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Hungary: Economic and Fiscal Impacts of Proposed Curtailing of EU Funds Are Moderate

Yesterday, the European Commission (EC) proposed suspending EUR 7.5 billion (4.9% of Hungary's nominal GDP in 2021) of EU funds earmarked for Hungary in the long term budget 2021-2027, due to rule of law concerns. This proposal needs to be approved by a qualified majority of EU governments - 55% of EU governments which represent at least 65% of the total EU population - over the next three months. In order to alleviate the Commission's concerns, the Hungarian government has proposed implementing seventeen different remedial measures over the next months. The EC deems these measures - if fully implemented - as adequate to unblock the funds.

This commentary makes the case that while the proposed partial suspension of EU cohesion funds, should it take place, would weaken investment-driven growth dynamics and the fiscal accounts particularly in the short-term, the overall economic and fiscal impact of this measure will likely be moderate. First, Hungary will continue to receive substantial inflows of EU funds as the proposed cuts refer only to around 22% of total EU funds earmarked for Hungary in the EU's current long-term budget 2021-2027 (primarily cohesion funds and agricultural subsidies). Second, the seventeen remedial measures, should they be enacted, might not only lead to a gradual unfreezing of suspended EU cohesion funds but might also pave the way for a gradual release of the important EUR 8.5 billion in grants from the Next Generation EU program. The disbursement of these grants has so far been blocked by the European Commission due to similar rule of law concerns.

Key Highlights:

• Proposed suspension of EU cohesion funds would weaken economic growth dynamics and fiscal accounts only moderately due to the limited scope of EU funds affected.
• Progress on the remedial measures proposed by the Hungarian government might not only unfreeze affected EU cohesion funds but also grants from Next Generation EU program.
• Shortfall of EU cohesion funds would impact economic growth dynamics primarily by constraining public investment activity.

“The potential economic and fiscal impacts of the proposed funding cuts are manageable for Hungary,” said Yesenn El-Radhi, Vice President of the Sovereign Group at DBRS Morningstar. “Furthermore, the European Commission’s assessment that the Hungarian government’s proposed remedial measures are adequate if fully implemented provides a clear path for the government to unfreeze blocked EU funds.”