(Bloomberg) -- The European Union unleashed an unprecedented punishment on one of its own, signaling that patience has worn out with Hungary -- and Prime Minister Viktor Orban’s determination to engage with Russian President Vladimir Putin, while eschewing the democratic values of the bloc, makes the move all the more resonant.
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But Hungary claimed it was ready to abide by the EU’s requirements in order to unlock both reconstruction and cohesion funds and would strike a deal with the bloc before year-end, Justice Minister Judit Varga said in a Facebook post late Monday.
Varga pledged that the cabinet would focus on implementing and enforcing its commitments, and she “submitted to Parliament a law package amending the legislation on cooperation with the European Anti-Fraud Office and on public interest trusts performing public tasks.”
The Hungarian forint, which has declined 9% against the euro this year over the uncertain outlook for EU funds, rose 1.4% on Monday, bolstered by the prospect that Brussels and Budapest could eventually reach an agreement on disbursing the money.
For more than a decade, the EU has unsuccessfully tried to keep Orban in the fold while mostly looking past his antagonistic approach to the bloc, including repeated efforts to hamper sanctions on Russia. On Sunday, the EU changed tack and threatened to freeze 7.5 billion euros ($7.5 billion) earmarked for Hungary unless it takes steps to curb fraud and corruption.
It’s a coincidence that the financial penalties come in the midst of Russia’s invasion of Ukraine, but the war has put Orban’s cozy relationship with Moscow in a new light and has forced the EU to address Hungary’s willingness to flaunt the rule of law in a more aggressive manner.
Europe is entering a critical phase, with energy shortages set to increase the strains on the fragile unity that the 27 EU members have managed to maintain since the February invasion. Yet while most member states have been engaged in a desperate struggle to secure alternative gas supplies before the winter, Orban has deepened his country’s ties to the Kremlin, exploiting the exemptions he demanded from EU sanctions to secure increased imports of gas from Russia.
Orban’s popularity is also supported by some of the cheapest gasoline in Europe thanks to a price cap that is largely possible because of low-cost Russian imports. Hungary’s oil pipeline to Russia is also exempt from EU sanctions.
“Hungary’s pro-Putin stand after the Russian invasion of Ukraine has made it obvious to the EU political class that Orban is not just a threat to Hungarian democracy but to the EU’s ability to respond to this war,” Jacek Kucharczyk, president of the Institute of Public Affairs think tank, wrote in Carnegie Europe last week.
The showdown with Hungary cuts to a fundamental weakness in the EU structures: With the 27 sovereign countries each granted a veto over the most important decisions, the union effectively has a standing invitation to rival powers like Russia or China, and at times even the US, to drive a wedge between members by offering privileged deals to some.
During years of frustration at the Hungarian government, Orban has been shielded from the EU’s main disciplinary machinery, known as the Article 7 procedure, by the support of the nationalist government in Warsaw -- because that, too, requires the endorsement of all the other members. The war in Ukraine has soured Orban’s relationship with the Polish government, which has been among the most ardent supporters of firm action against Putin, but for now the Poles are standing by Orban.
“Poland will strongly oppose any action of European institutions that intend to unduly deprive any member states of funds, in this case Hungary,” Prime Minister Mateusz Morawiecki said Sunday.
But Poland’s support is no longer enough for Hungary. Under the so-called rule of law mechanism, EU governments make the final decision within a month on whether to freeze Hungary’s funding, with the possibility of extending the deadline by as much as two months. A majority of member states is required for the commission proposal to take effect.
Appetite for action is increasing across the bloc, with EU lawmakers last week saying inaction has “exacerbated the backslide” and that Hungary can no longer be considered full democracy. Lawmakers called on the commission to take harsher measures “at a time when EU values are especially under threat by the Russian war against Ukraine and its anti-EU actions.”
Orban dismissed the Parliament’s vote as “a boring joke.”
Since coming to power in 2010, he’s challenged the EU’s democratic foundations with an unprecedented power grab that saw him rewrite the Hungarian constitution, overhaul election rules and extend government influence over the courts, the media, cultural institutions and the education system. Under his leadership, Hungary has plunged in Transparency International’s Corruption Perceptions Index and now ranks second lowest in the EU, with only Bulgaria worse.
The EU’s concerns include irregularities in Hungary’s public procurement system, conflicts of interest in public interest trusts and the independence of the judiciary, according to a person familiar with the procedure. Budapest will inform the commission about progress in implementing remedial measures by Nov. 19, said the person, who asked not to be identified because the process is private.
In the past month, Hungary has offered to set up an anti-graft agency and to amend laws including on public procurements to allay the concerns of the EU executive. EU Budget Commissioner Johannes Hahn told reporters in Brussels that Hungary had made “important and public commitments in the right direction,” and that the commission welcomed the constructive development.
“We made pledges that we can implement, we want to implement and that we will implement,” Tibor Navracsics, a minister in Hungary who’s negotiated with the European Commission, said in a Facebook post Sunday.
Separately, Hungary is still waiting for the commission to approve its pandemic recovery plan, which would allow the country to tap a separate 5.8 billion-euro pot of EU money.
(Updates with justice minister comments in second and third paragraphs. Moved market reaction to fourth paragraph. A previous version of this story corrected the spelling of Orban’s name in a photo caption.)
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