1 September 2020

The Comission's EU Budget Proposal Has Been Overruled

"The Eurozone was already in a fragile condition when the coronavirus pandemic struck, so at the instigation of France and Germany, a major €750 billion support and recovery fund was established by the EU to tackle the challenges posed by the pandemic. €390 billion of this stimulus package, which is known as the Next Generation EU programme, is made up of grants, with the remainder (€360 billion) comprised of loans extended on very favourable terms. This €750 billion will be added to the total budget for the next seven-year cycle (the standard Multiannual Financing Framework, or MFF), which amounts to some €1,074 billion."

On the basis of previous proposals, in the course of June and early July, Hungary had appeared set to be one of the biggest losers in the new EU financial aid programme, with Brussels “rewarding” irresponsible economic policies in order to save the Eurozone as a political project. At the last minute, however, Hungary succeeded in finding partners and significantly increased its financial room for manoeuvre in the 201027 EU budget at the July 1721 summit.

The Eurozone was already in a fragile condition when the coronavirus pandemic struck, so at the instigation of France and Germany, a major €750 billion support and recovery fund was established by the EU to tackle the challenges posed by the pandemic. €390 billion of this stimulus package, which is known as the Next Generation EU programme, is made up of grants, with the remainder (€360 billion) comprised of loans extended on very favourable terms. This €750 billion will be added to the total budget for the next seven-year cycle (the standard Multiannual Financing Framework, or MFF), which amounts to some €1,074 billion.

The subsidy-credit ratio shifted significantly over the course of the negotiations, as the original proposal for a €500 billion subsidy was opposed by a coalition of countries including Austria, the Netherlands, Denmark and Sweden – a group collectively dubbed the “frugal”. It is worth pointing out, however, that the concept of the Commission taking out loans on behalf of member states, then repaying them at some point between 2026 and 2058, marks a significant departure. It will entail a new kind of joint indebtedness: indebtedness at the EU level.

As we pointed out previously in the Hungarian press, it was clear even before the EU summit in July that the funds to be allocated to Hungary would hardly increase at all during the upcoming EU budgetary cycle: compared to those allocated between 2014 and 2020, the increase would amount to no more than 9 per cent, though together with the €750 billion fund added to the original MFF figure of €1074 billion, the total budget for the upcoming 7-year cycle amounts to some €1824 billion. By contrast, many Western European countries could count on a significant increase in budgetary resources, compared to the previous cycle.

Hungary attended the EU summit aware that there was little prospect of a substantial increase in EU funding. Indeed, the only reason funding was not in fact reduced, as per the Commission’s proposal of two years ago, was the historic Next Generation EU financial recovery fund, created due to the Coronavirus pandemic. The Commission’s original proposal would have seen funding for Hungary drop from €23.6 billion to €17.9 billion, at 2018 prices. The ceiling for callable subsidies would have been reduced by roughly 40 per cent after 2021, to a maximum of 1.5 per cent of GDP. (As shall be discussed below, however, Hungary has succeeded in “incorporating” a one-sentence condition into the framework of rules, whereby if one third of the population of a member state lives in a NUTS2 statistical region [Nomenclature of Territorial Units for Statistics] – in other words, with an average per-capita GDP of less than 50 per cent of the EU average – then the minimum resource allocation may not amount to less than 85 per cent of that received in the 2014–2020 cycle.)

Under early Commission plans, the chief winners would have been the Mediterranean countries, while Central Europe and the Visegrad Countries, which over the past decade have become the engines of the EU economy, would have been penalised. As will be explained below, however, the region ultimately came out of the negotiations with, relatively speaking, the greatest overall success. Nevertheless, it should be noted that according to the original plans, Slovakia, which suffered a historic economic downturn in the first quarter of this year, would have been the recipient of a much more generous funding increase (around 29 per cent) while Poland would have received an increase of 24 per cent. In all probability, this indicated a deliberate attempt from Brussels to drive a wedge between the countries of the Visegrad Group, or V4. The V4 has held together, however, issuing a joint statement declaring that the EU budgetary proposal represented a victory for the richer states over the poorer ones. Mateusz Morawiecki, the Polish Prime Minister, said after the July summit that it was at last the voice of Central Europe which clinched the EU budgetary compromise.

