Hungary seeks to quash EU funding freeze reports

By bne IntelliNews October 6, 2016

Hungary will allocate HUF1tn worth of EU funds in the last three months of the year to meet the full-year disbursement target of HUF2,028 (€6.56bn), a government official pledged on October 6. The announcement comes in the face of claims that Brussels is threatening to freeze disbursements.

Due to apparent concerns about the country’s EU fund management framework, the European Commission was reported the previous day to be mulling a halt to EU structural funding for Hungary. The announcement that Budapest plans to double disbursements in the fourth quarter appears intended as support to government statements insisting no such risk exists.

Brussels is currently compiling a report on an audit of the management and control mechanism of Hungary’s 2014-2020 EU subsidy system reported, citing unnamed sources. If serious problems are identified, payments of all structural and cohesion funds to Hungary could be suspended, the report claims.

In particular, the commission is reportedly investigating suspicion of bias in the work of Hungary’s Managing Authority – which provides information on EU programmes, selects projects and monitors their implementation. The EU executive has found several problems in this regard, the sources say.

Nandor Csepreghy, deputy minister at the Prime Minister’s Office admitted that the government has disputes with the commission “in several areas”. He stressed, however, that the audit is not systematic, but only aimed at the management and controlling mechanism of one specific operational programme - the Economic Development and Innovative Operational Programme.

Csepreghy also claimed that the commission “identified only minor problems in the controlling mechanism of the affected areas”. Hungary “may start sending invoices to Brussels and wait for the funds to be transferred in due course," he added.

While questions remain, however, Hungarian assets are likely to suffer, suggest analysts. The collapse of investment this year, the first in which funding under the 2014-20 window is active, has illustrated just how dependent the economy is on money from Brussels. “The forint is likely to see increased volatility over coming months as these issues unfold under media scrutiny,” analysts at Commerzbank forecast.

Budapest is pushing to accelerate the absorption of EU funds under the new window, but that has also provoked a dispute with Brussels. In the 2014-2020 financial cycle the government pays 50% of funds in advance to businesses that win EU-funded tenders, and the advance paid to public bodies can reach 100%. The European Commission opposes the high level of advance payments, saying it implies too much financial risk and is not in line with EU rules. Csepreghy stressed that the “cabinet is ready to go all the way in its dispute”.

However, at Commerzbank, they also note the risk that the funding dispute could take on a political angle in Hungary's stand off with Brussels, as PM Orban seeks to push his populist "counter revolution".

"In such crucial times, such funding decisions can easily turn into bargaining tools," the analysts worry.

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