Earlier this month, Hungary and Poland rejected the 7-year EUR 1.8 trillion EU budget with the aim to block the EUR 750 billion covid-19 recovery package (funded by the first-ever EU collective bond issue), being part of this budget. The reason is that the recovery package, agreed in July after lengthy and tense negotiations, contains provisions that require recipients to comply with EU rule of law. Complying with the law should be an obvious condition, certainly when you have signed up to do so at the time of joining the EU. The provisions were squarely aimed at Hungary and Poland, who over the last couple of years have tightened their grip on the media, bashed the LGBT community as well as Jews and taken control over the judiciary (by directly or indirectly appointing their own cronies). Hungary’s prime minister, Viktor Orbán, went one step further and passed a law in March of this year that allows him to rule by decree, bypassing parliament (which, anyway, is controlled by his acolytes of the ruling Fidesz party) under the pretense that this was required to deal with the covid-19 emergency. Messrs. Orbán and Kaczyński (the de facto leader of Poland) do not wish to be held to account by EU institutions and so far largely have succeeded. They only want to approve the budget when the rule-of-law conditions to the recovery package are removed.

Hungary and Poland seem to play a game of chicken as, without an agreed budget, EU funds to these two countries will dry up as well. Grants from the recovery fund, for example, amount to about 3% of GDP for both countries each (EUR 6.2 billion for Hungary and EUR 23 billion for Poland, in 2018 prices), money they can’t really forego without dire consequences to their economies. If the budget is not approved, an emergency budget will be triggered that allows for money to flow only to ring-fenced areas (which for some reason includes subsidies to farmers). Cohesion funds for new projects that benefit poorer nations in the EU would be halted, which for Hungary and Poland amount to about EUR 20 billion and EUR 66 billion, in 2018 prices, respectively for the next 7 years. Hungary’s public debt level (projected at 77% for 2020, according to IMF) is elevated compared to EM peers and seems vulnerable to a credit downgrade to junk if it were to lose access to EU funds.

Mr. Orbán in action…

Especially Mr. Orbán over the last 10 years has been apt in unpicking constitutional checks and balances whilst enlarging his power base, often using his affiliation with the centre-right European People’s Party as cover to deflect EU criticism (the EPP is putting up with Orbán in order to remain the largest bloc in the European Parliament). Indeed, already in 2014 Mr. Orbán presented his vision of an ideal state in what he called an “illiberal democracy”. There are also strong indications that some of the EU money that Hungary received systematically has been siphoned off for illegitimate purposes. Hungary tops the European Anti-Fraud Office (OLAF) list of number of probes as well as amounts involved (nearly 4% of payments). The EU has limited options to discipline a member state. An Article 7 procedure can be used to suspend certain rights (including voting rights) of a member state for breaching EU fundamental values and has been invoked against both Hungary (2018) and Poland (2017). However, this procedure can easily be defused as it requires unanimity amongst voting member states: for example (and not entirely hypothetical), Hungary and Poland may provide cover to each other.

Clearly, a delay in activation of the EUR 750 billion covid-19 recovery package, inspirationally named NextGenerationEU, is a setback for countries like Italy and Spain that need funding urgently and with an EU-wide double-dip recession in sight. However, giving in to blackmail will do lasting damage to the EU’s values of democracy and judiciary independence. Therefore, as already pointed out by Guy Verhofstadt, amongst others, the EUR 750 billion recovery package could be set up under “enhanced cooperation”, an arrangement where EU structures can be used for projects only some members (i.e. all EU members but Hungary and Poland) want to take part in. This is not as unusual as it may sound and was used to form the Schengen agreement and even the euro (with Denmark staying outside). As a consequence of their actions to undermine democracy and trampling of the rule of law, Hungary and Poland should be excluded from receiving any money from the recovery package. Let the chickens go home to roost…