EU to freeze EUR 495m in Hungary funds

(BRUSSELS) - Brussels is proposing to freeze 495 million euros ($655 million) in EU funds destined for Hungary in 2013, the European Commission said Wednesday, the first time it has ever taken such a measure.

Hungary, whose Prime Minister Vikor Orban is already in dispute with Brussels over a raft of new laws criticised as undemocratic, lashed out over the "unfathomable" move, saying it contravened the spirit of EU treaties.

"This unprecedented step follows the Commission's repeated warnings to Hungary urging it to step up its efforts to end the country's excessive government deficit and its subsequent failure to take appropriate action," the Commission said in a statement.

The freeze in so-called cohesion funding, aimed at reducing economic disparities across the 27-nation bloc, would take effect January 1, 2013 and would concern 29 percent of Hungary's allocations for the year.

The European Union executive last month concluded that Hungary had not taken effective action to reduce its deficit below the limit of 3.0 percent of gross domestic product by 2011 "in a sustainable and credible manner.

"Today's proposal should be seen as a strong incentive for Hungary to conduct sound fiscal policies and put in place the right macro-economic and fiscal conditions to ensure an efficient use of Cohesion Fund resources," Economic Affairs Commissioner Olli Rehn said.

"It is now for the Hungarian government to act before the suspension takes effect," he said.

But the Hungarian government said Brussels had got its sums wrong.

"It is unfathomable why the European Commission has ignored the facts," a government statement said.

"Hungary's budget deficit was, for the first time since we joined the European Union in 2004, below 3.0 percent in 2011 and will remain so this year as well, which makes it the country with the eighth-lowest deficit in the European Union."

Stripping out one-off measures, however, the deficit in 2011 was in fact some six percent of GDP.

Rehn told a news conference that Hungary has been in excessive deficit ever since its EU accession in 2004, adding that the deadline for Budapest to get back within the limit had already been pushed back by three years.

Rehn's office said in January that Hungary formally respected the threshold last year but he stressed on Wednesday that this was only possible due to one-off measures worth "around 10 percent of GDP."

Without a key -- and hugely controversial -- transfer of private pension funds to the public books, the commission maintains the deficit would have hit 6.0 percent of GDP.

The commissioner said the suspension threat was both fair and proportionate.

EU regional policy commissioner Johannes Hahn said the "overarching aim" of the decision was "to prevent further difficulties ... If Hungary takes corrective action, the funds will be available again to spend."

Projects including flood protection on the Danube could suffer if Budapest does not respond to the commission demands.

"The ball is now in the Hungarian camp," he said.