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Wednesday, February 22, 2012

The European Commission wants to sanction the excessive deficit in Hungary by suspending a Cohesion Fund payment.

After repeated warnings to Hungary, the European Commission has decided to move to the second step of the excessive deficit procedure (EDP): give the Member State a financial sanction. The European Commission suggests a suspension of the 495,184 million euro payment from the Cohesion Fund that Hungary was to receive in 2013, which represents 0.5% of its GDP and 29% of the  Fund credits that the country is supposed to receive in 2013.

The current Cohesion Fund Regulation explicitly provides for the suspension of the totality, or part of, the Fund in the case of an excessive government deficit and an absence of effective action to correct it. This is the first time such a measure is being applied. The proposed suspension concerns the most recent breach only, and not past fiscal behaviour. It is now up to the Member States to endorse the Commission's proposal concerning Hungary. Once effective action is deemed to be taken, the suspension would be lifted without delay.

Background

Hungary has been under the Excessive Deficit Procedure ever since its accession to the EU in 2004. After deciding in January and November 2005 that Hungary had not taken effective action, the deadline for correcting this situation was postponed in October 2006, from 2008 to 2009. In July 2009, against the background of a severe economic downturn which triggered fiscal adjustment measures and the provision of EU/IMF balance of payments support, the Council concluded that Hungary had taken effective action and issued revised recommendations under Article 104(7) TEC, setting 2011 as the new deadline to correct the excessive deficit in a sustainable manner.

Although Hungary is expected to notify a sizeable budgetary surplus of 3.5% of GDP for 2011, the country has achieved this surplus only thanks to one-off measures worth some 10% of GDP altogether (Hungary transferred private pension funds of 9¾ of GDP to the budget. In addition, extraordinary levies were introduced). Without these one-off measures the deficit in 2011 would have reached 6 % of GDP. Moreover, and in stark contrast to the recommended cumulative fiscal improvement of 0.5% of GDP, the structural budgetary position deteriorated by a cumulative 2½ % of GDP in 2010 and 2011.

In 2012, the budgetary outcome will swing into deficit again. In 2013, the deficit is forecast to reach 3¼% of GDP and thus again breach the reference value of the Treaty.

This is why the Council took a decision under Art. 126 (8) of TFEU on 24 January 2012 that Hungary has not taken effective action. Under the Cohesion Fund Regulation, failure to comply with the recommendations under the excessive deficit procedure can lead to the suspension of Cohesion Fund commitments, as is the case with Hungary today.

The decision on the amount of Cohesion Fund commitment appropriations to be suspended should ensure that the suspension is both effective and proportionate, whilst taking into account the current overall economic situation in the European Union and the relative importance of the Cohesion Fund for the economy of the Member State concerned. Accordingly, it is appropriate, in case of a first application of Article 4 (1) of Regulation (EC) No 1084/2006 to a given Member State, to set the amount at 50 % of the allocation of cohesion funds for 2013, without exceeding a maximum level of 0.5 % of the nominal GDP of the Member State concerned as forecast by the Commission services. This formula will apply for the rest of the 2007-2013 programming period.

The suspension is 5.7% of the total 2007-2013 allocation and 29% of 2013 commitments. The allocation from the Cohesion Fund for Hungary for this financial programming period of 2007 until 2013 amounts to 8,6 billion Euro in EU-funding, representing 1.26% of GDP. The foreseen allocation for 2013 is 1,7 billion Euro, representing 1.73% of GDP. The Cohesion Fund is available for all Member States who have a GDP which is below 90% of the European average and aims specifically at larger investments in infrastructure and environment in these Member States.

Source  European Commission - Press release

More information  MEMO/12/7

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