EC proposes suspension of €495 mln in Cohesion Fund allocation for Hungary

The European Commission on Wednesday said it proposed the suspension of €495 million of Cohesion Fund allocations for Hungary for 2013 because of the country's failure to address its excessive deficit.

"This unprecedented step follows the Commission's repeated warnings to Hungary urging it to step up its efforts to end the country's excessive government deficit, and its subsequent failure to take appropriate action," the Commission said.


"Today's proposal should be seen as a strong incentive for Hungary to conduct sound fiscal policies and put in place the right macro-economic and fiscal conditions to ensure an efficient use of Cohesion Fund resources. It is now for the Hungarian government to act before the suspension takes effect," European Commission Vice-President for Economic and Monetary Affairs Olli Rehn said.


"It is now up to the Hungarian authorities to take the necessary measures without delay, in order to be able to reap the full benefit of the Cohesion Fund. Today's proposal is proportionate and leaves the possibility to continue investments via the Fund, whilst giving Hungary the chance and time to redress the situation," said Johannes Hahn, Commissioner for Regional Policy.


The amount the Commission proposes suspending is equivalent to 0.5% of GDP and 29% of the country's total Cohesion Fund allocations for 2013.


Johannes Hahn, European Commission member in charge of Regional Policy on Commission, said at a press conference after the Commission took the decision on the proposal that the scale of the suspension was "high enough to provide a serious incentive for Hungary to act". He added that if Hungary takes no action by the end of 2015 "these resources are lost for good".


The Commission concluded on January 11, as part of the Excessive Deficit Procedure against Hungary, that the country had not taken effective action to bring its deficit under the 3% -of-GDP target by 2011 "in a sustainable and credible manner". Consequently, the Commission proposed stepping up the procedure and the recommendation was endorsed by the Council of Ministers on January 24, paving the way for a suspension of part of the Cohesion Fund allocations for Hungary.


Under Cohesion Fund rules, allocation of support from the fund may be suspended in part or in whole in the case of an excessive government deficit and an absence of effective action to correct it.


The proposed suspension concerns only Hungary's most recent breach, and not past fiscal behavior, the Commission noted.


The European Union member states must endorse the Commission's proposal on the suspension.


"Once effective action is deemed to be taken, the suspension would be lifted without delay," the Commission said.


Speaking to journalists after the decision, Rehn called the move an "incentive to correct a deviation, not a punishment".


"It is a fair and proportionate measure of a preventive nature," he added.


He noted that Hungary has until January 1, 2013 to bring its deficit on track and said the Commission was prepared to cooperate in meeting the goal.


"The Commission stands ready to engage with the Hungarian authorities in a true spirit of partnership to achieve this objective," Rehn said.


"Restoring confidence in the Hungarian economy and supporting the prosperity of Hungarian citizens is the goal of our decision today," he added.


Asked about a government resolution published Tuesday that mandates cuts in drug subsidies, reduced support for Budapest public transport company BKV and a freeze on some procurements at government institutions, Rehn said he and EC President Jose Manuel Barroso had received letters from National Economy Ministry György Matolcsy and Prime Minister Viktor Orbán, respectively, "one or two days ago".


"These letters did not present such kind of newly adopted measures or fiscal consolidation which could immediately change our picture regarding the outlook of public finances," he said. 


Hungary has been under the Excessive Deficit Procedure ever since its accession to the EU in 2004. After deciding in January and November 2005 that Hungary had not taken effective action, the deadline for correcting the situation was postponed in October 2006, from 2008 to 2009. In July 2009, against the background of a severe economic downturn which triggered fiscal adjustment measures and the provision of balance of payments support from the EU and the International Monetary Fund, the Council concluded that Hungary had taken effective action and issued revised its recommendations, setting 2011 as the new deadline to correct the excessive deficit in a sustainable manner.


Although Hungary is expected to notify a sizable budgetary surplus of 3.5% of GDP for 2011, the country has achieved this surplus only thanks to one-off measures worth some 10% of GDP altogether, the Commission said, noting the transfer of private pension funds worth 9.75% of GDP to the budget and the introduction of extraordinary levies. Without these one-off measures the deficit in 2011 would have reached 6% of GDP, it added.


The Commission said Hungary's structural budgetary position had deteriorated by a cumulative 2.5% of GDP in 2010 and 2011, "in stark contrast to the recommended cumulative fiscal improvement of 0.5% of GDP".


It said Hungary would run a fiscal deficit again in 2012 and the gap for 2013 was seen reaching 3.25% of GDP. 


"The decision on the amount of Cohesion Fund commitment appropriations to be suspended should ensure that the suspension is both effective and proportionate, whilst taking into account the current overall economic situation in the European Union and the relative importance of the Cohesion," the Commission noted.