Hungary stands to lose access to European Union cohesion funds as a penalty for fiscal laxity. 

The European Commission said yesterday (11 January) that the country had not taken sufficient action to correct its budget deficit. Hungary cannot be fined for its lack of action because it is not in the eurozone, but it could become ineligible for cohesion funding as from January 2013. This is the first time that the Commission has applied the new rules of the strengthened stability and growth pact since the so-called ‘six-pack’ of economic-governance legislation, with its penalties as well as its incentives, came into force on 13 December 2011.

Olli Rehn, the European commissioner for economic and monetary affairs, said yesterday that there was a “severe deterioration in the underlying structural balance” of Hungary’s public finances.

Hungary (along with Belgium, Cyprus, Malta and Poland) received a warning from Rehn on 10 November that deadlines had to be met to correct excessive deficits. All but Hungary have been judged to have taken effective steps, and no further action will be taken against the other four.

Rehn said that the Commission’s decisions showed that “the six-pack is already delivering”. He added: “It has given the European Commission teeth to act when countries fail to bring their deficits under control and reduce their debt.” He insisted that “fiscal discipline is crucial to reinforce confidence in public finances”, adding: “I stand by my word; I am determined to fully use this new powerful set of tools from day one.”

National finance ministers will be asked to endorse the Commission’s decision that Hungary has not taken effective action to bring its deficit below 3% of gross domestic product (GDP) in a sustainable manner. Subject to this approval, the Commission will propose new recommendations addressed to Hungary to demand that it brings its deficit under control. The loss of access to cohesion funding would result in Hungary losing about 1.7% of its GDP, EU officials calculate.

The development was another blow for Hungary, which this week acknowledged that it may need to seek financial support from the International Monetary Fund (IMF).

Hungary started negotiations with the IMF this week aimed at securing financial support as the economy deteriorates. In the past fortnight, Hungary’s forint has fallen to record lows, government borrowing costs have leapt to unsustainable amounts and the trading in credit-default swaps on the country’s debt – a significant indication of investors’ fear that the country could default – has reached record high levels.

The health of Hungary’s economy is crucial to countries in the rest of Europe, because many banks, particularly in western Europe, have massive exposure to Hungarian debt.

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