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The European Commission’s recent decision to suspend €7.5 billion of EU cohesion funds to Hungary is meant to push Orbán’s government to redress at least some of the country’s rule-of-law discrepancies. But will it be enough to bring Hungary back on a democratic track?

“If the question is whether it’s enough to force Mr Orban to re-transform Hungary into a democracy, the answer is very clearly no,” former Commissioner for Jobs and Social Rights and Hungarian economist László Andor told EURACTIV in Budapest last week.

In mid-September, the Commission proposed to trigger the conditionality mechanism suspending one-third of cohesion funds for Hungary due to longstanding concerns about corruption and mismanagement of EU funds.

To reverse this decision, the country has two months to enact remedial measures, which include setting up an anti-corruption task force involving civil society.

However, Andor doubts that the mechanism, even if adopted by member states later this year, will fix the rule-of-law problems in the country.

“I think a lot of people in Brussels just fell too much in love with this approach to sanction and conditionality,” he said, adding that the tool was introduced as a “substitute” to Article 7, the procedure that can suspend the voting rights of a country in the Council in case of a serious and persistent breach of EU values.

Indeed, the conditionality mechanism is primarily a tool to protect the EU financial interests from rule-of-law breaches.

“Now we see that this is very far from a perfect substitute,” Andor said, adding that it can only “cut off some excesses.”

In his view, to appease the Commission, Hungary might intervene in the conflict of interests in the governance of universities or other issues which are “not the essence of the system.”

“Cutting off these excesses is not going to affect the essential elements of this hybrid autocracy,” he said, echoing the European Parliament’s decision to brand Hungary a “hybrid regime of electoral autocracy.”

Benedek Jávor, head of the Budapest representation in Brussels, agreed that while the tool might help reduce corruption in the country, it is unlikely it will do more than that.

“This rule-of-law conditionality says nothing about media freedom […], academic freedom, educational freedom, distorted electoral system, party financing regulation and so on,” he said, adding that some of these problems are “even more problematic than corruption itself.”

In Andor’s view, as long as the conditionality mechanism is considered the “magic solution” that will solve the problem, the EU will not consider other options, such as channelling funds directly to pro-democratic organisations and media outlets.

Budapest and other opposition-led municipalities have long campaigned for direct access to EU funds to avoid them being mismanaged at the national level, but so far, their calls have not been answered.

Such a measure would require a reform of shared management rules, according to which the Commission entrusts member states with allocating funds to local recipients.

Although political will can achieve anything, this decision could take “years of discussions,” Andor warned.

Yet, rethinking the management of EU funds might be the right decision, at least for the Hungarian people.

With inflation at 15.6% in August, the highest bread price increase recorded in the bloc, the forint near an all-time low against the euro, and the EU’s recovery funds yet to be released, the population faces a very dire economic situation ahead.

“If [funds] are withdrawn from the country, this blocks development, so it would be a good next step to say that the sum should not be lost for the country, but be managed differently,” Andor suggested.

Meanwhile, to those who call for even harsher measures to suspend 100% of funds for Hungary, Andor said it would still not be enough to bring Hungary back to full democracy.

“For 10 or 12 years, so much has happened in this country that you’re not going to create eggs from the omelette, at least not in a couple of months.”

Chart of the Week

While the Commission is moving to tackle poverty through adequate minimum income schemes across the bloc, Eurostat found that self-employed people in the EU are more at risk of poverty or social exclusion than European employees.

In 2021, almost a quarter of EU self-employed people aged 18 years and older were at risk of poverty or social exclusion, while the same risk impacted just 9.1% of employees.

According to the data, the situation of self-employed people is also worsening compared to the past years, increasing from 22.6% in 2020 to 23.6% in 2021, while the risk of poverty has decreased among employees.

Graph by Esther Snippe

Economic Policy Roundup

EU Consumer Confidence at a record low. In a sign of growing disillusion about inflation and uncertainty about the winter ahead, the Commission’s September estimate of the consumer confidence indicator hit a new low at levels not seen in the 2008 financial crisis, the euro crisis, or the pandemic. Today, the EU Commission is expected to release the numbers for business confidence, where the picture is unlikely to be much rosier.

