Blog Post

Will cohesion fund disbursement be suspended for Hungary?

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 […]

By: Date: February 24, 2012 Topic: Macroeconomic policy

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.


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint. Anyone is free to republish and/or quote this post without prior consent. Please provide a full reference, clearly stating Bruegel and the relevant author as the source, and include a prominent hyperlink to the original post.

Read about event More on this topic
 

Upcoming Event

Nov
4
14:00

European monetary policy: lessons from the past two decades

This event will feature the presentation of “Monetary Policy in Times of Crisis – A Tale of Two Decades of the European Central Bank."

Speakers: Petra Geraats, Wolfgang Lemke and Francesco Papadia Topic: Macroeconomic policy
Read article More by this author
 

Opinion

European governance

Can EU fiscal rules jump on the green bandwagon?

By and large, setting a new green golden rule would be a useful addition to the existing EU fiscal framework.

By: Guntram B. Wolff Topic: European governance, Green economy, Macroeconomic policy Date: October 22, 2021
Read about event More on this topic
 

Upcoming Event

Nov
9
11:00

Phasing out COVID-19 emergency support programmes: effects on productivity and financial stability

How can European countries phase out the COVID-19 support measures without having a negative impact on productivity and financial stability?

Speakers: Maria Demertzis and Laurie Mayers Topic: Macroeconomic policy
Read article
 

Blog Post

European governance

Germany’s post-pandemic current account surplus

The pandemic has increased the net lending position of the German corporate sector. By incentivising private investment, policymakers could trigger a virtuous cycle of increasing wages, decreasing corporate net lending, which would eventually lead to a reduction of the economy-wide current account surplus.

By: Lionel Guetta-Jeanrenaud and Guntram B. Wolff Topic: European governance, Macroeconomic policy Date: October 21, 2021
Read about event
 

Past Event

Past Event

Monetary policy in the time of climate change

How does climate change influence monetary policy in the eurozone? What potential monetary policy measures should be taken up to address climate risks?

Speakers: Cornelia Holthausen, Jean Pisani-Ferry and Guntram B. Wolff Topic: Green economy, Macroeconomic policy Date: October 20, 2021
Read article More by this author
 

Podcast

Podcast

Rethinking fiscal policy

A look at the past, present and future of fiscal policy in the European Union with Chief economist of the European Stability Mechanism, Rolf Strauch.

By: The Sound of Economics Topic: European governance, Macroeconomic policy Date: October 20, 2021
Read article
 

External Publication

European Parliament

Tailoring prudential policy to bank size: the application of proportionality in the US and euro area

In-depth analysis prepared for the European Parliament's Committee on Economic and Monetary Affairs (ECON).

By: Alexander Lehmann and Nicolas Véron Topic: Banking and capital markets, European Parliament, Macroeconomic policy Date: October 14, 2021
Read article More by this author
 

External Publication

Global Economic Resilience: Building Forward Better

A roadmap for systemic economic reform calling for step-change in global economic governance to increase resilience and build forward better from economic shocks, prepared for the G7 Advisory Panel on Economic Resilience.

By: Thomas Wieser Topic: Global economy and trade, Macroeconomic policy Date: October 14, 2021
Read article More on this topic More by this author
 

Opinion

Letter: Declining investment may explain why rates are low

Perhaps an analysis of the causes of the declining investment rate would bring us closer to explaining why real interest rates are so low.

By: Marek Dabrowski Topic: Macroeconomic policy Date: October 1, 2021
Read article More by this author
 

Podcast

Podcast

A green fiscal pact

How can the European Union increase green public investment while consolidating budget deficits?

By: The Sound of Economics Topic: European governance, Macroeconomic policy Date: September 29, 2021
Read article More on this topic More by this author
 

Blog Post

Monetary arithmetic and inflation risk

Between 2007 and 2020, the balance sheets of the European Central Bank, the Bank of Japan, and the Fed have all increased about sevenfold. But inflation stayed low throughout the 2010s. This was possible due to decreasing money velocity and the money multiplier. However, a continuation of asset purchasing programs by central banks involves the risk of higher inflation and fiscal dominance.

By: Marek Dabrowski Topic: Macroeconomic policy Date: September 28, 2021
Read article More on this topic More by this author
 

Opinion

The pandemic’s uncertain impact on productivity

The pandemic has certainly permanently affected our way of working. Whether this is for the better remains to be seen.

By: Maria Demertzis Topic: Macroeconomic policy Date: September 28, 2021
Load more posts