EU Plans to Withhold Funds From Hungary

Hungary appears to be turning into the next Greece. The country has failed to reduce its deficit, and today the European Commission reacted. The executive arm of the European Union has announced a proposal to withhold from Hungary $655 million in EU development funds.

“The commission took a decision today to propose to partially suspend commitments of the EU Cohesion Fund for Hungary from January next year onwards because of non-compliance with the latest council recommendation in January to correct its excessive deficit,” said Olli Rehn, EU commissioner for economic and monetary affairs.

This is the first time the European Commission has taken such an action against one of its members as punishment for an excessive deficit.

Hungary’s deficit has exceeded the EU’s limit ever since it joined the bloc in 2004. When one-off measures are stripped out, Hungary’s deficit has consistently remained above the EU’s threshold, which is 3 percent of economic output.

However, Hungary has resisted EU interference and has not made any changes to reduce its spending. In recent months, all three major credit rating agencies have downgraded Hungary’s creditworthiness to junk.

EU development funds are an important source of funding for Hungary, equivalent to half a percent of the country’s gross domestic product. The commission’s threat to withhold the funds would take effect in 2013, giving the member state until the end of the year to take action and avoid the sanctions.

“I want to underline also that this decision today is to be regarded as an incentive to correct a deviation, not as a punishment. It is a fair and proportionate measure of a preventive nature,” said Rehn.

Though EU officials portray today’s action as an encouragement rather than a punishment, the greater truth is that the European Union is now wielding tremendous power over nations that were formerly sovereign—especially those that are poorer. Expect Hungary’s sovereignty to fade away just as Greece’s has, and for EU authority to continue to strengthen.