Hungary’s EU allies are threatening to take a much tougher stance against Budapest unless it starts to be more co-operative on Ukraine, according to media reports. Pressure is growing on Hungary ahead of the European Council summit on February 1, which will vote on a €50bn four-year package of aid to Kyiv.

Hungarian Prime Minister Viktor Orban blocked the package at the previous summit before Christmas. Ukraine desperately needs the new funding, particularly given that US funding remains blocked by the Republican majority in the House of Representatives.

Orban is now being told that Hungary’s frozen EU funds will be suspended indefinitely unless he co-operates on Ukraine, according to a report in the Financial Times based on a leaked document. EU leaders argue that he is failing to co-operate meaningfully in an attempt to reach a compromise on the issue, breaching the way the EU is meant to work.

The document declares that “in the case of no agreement in the February 1 [summit], other heads of state and government would publicly declare that in the light of the unconstructive behaviour of the Hungarian PM . . . they cannot imagine that” EU funds would be provided to Budapest.

There has also been speculation that the EU might try to use its “nuclear option”, Article 7, which would take away Budapest’s voting rights. However, this would require unanimity and new Slovak Prime Minister Robert Fico has pledged to veto it.

The funding freeze is seen as Hungary’s weak point, given that the economy has been flatlining, and inflation was until recently the highest in the EU.  The budget deficit is forecast to hit 5% this year, far above the 3% level permitted under the EU’s stability and growth pact, and Hungary’s debt service payments are the most onerous in the bloc.

Investors in the forint and Hungarian bonds could panic if the funding freeze were seen as long term. The forint, one of the EU’s most volatile currencies, fell 0.7% in early trading on January 29.

The EU funding pressure might interfere with the Hungarian National Bank’s  (MNB) relaxation of monetary policy as this would weaken the forint further. The MNB had been expected to cut interest rates by a full percentage point to 9.75 per cent on January 30.

"The loss of Eurofunds would clearly affect the Hungarian economy, but the immediate and direct impact would probably be less than the article suggests," said Capital Economics economist Liam Peach. "A significant part of the Eurofunds is already frozen and the markets are already discounting a lot of bad news."

Hungary has vowed to resist the EU pressure, the FT reported on January 29, describing it as “blackmail”.

“Hungary does not give in to blackmail,” Hungary’s EU minister János Bóka wrote on X. “The document, drafted by Brussels bureaucrats, only confirms what the Hungarian Government has been saying for a long time: access to EU funds is used for political blackmailing.”

Orban has put forward a series of counter-proposals on aid for Ukraine, including voting for it on an annual basis – which would give him many other veto possibilities – and keeping it outside the overall EU budget without common borrowing for it.

Orban’s motives for blocking aid to Ukraine seem mixed. EU leaders assumed it was part of an attempt to force the release of the funds that were frozen because of the way his governments have undermined the rule of law.

Some €11.7bn of Hungary’s cohesion funds remain frozen for various reasons: some €6.3bn is frozen under a mechanism to protect EU  funds from corruption, while other money is held because of Hungary's  treatment of asylum seekers, its anti-LGBT+ law, and concerns over academic freedom. 

Hungary is also seeking the unfreezing of some €10.4 billion (€6.5bn in grants and €3.9bn in cheap loans) from the EU's  post-pandemic recovery fund, but this requires the meeting of 27 supermilestones set by the EU. So far only €0.9bn of these are being released.

Orban has also criticised the language rights granted to the small ethnic Hungarian minority in Ukraine, even though Kyiv has recently made an attempt to address Hungarian concerns.

Hungarian strongman is also accused by some EU politicians of simply acting as Russian dictator Vladimir Putin’s agent inside the EU by blocking the aid package. Orban remains on good terms with Putin, and Hungarian ministers continue to meet their Russian counterparts regularly.

Hungary has only made limited attempts to reduce its dependence on Russian energy, and Orban himself has criticised sanctions and advised Kyiv to make a compromise peace rather than continue fighting.

Orban, who has become increasingly isolated in the EU, has also made himself unpopular by blocking Sweden’s accession to Nato. The Hungarian parliament has yet to ratify the accession, making it the last country to do so.