By: Mahima Sharma, Research Analyst, GSDN

The European Union’s relationship with Hungary has reached a critical juncture, marked by persistent violations of rule of law principles and a deepening divide over core values. Despite Hungary’s significant economic ties with the EU, the country’s authoritarian government, led by Viktor Orbán, has systematically undermined democratic institutions and human rights, leading to a standoff that has frozen over €30 billion in EU funds. This standoff not only highlights the challenges to EU cohesion but also raises fundamental questions about how the bloc should deal with a member state that rejects its foundational principles. As Hungary assumes the rotating presidency of the Council of the EU, these tensions are set to intensify, posing a significant headache for the EU’s future and its ability to uphold its values.

Violations of Rule of Law and Democracy

The European Union has been grappling with persistent violations of rule of law principles in Hungary for years. In response, the EU has deployed a range of instruments and procedures to address these concerns.

One of the key actions taken by the EU is the initiation of infringement proceedings against Hungary. The European Commission has launched numerous infringement cases, accusing the Hungarian government of breaching EU law in areas such as the independence of the judiciary, freedom of expression, and data protection.  These proceedings can ultimately lead to Hungary being brought before the Court of Justice of the European Union and facing potential fines or other sanctions.

Additionally, the EU has taken the unprecedented step of activating Article 7 of the Treaty on European Union against Hungary. This procedure, often referred to as the “nuclear option,” is designed to address serious and persistent breaches of the EU’s core values, including the rule of law.  The activation of Article 7 has placed Hungary under heightened scrutiny and could potentially result in the suspension of its voting rights within the EU.

The consequences of these rule of law violations have been significant for Hungary. Over the past three years, the country has had more than €30 billion in EU funds frozen due to these serious deficits.  This is a staggering amount, equivalent to nearly 5% of Hungary’s GDP, and has put significant economic pressure on the government. Furthermore, Hungary has become the first and only member state against which the EU’s new conditionality mechanism has been applied, further tightening the financial constraints.

These actions by the EU demonstrate the gravity of the situation and the bloc’s determination to uphold its foundational values of democracy, the rule of law, and respect for human rights. The ongoing tensions between Hungary and the European Union over these issues pose a significant challenge for the EU, with the potential to undermine its cohesion and credibility if left unresolved.

Economic and Political Pressure

The blocking of EU funds for Hungary is a significant economic and political pressure point, amounting to almost 5% of its GDP between 2024 and 2026. This has put the government under immense financial strain due to the high cost of borrowing on financial markets. The economic impact is substantial, as Hungary relies heavily on EU funds for its economic development and stability.

Additionally, Hungary is facing increasing political pressure within the EU. The loss of its ally Poland, which has been a key supporter of Hungary’s stance on EU issues, has left Hungary more isolated. The possibility of Article 7 proceedings being initiated against Hungary, which could lead to the suspension of its voting rights, further exacerbates the political pressure. This could potentially isolate Hungary within the EU and undermine its ability to influence EU decisions.

The economic and political pressures on Hungary are intertwined and have far-reaching implications. The loss of EU funds and the threat of further sanctions can lead to economic instability and political uncertainty, which can, in turn, exacerbate the political tensions within the EU. The ongoing standoff highlights the challenges the EU faces in maintaining cohesion and upholding its values in the face of persistent rule of law and democracy violations by a member state.

Challenges to EU Values and Institutions

The Hungarian government is accused of deliberately and systematically undermining the EU’s founding values, including through the recently adopted “national sovereignty protection” package.  This legislation has been compared to Russia’s “foreign agents” law, raising concerns that it could be used to unjustly target government critics and dissidents.

The EU has responded by initiating legal proceedings against Hungary, arguing that the law breaches multiple EU regulations and threatens democratic principles, voting rights, and fundamental freedoms.  This action signifies the latest clash in the ongoing conflict between Brussels and Budapest over the rule of law and democratic backsliding in Hungary.

Beyond the legal challenges, there are also concerns about Hungary’s ability to fulfil its duties during its upcoming Presidency of the Council of the EU in the second half of 2024.  There are calls for the Council to find proper solutions to mitigate the risks posed by a Hungarian Presidency, and for reforms to the Council’s decision-making process to prevent the abuse of the right of veto and blackmail.

These tensions highlight the broader challenges the EU faces in upholding its core values and institutions in the face of a member state that appears determined to undermine them. The standoff with Hungary poses a significant headache for the EU, with the potential to further erode its cohesion and credibility if left unresolved.

Diverging Paths and Missed Opportunities

While Hungary remains deeply linked with the European Union economically, support for EU membership is declining as sanctions from Brussels intensify. This decline is partly due to the economic pressure resulting from the blocking of EU funds, which has significant macroeconomic implications. The amount of EU funds blocked for Hungary is substantial, amounting to almost 5% of its GDP between 2024 and 2026, and has forced the government to tighten fiscal policy to compensate for the lack of these funds. The high cost of borrowing on financial markets, with interest rates for Hungarian government bonds standing at 6.16% in December 2023, further exacerbates the economic strain.

Hungary has also fallen behind its Central European peers in terms of economic convergence. The country has seen slow progress in areas such as GDP per capita, wages, and productivity growth. This stagnation is particularly notable given that Hungary has historically been a net recipient of EU structural assistance, receiving significant funds for infrastructure, ecology, climate protection, energy transition, and civil society projects. However, the withdrawal of these funds due to rule of law issues has hindered Hungary’s economic development and convergence with other EU member states.

The Orbán government’s policies, such as further centralization, strong state intervention, and a focus on reindustrialization, have been criticized as misinterpreting the needs of the 21st century economy. These policies have led to a significant budget deficit and fiscal consolidation challenges. The government’s reliance on Russian gas and oil supplies, despite the geopolitical tensions, also highlights its strategic and economic dependencies

Conclusion

The ongoing tensions between Hungary and the European Union have reached a critical juncture, posing significant challenges for the bloc’s cohesion, values, and institutions. The Hungarian government’s persistent violations of rule of law principles and its systematic undermining of democratic institutions have led to a standoff with the EU, resulting in the freezing of over €30 billion in EU funds and the activation of Article 7 proceedings.

While Hungary remains deeply linked with the EU economically, support for EU membership is declining as sanctions intensify. Hungary has fallen behind its Central European peers in terms of economic convergence, with slow progress in areas like GDP per capita, wages, and productivity growth. The Orbán government’s policies, such as further centralization and a focus on reindustrialization, have been criticized as misinterpreting the needs of the 21st century economy.

The bloc must find a way to uphold its values while maintaining unity and cohesion. This will require a delicate balance of diplomacy, economic incentives, and a commitment to the rule of law. Failure to resolve these issues could have significant consequences for the EU’s future and its ability to project its values on the global stage.