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Brussels threatens Budapest with half-a-billion euro aid cut.
ROME – The European Union's dispute with Hungary intensified Wednesday with the bloc's executive body deciding to freeze 495 million euros in development funding for its bad boy member.
The move is unprecedented and comes in direct response to the Hungarian government's refusal to bring its budget deficit under control. Underlying the budget battle, there is widespread exasperation at EU headquarters in Brussels over perceived threats to the freedom of Hungary's courts, media and central bank.
In Budapest, Prime Minister Viktor Orban's government reacted furiously to the European Commission's decision.
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"Our government regards it as an unfounded and unfair proposal," read a government statement from Budapest. “It is unfathomable why the European Commission has ignored the facts.”
The Commission has never before sought to withhold from any EU member the so-called Cohesion Funds which are used by the EU to develop transport, communications and other projects in the bloc's poorer regions. The aid to Hungary will not be cut immediately but will depend on the agreement of the EU's other 26 member nations.
Nevertheless the threat is significant and it quickly triggered a fall of the Hungarian forint on currency markets. The threatened aid represents 0.5 percent of Hungary's entire economic output, money it can ill afford to lose as it struggles to avoid the risk of bankruptcy.
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The toughening attitude from Brussels also bodes ill for Hungary's hopes of securing a bailout of up to 20 billion euros from the EU and International Monetary Fund to keep its economy afloat. The two institutions have been insisting for months that Orban has to bring his policies in line before they will agree to the emergency funding.
"Today's proposal should be seen as a strong incentive for Hungary to conduct sound fiscal policies,” said EU Economics Commissioner Olli Rehn. “It is now for the Hungarian government to act before the suspension takes effect.”
Orban's government showed little sign of contrition, however, accusing the EU headquarters of breaking its own treaty rules. The government claim's Hungary has some of the healthiest public finances in the EU. Brussels replies that Orban's government has skewed the figures through one-off actions, like a massive transfer of private pension funds to the state's budget, while doing nothing to address the underling fiscal weakness.
Although the EU is likely to give Hungary until the end of the year before making good on the threat, Wednesday's decision looks dangerously like another step on Budapest's route to becoming Athens-on-the-Danube.
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