Will cohesion fund disbursement be suspended for Hungary?

by Zsolt Darvas on 24th February 2012

For the first time in history, the European Commission proposed the suspension of cohesion fund disbursement for a member state on 22 February 2012. It was judged, within the framework of the Excessive Deficit Procedure (EDP), that Hungary had not taken effective action to reduce its budget deficit. While the budget had a surplus in 2011, it was largely the result of one-off measures, without which the deficit would have been about 6 percent of GDP. And the structural deficit, which measures the underlying position of the budget without one-off measures and the impact of the economic cycle, has deteriorated by 2.5 percent of GDP from 2009 to 2011. It is now up to the Hungarian government to implement appropriate actions, otherwise, €495 million of Cohesion Fund for 2013 (29 percent of 2013 commitments, which is 0.5 percent of GDP) will be suspended.

Will the funds be really suspended? I have a very simple explanation why this is extremely unlikely. The intensifying market pressure on Hungary in December 2011 and early January 2012 clarified that the country will not be able to finance herself from the market in the absence of financial assistance from the IMF and European Commission. The negotiation for such assistance has not yet been started, because the country has not yet met its preconditions. But it should be started and concluded, otherwise, Hungary may face a default with very harmful economic and political consequences. Therefore, I am confident that the Hungarian government will comply with the requirements. But the financial assistance programme will set the paths for fiscal, macroeconomic and structural policies. It is nearly impossible that the Commission provides financial assistance and agrees to a medium term fiscal programme, which will not improve the structural balance sufficiently and therefore the cohesion fund disbursements will need to be suspended.

So why has the suspension been announced? First, the negotiation for financial assistance has not yet started so we are still far from its conclusion. Second, in the reformed governance of the euro area sanctions are supposed to have a significant role (yet the cohesion fund regulation was codified already before the crisis). While I would prefer a different EU institutional setup, which is not so much reliant on sanctions from Brussels, if a rule is agreed, it is time to follow at last. Third, certain legislations by the Hungarian parliament triggered widespread, though not univocal, disappointment in other EU countries. While the Commission has launched three major accelerated infringement procedure against the country (independence of the central bank, independence of the data protection authorities, measures affecting the judiciary), it has been criticized by not going far enough. In particular, some politicians suggested opening a procedure against country based on Article 7 of the Treaty by the suspected violations of basic European values. A hard stance in the EDP may calm these voices.

Yet Hungary is an easy target: a small country outside the euro area, which is viewed with scepticism and which has requested financial assistance. The real first test of the sanction-based system would be the issue of sanctioning a major euro-area member state.

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