Fri, Feb 24, 2012 - Page 10 News List

EU penalizes Hungary over budget deficit

Reuters, BRUSSELS and BUDAPEST

EU Economic and Monetary Affairs Commissioner Olli Rehn addresses a news conference on suspending funds for Hungary at the EU Commission headquarters in Brussels on Wednesday.

Photo: Reuters

Officials on Wednesday approved the suspension of almost 500 million euros (US$664 million) in EU funds for Hungary next year, giving it until the start of next year to prove it can cut its budget deficit below a 3 percent limit, after years of broken promises.

A last-ditch effort by Budapest failed to prevent the announcement of the move, which is the latest sign of tensions between Brussels and Hungarian Prime Minister Viktor Orban’s government after two controversial years in power.

“[The decision] to partially suspend cohesion funds intended for Hungary from 2013 is unfounded and unfair,” the government said in a statement.

A legal row over changes to the central bank law and the judiciary, which Brussels says undermine their independence, already threatens to block a deal on emergency EU and IMF aid, which Budapest needs to cut borrowing costs and avert a market crisis.

Wednesday’s decision by the European Commission gave Hungary until Jan. 1, next year to take steps to reduce the chronic budget shortfall in a more lasting way, after a one-off surplus last year, generated by renationalizing US$14 billion in pension savings and imposing Europe’s highest bank tax.

EU Economic and Monetary Affairs Commissioner Olli Rehn said fresh consolidation steps laid out by Hungary publicly on Wednesday were not enough to prevent the EU’s executive from proposing the suspension of 495 million euros in cohesion funds from next year.

The proposed cut in the funds, which less-developed members of the 27-nation bloc receive to catch up more quickly, amounts to 29 percent of Hungary’s allocations for next year.

Rehn said the Commission had received letters from Hungary’s Prime Minister Viktor Orban and Economy Minister Gyorgy Matolcsy one or two days ago about the latest steps, which also indicated a cut to the government’s economic growth projection for this year.

“I should stress first that these letters did not present such kind of newly adopted measures of fiscal consolidation which could immediately change our picture regarding the outlook over public finances,” Rehn told a news conference.

“I have to point out that, given the downward revision of the growth forecast for Hungary, it seems likely that additional measures will be needed to bring the deficit below the 3 percent of treaty reference value,” Rehn said.

This year’s budget targets a deficit of 2.5 percent of GDP, by far the lowest since Hungary joined the EU in 2004, but is based on a 0.5 percent GDP growth projection and a slowdown has made more measures necessary.

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