Hungary feels wrath of Rehn as new economic order takes hold

EUROPEAN DIARY: The EU's economics commissioner has stepped up action against Budapest, proposing to suspend €495 million in funding

RELATIONS BETWEEN Hungary and the rest of Europe soured yesterday as economics commissioner Olli Rehn moved to suspend almost a half a billion euro in EU funding for the country over its wayward public finances.

The manoeuvre compounds tension with the combative Hungarian prime minister Viktor Orban, who stands accused of blunting the independence of the country’s central bank, judges and data protection body.

It also heralds a new phase in Rehn’s effort to assert his authority over the European economy.

At issue is Hungary’s budget, in which deficits are forecast this year and next. Nothing exceptional there – most member states are in breach of the EU limits.

What irks Rehn, however, is Hungary’s failure to take effective action to tackle the problem. Although the country achieved a budget surplus last year, this was possible only with the benefit of once-off measures like a huge transfer of private pension funds into the public budget.

Last month, the commissioner called for new fiscal measures and said Hungary ran the risk of seeing its EU cohesion funds suspended if it did not comply. EU finance ministers backed that stance.

Orban submitted new proposals to Brussels a few days ago, but Rehn found them insufficient. He has now stepped up action against Hungary, proposing to suspend €495 million in EU cohesion funding due next year.

“This decision today is to be regarded as an incentive to correct a deviation, not a punishment,” said Rehn.

“It is a fair and proportionate measure of a preventive nature. Hungary has until January 1st next year to bring its deficit back on track and avoid these consequences. I trust it can and will do so.”

The response from Budapest was predictably blunt, with the commission accused of ignoring the facts.

“Hungary’s budget deficit was, for the first time since we joined the EU in 2004, below 3 per cent in 2011 and will remain so this year as well, which makes it the country with the eighth lowest deficit in the EU,” the Hungarians said.

“The proposal adopted by the European Commission today is also controversial from a legal point of view: it contradicts the spirit of the treaties since it imposes sanctions in response to a presupposed future event.”

But Rehn is not for turning.

Making the point that Hungary would face an immediate financial sanction if it was a member of the single currency, he left open the possibility that the punishment would be withdrawn.

If the sanction is imposed eventually, it would break something of a taboo in Brussels. While governments merrily broke Europe’s fiscal rules in the good times, none was ever fined for its misbehaviour.

The law was tough enough, but a culture of brazen impunity prevailed. How well we know the costs of that.

When the discredited stability pact was strengthened last year, Rehn warned that he would, from the earliest moment, deploy new powers to ensure compliance with the law.

In the shadow of the debt crisis this is crucial, given the necessity to establish the credibility of Europe’s newly reinforced system of economic governance.

At its core, this is all about intrusive intervention. The first country to feel Rehn’s wrath was Belgium, whose government he directed last month to find up to €2 billion in savings within five days. The Belgians duly imposed an emergency €1.3 billion spending freeze, leading Rehn to say the system was already yielding results.

Belgium was something of a soft target, of course, the country being a huge beneficiary of the vast EU bureaucracy in Brussels and its leaders ranking among the most communautairein all Europe. The same goes for Hungary, which is seriously out of favour these days thanks to Orban's new constitution.

Dissuasive action is crucial, yet it is not the only tool. Rehn has intensified surveillance of 12 European economies – including France, Britain and Italy – with a view to making policy recommendations to tackle risky trends such as excessive debt and spiking property prices.

With the fiscal treaty still to be ratified, these are early days in the new economic order.

Still, most of the measures in the treaty are already available to Rehn in the reinforced stability pact. The sense remains that the real test of the new system will come only if a major member state tries to defy his writ.

As for Hungary, more trouble is in store. In the face of legal action from the commission for violating EU law, the country made new submissions on its central bank, judiciary and data protection office last Friday.

The commission is withholding judgment for now, and may not complete its assessment until next week.

The sense already in Brussels, however, is that the latest overtures from Budapest do not go far enough to address the commission’s concerns.

At this point in the game, it is no surprise.