Council decides to suspend €6.3 billion given only partial remedial action by Hungary

The ambassadors of the EU member states recommended to the Council to adopt via written procedure an implementing decision under the conditionality regulation as regards Hungary.

The recommendation means that the Committee of Permanent Representatives has found the required qualified majority to impose measures for the protection of the Union budget against the consequences of breaches of the principles of the rule of law in Hungary, concerning public procurement, the effectiveness of prosecutorial action and the fight against corruption in Hungary. The budgetary impact of this suspension amounts to approximately €6.3 billion in budgetary commitments.

In the course of the procedure, Hungary has committed to adopt a number of remedial measures considered by the Commission as capable to address the concerns raised, if taken together and correctly and effectively implemented. Given the remedial measures so far adopted by Hungary are affected by significant weaknesses which seriously compromise their adequacy to address the breaches of the principles of the rule of law identified by the Commission in its proposal, the Council considers that the ensuing risk for the budget of the Union remains high. However, in light of the number and significance of remedial measures that have been satisfactorily implemented by Hungary and given the degree of cooperation it would be a “reasonable approximation” to establish the remaining risk for the budget at 55% of the commitments of the programmes concerned.

The conditionality regulation is an instrument aimed at the protection of the Union budget and of the financial interests of the Union.

For their decision, member states based themselves on an assessment made by the Commission, which evaluated the facts and circumstances that have given rise to the activation of the mechanism. The decision of the Council mainly relies on the facts and circumstances as assessed and substantiated by the Commission.

Recently, Hungary adopted a number of remedial measures. However, on 30 November, on the basis of its analysis, which it confirmed in its updated assessment on 9 December, the Commission concluded that those remedial measures were not fully satisfactory to meet the conditionality regulation’s objective to protect the Union budget.

EU member states acknowledge the work done by the Hungarian authorities but decided that these remedial measures do not sufficiently address the identified breaches of the rule of law and the risks these entail for the Union budget.

Next steps

The measures defined in the implementing decision are of a temporary nature and can be lifted by the Council, acting on a proposal from the Commission, without loss of Union funding, if the situation is fully remedied within two years.

According to the Conditionality Regulation, any member state which faces measures under the rule of law conditionality mechanism remains obliged to implement the program or the fund affected by the measure and in particular to fulfil its obligations towards final recipients or beneficiaries of the funds.

Background

On 18 September 2022 the Commission adopted a proposal on measures for the protection of the Union budget against breaches of the principles of the rule of law in Hungary. The proposal is based on regulation 2020/2092 on a general regime of conditionality for the protection of the Union budget (the conditionality regulation).

The conditionality regulation is aimed against breaches of the principles of the rule of law that affect or seriously risk affecting the sound financial management of the budget or the protection of the financial interests of the Union. The regulation entered into force on 1 January 2021 as an additional layer of protection of the budget, complementing the already existing instruments defending the financial interests of the Union.

This regulation is an instrument intended for the protection of the Union budget, and not an instrument to oblige a member state to abide to the principles of the rule of law. The EU Court of Justice has confirmed that the budget conditionality is an independent and different procedure from that of Article 7 TEU.

The first notification from the Commission under the conditionality regulation was sent to Hungary on 27 April 2022. This represented the beginning of a process of assessment and exchange of information with the member state concerned, which lasted until mid-September and led to the submission of a proposal for a Council decision on 18 September 2022.

The Commission considered that the issues identified by Commission services and notified repeatedly to Hungary still persist and they constitute systemic breaches of the principles of the rule of law, in particular of the principles of legal certainty and prohibition of arbitrariness of the executive powers. This mainly relates to:

• systemic irregularities, deficiencies and weaknesses in public procurement, with the improper functioning of the national authorities implementing the Union budget in the context of public procurement procedures, an issue already identified since the 2007-2013 period (e.g. one single bidder participation, attribution of contracts to specific companies with large market share, serious deficiencies in the attribution of framework agreements, etc.)
• public interest trusts: as they are not being subject to rules under the EU public procurement directives, with their recurrent issues related to conflict of interests and transparency (e.g. trust members not being subject to conflict of interest requirements or conflict of interest rules not being applicable to members of Parliament, state secretaries and other public officials of the government who may serve at the same time as board members of such trusts)
• limitations to effective investigation and prosecution of alleged criminal activity, the organisation of the prosecution services, and the absence of a functioning and effective anti-corruption framework. In particular, there is a lack of effective judicial remedies by an independent court against decisions of the prosecution service not to investigate or prosecute alleged corruption, fraud and other criminal offences affecting the Union’s financial interests, a lack of a requirement to give reasons when such cases are attributed or reassigned, and an absence of rules to prevent arbitrary decisions in their regard
• the lack of a comprehensive anti-corruption strategy covering also the most relevant corruption prevention areas; an under-utilisation of the full range of preventive tools to assist corruption investigation, in particular high-level corruption cases; as well as an overall lack of effective prevention and repression of criminal fraud and corruption offences

The Commission identified deficiencies, weaknesses, limits and risks that are widespread and intertwined in the Hungarian public administration system and beyond, and remedies in sectoral legislation (such as the common provisions regulation) were not sufficient to address them. Therefore, the Commission considered that no other procedure under Union law would allow it to protect the Union budget more effectively than the procedure set out by the conditionality regulation.

The concerns expressed by the Commission in the case of Hungary affect a number of key areas for the implementation of the Union budget and the compliance with sound financial management principles and, cumulatively, they pose serious risks to the Union’s financial interests.

In its assessments of remedial measures taken by Hungary, the Commission confirmed that serious risks to the Union’s financial interests remain.

EU member states examined the Commission’s assessments on the following main elements:

• the existence of breaches of the principles of the rule of law
• whether these breaches affect or seriously risk affecting the sound financial management of the Union budget or the protection of the financial interest of the Union in a sufficiently direct way
• whether possible remedial measures taken by Hungary address the situation
• the absence of alternative procedures that would allow to protect the budget more effectively
• assessment of the choice and proportionality of the measures proposed by the Commission

The written procedure for the adoption of the implementing decision is expected to conclude on 14 December. The adoption of the implementing decision by the Council is the final step in the process as regards the proposal presented on 18 September.