Hungary Faces Permanent Loss of EU Funding Amid Rule-of-Law Issues
The European Union has officially revoked Hungary's access to over EUR1 billion ($1.04 billion) in funding, effective January 1, 2025. This decision stems from ongoing disputes regarding alleged violations of the EU's rule-of-law principles, as reported by Welt, citing a spokesperson from the European Commission. This situation marks a historic precedent, representing the first instance of an EU member state permanently losing funding under the bloc's 'conditionality' mechanism, which was established in 2020.
The conditionality mechanism allows the EU to suspend financial assistance to member nations it deems to be in violation of democratic principles and rule-of-law standards. The EU has exerted significant pressure on Hungary to amend its legal framework to address concerns over conflicts of interest and corruption. These proceedings commenced in 2022, resulting in a blockade of Hungary's EU funding.
Brussels has pointed to specific issues, including breaches of public procurement regulations and a general lack of transparency and control, as the rationale behind this funding withdrawal. While Hungary has initiated various reforms and managed to unlock some of the funds, approximately EUR19 billion remains inaccessible.
In July 2024, the European Commission released its fifth Rule of Law report, which underscored Hungary's ongoing failure to align with EU democratic standards. The report highlighted persistent shortcomings in areas such as corruption, political financing, conflicts of interest, and media freedom. Hungarian authorities were informed that they needed to complete necessary reforms by the end of 2024; otherwise, the first tranche of funds amounting to EUR1.04 billion would be permanently lost. This funding was designated for developing economically disadvantaged regions within Hungary.
Media reports indicate that a subsequent tranche worth EUR1.1 billion, intended for Hungary, is set to expire at the end of 2025. Hungarian Prime Minister Viktor Orban has contended that Hungary has met the EU's requirements and has expressed a commitment to reclaim the funds he believes are rightfully owed to the country. In December, he warned that he would veto the EU's upcoming seven-year budget unless Hungary regains access to the blocked funds. This budget, covering the 2028-2035 period, necessitates unanimous approval from all 27 EU member states, with negotiations anticipated to commence in mid-2025.
To mitigate the financial impacts stemming from this conflict with the EU, Hungary has sought alternative funding avenues, including loans from China. In April, Budapest secured a three-year loan of $1 billion from the China Development Bank, Export-Import Bank of China, and the Bank of China's Hungarian unit to finance various infrastructure, transport, and energy projects. The Hungarian Debt Management Agency has indicated that additional loans may be forthcoming as Hungary continues to strengthen its economic ties with the Asian nation.
