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Hungary is set to permanently lose access to just over €1 billion in EU funds on January 1, as disputes between Budapest and Brussels hamper the country’s capacity to pull itself out of recession – and undermine Prime Minister Viktor Orbán’s re-election bid. in 2026.
The EU funding freeze has hit Hungary at a time when its government has little room for maneuver. Its budget deficit this year stands at more than 4.5 percent of GDP, raising political tensions.
Hungary’s economy shrank by 0.7 percent in the third quarter – the second contraction in a row – plunging the economy into a technical recession amid weak demand in the automotive, electronics and pharmaceuticals sectors that dominate its manufacturing base.
Of the 6.3 billion euros in funds frozen by Brussels over rule of law concerns, Budapest will lose 1.04 billion euros forever, because the amount must be allocated by the end of 2024 or expire. Hungary is also missing €1 million a day in EU funding for illegal asylum-seeker treatment; Its total losses for the treatment of asylum seekers will reach 200 million euros by the end of the year.
The two come on top of a €200m fine imposed by the European Court of Justice in June for breaching asylum rules and ignoring an earlier ruling.
In total, €19 billion in post-pandemic recovery funds and other EU resources remain blocked.
János Bóka, Hungary’s EU affairs minister, said in mid-December that it was “very difficult” not to interpret the withdrawal of funds as “political pressure”, adding that Budapest would take measures to “correct this discriminatory situation”.
The government is also seeking compensation for the ECJ ruling in June that led to the multimillion-euro fines, in another sign that relations between Brussels and Budapest have reached a new low.
The Hungarian opposition has used the opportunity to blame Orbán’s government for the economic situation.
Péter Magyar, an Orbán ally-turned-enemy whose party faced off against Orbán’s Fidesz in EU elections in June and has since topped opinion polls, said: “You have had 14 years of unlimited power and billions in EU funds. . . This ship has sailed. The Hungarians will not wait. Enough is enough!”
EU money is likely to remain blocked all the way to the election, with neither side willing to give up on what each sees as fundamental issues, including anti-corruption measures, the independence of the judiciary and the handling of minorities and asylum seekers from Hungary.
Brussels has also questioned Budapest’s confidence that it can increase spending over the next four years, based on Hungary’s expectations of stellar growth.
The two sides have until mid-January to agree a compromise fiscal plan between 2025 and 2028, with the EU set to give the country bad marks if the government does not cut spending.
“There will be a lot of tug of war,” said Péter Virovácz, ING’s senior economist for Hungary.
For the 2025 budget, billions of euros in investment and social spending largely funded by the EU have been scrapped, prompting Magyar to tour the country, drawing attention to dilapidated hospitals, inadequate childcare facilities and railway stations that have been left to the elements for decades. .
Economy Minister Márton Nagy has admitted that the government cannot completely close the gap left by EU funding.
“You can’t just say you want a shiny new hospital, but you need money. For that you need growth,” Nagy told the Financial Times. “The economy must be fixed first. . . for years we have been stuck from crisis to crisis, Covid, energy crisis, war, now the weakness of the German economy. . . We all know that tax revenue is missing, so we need to recreate it.”
Nagy has insisted the government will not overspend, saying he will limit the use of funds to boost growth to 0.5 percent of GDP.
Instead of using government stimulus funds, the economy minister has proposed allowing people to use around €5 billion in savings from private pension funds to buy real estate or renovations tax-free, in a move aimed at boost weak demand.
Meanwhile, Orbán is betting that investors from Asia can fill the gap – a policy he has called “economic neutrality”.
Chinese investment in Hungary has increased in recent years, but few believe it can fully compensate for the lack of funding from Brussels.
Before the row between Brussels and Budapest intensified in 2022, the EU was ready to finance several major infrastructure projects in Hungary.
They included a rail link from the center of Budapest to the capital’s airport.
“We could have had a golden age, with more than 10 billion euros spent on the sector in this decade alone,” said Dávid Vitézy, who headed Budapest’s transport authority at the time and later served for a time as briefly as Orbán’s secretary of state for transport. “We’ve lost almost all of that.”
“EU funding is an important part of a public investment in Hungary,” EU economy commissioner Valdis Dombrovskis told the FT in an interview in December, adding that “it’s important that Hungary obviously does it that is necessary to ensure the availability of funds”.
