Editorial – Are the rats beginning to desert the sinking ship?


This article is actually two articles written on the Hungarian ‘Portfolio’ website.  The story appears to be that Hungary is racing to spend all of its EU funding as quickly as possible because of the possibility that the EU will cease to exist in its present form by 2017

Will the European Union break up in 2017?

January 19, 2016, 11:48 am    Hungarian version
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The European Union as we know may cease to exist it in 2017, reported on Tuesday based on information gained at talks with officials of top EU institutions.

Citing several unnamed sources the portal said:
  • According to one of the alleged scenarios, the EU as we know it could come to an end in 2017.
  • That is when they will celebrate the 70th anniversary of the Treaty signed by France, Germany, Italy and the Benelux states (Belgium, Netherlands, Luxembourg).
  • These countries would further deepen their current co-operation by harmonising their political and social regimes.
  • By this move they can shake off the countries that joined the block in 2004 and 2007, including Eastern European member states.
  • Spain, the Scandinavian states and Austria are almost sure to join The Six.
  • One of the sources said the confidence of Germany in Poland as a long-term and reliable ally has been shaken to the core.

The paper also pointed out that both Germany and France will hold elections in 2017, and their campaigns may have corrupt eastern member states on their agenda.

What about EU funds then?

The portal reminded that discussions on EU funds beyond 2020 will be started this year. Rumour has it in Brussels that a revision of such funds is on the agenda. The Hungarian government also expects the drying up of EU funds beyond 2020.

And then:……………


Hungary to allocate all available EU funds by end-2018, early 2019

January 14, 2016, 4:16 pm    Hungarian version
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(Adds Portfolio estimates, charts)
The Hungarian government aims to disburse all available European Union funds in the 2014-2020 fiscal period by the end of 2018 or early 2019, announced the head of the Prime Minister’s Office on Thursday. János Lázár also told journalists today that the disbursement target has been set to HUF 2,048 billion and if the goal is achieved public administration staff involved in the work will receive one year’s worth of salary as a bonus.


Lázár told a Portfolio conference last autumn that in order to appease growth concerns in 2016 the government wants to rev up the absorption of EU funds, which were pushed to the extremes in 2015 (HUF 2,590 billion). In early October, he still said, however, that it would take a huge effort to allocate even HUF 1,500-1,600 billion, not to mention the HUF 2,000 bn he mentioned already then.

Since then an 8-point package was created in the autumn aims at accelerating the 2016 allocations to reach the HUF 2 trillion target (by speeding up large infrastructural projects, etc.), which would give a boost to GDP growth, as well.

However, even this package failed to ensure without a doubt that the HUF 2 trillion goal is actually attainable. That is why rumours surfaced in the institutional system of development policy over the last few weeks that the cabinet will implement even more serious measures to reach its objective. What Lázár has announced today is that a decision has been taken to this end.

Lázár did not disclose details for the HUF 2,048 bn disbursement, but noted a breakdown of the mandatory allocations for this year has been created for each development area. The minister leading the Prime Minister’s Office reminded that tenders worth some HUF 3,500 billion have already been invited for the 2014-2020 period, which corresponds to 40% of the 7-year budget.

Lázár said that the accelerated allocation is aimed at avoiding the unpleasant experience in the previous fiscal period when payout was picking up very slowly and huge efforts had to be made at the end of the cycle not to lose EU funds.

Lázár has also admitted that at this rate of allocation the cabinet will not only invite all the tenders by the summer of 2017 but would actually allocate the funds by the end of 2018 or early 2019.

This is rather odd given that the current EU fiscal cycle ends in 2020, but thanks to the n+3 rule the available funds may be utilised until the end of 2023. This way Hungary would have no EU funds to allocate in the 2020-2023 period, and so the country would need to rely exclusively on EU funds available in the 2021-2026 programming period.

More ambitious than even the most ambitious estimate

According to the most ambitious scenario drawn up by Portfolio last autumn, Hungary was expected to run out of available EU funds by 2019-2020.

The situation created by today’s government decision will present a challenge for the next cabinet to be formed in 2018. True, a new 7-year EU fiscal cycle will start in 2021 – if it can start at all and if Hungary receives significant non-refundable funding in it. This is partly why the cabinet is interested in launching the expansion of the Paks nuclear power plant (the construction of two new blocks with a massive EUR 10 bn Russian loan) around 2018, because the growth-stimulating impact of that project may assume the role of the EU funds that will become non-existent.

Why such a rush?

One of the key priorities of the Hungarian government was to absorb every cent of EU funds available in the 2007-2013 period. There is a good chance that all of these funds will be drawn eventually. The volume of allocation sin 2015 was so high that it created a highly elevated base with regard to economic growth in the coming years.

If the cabinet does not want economic growth to slow too much approaching the 2018 elections it has no choice but to try and remain close to this high base. This puts the economy under pressure, as it greatly depends on EU funds without a sufficient amount of foreign working capital investments.

A Portfolio analysis found an intensive drawdown of EU funds elsewhere in the region too. Hungary’s economic policy cannot afford itself to let up in respect of the speed of EU fund allocations. A consequence of this approach, however, is that the cabinet will make payments of EU funds to tender winners sooner and the funds will be exhausted much faster that way. There could be implications for the budget too given that the EU will transfer these funds with a delay compared to the actual allocation. See the chart below. (As the cabinet plans to allocate all available EU funds by early 2019 at the latest, we estimated no more than HUF 300 bn for that year.)

Under pressure in regional terms too

For the chart below we have used the official 2008-2014 expenditure and revenue figures of the EU, comparing the cohesion and structural funds received to the total available funding in the 7-yr period. The basis for our 2015 estimate was the absorption rate at the end of last year (88.5% in Hungary’s case) and the actual volume of national allocations (106% in Hungary’s case).

We have taken half of the difference between the two, i.e. we assumed that Hungary, for instance, made allocations last year to fully absorb all the available EU funds in the 2007-2013 period. In the case of Poland we used half of the 94.9% absorption rate and the 101% allocation ratio, hence the 99% rate.

For the chart below we used the nominal EU funds available in the 2007-2013 period, the aforementioned rally in absorption rates, the time series for nominal gross national income (GNI), and the nominal GDNI estimate for 2015, according to the AMECO database

We wanted to show how massive is the drawing of EU funds by Hungary compared to the size of the economy and how drastically it stands out from regional trends.

Hungary’s allocation volume is greatly different even from what we see at its regional peers. This underpins our assumption that Hungary’s economy policy is forced to remain on this highly limited course and the cabinet has no choice but to keep allocations high even beyond their rally in 2015.

It is particularly interesting what has taken place in Poland. By the end of 2014 the country was faring rather well in terms of EU fund allocation so there was no need to step on it. As a result, allocations as a ratio of GNI turned out favourably last year, at least according to our calculations.

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