Corruption is the purpose of the system

Can the Drying Up of EU Funds Rein in Orbán?

The European Parliament voted on a draft law on making access to EU funds conditional on the rule of law and fighting corruption in recipient countries. Corrupt and pseudo-autocratic MEPs were naturally not delighted and blamed migration for some reason.

EU funds made Orbán’s autocratic mafia-like regime happen so the question whether they continue to flow so abundantly is not without political significance. But can the end of EU funds mean the end of Orbán?

According to a calculation, 7 million euros a day have been sent from Brussels to Hungary during the 12 years between 2004 (Hungary’s EU accession) and 2016. The bulk of that money arrived during the reign of the Orbán-administration (payouts only really kicked in 2008 and their impact only became visible from 2012).

But it didn’t bring prosperity. As it is predictably common with foreign aid of any kind, it acted as a kind of resource curse. Pouring resources of a malfunctioning system didn’t incentivize effective reforms, and it eventually zombified the economy, making it addicted to and dependent on the influx of new funds.

Every time the payments slow down, the economic output immediately suffers. The payments of EU funds can be tracked by the fluctuations of the quarterly GDP, signaling without doubt that the mindless development spending had not resulted in any qualitative improvement or created sustainable economic fundamentals.

To make things even worse, a new economic elite had materialized that is completely dependent on political connections – and not at all dependent on running an efficient business. Orbán gleefully calls them “the Hungarian capital-owning class” and they consist of men hand-picked by him.

But not every pile of money acts as capital if the owner doesn’t know how to use it. Without voluntary interactions by market players, piles of money remain just stolen public funds. And the politicization and centralization of the economy pulled the last shreds of voluntarism out of the markets and stifled market logic.

To call the arrival of EU funds one of the biggest economic opportunity in history – yet the greatest economic (and political) tragedy that could befall Hungary – is probably not an understatement. The biggest problem is not that the money was often spent with western European companies – but that it didn’t leave any sustained benefit behind, the intended big infrastructure development was dumb, overpriced, and often just checked the boxes of bureaucratic logic that was detached from reality.

The money had achieved one thing though. As the economy went on life support by EU funds, the ruling elite had learned to use it as a tool to build up a massively corrupt, cronyist system of clientelism and patronage where access to EU funds became the measure of “entrepreneurial” success, and the decisive factor in the access became the proximity to politicians in a highly centralized manner that was ultimately focused in the hands of just one person. It is not the first nor the only time development funds have created an unmovable political elite, state capture or corruption, not even in the EU. It is the inevitable political result of a funding mechanism that is guided by bureaucratic and political rationale and feeds participants’ personal power motives rather than following market logic, let alone any real public interest. Abundant EU money helped Orbán’s buildup of power to this point by providing an unsustainable economic welfare legitimacy to his system and immense power in the hands that distribute the “free” and dumb money.

There have been signs of growing discontent with the wasteful and corrupt spending of European taxpayer money for years. In November 2017 Hans Eichel, Germany’s former finance minister and three ex-EU commissioners, Pascal Lamy, Franz Fischler and Yannis Paleokrassas sent an letter to Jean-Claude Juncker, saying that money flows to Hungary should be turned off until “basic democratic freedoms are reinstated and corruption counteracted”. But these were not the only voices. Linking the continuation of the money shower to the adherence to core European values and to joining the European Prosecutor’s office had been called for repeatedly. And by the last months

In the last months of 2018, rumors about the potential drying up of payments have been circulating, fueling speculation that there might be some effective pushback from EU bureaucracy by delaying funds to put pressure on the regime. A dispute between Hungary and the European Commission about some EU-funded projects seem to have delayed payments from the EU in 2018. As a consequence of the delays (and 2018 being an election year when the government had spent generously on its preferred voter groups as well as blurring the line between party campaign and taxpayer-funded government communication) there have been signs of distress in the distribution mechanism in the shape of claw backs of previously approved funds that have been advanced by the budget. The budget had also looked to close with substantial deficit for the year due to its extreme reliance on EU money.

In September 2018 g7.hu reported that European Commission inspectors found “widespread irregularities” in EU-financed projects in Hungary, raising the risk that the European Union could withhold development funds worth EUR 1.6 billion. According Finance Ministry data, in the first eight months the cash-flow deficit widened to 1646 billion forints (EUR 5.49 billion), exceeding the full-year target of 1361 billion in the 2018 budget. A delay in reimbursements of billions of euros has temporarily increased Hungary’s cash-flow budget deficit and a row over payments strained relations with the EU that has threatened to impose sanctions for flouting the rule of law and civil rights, and for wide scale corruption. By the end of August budget spending related to EU projects (advance payments by the state) totaled 1388 billion forints, while reimbursements from the EU were only at 183 billion forints.

By the end of the year, however, the problem appears to have been sorted out. Orbán’s most precious Christmas gift (apart from finally moving himself into the Buda Castle) had been the last minute transfer of over 2 billion euros of delayed EU funds during the final weeks of 2018 that boosted the budget and removed any doubt as to the toothlessness of European democratic control mechanisms. The unprecedented, large transfer even came in the most disputed chapters of funding, and it improved the ratio of budget spending to EU reimbursements to 1597 billion forints in spending vs 1451 in reimbursements.

Whether it was the result of another sweet promise from Orbán that allowed the EU to do nothing while still saving face in an election year or something else, we know not. The Hungarian government celebrated the windfall with massive spending on football and churches – both in Hungary and abroad.

The further progress of the Article 7 procedure against Hungary is, however, still to be watched closely. Behind the opaque political decision making someone might come up with a deal that finally reigns in Orbán’s European economic resources – the only thing that currently ties Orbán to the EU. (The country and its people enjoy other benefits of EU memberships, the freedom of movement, the freedom to do business, but Orbán is really only there for the handouts.) Calls for more accountability in the spending of EU funds and more conditionality are constant.

Another way the EU funds might become less available for Orbán’s system is the activity of OLAF, the European Anti-Fraud Office. Orbán has resisted joining the European Prosecutor’s office, and with good reason. OLAF has concluded an investigation in 2017 into the EU-funded business success of Orbán’s son-in-law, for instance. The two-year probe has found “serious irregularities” around infrastructure projects won by Orbán’s son-in-law. They were part-financed by the European Union and OLAF’s claims could prompt Brussels to try and claw back payments on the projects of more than EUR 40 million – in this case only.

Hungarian authorities have dismissed OLAF’s findings, but the dropping of the Hungarian investigation just further “strengthens doubts on the independence of Hungarian law enforcement authorities” according to the chair of the EP parliamentary committee. If other schemes come under investigation and the funds under consideration for claw back grow even further, it might put financial pressure on Orbán’s system of clientelism.

Ultimately, it will only hurt the Hungarian taxpayer as such claw backs and fines are not paid by the perpetrators, but the reduction of available resources to provide the carrots that support an autocracy will be felt.

As of the political impact, a potential drying up of EU funds can cut both ways.

It may be accompanied by a mechanism that finally enforces the founding principles of the European Union in exchange for the funds – if there is political will and talent left in the EU to do so. This is why the progress of illiberal forces in other European countries need to be watched, with special regard to their own exposure to Russian influence and economic assistance.

But the drying up of European money could equally likely push the regime to turn for more economic favors towards Russia, China and its other eastern allies. These new allies are, however, less reliable and less generous with their economic help – with stronger political strings attached and with more reliable mechanisms of political accountability of a different kind.

The question is whether Europe becomes a club of its countries’ rulers – or of its people. The interests of the two groups, rulers and ruled, are diverging rapidly.

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