EU Commission proposes Council recommendation on minimum income. On Wednesday (28 September), the Commission presented a proposal to help EU countries achieve adequate minimum income support by the end of 2030. Member states should extend the coverage of their minimum income schemes and facilitate the application process and policies aimed at reintegrating citizens into the labour market.

Business concerns over energy prices get louder. In a press release on Wednesday (28 September), SMEUnited, an association of European SMEs, issued an “emergency call” to the EU Commission, pleading for it to “come forward with a reviewed state aid crisis framework as soon as possible allowing member states to implement price-cutting measures for SMEs.” But also larger businesses are sounding the alarm, with the association BusinessEurope sending a letter to President von der Leyen, calling it “a matter of survival.” In an interview with EURACTIV France, the boss of the E.Leclerc supermarket chain Michel-Edouard Leclerc argued for more state intervention to cap energy prices for companies.

Chaos in UK financial markets after new government’s tax cuts. Last week, the UK’s new Chancellor of the Exchequer, Kwasi Kwarteng, announced across-the-board tax cuts that would cost the government an estimated £45 billion on top of £100 billion of subsidies for energy bills announced earlier this month, prompting market concerns about the state of the UK’s debt burden and budget deficit. The British Pound lost nearly 10% of its value against the Dollar within a week, and the interest rates on British government bonds increased dramatically before the Bank of England (BoE) intervened on Wednesday (28 September) to stabilise government bonds and to save UK pension funds from having their own ‘Lehman moment’. The turmoil puts the BoE in a difficult position since it also tries to rein in inflation by tightening monetary policy.

Economy news from the Capitals

Portuguese government to propose income tax reduction for innovator companies. The government will propose a selective reduction of corporate income tax for companies promoting increased wages and investment in research and development. Read more.

2022 bumper year for foreign tourists and investment in Albania. 2022 has been a bumper year for tourism in Albania, with more than 5.7 million people entering the country from January to August, an all-time high according to data from INSTAT. Read more.

Trade between areas of divided Cyprus doubles. Trade between the self-proclaimed Turkish republic and the Republic of Cyprus is at its highest in 18 years, reaching €12 million. Read more.

Cost of living, energy focus in new Irish budget. Measures designed to offset the cost-of-living and energy crisis are the focus of this year’s budget, unveiled by Dublin on Tuesday.  Read more.

French 2023 budget tackles inflation but faces uncertainty in assembly. The French budget for 2023 increases spending by €7.5 billion compared to 2021, but with a lack of majority in the assembly, passing the bill could be tough and risk a government-toppling no-confidence vote. Read more.

ECB VP confident Meloni’s victory won’t change Italy’s economic policy. Italy will continue its current economic path despite far-right Brothers of Italy leader Giorgia Meloni being set to form the new government, according to the Spanish Vice-President of the European Central Bank (ECB). Read more.

Poland threatens to sue Commission over recovery money block. Poland will file a complaint against the Commission before the EU Court in Luxembourg if it continues to block funds from the Recovery and Resilience Facility, announced Deputy Foreign Minister Marcin Przydacz. Read more.

Literature corner

Will Ukraine’s refugees go home? In this policy brief, Uri Dadush and Pauline Weil look at the short-term costs and long-term economic gains of Ukrainian immigration in Europe and argue that the best way to help Ukraine and moderate the outflow of its people is to assist in the country’s reconstruction.

Europe should not forget the challenges to its South. According to Luigi Scazzieri, the EU should help its Middle Eastern neighbours cope with energy prices and lower food exports from the Black Sea region while also offering them better access to the single market, cooperation on the green transition and a deeper political partnership.

Nationalism at the till. This column looks at how the rise in nationalism, such as the Brexit referendum, can affect consumers’ behaviours. The authors argue that this effect is driven by social and traditional media keeping national identity top of mind among consumers.

János Allenbach-Ammann contributed to the reporting.

[Edited by Alice Taylor]

Read more with Euractiv

Commission presents recommendation for adequate minimum income schemes

The Commission put forward a proposal for a new Council Recommendation on minimum income to help EU countries reduce poverty and promote reintegration in the labour market.