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Hungary – EU Raises the Stakes

A victory for the main governing Fidesz in a parliamentary by-election held on October 11 has raised doubts about the feasibility of the opposition’s proposed strategy of forming a big-tent electoral alliance and fielding joint candidates for all 199 seats in the National Assembly. Moreover, by retaining its two-thirds parliamentary majority, Prime Minister Viktor Orban’s coalition, which includes the tiny KDNP as a junior partner, will be free to implement electoral reforms that reinforce the opposition’s disadvantages, creating additional impediments that ensure Fidesz’s political rivals face an uphill battle, even if they manage to create and sustain a united front.
A surge in COVID-19 infections has made clear that the health crisis is not fully under control, but the national government has been distracted by the recent escalation of a long-running power struggle with the EU over Orban’s authoritarian inclinations. Hungary’s EU partners have lacked an effective tool for eliciting better behavior but took a step toward rectifying the situation earlier this month, when a majority of EU members approved a provision that conditions access to financing from the $2.1 trillion 2021–2027 EU budget and an $860 billion post-pandemic recovery fund on a government’s proven commitment to upholding the rule of law.
Joined by Poland, which is similarly vulnerable to a loss of funding under the new guideline, Hungary has responded by vetoing the proposed EU-wide tax increases that are essential to the feasibility of the entire financing plan. The game of chicken will probably continue through an early December meeting of the General Affairs Council at which the tax measures must obtain final approval. Failure to break the impasse would leave the larger EU body with little choice but to strip Hungary and Poland of their voting rights as authorized under Article 7 of the EU treaty, which would be tantamount to daring Hungary and Poland to follow the UK out of the EU.
Orban knows full well that the favorable economic performance that underpins Fidesz’s political dominance is only possible thanks to the development funds Hungary receives from the EU and the credibility that EU membership bestows upon it among investors who might otherwise be wary. That said, he does not want to be seen to be caving to pressure from Brussels. As such, a resolution will likely amount to both sides agreeing to live to fight another day, with Hungary and Poland grudgingly approving the tax increases on the basis of assurances that the neither will be denied access to funding in the near term based on the new conditions.
Since 1979, The PRS Group Inc., has been a global leader in quant-based political and country risk ratings and forecasts. This commentary represents a sneak peek from our upcoming political risk reports. For more information please contact us at (315) 431-0511 and, or explore a subscription to PRS Online and/or ICRG Online today to receive political risk updates.


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