As the recession deepens, Hungary will lose EU funds.

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Hungary is set to permanently lose access to more than €1 billion in EU funding on January 1, as a standoff between Budapest and Brussels hampers the country’s ability to pull itself out of recession and Prime Minister Viktor Orbán’s bid for re-election in 2026.

The ban on EU money has fallen Hungary When governments have little room to maneuver. This year, the budget deficit is more than 4.5 percent of the GDP, which increases political tension.

Hungary’s economy shrank 0.7 percent in the third quarter – the second contraction in a row – as weak demand in the automotive, electronics and pharmaceutical sectors that dominate the manufacturing base pushed the economy into a technical recession.

Of the 6.3 billion euros blocked by Brussels The rule of lawBudapest will permanently lose €1.04bn as this amount must be allocated by the end of 2024 or expire. Hungary loses €1mn a day in EU funding over illegal treatment of asylum seekers; The total cost of processing asylum seekers will reach €200mn by the end of the year.

Both received a one-time €200mn fine from the European Court of Justice in June for breaching asylum rules and ignoring an earlier ruling.

In total, €19 billion of post-pandemic recovery funds and other EU resources remain frozen.

Hungary’s EU Affairs Minister János Boca said in mid-December that it was “very difficult” not to interpret the withdrawal as “political pressure” and that Budapest would take steps to “correct this bias”.

The government is also seeking reparations for an ECJ ruling in June that resulted in millions in fines, in what would otherwise appear to be a new low in relations between Brussels and Budapest.

Hungary’s opposition took the opportunity to blame Orbán’s government for the economic crisis.

“You’ve had 14 years of unlimited power and billions of EU money,” said Peter Majir, Orban’s ally, who tied with Orban’s Fidesz in June’s EU election and has since led the polls. . . This ship has sailed. Hungarians don’t wait. Enough!”

EU funding will remain frozen until the election, with both sides refusing to give up on issues each says are fundamental, including anti-corruption measures, judicial independence and the treatment of Hungary’s minorities and asylum seekers.

Brussels has questioned Budapest’s confidence that Hungary can raise spending over the next four years based on expectations of stellar growth.

The two sides They have until mid-January to agree on a fiscal plan for the period between 2025 and 2028, which is set to give the country a bad score unless the EU government cuts spending.

“There will be a lot of war,” said Peter Virovakz, senior economist at ING Hungary.

Billions of euros worth of mostly EU-funded investment and social spending have been scrapped for the 2025 budget, prompting Maguire to visit the country, where hospitals, inadequate childcare facilities and railway stations have been abandoned for decades. .

Economy Minister Maarten Nagy has admitted that the government will not be able to fully plug the gap created by EU funding.

“You can’t say you want a shiny new hospital, you need money. You need growth for that,” Nagy told the Financial Times. “The economy must be fixed first. . . For years from crisis to crisis, covid, energy crisis, war, now the weakness of the German economy. . . We all know there are no tax revenues so we need to recreate those.

Nagy stated that the government will limit the use of funds to achieve growth of 0.5 percent of the GDP and that the government will not spend excessively.

Instead of using government funds for stimulus, the economy minister has proposed allowing people to use nearly 5 billion euros of private pension fund savings tax-free for real estate purchases or renovations, to boost weak demand.

Orbán, for his part, is betting that investors from Asia could fill the gap – a policy he calls “economic neutrality”.

Chinese investment in Hungary It has increased in recent years, but few think it can fully offset the shortfall in funding from Brussels.

In the year The EU was ready to support several large infrastructure projects in Hungary in 2022 before tensions between Brussels and Budapest escalated.

Among them is the railway line from the center of Budapest to the capital’s airport.

“We could have had a golden age with more than €10bn spent in this decade alone,” says David Vitezzi, who headed the Budapest Transport Authority at the time and later served as Oban’s transport secretary. “We lost almost all of this.”

“EU funding is an important part of public investment in Hungary,” EU Economic Commissioner Valdis Dombrowski told the FT in a December interview.