EU Gives Hungary 495 Million Reasons to Comply With Budget Rules

Hungary’s disregard for budget rules has landed the country in a very unsavory position, with the European Union prepared to freeze half a billion euros in aid to the country of 10 million, which the OECD group of nations predicted would slide into recession this year.

Such a move would mark the first time in history the EU has punished a member state for flouting budget rules. Prime Minister Viktor Orban is trying to block the move to withhold 495 million euros in EU cohesion funds, which Hungary needs to stabilize the economy and prop up the florint currency.

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The EU charges that some of Orban’s policies are in violation of its rules. However, 23 of the union’s 27 member states have exceeded its deficit ceiling of 3 percent of gross domestic product, and yet Hungary is the first to face the freezing of development funds aimed at helping it catch up with richer EU members.

Germany and France both missed budget deficit targets in 2003, but rejected being disciplined. Analysts now believe the European Commission is hoping to make an example out of Budapest after Orban ignored warnings from Brussels and used his two-thirds majority in parliament to pass Europe’s highest banking tax, a new central bank law, and other policies criticized as ineffective and potentially undemocratic.

Not everyone is so quick to bring down the heavy hand of the law. “We would have preferred to give Hungary some time to fall into line,” said Austrian Finance Minister Maria Fekter. “We must treat all states in the same way.”

Hungary’s deficit could hit 3.6 percent of GDP in 2013 if Budapest does not take new measures, according to EU officials. The Organization for Economic Co-operation and Development agrees more fiscal consolidation is needed. “Overall, the economy is projected to be in recession in early 2012, with a weak recovery starting in the second half of the year as confidence improves somewhat and global financial and economic conditions improve,” it said.

The OECD predicted a contraction of 0.6 percent this year and growth of 1.1 percent in 2013, though Budapest is anticipating growth of 0.5 percent in 2012. The OECD warns that the only way for Hungary to return to growth would be to pursue structural reforms and reduce the high level of foreign currency debt burdening its households, among other moves. The OECD also urged Orban to close a funding deal with the EU and International Monetary Fund as soon as possible.

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To contact the reporter on this story: Emily Knapp at staff.writers@wallstcheatsheet.com

To contact the editor responsible for this story: Damien Hoffman at editors@wallstcheatsheet.com