The European Commission on Sunday called for an estimated €7.5 billion in European funds to be withheld from Hungary over corruption concerns.
Commissioner Johannes Hahn, in charge of Budget and Administration, said the figure amounts to 65% of the commitments for three operational programmes under cohesion policy and about a third of cohesion funds the country received from the EU budget.
EU cohesion funds are given to poorer European countries to help promote growth and employment, while operational programmes surround more specific investment projects.
For Brussels, the recommendation to the Council to adopt this punitive measure is the next step in the rule of law mechanism process that it triggered against Hungary in April.
The mechanism, which was approved by the European Court of Justice just weeks earlier following a challenge from Budapest and Poland, allows Brussels to impose financial sanctions on member states "to protect the budget" if they are deemed to have breached core EU values.
'A risk to the budget remains'
The decision to impose the financial penalty was taken unanimously by commissioners, Hahn said, during their College meeting exceptionally held earlier in the morning.
Hahn emphasised that Budapest has outlined 17 remedial measures since Brussels triggered the conditionality mechanism.
He said that these "should in principle be capable of addressing the issues described in the notification," including "systematic irregularities" in the public procurement process, conflict of interest from government officials and weakness in the investigation and prosecution in cases regarding EU funds.
But Hahn also stressed that this is only if they are "implemented accordingly", that the timeline remains "very tight" and that concrete changes would also take time to be rolled out in practice
"A risk for the budget at this stage remains, therefore we cannot conclude that the EU budget is sufficiently protected," he went on.
The Council now has one month to decide whether to go ahead with the Commission's recommendation. If it does, Hungary will also be given one month to reply -- although it can request an extension -- which means that the earliest the Commission could freeze funds to Budapest would be 19 November.
The decision at the Council level will only require a qualified majority and not unanimity to be adopted, so Poland, with which Hungary had in the past struck a deal to block any punitive actions over rule of law, will not be able to prevent the financial penalty on Hungary.
Yet, the Commission left the door open to compromise as Hungary has committed to rolling out the majority of its remedial measures by 19 November.
The measures Budapest agreed to take to address the Commission's concerns include the establishment of a new and independent Integrity Authority and of an Anti-Corruption Task Force and the modification of the criminal code to allow judicial review of prosecutorial decisions.
The rollout of an Electronic Public Procurement System and training to SMEs and micro enterprises on public procurement practices are also on that list.
A senior EU official said that "very intensive dialogue took place" between Budapest and Brussels over the summer over these remedial measures and that "it is going to be an extremely busy period" as Hungary "now comes forward through legislation and rulemaking".
He noted that the country has "actually stuck to these deadlines" so far.
Ultimate decision is 'purely political'
German MEP Daniel Freund (Greens) has criticised the announcement as "not going in the right direction," arguing that the "Commission is showing Orban [an] easy way out: sham reforms".
He also noted that €27bn of EU funds would meanwhile continue to make their way to Hungary.
Milan Nic, a senior fellow at the German Council on Foreign Relations (DGAP), nonetheless stressed that "for the EU Commission, it’s a new territory: this is for the first time in its history to propose suspending the disbursement of EU funds to a member state."
"The recommended amount is substantial; it will put the Hungarian government under pressure to implement additional measures against systemic corruption and increase transparency in the disbursement of EU cohesion funds," he told Euronews.
But he also noted that chances are a compromise will be found.
Piotr Buras, a senior policy fellow and head of the Warsaw office for the European Council on Foreign Relations (ECFR), similarly expressed doubt that the decision, which he described as "a demonstration of the Commission's resolve to remain tough regarding the violations of the rule of law" will result in fewer funds for Budapest.
"The ultimate decision requires the qualified majority in the Council and is thus purely political. Many countries will be wary of taking such a drastic step," Buras told Euronews.
We have seen in it in the Article 7 procedure where it has not been possible to command 4/5 majority to state that there are severe risks for the rule of law in Poland or Hungary, not to speak about financial cuts."
"If Hungary takes some reform steps, which it actually has already done, I would expect a deal which will make it possible for the Council to reject Commission's motion," he added.
He stressed that the ongoing negotiations between Brussels and Budapest" over Hungary's Recovery Plan are "much more important."
Hungary is the only member state not to have had its plan to receive some of the €800bn of post-COVID recovery funds approved by Brussels. The Commission has asked for reforms in exchange for green-lighting the plan.
"I would expect that Hungary commits to some further reforms before the end of the year so that the Council rejects today's recommendation and the Commission can ultimately approve the Hungarian Recovery and Resilience Facility (RRF) plan," Buras said.
"However, this would not equal the disbursement of the RRF money as Hungary would still have to deliver on the commitments. This will be a face-saving solution for all sides. And a typical EU deal."
Nic shared the analysis, arguing that "the overall dynamics in both tracks [the conditionality mechanism and the RRF negotiations] between Brussels and Budapest is towards some kind of a compromise."
Sunday's announcement comes just three days after MEPs declared that Hungary is no longer a fully functioning democracy but a "hybrid regime of electoral autocracy" instead.
In their resolution, European lawmakers put the blame for the rule of law drift in the eastern European country squarely on Prime Minister Viktor Orbán.