EU Breaks Logjam on Ukraine Aid With Hungary Funding Deal

(Bloomberg) -- European Union countries reached a preliminary agreement to clear the way for Ukraine to receive crucial aid from the bloc after Hungary dropped its opposition.

In return, member states reduced the amount of money it would suspend from Hungary over corruption concerns. The forint surged against the euro. 

Hungary had been vetoing an €18 billion ($19 billion) support package for Ukraine, a measure that requires the consent of all 27 EU members. As part of the deal struck among EU ambassadors on Monday, Hungary removed its block on the money.

EU nations agreed to approve Hungary’s pandemic-era recovery plan, which entitles Budapest to €5.8 billion in grants. That averted a worst-case scenario for Prime Minister Viktor Orban, which would’ve seen the permanent loss €4.1 billion of such funds for Hungary without an endorsement. 

The envoys also agreed to suspend €6.3 billion of EU budget funds allocated to Hungary over persistent corruption issues, which is less than the €7.5 billion the European Commission, the EU’s executive arm, had recommended earlier.

Crucially though, Hungary won’t be able to tap either Covid-recovery funds nor suspended so-called cohesion money before meeting a set of conditions prescribed by the EU’s executive to bolster the rule of law and reduce corruption. Orban’s ministers said on Tuesday that won’t happen until the second quarter of 2023 at the earliest. 

The forint jumped as much as 1.5% and traded at 410.72 per euro in early Tuesday trading, leading emerging-market gains. It was still significantly weaker compared with a month ago, when optimism that Hungary would be able to quickly tap EU funds led the currency to briefly strengthen below 400 per euro.

The forint has dropped more than 10% against the euro this year, the third-worst performance among emerging market currencies after the Argentine peso and the Turkish lira, largely because of uncertainty over EU fund access. 

The EU’s block on disbursing the funds to Hungary has been an attempt to bring an end to suspected widespread graft in Budapest and the erosion of the rule of law under more than a decade of uninterrupted rule by Orban. 

Hungary’s budget is cash-strapped after Orban’s pre-election spending spree earlier this year, which helped him to a fifth term. Hungary’s energy import costs have also soared in the fallout from Russia’s war on Ukraine.

The government in Budapest sought to portray the EU’s funding decision as an expected move before an eventual release of all the funding earmarked for Hungary next year.

“This is a milestone,” Tibor Navracsics, Hungary’s EU Funds Minister, told reporters Tuesday. “What’s happening now is the recognition of our work” in negotiating for the release of the funds, he said.

The EU had been racing to strike a deal, with Ukraine badly in need of the EU funding as it tries to keep its economy going while it defends itself against invading Russian forces. Many decisions in the EU require support from all 27 member states and Hungary has shown a willingness to use its veto to try to influence unrelated policy issues.  

As part of the broader deal, the EU ambassadors also agreed to implement a global minimum tax at the EU level for large multinational corporations after Hungary dropped its opposition. 

The eastern European nation will be allowed to include a local business tax in the calculation of the effective corporate tax level, averting the need for Hungary to raise it to meet the global requirement if and when it takes effect, Vilaggazdasag business daily reported late Monday, citing EU documents.

(Updates with Hungarian reaction in 11th and 12th paragraphs)

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