What to do about Hungary? The European Union last year finally got tough over Hungary’s slide towards authoritarianism but it seems no closer to changing the behaviour of Viktor Orban’s regime. Now as the Hungarian strongman threatens to veto accession talks with Ukraine, the EU’s mettle will really be tested.

Since he returned to power in 2010 Orban has been a constant headache for the EU, despite the relative insignificance of the country he heads (Hungary is only the 17^th largest economy in the bloc).

Orban’s cosying up to Russian dictator Vladimir Putin and his hollowing out of Hungarian democracy have made a mockery of the bloc’s self-image as a club of democracies that teaches those values to potential new entrants.

Freedom House categorises Hungary as a hybrid regime, and it is clear that it would not be allowed to join the bloc if it were applying for accession today. In fact it ranks lower as a democracy in Freedom House’s assessment than applicant states Albania, Montenegro and North Macedonia.

Last year the European Commission punished Hungary for its democratic backsliding by freezing €10.4bn of its reconstruction funds, and €22bn of its cohesion funds. This hurt at a time when the Hungarian economy is flatlining and the government budget deficit is worrying financial markets.

But this punishment has led to little significant change inside Hungary and has, if anything, worsened Orban’s behaviour inside the EU.

In the past the Hungarian premier would perform a “peacock dance” in Brussels for domestic voters, but he usually eventually backed down at the summits, winning just minor concessions.

Now Orban is threatening to wreck next week’s European Council summit in Brussels, where the main points on the agenda are opening accession negotiations with Ukraine and providing it with €50bn in much-needed aid.

He could be bluffing once more, but the EU seems more and more worried that he is deadly serious this time. European Council President Charles Michel visited Budapest last week to try to persuade Orban to cooperate, and the Hungarian premier has now been invited to Paris this weekend for talks with French President Emmanuel Macron.

Painful dilemma

The EU faces a painful dilemma whether to unfreeze its funding – the only effective weapon it has – in order to bribe Orban to drop his veto, or to stand firm and suffer the embarrassment of a major defeat, one that could have damaging effect on Ukraine’s morale at a time when US support is also in doubt.

There have been persistent rumours that the EU is ready to make a devil’s bargain to release the funding, though it has always been strongly denied by commissioners.

What alternatives does the EU have? The nuclear option would be to use Article 7 to revoke Hungary’s voting rights. This would be fully deserved but it is doubtful the European Council has the stomach for it.

Once Donald Tusk becomes Polish premier later this month, Orban will lose his guaranteed protection from this (Article 7 requires unanimity) but several other countries would also be reluctant to unsheathe this weapon in case it both sets a precedent and precipitates Hungary’s exit from the EU.

The “Plan B” the EU is reported to be considering for the EU aid is to divide up the €50bn into individual allocations for states. However, this creates problems for governments that are already struggling to keep budget deficits within the Stability and Growth Pact limit of 3% of GDP next year.

As for opening accession talks with Ukraine, this requires unanimity and therefore the Hungarian veto cannot be circumvented.  Nevertheless much of the preparatory work can continue to be done outside the formal negotiation process, though Ukraine and the EU would miss the hoopla of the official launch of the talks.

Orban clearly believes he is in a strong position, given the EU’s desperation to announce good news for Ukraine, and that time is on his side: the Hungarian economy has turned the corner, and the European Parliamentary Elections in June could swell the radical right-wing presence in the parliament, potentially deterring the new Commission from pursuing Hungary.

There are no good options but that does not mean that the EU should choose the worst one.  If it pretends that Hungary has undertaken real reform and releases the funding, then populists inside the EU and in countries queuing to join will take home the message that the bloc’s democratic credentials are just a charade and that they can do anything they want to prolong their rule. Will the EU stand up this time?

This blog first appeared on bne IntelliNews's Editor's Picks. To sign up for the daily Editor's Picks newsletter, please click here.