Hungary loses EU funds as economic slump deepens

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Hungary will permanently lose access to €1bn in EU funds on January 1 as disputes between Budapest and Brussels hamper the country’s ability to pull itself out of recession – and undermine Prime Minister Viktor Orbán’s bid for re-election in 2026.

The freeze has hit EU funding Hungary At a time when its government has little room for maneuver. Its budget deficit this year is more than 4.5 percent of GDP, raising political tensions.

Hungary’s economy shrank 0.7 percent in the third quarter – the second contraction in a row – plunging the economy into a technical recession amid weak demand in the automotive, electronics and pharmaceutical sectors that dominate its manufacturing base.

€6.3bn in funds frozen by Brussels for concerns about rule of lawBudapest will permanently lose €1.04bn as this amount must be allocated by the end of 2024 or it will expire. Hungary loses 1 million euros a day in funding from the EU for its illegal treatment of asylum seekers; Its total losses in the treatment of asylum seekers will amount to €200mn by the end of the year.

Both are on top of a one-off €200 million fine imposed by the European Court of Justice in June for breaching asylum rules and ignoring earlier rulings.

In total, €19bn in post-pandemic recovery funds and other EU resources are blocked.

Hungary’s EU Affairs Minister János Boca said in mid-December that it was “very difficult” not to interpret the withdrawal of funds as “political pressure”, adding that Budapest would take steps to “remedy this discriminatory situation”.

The government is also seeking compensation for the ECJ’s June ruling that resulted in a multimillion-euro fine, another sign that relations between Brussels and Budapest have reached a new low.

Hungary’s opposition seized the opportunity to blame Orbán’s government for the economic malaise.

Péter Magyar, an Orbán ally turned foe whose party battled Orbán’s Fidesz in EU elections in June and has since led opinion polls, said: “You have 14 years of unlimited power and billions of EU funds. . . This ship has sailed. The Hungarians will not wait. Enough is enough!”

EU money is likely to be blocked all the way until the election, refusing to let go of what it considers fundamental issues, including anti-corruption measures, judicial independence and Hungary’s treatment of minorities and asylum seekers.

Brussels has also questioned Budapest’s belief that it can increase spending over the next four years based on Hungary’s strong growth expectations.

The two sides have until mid-January to agree a compromise fiscal plan between 2025 and 2028, with the EU giving the country a bad mark if the government doesn’t cut spending.

“There will be a lot of tug-of-war,” said Peter Virovacz, senior economist at ING in Hungary.

For the 2025 budget, billions of euros worth of EU-funded investment and social spending have been scrapped, prompting Magyar to tour the country, drawing attention to crumbling hospitals, inadequate childcare facilities and railway stations left to the elements for decades. has been .

Economy Minister Marton Nagy has admitted that the government cannot fully fill the gap left by EU funding.

“You can’t just say you want a shiny new hospital, you need money. You need growth for that,” Nagy told the Financial Times. “The economy needs to be fixed first. . . Over the years we have stumbled from crisis to crisis, covid, energy crisis, war, now the weakness of the German economy. . . We all know tax revenues are missing so we need to recreate them.”

Nagy insisted the government would not overspend, saying he would limit the use of funds to boost growth to 0.5 percent of GDP.

Instead of using public funds for stimulus, the economy minister has proposed enabling private pension fund savings worth around €5bn to be used tax-free to buy or renovate real estate in a move aimed at boosting weak demand.

Orban, meanwhile, is betting that Asian investors can fill the gap – a policy he calls “economic neutrality”.

Chinese investment in Hungary There has been an increase in recent years, but some think this may fully compensate for the lack of funding from Brussels.

Before the dispute between Brussels and Budapest intensified in 2022, the EU was set to finance several major infrastructure projects in Hungary.

This includes a rail link from the center of Budapest to the capital’s airport.

“We could have had a golden age with more than €10bn spent on this sector alone this decade,” said David Vitezi, who led the Budapest Transport Authority at the time and later briefly served as Orbán’s secretary of state for transport. “We lost almost everything.”

“EU funding is an important part of a public investment in Hungary,” EU Economy Commissioner Valdis Dombrovskis told the FT in an interview in December, adding that “it is important that clearly Hungary does what is necessary to ensure the availability of funds”.