sustainable manner to enhance the recovery, thus also facilitating the task of monetary policy to ensure price stability by not adding inflationary pressures" — Press release
At the end of last week, prior to a meeting of the ECOFIN Council, French Economy and Finance Minister Bruno Le Maire said that the fiscal rules, contained in the Stability and Growth Pact, are "obsolete", calling for a "new economic model", while all EU Member States are taking measures to help their citizens in a context of record inflation. The French government intends to increase the share of capital held in EDF from 84% to 100%, while in Germany Uniper asked the government to take a stake in the company.
Le Maire’s quip relates to the ongoing debate on the reform of the Stability and Growth Pact, which contains 60% public debt and 3% deficit rules. The pact was suspended during the Covid crisis, and the derogatory clause was extended until the end of 2023. The economic credentials of the French Junior Minister for European Affairs, Laurence Boone, will be useful for Paris.
In addition, the euro continues to fall against the dollar, at its lowest since 2002. The euro is nearing parity with the US currency, driven down by the negative prospects of the European economy due to the energy shock linked to the war in Russia, rate hikes by the US Federal Reserve, and inflation.
TAXONOMY • On 6 July, the European Parliament, in plenary, "rejected the proposal opposing the inclusion of nuclear and gas activities in the list of environmentally sustainable activities". The proposal received only 278 votes, against the 353 required to obtain a majority in the European Parliament. Gas and nuclear will therefore be considered green energy in the EU taxonomy.
The Commission considers that private investment in the field and nuclear power is necessary for the ecological transition, as transitional energies. The Commission is criticised for having coupled gas and nuclear power in the same text, which has led to a compromise between the French, who are in favour of the inclusion of nuclear power, and the Germans, who are in favour of the inclusion of gas. Investments in gas and nuclear will benefit from a favourable classification vis-à-vis investors, encouraged by the taxonomy to direct their funds towards the green bonds and stocks.
The delegated act on taxonomy will enter into force on 1 2023. Austria and Hungary intend to refer the text to the Court of Justice of the EU.
What we’ve been reading this week
Europe must keep on probing and reshaping her relationship with China, write Mikko Huotari and Sébastian Jean for MERICS and the French Council of Economic Analysis. This rebalancing act is being carefully scrutinised in Beijing’s circles of power, Tuvia Gering reminds us. In his newsletter Discourse Power, he publishes a translation of an interview of Li Haidong, a Chinese diplomat, who argues that NATO will take centre stage in the American efforts to contain China.
The Institut Montaigne’s Bruno Tertrais takes stock of the summit convened by the alliance in Madrid on 28 - 30 June. The war in Ukraine and the northward expansion of NATO is discussed, but so is, indeed, the risk posed by China.
Meanwhile, Miguel Otero Iglesias of the Real Instituto Elcano cautions against a Western foreign policy guided by a manichean worldview. Most countries outside of Europe and of the circle of close American allies have not condemned Russia for the invasion, and are unlikely to be swayed by moralistic appeals to defending democracy. European countries must put pragmatism first to avoid needlessly alienating them.
The IFRI has released a paper by Niclas Frederic Poitiers and Pauline Weil that looks at the EU Chips Act, and concludes that cooperation with friendly states is necessary to ensure the success of the initiative, given the extreme complexity of the technologies involved.
Zach Myers of the CER warns against expanding GDPR rules to industry, and instead encourages the EU to remain faithful to her current strategy, which seeks to use incentives to promote data sharing and standardisation, rather than making them mandatory.
This week's newsletter is brought to you by Maxence de La Rochère and Thomas Harbor. See you next Tuesday!