General Information for Investors On Recent EU Developments Regarding Hungary

The media have recently given large coverage to the announcement of the President of the European Commission that the Commission activated the rule-of-law mechanism in regard of Hungary. This factually is not the case.

The media have recently given large coverage to the announcement of the President of the European Commission that the Commission activated the rule-of-law mechanism in regard of Hungary. It was also mentioned by a large number of articles and portals that the EU would deprive Hungary from the EU funds in the coming period.

This factually is not the case. For the sake of transparency, clear assessment and to clarify potential misunderstandings or misinterpretations, the Ministry of Finance provides the following explanations:

  • The rule of law conditionality mechanism has not been initiated against Hungary

Currently no procedure has been initiated in relation to Hungary on the basis of the general regime of conditionality for the protection of the Union budget („the rule-of- law mechanism”).

To launch this procedure, after the assessment of the Commission, the College of Commissioners has to approve the initiation of the process. Afterwards, the Member State concerned shall be officially notified in writing about the assessment of the Commission regarding the breaches of the principles of the rule-of-law. This is regulated by an EU regulation and additional guidelines which prescribe the procedure to be followed by the Commission and the Member States involved. The procedure starts with appropriate examination of the situation, fact finding. The Member State concerned shall provide relevant information and may make observations. It presumes a dialogue between the Commission and the Member State involved. The Member State can also propose remedial measures to address any finding of the Commission. Therefore, we are confident, if the procedure will be launched, finally Hungary will be able to address the findings of the Commission satisfactorily, in the spirit of mutual trust and goodwill. In Hungary, principles of the rule-of-law are complied with in a strict and transparent manner. Consequently Hungary is ready to contribute to any fact-based dialogue in order to avoid the application of undue sanctioning measures. In this watershed moment, when the EU is facing several unprecedented challenges including the devastating war in Ukraine, we should focus on what unites EU Members and not on what divides. Hungary needs a strong EU, and the EU needs strong Member States.

  • The foreseen initiation of the mechanism does not have any effect on the RRF negotiations

The possible activation of the rule-of-law mechanism have no bearing on the approval of the Hungarian recovery and resilience plan (RRP) submitted in the frame of the Recovery and Resilience Facility. Our RRP contains the necessary guarantees to ensure the protection of the financial interests of the Union. Constructive negotiations regarding the Hungarian RRP are currently ongoing and we are sure that we can solve the remaining outstanding issues soon.

We highlight that the accelerated approval of the Hungarian RRP might be crucial for the EU itself as it contains several measures to decrease the energy dependency and enhance the strategic autonomy of the Hungarian economy, and thereby it can effectively contribute to the mitigation of the strong negative spillover effects of the conflict in Ukraine.

  • Sufficiently direct link should be demonstrated between the breach of rule-of-law principle and the EU budget

Any breach of the principles of the rule-of-law should have a sufficiently direct link with its effects on the EU budget or the financial interests of the EU. With other words, the casual link should be demonstrated that the identified rule-of-law deficiency is directly and substantially putting the EU budget at significant risk. Only in this case may the Commission propose to the Council the withholding a certain percentage, a proportionate part of the funds concerned. Rule-of-law related concerns alone do not automatically lead to the suspension of EU-funds or part of it. Furthermore, the - often politically motivated - concerns raised by certain stakeholders, or even by the Commission, which do not have direct correlation with the EU budget, cannot result in sanctions under the conditionality mechanism Regulation.

The other type of rule of law procedure under Article 7 of the Treaty is not of budgetary nature; it is not a budgetary sanctioning mechanism; the two procedures are diverse and not connected in any way.

  • In no way will all the EU-funds allocated for Hungary be suspended

Sanctions might be imposed at the end of a long procedure, which starts with the written notification. After a dialogue with the Member State in a formalized procedure the Commission may only propose measures. Where the Commission intends to make a proposal for sanctions it shall give the Member State the opportunity to submit its observations, in particular, on the proportionality of the envisaged measures.

The suspension of payments or any other sanction could only apply after a formal decision of the Council where Member States decide.

In case, if at the end of the above described procedure, the Council would impose sanctions it would only apply to certain, specific financial instruments, programmes or payments, with due respect to the principle of proportionality.

According to the Regulation if measures are decided and taken they shall be proportionate and be determined in light of the actual or potential impact on EU budget. The nature, duration, gravity and scope of the breaches of the principles of the rule of law shall be duly taken into account.

It means that contrary to the general conclusions presented in the media in the worst case scenario only a proportionate part of the available funding can be withheld at the end of a formal procedure.

Provided that legal rules are respected by the EU (i.e. the rule of law principles) it is simply not possible to withhold the overall amount of EU Funds allocated for Hungary, only a proportionate part may be, in case, withhold.

Furthermore, the rule-of-law conditionality mechanism applies only to budgetary commitments made under the new multiannual financial framework (2021-2027) including the Next Generation EU.

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