EU funding which has not yet been disbursed is composed of a fraction of the 2021-2027 Cohesion Funds and the Recovery and Resilience Facility (RRF).
As part of the RRF, Hungary is eligible to EUR 5.8bn in grants and to request a maximum of EUR 9.7bn in loans. Similarly, the REPowerEU instrument also contains an additional EUR 0.7bn in grants for Hungary. These three sources of funds are supposed to be used by August 2026.
The overall amount allocated to Hungary under the Cohesion Funds between 2021-2027 amounts to EUR 21.77bn.
There are 3 interlinked issues which, until they are not closed in a positive way, hamper the disbursement of a certain part of the above mentioned EU funding. Namely the conditionality procedure including the specific EU’s political concerns relative to the public interest trusts, the “super milestones” in the RRP, and the non-compliance with the enabling clause.
The conditionality procedure
- What is the conditionality procedure?
On 27 April 2022, the Commission triggered the conditionality procedure vis-à-vis Hungary to address concerns related to the rule of law. Regulation 2020/2092 empowers the Commission to recommend suspension or reduction EU Funds for Member States once it is assumed that the budgetary interests of the Union may be endangered due to rule of law deficiencies. Hungary has since then been engaged in intensive discussions with the Commission to address the identified concerns, committing to substantial reforms in an agreed time-schedule.
- What has happened so far?
After intense consultations with the European Commission during the summer of 2022, Hungary has committed to implement 17 remedial measures in order to address concerns by the Commission. As a result, Hungary adopted in the past few months a number of legislative instruments to implement those commitments, including the set-up of a new Integrity Authority to fight against corruption.
On 9 December 2022, the Commission noted that the majority of remedial measures had been implemented, but 5 out of the 17 identified measures were not deemed to be fully complete or satisfactory due to specific risks.
As a result, the EU Council decided on 15 December to temporarily suspend 55%of EU funding linked to three Hungarian Operative Programmes for EU Cohesion Funds, amounting to EUR 6.3 bn. It is worth noting that the Council revised downwards to 55% the amount of funding to be suspended from the Commission’s initial 65% recommendation. Suspended funding linked to those three programmes represents 29% of the total amount of the EU Cohesion Funds (EUR 21.77bn) and altogether 14.4% of the total amount of EU funding available for Hungary (EUR 43.8bn) in 2021-27.
The public interest trust issue is also part of the conditionality procedure. Due to concerns related to the implementation of the remedial measure concerning the public interest trusts, the Council also decided in December 2022 that in case of implementation of the Union budget by the European Commission in direct or indirect management, no legal commitments shall be entered into with any Hungarian public interest trust.
The amount of those funds are not outstanding. However, access to some related funds, including the Erasmus+ and Horizon Europe Programme, is essential for Hungarian universities, students and researchers. They are key components of higher education, research, innovation and international cooperation at university level. The Government therefore remains fully committed to find remedial solutions to those concerns to limit any potential impact that could derive from such a measure.
2) Super milestones in RRP
The EU Council approved Hungary’s Recovery and Resilience Plan (RRP), ensuring no recovery funds will be lost to the country and paving the way for the first disbursement request under the RRF.
Although the RRP and the conditionality procedure are two separate processes, they are interrelated. Indeed, the original 17 remedial measures undertaken as part of the conditionality procedure have also been included in Hungary’s RRP in the form of milestones, forming a new ensemble of 27 “super milestones” that must be met by the country to be eligible to submit its first payment request. They include new (!) milestones relating to strengthening of judicial independence in addition to the 21 milestones related to the 17 original measures. It is worth noting the Commission and the Council did not contest the correct implementation of 16 milestones, out of the 21 originally set. Consequently, Hungary has already implemented a significant part of those milestones by the end of December 2022.
The Hungarian Government remains fully committed to fully implement all commitments made and address the few remaining risks identified within the conditionality procedure.