As the Hungarian Prime Minister pointed out, the budgetary proposal would have seen Portugal, which has the same population as Hungary and is at a roughly similar stage of development, receive 30 per cent more than Hungary in support funding. It is also surprising to note that, when previously agreed EU financial support funds are taken into account, just five Mediterranean countries would have received 50.6 per cent of the total funding, while the whole of Central Europe would have been allocated just half as much.

The question which then arose – what mechanism or formula was being employed in the allocation of funds? – was thus a legitimate one. If Brussels chose to reward high unemployment, high public debt and weak economic growth, then irresponsible economic policies would be unjustly enabled and encouraged on a continent-wide basis. In fact, it appears that Brussels was not chiefly interested in responding to the economic effects of the coronavirus crisis, since the metric which would have been used to allocate resources for mitigating the effects of the pandemic was the level of unemployment in a country before the crisis even began. Hungary, together with the Czech Republic and Germany, at last succeeded in replacing this metric with economic growth – that is, the drop in real GDP – as the basis on which the Next Generation EU recovery package would be distributed. As the Czech Prime Minister Andrej Babis put it: “We must not be punished for our successes.” According to the final compromise, 70 per cent of the largest element in the €750 billion NextGenEU package, the €672.5 billion RFF (Resources for the Future) allocated for the financing of member state reforms, will be distributed in 2021 and 2022 according to the Commission’s formula (of which the 2015– 2019 unemployment rate still forms a part). The rest, however, will be distributed on the basis of actual economic harm caused by the coronavirus.




Hungary’s aim in the negotiations was to recover for its economy as much as possible of the amount which mostly Western European companies have been extracting from the country's budget in the form of capital income – such as profit. According to Thomas Picketty’s calculations, Western European companies have so far extracted more resources from Hungary in the form of profits (7.2 per cent of GDP) than the country has received from the EU in subsidies (4 per cent of GDP). In addition, numerous studies have confirmed that a large proportion of the subsidies are subsequently recovered by Western European companies, boosting their home economies. It is unlikely, in other words, that these subsidies were of much real help in raising Hungary’s economic standing. Hungary has largely had to fend for itself, and has done so successfully.

In 2019 Hungary reached the top of the EU economic growth table. This, in addition to its specific economic model, was due to its rejection of the politics of austerity which Brussels and the IMF imposed upon, among others, the Greeks. Today, Hungary has one of the lowest unemployment rates in Europe, and its economic growth was the second highest in the bloc last year. Even in the first quarter of this year, when Slovakia – and virtually all Western European economies, fell into steep negative growth – Hungary’s growth rate was two per cent. There is a strong suspicion that the original proposal from Brussels was in fact an attempt to address pre-crisis challenges, and the danger that the EU’s poorer countries would end up financing the richer ones, not merely through hidden economic processes but in an obvious, institutional form.

This is particularly unjust because Hungary is one of the countries in Europe which has been most successful in reducing its level of national debt, and never once requested a renegotiation of this debt, even during its period of near collapse in the early 1990s. The state financed this burden of debt through the sale of national enterprises to foreign investors.

Hungary belongs to that small group of countries in the EU which have managed to successfully reduce both unemployment and public debt over the past decade. The only country which has performed better than Hungary on both counts is Ireland. In this area, Hungary has delivered the second-best economic policy performance in the EU27, yet when it came to negotiating to the next EU budgetary cycle, it began from the worst starting point.

There are four states in the EU which stand as particularly cautionary examples of poor economic policy: Greece, Italy, Luxembourg and Cyprus. In all four states, levels of both public debt and unemployment have risen over the past decade, yet according to the original Commission proposals, all four would have received EU funding which far outstripped that allocated to Hungary. This has been corrected slightly in the final draft, though Italy and Spain will still receive the lion’s share of support.

14 EU countries have increased their levels of public debt over the past decade, so while ten of these have at least been able to reduce unemployment, they have done so only at the cost of an increased debt burden. Hungary stands as an international example of a sustainable equilibrium: in fourth place when it comes to debt reduction over the past decade, and fifth in reducing unemployment.

