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The European Union's executive arm proposed suspending 7.5 billion euros ($7.5 billion) from its budget earmarked for Hungary over accusations of corruption and fraud.
The European Commission proposed suspending the funding as part of its new power under its so-called conditionality mechanism, according to a statement on Sunday. The penalty would still need to be approved by the bloc's member states.
"Today's decision is a clear demonstration of the commission's resolve to protect the EU budget, and to use all tools at our disposal to ensure this important objective," EU budget chief Johannes Hahn said in a statement.
Hungarian Prime Minister Viktor Orban has challenged the EU's democratic foundation following an unprecedented power consolidation that saw him rewrite the constitution, overhaul election rules and extend his influence over the courts, media, culture and education. Under his leadership since 2010, Hungary has plunged in Transparency International's Corruption Perceptions Index and now ranks lowest in the EU after Bulgaria.
Weary of moves to undermine the independence of judges, the erosion of minority rights and the primacy of EU law, the bloc has put in place a new mechanism to protect its financial interests against members they accuse of democratic backsliding. Hungary is the first country targeted by the measure.
EU governments must make the final decision within a month on whether to freeze Hungary's funding, with the possibility of extending the deadline by as much as two months. A qualified majority of member states is required for the commission proposal to take effect.
The EU's concerns include irregularities in Hungary's public procurement system, conflicts of interest in public interest trusts and the independence of the judiciary, according to a person familiar with the procedure. Budapest will inform the commission about progress in implementing remedial measures by Nov. 19, said the person, who asked not to be identified because the process is private.
The EU standoff battered Hungarian assets, with the forint declining almost 10% against the euro this year. Investors have cited the uncertain outlook for EU funds as contributing to a disproportionate sell off.
In the past month Hungary has offered to set up an anti-graft agency and to amend laws including on public procurements to allay the concerns of the EU executive. Hahn told reporters in Brussels that Hungary had made "important and public commitments in the right direction," and that the commission welcomed the constructive development.
"Even the commission has acknowledged that we've jointly achieved positive results in many areas after talks with the Hungarian government," Hungarian Justice Minister Judit Varga said on Facebook on Sunday. "But the work is far from over."
Separately, Hungary is still waiting for the commission to approve its pandemic recovery plan, which would pave the way to 5.8 billion euros in EU money. Hahn said that some of the commission requirements related to the conditionality mechanism could be transfered to Hungary's Covid recovery plan as milestones.
If Hungary's recovery plan isn't implemented by the end of the year, it stands to lose 70% of that funding.
EU lawmakers said this week that the bloc's executive had let problems in Hungary fester for too long and the lack of decisive action had "contributed to the breakdown in democracy" there.
"Leaving rule of law breaches unchecked undermines democratic institutions and ultimately affects the human rights and lives of everyone in the country where those breaches are committed," the European Parliament said in its resolution.
(Updates with Hahn quote in the third paragraph.)
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