(Bloomberg) — The European Union’s executive will withhold almost all of the €22 billion in cohesion funds earmarked for Hungary until the country resolves concerns over the rule of law and the protection of human rights.
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In an economic blow to nationalist Prime Minister Viktor Orban’s government, the European Commission assessed that Hungary hadn’t met the conditions to receive the regional funds. The aid is used to strengthen the economic and social cohesion of less-wealthy countries in the 27-nation bloc.
“As long as the enabling conditions are not fulfilled, the commission cannot reimburse related expenditure included in the payment claims introduced by Hungary,” commission Spokesman Stefan De Keersmaecker said in a message on Friday.
Investors showed little initial reaction to the news. The forint, which plunged to a record low in October over worry that Hungary may not be able to access its allocated EU funds, was trading 0.1% stronger at 400.41 per euro on Friday.
The commission said in a statement that Hungary wasn’t fulfilling the EU’s Charter of Fundamental Rights. In particular, it mentioned a so-called “child-protection law” that bans minors being exposed to any kind of portrayal of homosexuality or sex reassignment, which has drawn criticism for restricting the rights of the LGBTQ community.
Risks to academic freedom and the right to asylum — cultural battlegrounds in which Orban’s right-wing administration has repeatedly clashed with the EU’s liberal, multi-cultural values — also persist, according to the executive.
That represents a significant setback for Orban, whose government has been forced to scrap generous subsidies that have bolstered his political support. News earlier this year that the EU might block the funds that have helped fuel his economy and keep him in power also helped drive bond yields above 10%.
Hungary is also struggling to contain the EU’s highest inflation rate, while the central bank has slammed Orban’s cabinet for experimenting in economic engineering by imposing price caps on everything from food staples to mortgage rates.
“Hungary currently is in a particularly difficult economic condition and is also dependent on this money,” European Budget Commissioner Johannes Hahn told the Der Standard newspaper. “It seems that financial pressure is the most effective. If that helps to improve the conditions for the rule of law, that’s good.”
The commission’s decision to withhold funds effectively overrides and goes further than an agreement struck by Hungary and the other member states to suspend €6.3 billion in cohesion funds.
After that deal was clinched, Orban’s government dropped its threat to veto a package of aid for Ukraine and the EU’s implementation of a global minimum corporate tax.
Hungary can proceed with its plans to tap the funds, but the commission “cannot reimburse the related expenditure submitted other than for technical assistance and for fulfilling the enabling conditions,” until Budapest resolves the concerns, the EU’s executive said in a statement.
(Updates with market reaction in fourth paragraph.)
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