(Bloomberg) – The European Union executive will withhold nearly all €22 billion in cohesion funding earmarked for Hungary until the country addresses concerns about the rule of law and human rights protections.
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In an economic crackdown on nationalist Prime Minister Viktor Orban’s government, the European Commission found that Hungary had failed to meet the conditions for receiving the regional funds. The aid serves to strengthen the economic and social cohesion of less prosperous countries in the 27-state bloc.
“As long as the enabling conditions are not met, the Commission cannot reimburse the related expenses included in the payment entitlements introduced by Hungary,” Commission spokesman Stefan De Keersmaecker said in a statement on Friday.
Investors initially showed little reaction to the news. The forint, which fell to a record low in October amid fears Hungary might not be able to access its allocated EU funds, was trading 0.1% higher at 400.41 per euro on Friday.
The commission said in a statement that Hungary does not comply with the EU’s Charter of Fundamental Rights. In particular, a so-called “Child Protection Act” was mentioned, which prohibits minors from being exposed to any depiction of homosexuality or gender reassignment, which has been criticized for restricting the rights of the LGBTQ community.
Risks to academic freedom and the right to asylum – cultural battlegrounds where Orban’s right-wing government has repeatedly clashed with the EU’s liberal, multicultural values - also remain, according to the executive.
It represents a major setback for Orban, whose government has been forced to scrap generous subsidies that have bolstered his political support. News earlier this year that the EU could block the funds that have helped boost his economy and kept him in power also helped push bond yields above 10%.
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Hungary is also struggling to contain the EU’s highest rate of inflation, while the central bank has criticized Orban’s cabinet for experimenting with economic manipulation by imposing price caps on everything from basic necessities to mortgage rates.
“Hungary is currently in a particularly difficult economic situation and is also dependent on this money,” said EU Budget Commissioner Johannes Hahn to the newspaper “Der Standard”. “It seems that financial pressure is most effective. If that helps to improve the conditions for the rule of law, that’s good.”
The Commission’s decision to withhold funds effectively overrides and goes further than an agreement reached by Hungary and the other member states to suspend €6.3 billion in cohesion funds.
After that deal was signed, Orban’s government dropped its threats to veto an aid package for Ukraine and the EU’s introduction of a global minimum corporate tax.
Hungary can proceed with its plans to draw down the funds, but the Commission “cannot reimburse related expenses, except for technical assistance and compliance” until Budapest addresses the concerns, the EU executive said in a statement.
(Updates with market reaction in fourth paragraph.)
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