There are of course some Western European states – including Austria, the Netherlands, Denmark, Sweden and Belgium, which have been able to reduce their public debt by between 0–10 per cent, but these have, in the best case, been able to reduce unemployment by only half the rate seen in Hungary. Despite their very limited success these highly developed Western European nations wished to reward themselves generously, while reducing the resources put at Hungary’s disposal. Thus, on the whole, Brussels would have encouraged less responsible economic policies, by giving more money to countries with high levels of public debt and unemployment.




Politics and economics are inextricably intertwined, and Hungary is confronted with the liberal cultural revolution of our age. It seems that the EU bureaucracy has, for political reasons, resorted to the use of economic penalties. The economic “attacks” on Hungary by the Western liberal mainstream may also stem from the fact that Hungary’s political leadership dares to express its own assessments of EU policies. What is more, these assessments have generally been proved correct, which is still more damaging to the Brussels elite. The Hungarian position on the issue of migration – one of the principal political questions of our time – has, for instance, emerged victorious. With regard to migration, it is worth noting, as the Centre for Fundamental Rights indicated, that those Western and Northern European countries now known as the “Frugal Four” expect voluntary solidarity when it comes to migration, but do not practice the same solidarity when it comes to economic assistance for more economically disadvantaged parts of Central Europe. It may also be added that the credibility of Prime Minister Mark Rutte, in his efforts to portray himself as a paragon of Dutch thrift, is at least called into question by the status of the Netherlands as one of Europe’s foremost tax havens, indirectly accruing large sums from other European governments. According to the Tax Justice Network, for instance, the Netherlands is responsible for the loss of $24 billion in tax revenue to other countries.

As on the issue of migration, the Hungarian economic model likewise proved a success after the 2008 crisis. Hungary dared to openly oppose the recommendations put forward by Brussels and the IMF, and chose to tackle the crisis in its own way. Time has vindicated this decision, and the IMF has since acknowledged that tunnel vision and injured pride were largely to blame for their attacks on the country. Today the Hungarian method is even promoted as an example for other countries to follow in similar crises. Hungary was among the first to break with the politics of austerity, committing itself instead to economic stimulus and support for families. The Hungarian government also correctly calculated that it was worth delaying entry to the Eurozone for the time being, since membership was evidently exacerbating the economic problems of countries in Southern Europe. This preservation of fiscal sovereignty has also contributed to Hungary’s position as an economic growth leader in the EU, though it could also be construed by the Brussels elite as a rejection of the European project itself. From their point of view, it is extremely disagreeable that Hungary’s greatest successes – be they political, as in opposing migration, or economic, as in opposing austerity or immediate eurozone accession – should have been achieved precisely when it stood up most strongly against EU orthodoxy. Since Hungary’s economic success is an indisputable fact, Brussels has come up with a new miracle weapon: by using the concept of “rule of law” as a stick, it has threatened to withdraw the resources allocated to Hungary to help it catch up with Western Europe. One of Hungary’s fundamental conditions since 2010 however, has been that it should be able to employ these resources at its own discretion, at the level of the nation state, and without outside political constraints.




Not for nothing did the Hungarian press hail the outcome of the July summit as a major political success. Compared to the total EU support of €39 billion distributed over the 2014–2020 cycle, the EU funds now allocated to Hungary (including loans) may be as much as €52.8 billion for the 2021–2027 period. In real terms, that means Hungary will receive more than a third more EU money at 2018 prices. Thus the resources allocated to Hungary seem to significantly exceed the 9 per cent increase originally envisioned in the Commission’s proposal.

In this, a particularly important role was played by the “one-sentence rule”, whereby the planned 24 per cent cut in cohesion (catch-up) funding was in fact limited to a reduction of 15 per cent. The Hungarian news portal Portfolio also pointed out that when spread across all member states, and including the mandatory state deductible, the actual reduction would “only” be 2.3 per cent. Relative stagnation in this area will be significantly improved by a larger-than-planned share of the €750 billion Next Generation EU programme. As Portfolio pointed out, if Hungary makes use of the credit line opened up by this programme, together with the funds allocated to it as a member state, it could have almost 40 per cent more funding in real terms than that made available to it in the current budget cycle.