In 2023, the Government’s main priority so far has been the implementation of four judicial-related "super milestones”. Those were elaborated together with the European Commission to remedy its concerns regarding the Hungarian judicial system, as expressed by the Commission in its 2022 Rule of Law Report.
Productive discussions with the Commission have taken place since January on a draft legislative package and are now reaching their final stage, with no open issues left with the Commission. The Government expects confirmation from the Commission still in April in order to be able to submit the bill to Parliament for an accelerated adoption expected by early May. It is worth noting here that the original deadline set out in the RRP as of 31 March was indicative and would not affect access to EU funds allocated to Hungary.
In addition, and as a sign of its commitment, the Government has also proposed that new policies and measures to be implemented on public procurement and anti-corruption be benchmarked by an independent international entity (OECD). This was welcome by both the Commission and the OECD.
Finally, the Government also recently took a decision on the uptake of RRF loans. Out of the maximum allocation of EUR 9.7bn available to Hungary the Government indicated that it wishes to take up maximum of EUR 6.6bn. Such loans will finance energy infrastructure to reduce energy dependency and increase Hungary’s renewable energy production, in line with the Government’s and the EU’s objectives.
3) Enabling conditions for Cohesion Funds
The adoption of the judicial package is not only a condition to access to RRF funds, but also the condition for a significant part of the Cohesion Funds allocated to Hungary to be released.
- What are enabling conditions for Cohesion Funds?
Another pre-requisite to access the overall envelope of Cohesion funds is to comply with the so-called horizontal enabling conditions assessed by the Commission. These are necessary prerequisites for the use of EU support funding. Among them there is a condition which requires all Member States to put in place effective mechanisms to ensure that the implementation of the programmes complies with the EU Charter of Fundamental Rights.
- What has happened so far?
To be more specific: at the moment, according to the Commission’s assessment, Hungary does not fully comply with that specific enabling condition (“Effective application and implementation of the EU Charter of Fundamental Rights”), citing in particular concerns with regard to judicial independence.
In addition, the Commission also set out specific concerns regarding the domestic child protection law and academic freedom, and is suspending related funds (EUR 2.5bn in total and respectively 2% and 9% of our overall Cohesion Policy envelope).
In its December assessment, the Commission outlines that it will have to make a new assessment on the relevant operational programmes for Cohesion Funds (7 out of 8) once the measures remedying the identified risks regarding judicial independence will be implemented.
When the Commission will assess that judicial “super milestones” were fully and adequately implemented by Hungary, the corresponding horizontal enabling condition on the EU Charter of Fundamental Rights could be considered as fulfilled and Hungary could have access to its Cohesion Policy envelope.
The Government also remains in close contact with the Commission to cooperate and address specific concerns regarding the child protection law and academic freedom in order to get access to those envelopes as well.
In the 2023 budget, in relation to EU programmes about EUR 9.3bn expenditure and EUR 5.3bn revenue is calculated with (cca. 2/3 of which is linked to cohesion funding). According to Ministry of Finance forecasts for 2024, expenditure will amount to EUR 7.9 bn while revenue to EUR 5.4 bn. This means in 2023 and 2024 approximately 40% of the European Structural and Investment Funds (2014-2020 and also 2021-2027 programmes) and the RRF expenditures will be paid as advance payments to the recipients within the government sector, and will remain within the Single Account of the Treasury.
It is the Government’s expectation that the Commission could reassess its evaluation once the pending measures are fully implemented in the coming weeks. As a consequence, the suspension linked to the conditionality procedure, RRF funds and other Cohesion funds could be lifted by the end of H1 2023, and effective disbursement may be expected as from Q3 2023.
In the meantime throughout 2023, disbursements related to the 2021-27 Agricultural Funds and the remaining MFF 2014-20 Funds will continue to flow unencumbered.
Although technically not suspended, due to the performance-based nature of the instrument the first financial request and disbursement under the Recovery and Resilience Facility is conditional on the satisfactory implementation of supermilestones.