It’s gotta change: Here’s what’s behind PM Orbán’s “4 points” that must be revised in the next EU budget

Following a meeting with European Council President Charles Michel yesterday, Prime Minister Orbán outlined four key areas he would like to see modified in the upcoming 2021-2027 EU budget. Here’s what’s behind each of his points.

1. The system of rebates is unfair, so it should be terminated.

The system of rebates in the European Union is a compensation mechanism designed to refund those Member States that are net contributors and have an economy with a small agricultural sector. The system was established based on a British initiative in 1984 to compensate the United Kingdom for being a net contributor to the common budget while only receiving minor payments from the Common Agricultural Policy (CAP) due to its more industrial economy. Back then, the bloc agreed on two criteria for the system: a single policy area has to dominate the common budget (in this case, the CAP, whiach was equal to around 70 percent of all EU spending) and those countries receiving rebates should be making above average contributions to the common budget.

However, with the UK’s departure from the EU, a group of 18 Member States (Bulgaria, Cyprus, Czech Republic, Estonia, France, Greece, Hungary, Italy, Luxembourg, Latvia, Lithuania, Malta, Poland, Portugal, Romania, Slovenia, Slovakia and Spain) says that the CAP no longer dominates the common budget and recipient countries pay a lower percentage of their gross national income (GNI). Therefore, rebates must be terminated.

2. Via multinational companies, most of the funds transferred to Central Europe make their way back to Western Europe.

This point might seem controversial when, in fact, it’s quite straightforward. The main problem is that while EU funds do flow into Central Europe, the profits are mostly funneled back to Western Europe via multinational companies.

And it’s not only PM Orbán and other V4 politicians who are making this point. According to renowned economist Thomas Piketty, the proportion of outflowing capital from Hungary before 2000 was three times that of other EU countries and the highest among the Visegrád Four. Piketty and his colleague Filip Novokmet found that this trend continued between 2005 and 2015, with the highest proportion of profits and capital flowing out of Hungary in all of Central Europe.

Their calculations (see chart below) tell us that while net EU payments only reached 4 percent of Hungary’s GDP in 2018, the outflow amounted to some 7.2 percent, making Hungary a quasi net contributor.

3. Cohesion Fund resources will be decreased in a way that will affect poorer countries disproportionately more than rich countries.

The EU’s Cohesion Fund was established to support those Member States whose GNI per capita is below 90 percent of the EU average. Most of the recipients of cohesion payments are the Member States (including Hungary) who joined the bloc after 2004.

With Brexit, the total amount of cohesion funding will be decreased. Meanwhile, Prime Minister Orbán, along with the Friends of Cohesion group, argues that by reducing cohesion funds, western Member States jeopardize the stability of the EU’s internal market.

What’s worse, according to PM Orbán, is that the current budget drafts would decrease cohesion funds for poorer countries disproportionately more than for richer countries.

4. The European Commission's budget proposal is too rigid and must be changed.

At a Friends of Cohesion meeting in Prague last November, Prime Minister Orbán called attention to the fact that while the EU budget should be made more flexible, the European Commission’s draft goes in the opposite direction, further increasing the system’s rigidity. During the latest Friends of Cohesion meeting on Saturday in Portugal, PM Orbán went even further, saying that over the past years, Brussels has wrecked the EU’s economic policy and its results will soon become visible.

First, the Eurozone will lose its ability to grow, causing a spillover effect even beyond the eurozone. Secondly, if the budget draft remains unchanged, the European Union might lose its hard-earned competitiveness.

“Member States should agree that the most important goal is the regaining of EU competitiveness,” PM Orbán said, adding that in order for this to happen, the bloc must adopt a budget that is as flexible as possible.