Orbán government to lose billions of EU funds – compensates with Chinese loans and new taxes

According to sources familiar with the negotiations between the European Commission and Hungary, the Orbán government appears to have effectively relinquished €1 billion of EU funds. New taxes might offset the shortfall, but the recently acquired Chinese loans could also be related to the forfeited EU money.

The Hungarian government might have given up on frozen EU funds

Válasz Online reports that discussions between the European Commission and Hungary on frozen EU funds and university scholarships have reached an impasse. The Hungarian government has seemingly abandoned efforts to secure €1 billion. Sources indicate that the government is no longer making even minimal attempts to retrieve these funds. Additionally, negotiations on renewing Erasmus scholarships and Horizon research grants, previously withdrawn from foundation universities, have also stalled.

This development is unexpected, considering that last autumn it seemed likely that the Commission and Hungary would reach an agreement. Now, János Bóka, who represents Hungary in Brussels, blames the Commission for the stalemate. However, sources told Válasz Online that the responsibility lies with the Hungarian side.

János Bóka, Minister for European Union Affairs. Photo: János Bóka / Facebook

To release most of the frozen EU funds, the Hungarian government must meet conditions to comply with the rule of law mechanism. During 2022 and 2023, the government made proposals and engaged in active negotiations with the Commission, and several reforms were agreed upon.

However, Válasz Online states that the conciliation process faltered when the Commission rejected a Hungarian proposal during an exchange of letters in 2023. The Hungarian government did not submit a new proposal but instead requested further clarification on why their plan was rejected. The Commission did not provide a substantive response, merely confirming that they expected a different approach. Subsequently, negotiations ceased entirely.

The nature of the underlying dispute, whether legal or political, is unclear, but the situation is detrimental to the country. If the Hungarian government does not take the necessary measures to lift the sanctions by the end of this year, €1 billion of the €6 billion total cohesion funds frozen due to the conditionality mechanism could be permanently lost.

Hungarian government uses new taxes to supplement lost EU funds?

Válasz Online highlighted that the €1 billion Hungary seems to have forfeited is exactly the amount the Orbán government intends to collect from the new so-called defence contribution tax.

“The budget needs the money,” writes the paper, “but this way it will be paid not by taxpayers in other EU member states, but by Hungarian companies and indirectly by their Hungarian customers.”

The other option: using Chinese loans to address the shortfall

As we covered here, earlier this week, it emerged that the Hungarian government had secretly secured a €1 billion loan from three Chinese banks, with the interest rate and purpose of the loan undisclosed to the public. It is known that the loan was taken out at a variable interest rate and is due for repayment on 19 April 2027.

Currently, this Chinese loan is the largest item in the foreign currency loans of the Public Debt Management Centre (ÁKK). Only the USD 917 million borrowed from China for the Budapest-Belgrade railway comes close. As 24.hu points out, this new Chinese loan is precisely the amount Hungary will lose in EU funds this year.

PM Viktor Orbán and Chinese President Xi Jinping in Beijing on 8 July 2024. Did they talk about the loan? Photo: MTI/Miniszterelnöki Sajtóiroda/Benko Vivien Cher

The Minister for National Economy elaborates on the government’s position

In a recent interview with Inforádió, Minister for National Economy Márton Nagy was asked if the Hungarian economy needed the loan available through the EU Recovery and Resilience Facility (RRF), and if so, under what conditions. Nagy remarked that Hungary “is entitled to this money, but the EU is blocking us from it for political reasons.” He added, “We will continue to fight for the money, but it looks like we have run into very, very solid walls.”

During the programme, as reported by Portfolio, Nagy discussed the Chinese loans, stating that “there is a reasonable level of foreign currency debt, but there is no doubt that we should strive to have that debt in forints, domestically, and for as long as possible. Meanwhile, steps have been taken to increase our self-financing capacity.”

He added that the loan is a source that is “incorporated in the financing of the state,” and that the government has “taken it so that it goes mainly to infrastructure development.”

Read also:

• Finance Ministry: Hungary’s budget to guarantee protection of pensions, family subsidies
• Hungary seems to launch new joint projects with China

Source: Válasz Online, 24.hu, Portfolio, Inforádió