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Inflation in Hungary has already reached a 24-year high of 15.6 percent and the prime rate has risen to 13 percent.

Prime Minister Viktor Orbán continues to buy Russian raw materials despite sanctions, but wants state institutions to cut gas consumption by 25 percent.

The controversial Hungarian leader, who often "gets on the nerves" of Brussels, cannot be sure of receiving funds from the EU, nor of his cooperation with Russia, writes the Polish edition of "Business Insider", quoted by BTA.

The EC proposed to activate the financing conditionality mechanism in relation to Hungary.

This would mean the suspension of around 7.5 billion euros of European funds for Budapest.

According to the EU's executive body, this is being done to "protect the EU budget and the bloc's financial interests from non-compliance with the rule of law in Hungary".

It is about violations in public procurement, a lack of guarantees against conflict of interest and an unsuccessful fight against corruption, said the EU budget commissioner Johannes Hahn.

Corruption in Hungary is a systemic problem.

It is a fact that oligarchs connected to the government take advantage of European funds and win state tenders, and this order has been functioning for 10 years, said Andrzej Sadecki, an expert from the Center for Eastern Studies in Warsaw, in an interview with "Business Insider".

The EU Council has one month to decide on the matter.

Triggering of the funding conditionality mechanism requires a qualified majority.

It was created two years ago and Hungary would be the first country to apply it.

The prospect of punishing Hungary is also causing concern in Warsaw.

If taken, this decision could prove to be a harbinger of a hardening of the approach to Poland, which has not yet received the funds under the National Recovery Plan.

The EC proposes to suspend 65 percent of the funds for Hungary under the three operational programs within the EU's Cohesion Policy.

This is 7.5 billion euros or about 5 percent of the projected gross domestic product for 2022, the PAP agency reported, citing Reuters data.

The amount is by no means small against the background of the current crisis.

Hungary is in a very difficult economic situation, as all major indicators show.

The national debt is growing, inflation is "breaking" records, the national currency continues to depreciate.

These are the consequences of the politics of recent years and above all of the large social spending in the period before the elections in April.

Although the first signs of the crisis were present, the government decided to freeze fuel prices, recalls Andrzej Sadecki.

In November 2021, Viktor Orbán put a ceiling on food prices, and in January 2022 he also froze mortgage rates at their October 2021 level. Unsurprisingly, these populist decisions have a negative impact on the current state of the economy. 

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Due to the difficult situation, the government was forced to abandon the policy of low electricity prices.

Since August, there has been no ceiling on electricity and gas prices in Hungary.

European funds are of key importance for maintaining economic stability in the country, and the authorities in Budapest are currently in strained relations with the institutions in Brussels.

At the end of August, Hungary's central bank raised the key rate to 11.75 percent, and at its meeting on September 27, the monetary policy board added another 125 basis points to 13 percent.

This is the highest interest rate in the EU.

The rate hike cycle began in June 2021, when the country's prime rate was just 0.6 percent.

In addition, the government is continuing its program to protect borrowers who pay installments with interest rates from October 2021. This program was due to expire at the end of the year, but is likely to be extended.

In August, inflation in the country reached 15.6 percent, which is a 24-year high.

Foodstuffs have risen in price the most - by 30.9 per cent on an annual basis and by 3.3 per cent on a monthly basis. 

As for raw materials, Viktor Orbán continues to buy oil and gas from Russia.

Black gold enters Hungary through the Druzhba pipeline, and Gazprom supplied 4.5 billion cubic meters of gas per year, or 12.3 million cubic meters per day, through its pipelines.

On August 31, Hungary signed an annex to the agreement with the Russian gas monopolist for an additional 5.8 million cubic meters per day to be transported through the TurkStream gas pipeline to the Hungarian-Serbian border.

At the end of August, Hungarian storage facilities with a total capacity of 6.3 billion cubic meters were 63 percent full.

Orbán's cabinet, like most European governments, faces a difficult winter.

For this reason, the prime minister ordered the state institutions to reduce gas consumption by 25 percent.

The heating temperature in the buildings of the state administration will be reduced to 18 degrees Celsius.

In early September, Gergei Gulyash, Viktor Orbán's chief of staff, urged citizens to conserve gas and electricity. He announced that the government would regulate firewood prices and increase coal production.

The cabinet promised to provide support not only to consumers but also to small and medium-sized businesses.

The strong dependence on Russian energy sources and the uncertainty surrounding the tranches of European funds make the Hungarian currency one of the least desirable assets in the world, writes Bloomberg.

The forint has weakened by nearly 12 percent against the euro this year, the second biggest drop among the 23 emerging market currencies that Bloomberg tracks.

And after the EC's decision to freeze European funds for Hungary, the prices of Hungarian government bonds fell to record low levels.

According to the expert from the Center for Eastern Studies, Hungary is weaker than ever in economic terms, and the EU has received an additional tool to put pressure on the country in the form of the funding conditionality mechanism.

Viktor Orbán's government has fewer allies on the international stage: as a result of the war in Ukraine, cooperation within the Visegrad Group has weakened, and his Fidesz – Hungarian Civil Union party has left the European People's Party. 

Hungary will try to hinder the EU's actions against Russia, but I doubt that it will be able to block them alone, Andrzej Sadecki said.

Despite long opposing the sixth package of sanctions, Budapest eventually voted for the oil embargo, the expert commented. 

The consequences of the suspension of financial aid from the EU Cohesion Fund for the Hungarian economy would be dramatic, Sadecki emphasizes.

According to him, both sides will seek a compromise.

The Hungarians are making great efforts, promising a number of changes, including the creation of an anti-corruption body to oversee the use of EU funds, he concluded.

But will bare declarations be enough to convince Brussels?


European funding