A pyrrhic victory at the December EU Summit
Almost exactly one year after the EU Council’s blocking decision, the EU Commission endorsed the government’s reforms of the domestic judicial system, unfreezing Hungary’s access to about €10bn of its seven-year EU transfer quota, in the form of development grants from cohesion policy programs. With great likelihood, the rest of the total €32bn quota in grants and loans will not be made available any time soon. Unfreezing access to that part would require Hungary’s compliance with a number of further legal, policy and technical criteria, which is unlikely to happen under current circumstances. Some of these funds, especially those of the RRF, may be lost forever.
The partial release of funds did not bring peace into relations between Hungary and the EU. On the contrary, PM Orbán once again distinguished himself at the mid-December EU summit by vetoing a €100bn increase in the EU’s running seven-year budget and by stepping back from blocking accession talks with Ukraine only at the very last minute. As a reason for his constant outlier position, it is customary to mention only his special friendly ties to Russia, which seems partially correct. But actually it is about significantly more than that. Mr. Orbán appears to be concerned that Ukraine’s appearance in the EU would greatly reduce existing members’ share of EU transfers, ruin domestic agriculture, and potentially lead to tensions similar to those currently seen among domestic and Ukrainian truckers in Poland and Slovakia. A scenario in which Hungary is required to pay large extra sums into the EU budget, while not receiving the majority of its transfer quota, could fundamentally undercut him in domestic politics.
But this is only one side of the problem. Even though EU decision-makers may get around Hungary’s fiscal veto by using some second-best solution, Mr. Orbán has taken very substantial risk by going so sharply against the large, more or less unified majority within the EU. For sure, France and Germany tend to save him from extreme isolation within the EU, against the much less friendly company of Nordic members, but he can safely count on much future trouble with regard to the actual payout of the now unfrozen EU funds, a series of issues around energy supplies and a number of other, currently unforeseen subjects. And in general, a fundamentally hostile European Parliament guarantees a similarly hostile EU Commission, the worst thing to happen to Hungary in a variety of cases.
In domestic politics, PM Orbán typically gets super-active at times when he senses a difficult situation in his foreign relations. The current situation is no exception to that rule. In a recent period of unusually busy decision-making, the National Assembly amended the local government election rules for Budapest, and it authorized the government to set up a new institution to protect "national sovereignty", arguably with a view to enhancing government control over opposition parties and the independent media. In addition, two additional hospitals are now being transferred from public ownership to one of the existing "public interest trusts", the kind of which has led to Hungary’s exclusion from the EU’s cooperation and support programs for higher education and academic research institutes.
Regarding the economy, detailed GDP numbers verified the assumption that the recovery in Q3 was caused mainly by agriculture, but there were improvements in other areas, as well. In addition, October data has reflected further moderate improvement in industry and construction, and a marginal one in retail trade. The latter remains the weak point and a key subject of official worries, especially as the Christmas shopping season is an absolutely crucial period as regards consumer demand and tax revenue.
Energy import prices have shown an unexpected downtrend recently, with TTF gas prices returning to €30-40/MWh and Urals crude falling to around $60/Bbl again, due to reasonably good weather, successful supply and storage policies, and the weak global economy. This has had pleasant consequences on the BOP, inflation and even the government budget, which collected a part of the gain from the above-market administrative domestic pricing of gas in November. CPI-inflation, directly affected by energy through fuel prices, is on its way towards a marginally below-6% year-end figure. The government budget, now strengthened by the early increase of statutory minimum wages, is also likely to meet its amended annual deficit target, especially as the EU Commission’s positive decision will enable government accountants to write up some accumulated reimbursement claims as financial assets in accrual terms.
Favorable disinflation facts and the forint’s continued strength allowed the MNB to carry out another 75% cut in the base rate in December, leading to growing positivity of the ex-post real interest rate. The MNB apparently keeps a heavy focus on further disinflation, not being bothered by the fact that the amount of banking sector liquidity is increasing rapidly as a result of its high sterilization rate. In December, parliament approved the long-expected amendment of the central bank act, so that the government will not be required to put in one-fifth of the loss made by the MNB in 2023, to recapitalize the bank, next year. This is mainly a concern for fiscal policy, but it is also important for the freedom of monetary policy that the MNB has been relieved of the expectation of cutting its running loss as quickly as possible.
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