Hungary becomes first EU state to be sanctioned over high deficits

HUNGARY has become the first European Union member to be sanctioned over its high deficits, in a move many see as being as much about Brussels’ mistrust of the right-wing government of prime minister Viktor Orban as about financial mismanagement

However, in a compromise, EU finance ministers suspended Hungary’s access to €500 million in aid from next year for failing to keep its budget in check, but told Budapest it could escape the sanctions if it takes remedial fiscal action by June.

The move puts pressure on Mr Orban’s government as it struggles to win funding from the EU and International Monetary Fund to underpin the economy and prop up the weak forint currency.

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“This provides a strong incentive for Hungary to conduct sound and sustainable fiscal policy,” EU economic and monetary affairs commissioner Olli Rehn said.

Diplomats said Germany and Austria – a country whose banks play a large part in Hungary’s financial system – had proposed a compromise for a conditional delay, while other backers worried any freeze could complicate the start of EU/IMF talks.

In a compromise, EU finance ministers will revisit the issue on 22 June and will lift the suspension if Hungary assures them it has done enough to address its excessive budget shortfall.

Under the European Commission’s original proposal, Hungary needed to show by September that it could bring its fiscal deficit to below the EU threshold of three per cent of gross domestic product in 2013 in a sustainable way in order to be let off the hook.

Although 23 of the EU’s 27 states have exceeded the bloc’s deficit ceiling of three per cent of GDP in the past, Hungary is the first to face the freezing of funds aimed at helping it to catch up with richer EU members.

The commission has struggled to impose the limit since 2003, when Germany and France both missed budget deficit targets and rejected being disciplined.

However, the EU has been more harsh with Budapest to make it an example after Mr Orban ignored warnings from Brussels and used his two-thirds majority in parliament to pass Europe’s highest banking tax, a new central bank law, and other policies criticised as ineffective and potentially undemocratic.

On Monday, Spain was given the go-ahead by eurozone finance ministers to run a deficit of 5.3 per cent of gross domestic product this year – above its original target of 4.4 per cent.

However, Madrid yet has to cut its deficit to three per cent by 2013, as had been planned.

While Hungary has broken the EU’s deficit rules every year since it joined the bloc in 2004, Spain was a model student until a collapse in its property market amid the 2008 financial crisis ran its economy into turmoil.