EU Recommends Withholding Funds for Hungary Over Graft Concerns

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The European Union’s executive arm proposed suspending 7.5 billion euros ($7.5 billion) from its budget earmarked for Hungary over accusations of corruption and fraud.

The European Commission proposed suspending the funding as part of its new power under its so-called conditionality mechanism, according to a statement on Sunday. The penalty would still need to be approved by the bloc’s member states.

“The European Commission has today proposed budget protection measures to the Council under the conditionality regulation,” according to a Sunday statement. “This is to ensure the protection of the EU budget and the financial interests of the EU against breaches of the principles of the rule of law in Hungary.”

Hungarian Prime Minister Viktor Orban has challenged the EU’s democratic foundation following an unprecedented power consolidation that saw him rewrite the constitution, overhaul election rules and extend his influence over the courts, media, culture and education. Under his leadership since 2010, Hungary has plunged in Transparency International’s Corruption Perceptions Index and now ranks lowest in the EU after Bulgaria.

Financial interest

Weary of moves to undermine the independence of judges, the erosion of minority rights and the primacy of EU law, the bloc has put in place a new mechanism to protect its financial interests against members they accuse of democratic backsliding. Hungary is the first country targeted although Poland, where the leadership has mimicked Orban’s policies, may also be at risk of similar scrutiny in the future.

The EU standoff battered Hungarian assets, with the forint declining almost 10% against the euro this year. Investors have cited the uncertain outlook for EU funds as contributing to a disproportionate sell off.

In the past month it 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 governments must make the final decision within a month on whether to cut Hungary’s funding, with the possibility of extending the deadline by as much as two months. A qualified majority of member states is required for the commission proposal to take effect.

Orban wasted no time in dispatching his officials to convince his counterparts to vote against funding cuts.

“The Hungarian government is ready to provide guarantees to ensure that the Hungarian people receive the funds they are entitled to,” Justice Minister Judit Varga wrote on Facebook on Thursday after a meeting in Paris with Garance Pineau, French President Emmanuel Macron’s adviser for EU affairs .

EU lawmakers said this week that the bloc’s executive had let problems fester in Hungary for too long and the lack of decisive action had “contributed to the breakdown in democracy” there.

“Leaving rule of law breaches unchecked undermines democratic institutions and ultimately affects the human rights and lives of everyone in the country where those breaches are committed,” the European Parliament said in its resolution.

(Updates with amount of suspension in the first paragraph.)

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