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Both the macro-financial assistance and the minimum tax directive were held up by the Hungarian government, which tried to use its veto on these issues to pressure the EU into releasing EU funds for Hungary.
Meeting in Brussels, EU member state ambassadors agreed to freeze €6.3 billion of the EU cohesion funds destined for Hungary. They also agreed to formally greenlight Hungary’s recovery and resilience plan worth several billion euros, although this money will remain frozen for the moment.
“EU member states acknowledge the work done by the Hungarian authorities but decided that these remedial measures do not sufficiently address the identified breaches of the rule of law and the risks these entail for the Union budget,” a statement by the EU member state negotiators read.
In November, the EU Commission proposed that €7.5 billion of EU cohesion funds for Hungary should remain frozen under the rule of law mechanism. The rule of law and governance standards are not high enough to ensure that the EU money would not be misused, the Commission argued.
The EU Commission maintained this assessment also after EU member state ministers asked for an updated view on this in the past week. At that same meeting of finance ministers, Hungary had maintained its veto blockade, putting the EU’s financial help for Ukraine into doubt.
Last Saturday (10 December), meanwhile, the rest of the member states agreed on a way in which they could provide aid to Ukraine anyway, thus evading Hungary’s veto.
Apparently, this now led the Hungarian government to drop its veto, meaning that the EU can soon start paying out the €18 billion macro-financial assistance package for Ukraine. The money will be backed by guarantees from the EU budget.
Such help is urgently needed in Ukraine since the government’s purse has seriously suffered under the collapse of a large part of the economy and the needs of the war. Without the macro-financial assistance, the Ukrainian government would have to decide between curbing back public services, slowing down reconstruction efforts, or printing its own money, thereby risking runaway inflation.
The Hungarian government also dropped its veto on the directive for a minimum effective corporate tax rate of 15%. The EU Commission proposed the directive about a year ago to implement an international tax deal to put a backstop to global tax competition.
All EU member states signed the trade deal in autumn of 2021, but Poland and Hungary tried to use their veto power in this file to secure access to EU funding.
While it seems to have worked for the Polish government, which was able to get its recovery plan approved by member states this summer, the Hungarian government appears to have backed down without gaining much.
Compared to what the EU Commission proposed, Hungary only gets access to about €1 billion more in EU cohesion funds under the agreement among member states.
The agreement on the corporate minimum tax could still be scuppered by the Polish government, however. According to an EU diplomat, Poland reserved its right to veto the directive when it goes through the written adoption procedure.
The Hungarian government was also under time pressure to get a green light for its national recovery plan. Without this approval before the end of the year, 70% of the grants allocated to Hungary under the EU’s pandemic recovery fund would have been lost for Hungary.
Even with the approval, it got on Monday, however, the payouts will be conditional on fulfilling a series of rule of law reforms in Hungary.