Hungary loses €1 billion in EU funds after missing rule-of-law deadline

Hungary has become the first member state to lose European Union funding outright under the bloc's rule-of-law conditionality mechanism, after the European Commission confirmed that a €1 billion tranche of suspended cohesion commitments expired at the end of 2024. The decision, announced by the Commission on Wednesday, concludes a process that began in 2022 when Brussels triggered the regulation for the first time, citing systemic weaknesses in Hungarian public procurement, conflict-of-interest controls and judicial independence.

The regulation, adopted in 2020 and applied from January 2021, allows the Union to suspend budget payments where breaches of the rule of law affect, or seriously risk affecting, the sound financial management of the EU budget or the protection of its financial interests. Until now the tool had been used only to freeze funds; the expiry of the first suspended tranche marks the first time the financial consequence has become irreversible.

How the conditionality mechanism works

The conditionality regulation does not require a finding that EU money was misspent in a specific project. Instead it looks at whether systemic deficiencies, such as inadequate procurement rules, weak anti-corruption frameworks or political interference in the judiciary, create a sufficient risk to the Union's financial interests. If the Council, acting on a Commission proposal and by a qualified majority, agrees that such a risk exists, it can suspend commitments, payments or both. The suspension can be lifted only when the member state adopts effective remedial measures.

In Hungary's case, the Commission proposed measures in April 2022, the Council approved them in September 2022, and 65 % of three cohesion programmes, amounting to roughly €22 billion, were suspended. The Commission later agreed to release about €10 billion after Budapest passed a package of judicial and anti-corruption reforms in late 2023. But a remaining €19 billion stayed frozen, subject to 27 "super-milestones" covering public procurement, asset declarations, conflict-of-interest rules and the independence of the new Integrity Authority.

Where Hungary fell short

The Commission's July 2024 rule-of-law report, the most comprehensive annual assessment the executive produces, found that Hungary had not met the super-milestones. The report highlighted four areas. First, public procurement: despite legislative changes, the single-bid contract rate remained the highest in the Union, and ex-ante controls by the Public Procurement Authority were still judged insufficient. Second, conflicts of interest: the new Integrity Authority lacked operational independence and investigative powers, and asset-disclosure rules for senior officials contained loopholes. Third, political financing: transparency requirements for campaign spending and foundation funding remained weak. Fourth, media independence: the report noted the continued concentration of outlets in pro-government hands and the absence of a functional media regulator.

Budapest contested the assessment, arguing that the legislative framework had been overhauled and that the Commission was applying moving goalposts. In a statement in December, the Hungarian government said it had fulfilled its legal obligations and accused Brussels of political bias. The Commission, for its part, maintained that laws on paper were not enough; what mattered was verifiable implementation, including track records of investigations, convictions and final beneficiaries identified in procurement.

The Orban factor

Viktor Orban has governed Hungary continuously since 2010, winning four consecutive parliamentary elections with constitutional majorities that allowed his Fidesz party to reshape the judiciary, the media landscape, the electoral system and the institutional checks on executive power. During that period, a circle of businesspeople close to the prime minister, often referred to in Hungarian media as the "oligarchs", accumulated substantial wealth through state contracts, EU-funded projects and privatisations. The Commission's conditionality case rests on the argument that this concentration of economic and political power creates a structural risk that EU funds will be diverted to politically connected actors.

Orban has framed the dispute as a sovereignty issue, repeatedly stating that the money in question "belongs to the Hungarian people" and that Brussels is using financial blackmail to force ideological conformity. He has also cultivated alliances outside the EU, notably with Donald Trump and Vladimir Putin, positioning himself as a defender of national conservatism against what he calls a liberal imperial project. That posture has complicated the EU's internal dynamics: some member states worry that a heavy-handed approach fuels Eurosceptic narratives, while others insist that the credibility of the Union's legal order depends on consistent enforcement.

The €19 billion still on hold

The €1 billion that has now expired represents only the first tranche of suspended commitments, essentially the 2021 tranche of the 2021-2027 cohesion envelope. The remaining €19 billion covers subsequent annual tranches plus the €5.3 billion allocated to Hungary under the Recovery and Resilience Facility (RRF). The RRF funds are governed by a separate regulation but are subject to the same horizontal conditionality: the Commission has made clear that no recovery payments will flow until the super-milestones are satisfactorily met.

Technically, the conditionality regulation provides that suspended commitments expire automatically at the end of each financial year if the suspension is not lifted. That means further tranches could be lost at the close of 2025, 2026 and 2027 unless Hungary demonstrates sustained compliance. The Commission has indicated it will assess progress continuously, but the legal default is expiry, not rollover.

Article 7 runs in parallel

The conditionality procedure is distinct from the Article 7 TEU process, which the European Parliament triggered in September 2018 and the Council formally opened in 2019. Article 7 addresses a "clear risk of a serious breach" of the values listed in Article 2 TEU, respect for human dignity, freedom, democracy, equality, the rule of law and human rights. It is a political procedure that can ultimately lead to the suspension of voting rights, though that requires unanimity minus the concerned state, a threshold that has never been reached.

The two tracks operate on different logics. Conditionality is budgetary and technocratic: it asks whether financial management is at risk. Article 7 is values-based and political: it asks whether the member state still shares the Union's constitutional foundations. In practice they reinforce each other. The Commission's conditionality findings feed into the Article 7 hearings, and the political pressure from Article 7 strengthens the Commission's hand in conditionality negotiations. Yet the Article 7 process has stalled; the Council has held only a handful of hearings since 2019, and no determination of a "serious and persistent breach" has been made.

What the expiry means for Hungarian regions

The lost €1 billion was earmarked for less-developed regions, primarily northern Hungary, the Great Plain and parts of Transdanubia, where GDP per capita remains well below the EU average. Those regions rely on cohesion funding for infrastructure, small-business support, energy efficiency and social inclusion projects. Hungarian municipalities and managing authorities have already contracted many of these projects on the expectation of reimbursement. With the commitment expired, the legal basis for reimbursement disappears. The Hungarian state could theoretically step in with national funds, but the budgetary room is tight: the deficit target for 2025 is 3.7 % of GDP, and debt stands above 70 %.

Local officials in opposition-run cities such as Budapest, Szeged and Pécs have warned that the loss will hit public transport modernisation, district heating upgrades and school renovations. The government has responded by announcing a "national solidarity fund" financed from windfall taxes on banks and energy companies, but details remain vague and the amounts mentioned fall far short of the expired EU tranche.

What happens next

The Commission will publish its next rule-of-law report in July 2025, which will serve as the basis for deciding whether to recommend lifting the suspension on the remaining €19 billion. Hungary has signalled it will submit further legislative amendments in the first quarter, focusing on the Integrity Authority's powers and procurement ex-ante controls. However, the Commission has stressed that it needs evidence of results, concluded investigations, recovered funds, final beneficiaries disclosed, not just new laws. The next Council discussion on the conditionality file is scheduled for the General Affairs configuration in March. If the suspension is not lifted by 31 December 2025, a second tranche, estimated at €1.3 billion, will expire under the same automatic mechanism.