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Monday, May 5, 2014

"Suspension or no suspension?"

The tenth anniversary of the "big bang" enlargement and thus the accession of Hungary was also marked by some controversy. Some Court decisions against Hungary in infringement procedures (I will return to these later) and a controversy about disbursement of EU funds. So let's now speak about this and return to a summary of these ten years later.

The European commission is asking for additional information on the new system of managing EU funds in Hungary and asked the Hungarian authorities not to send new requests for disbursements (invoices) to the Commission before the workings of the new system is clarified. This is not a suspension of payments in the sense that payments on already submitted claims are going to be done. It is quite logical, these funds were disbursed under the old system which was working in a way (according to information from OLAF, there were twelve cases where OLAF proposed further follow-up (which can mean criminal prosecution, recovery of amounts paid or disciplinary action). The situation is that OLAF cannot directly take disciplinary action or initiate prosecution, it is up to the national authorities do it. The low percentage of criminal charges brought by the national prosecutors against fraudsters embezzling EU funds was the reason why the Commission proposed to set up a European Prosecutor's Office which would bring in these charges.

The Hungarian change came – and this shows the ignorance or lack of political feel, or even worse, lack of interest or understanding towards European developments – at an inopportune time: the Commission was strongly called upon in the report of the Court of Auditors and the discharge resolution (which accepts the report on the previous year and evaluates the management of the EU budget) by the Council and the Parliament to do more to tackle the loss of EU funds due to irregular and/or fraudulent claims for reimbursement submitted and not controlled by the member states.

The background is that while administrative expenditure and in general expenditure areas where the Commission directly spends EU money, get since years a "green" mark from the Court of Auditors, meaning that error rates are below the 2% materiality limit, i.e. are in the normal range, in the area of agricultural and structural funds, there is an error rate which is significantly beyond that. And the reason is that the member states' implementing and audit authorities do not provide the assurance requested that this spending really happens also in the quality expected. Unjustified costs are paid, documentation is lacking or erroneous affecting more than the (in)famous 2% (the materiality limit of 2% means that this is the level of errors which is considered a level where the cost of introducing additional controls is exceeding already the savings (improvement) which could be expected from them, and therefore this level of error is considered as inevitable). It can be disputed whether this level really is at 2% (some suggest it may be higher in complex areas), it is commonplace, however, that the authorities of the member states are too lenient towards their beneficiaries – among others because beyond the obvious economic interest, there is a political pressure to spend the funds assigned. This is evidently visible in Hungary, where the slow catch-up at the start makes the rate of spending an obvious target, in particular as the negotiations on the 2014-2020 financial framework did not result in a spectacular success for the government, so they want to differentiate themselves from the previous government by spending better.

So the Commission is finally planning to introduce a stricter monitoring and re-auditing of the implementation of EU funds by the member states, and it was in this process when the announcement by the Hungarian authorities to further centralise the implementation system and eliminate some actors in it came. And it is clear that at least a side-effect of this (if not the objective) will be less hassle – which would be nice if it would eliminate administrative hassle and unnecessary complications, on which the Commission is also working – and a quicker spending. This, however, entails more risk of irregularities being left unnoticed. And this risk – and weakening of the control system - the Commission cannot afford when its main task is to reinforce controls. Had the Hungarian decisionmakers taken this into account, we were better off now.

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