According to the calculations of Gabor Kutasi, the result of the July summit is that per-capita support (including the loan framework) will increase instead of decrease. As such, Hungary is no longer the last in line when it comes to support, but rather somewhere in the middle: Poland and Slovakia will receive more, while the Czech Republic and Romania will be allocated less per-capita funding than Hungary. While the €52.8 billion in funding is offset somewhat by Hungary’s €10 billion payment obligation, it can at least be said that it balances to an extent the money lost in profits to large Western European companies.

Not only Kutasi, but also Bert Colijn, ING’s economist, concluded in his analysis that Hungary and the countries of Southern Europe will be the main winners of the new rescue fund (or more precisely, RFF grants). As he points out, as a share of GDP, the countries which will receive the most economic assistance are Croatia, Bulgaria and Greece, with funding equal to over six per cent of GDP over two years. As a proportion of GDP, Spain and Poland will receive 3.5 per cent, Italy 2.5 per cent, and France, Germany and the Netherlands one per cent. Hungary is in the middle, with funding equal to around three per cent of GDP to be made available over a two-year period.




Overall, the financial resources available to EU economies will be higher than during the previous budgetary cycle. This will be covered, at least in part, by new forms of taxation at the EU level in Brussels. This will be “new proprietary funding”, which should reduce the GDP-proportionate burden on member states when it comes to the repayment of the joint debt. These new forms will include, for instance, a tax on digital giants, to be introduced by 2023 at the latest, an import tax on highly polluting products entering the EU market, and an EU-wide financial transaction tax.

This means that one source of revenue to cover the reconstruction package would be a form of tariff on the EU’s external borders. Through such instruments, the EU would not only acknowledge the need for locally sourced, green production, but also prevent European companies which operate in a more environmentally friendly manner being undercut by larger, more heavily polluting enterprises from farther afield.

That the digital tax is justified can be seen in the fact that several internet giants, including Facebook and Google, have previously been blacklisted by the Hungarian tax authorities. A financial transaction tax can likewise be a forward-looking solution, penalising speculation and reducing financial instability. In this respect, the aim of the EU is to implement a tax model similar to that introduced in Hungary after 2010, according to which the burdens of crisis should be borne in largest part by those who were the biggest winners during the economic upswing.

Even before the July summit, an EU-wide tax on multinational companies had been introduced, justified on the grounds that many large European companies benefit from the world’s largest single market, yet seek to exploit tax loopholes and place their assets overseas. As is widely known, the tax havens of Switzerland, Hong Kong, the USA, Singapore, the Cayman Islands and Luxembourg are collectively estimated to have accumulated somewhere in the region of $21–32 trillion in untaxed or lightly taxed private wealth. Provided that these new taxes finance economic policy objectives, and do not undermine the national sovereignty of member states, they may prove to be an additional burden worth shouldering.




To sum up, Hungary achieved much more than could have been expected at the July summit.

According to prior proposals, the additional funding total would have increased by less than ten per cent – the lowest figure in the EU. The Commission’s proposal would have placed Hungary in an unambiguously losing position. However, the Hungarian Prime Minister, together with allies in Central Europe, succeeded in achieving a funding increase of 30–40 per cent for Hungary, at least when loan options are factored in.

The Next Generation EU stimulus package, in addition to grants, partly comprises loans, which total some €360 billion. The repayment of these loans, which are expected to have a term of 30 years, will begin only from 2026, and with zero per cent interest. Under these extremely favourable – indeed virtually unheard of – conditions, it may be possible to recoup many times the principal, especially if the money is invested in high-yield ventures. This is of course less true if it is simply scattered as free money, as it is already clear many Western governments plan to do.

This is precisely why it is so important that the rules for spending this money are not set by the EU, but by national governments and organisations, which have the most thorough knowledge of what investments can be made to achieve the highest return in economic growth. This one-time loan of cheap credit would, in a modest way, help compensate Hungary, which despite having a commercial sector weakened by decades of Communism, took on larger Western enterprises in free-market competition, and may allow the country to at last establish an economic model based on its own particular creative genius, thus in turn strengthening its capacity to generate fresh innovation. The fact that the Commission’s original proposal, which would have been an additional constraint upon the EU’s poorer states, Hungary included, has been overturned is both a political and an economic success. Though irresponsible economic policies seem set to be generously rewarded, at least states with successful economic models, such as Hungary, are not to be penalised.

Translation by Thomas Sneddon


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