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EU strikes deal with Hungary, reducing funding freeze to get Ukraine aid approved

EU strikes deal with Hungary, reducing funding freeze to get Ukraine aid approved

Viktor Orbán’s tactical vetoes succeeded in getting EU countries to lower a proposed funding suspension.
The deal is done.

Hungary on Monday night got EU countries to lower the amount of a proposed funding freeze in exchange for Budapest lifting its veto on key items, including an aid package to Ukraine.

Hungary had been on the cusp of losing €7.5 billion in EU payouts over concerns that the money may aid graft in the country. In protest, Budapest had been blocking both an €18 billion EU aid package for Ukraine and a minimum global corporate tax rate.

But on Monday, EU countries agreed to lower the suspension to €6.3 billion.

They also approved Hungary's spending plan for its pandemic recovery funds — €5.8 billion in grants that have similarly been withheld for a year and a half over democratic backsliding concerns. However, countries made the approval conditional, saying Budapest must complete 27 anti-corruption and judicial independence reforms before getting its money.

The outcome amounts to a win for Hungarian Prime Minister Viktor Orbán, who has spent months gambling that he could use vetoes to wrangle EU funds from Brussels. Working in his favor were two factors: an EU system that requires unanimity on many major decisions, and an intense EU desire to preserve a united EU facade as war rages nearby.

That said, the decision still means Hungary is poised to lose billions in expected funds at a time when its economy is teetering. And there's no guarantee it will be able to fulfill its pledge to adopt the 27 rule-of-law reforms needed to unblock the pandemic recovery money and to unfreeze regular EU funds. Already, the country has struggled to satisfy EU officials assessing its progress.

For the EU, the deal will bring some relief on the Ukrainian front. It has been weeks since the European Commission first pledged to give Kyiv €18 billion to help cover budget shortfalls in 2023, and frustration was mounting over the delays.

In recent days, officials had been scrambling to develop a plan B for disbursing the Ukraine funds without Hungary's approval — crafting a proposal that required 26 countries to offer individual guarantees instead of an EU-backed guarantee. Such a move would have exposed unwelcome cracks in the EU's approach to Russia's war.

Now, after the European Parliament gives its approval on Tuesday, the EU can start disbursements to Ukraine in January.

The EU will also avoid the awkwardness of being unable to ratify its part of a tax deal meant to stop multinational corporations from skipping out on tax bills. Brussels championed the pact and over 130 countries, including EU members, have now signed it.

Avoiding these embarrassments comes at a cost, however. Monday's deal will also likely open the EU up to accusations that it is unwilling to stand up to its rule-of-law truants.

In addition to the reduced funding suspension, the agreement paves the way for Hungary to receive up to €5.8 billion in pandemic recovery grants by 2026. And it comes after Poland recently used the same tactic to get its pandemic recovery funds approved — albeit with the same caveats about first adopting reforms.

The breakthrough happened at a meeting of EU ambassadors on Monday evening after months of haggling with Budapest. Their decision will be formalized in a written procedure ending on Wednesday.

Two deadlines enhanced the pressure and increased the likelihood of a deal. First, EU countries had until December 19 to decide whether to freeze EU funds for Hungary over rule-of-law concerns. Moreover, Hungary needed a majority of countries to approve its recovery plan by year's end or it would lose 70 percent of the grants.

On Monday night, the recovery plan got through after getting support from a qualified majority of EU countries — equal to a majority of countries representing 65 percent or more of the bloc's population. The Netherlands, a frequent critic of Hungary's democratic backsliding, declared it will abstain.

Poland — which also held up the global tax deal until June — raised a last-minute reservation about the issue, injecting another unexpected hurdle. But the country has until Wednesday to lift its objections and is widely expected to do so, according to two EU diplomats.

In the lead-up to Monday's decision, countries including the Netherlands and Sweden had pushed to suspend the full €7.5 billion before relenting and supporting the lower figure.

In parallel, France and Germany led a push to ensure the withheld funds were "proportional" to any corruption-busting progress Hungary may have made — an effort many saw as an attempt to essentially strike the deal that was ultimately reached on Monday.
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