How to deal with "illiberal" corruption?

Two issues keep the debate around the new Multiannual Financial Framework (MFF) going: one is about how to find a mechanism to react to governments which do not comply with the Copenhagen Criteria, i.e. infringe democratic and/or rule of law principles (the infringement of democratic principles is more indirect as the sheer outcome of elections favours the governments of Hungary and Poland - although in Poland the tide may turn - but the circumstances under which these governments win the votes are at least dubious) without resorting to the famous (or rather notorious) Article 7, which is rightly called the "nuclear option" as it is very strong and virtually impossible to implement. It has to be noted also that this "nuclear option" is not directly so nuclear as it strips a country from its voting rights but leaves all other right untouched - of course after this the other member states can vote other sanctions if they are in line with general law.
The other question is also raised in the context of the projects in Hungary where the government is distributing EU funds with an extreme speed - leading to suboptimal decisions in itself - and favours its cronies in this distribution.
As it seems that - at least in Hungary - these two negative phenomena go hand in hand - and the concentration of power and hollowing out of all checks and balances really ensures that cronyism and corruption cannot be brought to court or hindered any other way, including wide publicity, the two questions are mixed together.
Proposals are tabled which would make EU funds conditional on rule of law criteria. In terms of proper use and avoidance of fraud, joining the European Prosecutor's Office is favoured. On the other hand, soon a new Financial Regulation will be voted which will simplify the disbursement of EU funds.
EU structural funds are an important source of economic development, a positive factor in the image of the EU and also help cohesion between the countries (also by enabling that their economic development approaches them to each-other - they are also called cohesion funds). I totally agree with Markko Markkula, president of the (European) Committee of the Regions, who emphasised the importance of these funds in an interview already serving as a preparation to the fight around the new MFF, arguing that the cohesion funds should not be cut. A recent article (and one of a leading Hungarian commentator who can also not be suspected of being on the side of the present Hungarian government, arguing that austerity will not break the government of Orbán) warns that the cut of funds can be counterproductive.
So what?
My proposition is that the decisions (including acceptance of projects and procurement) should be more centralised and also more controls should be applied, covering the cost of these from the funds made available to the country in question. These controls should also depend on whether the coutry joins the European Prosecutors' Office.
This would of course require additional resources which is always difficult to achieve but even more difficult now when EU sources are decreasing due to the Brexit. Therefore the structural funds should be used for this purpose. This would not be such a sensitive cut as what is proposed in the framework of the new "conditionality" proposals. Also, joining the European Prosecutor's Office should be the precondition of applying the simplifications in the new Financial Regulation.

What does the Hungarian minister of the national economy (including finance) know and understand?

According to a press article,the minister of the national economy, Mihály Varga (this superministry integrated or rather melted into itself the finance ministry, ministry of economy, labour and the different sectoral ministries - foreign trade, commerce, industry etc.) declared that the Hungarian government will not follow the recommendation of the European Council (it is prepared by the Commission but descussed in the Council and signed by the president of the Council) to cut tax benefits to poor people. Apart from the fact that low earners in Hungary have no special tax benefits (they were abolished by the FIDESZ government to cover partially the costs of the flat personal income tax), the article states that Varga confused the tax wedge with the tax benefits as the coutry-specific recommendation to Hungary proposed to decrease the tax wedge for low earners (see point 3 on page 7). Actually the document complains in an earlier paragraph (number 12 on page 5) that the" tax wedge on single low-income earners is one of the highest in the EU". Probably Mr Varga should have read the Hungarian version. There, the translator (who knows why, certainly not fearing misunderstanding by an economist and economy minister) translated the tax wedge to "tax burden" (pages 5 and 8 as the Hungarian text is somewhat lengthier).
The recommendations are denouncing the sectoral extra taxes (with the following justification: "The application of different tax rates across sectors is an obstacle to the effective allocation of resources
and thus negatively affects growth" and recommend a more equitable tax system. This is no surprise. No surprise either but very instructive are, however, some other statements about the situation of the economy and about economic policy: "Notwithstanding the Central Bank's subsidised 'Funding for Growth' scheme for small and medium-sized enterprises, normal lending to the economy has not picked up in a sustainable manner." (see also in Hungarian: Why the "funding for growth" programme did not help?)
"The regulatory burden on the financial sector has been
further increased, thus limiting the capacity for capital accumulation. Measures like
the increase of the financial transaction duty have contributed to a pick-up in the cash
usage of the economy. The household portfolio has further deteriorated and the high
proportion of non-performing loans currently represents one of the biggest
challenges for the financial sector. Portfolio cleaning is hindered by the weak
efficiency of resolution proceedings."
Also interesting: "The youth unemployment rate has decreased in 2013, while the rate of young people who are not in employment, education or training has increased." -  hints to the phenomenon often discussed in the Hungarian economic press that employment figures may hide more than reveal the real processes. "The Public Work Scheme attracts the bulk of budgetary resources available for employment measures, but in 2013 less than 10% of its participants were able to return to the open
labour market after exiting the scheme."
"The business environment in Hungary is characterised by frequent changes in the
regulatory framework and limited competition in an increasing number of sectors.
New barriers have been introduced in the services sector and existing ones have not
been removed (e.g. pharmacies, waste management, mobile payment, retail tobacco
and textbooks)."
"Overall investment has declined particularly strongly in those sectors
where sector-specific surtaxes have been imposed in recent years. Between 2010 and
2013, nominal investment declined by 44 % in energy, 28 % in finance and 18 % in
the communication sectors, while increasing by 3.4 % overall."

And so on, and so on. So if after this, the minister of national economy says that Brussels does not require adjustment any more, obviously concentrating on the budget balance (in fact this is also a little false as the recommendations state: "Reinforce the budgetary measures for 2014 in the light of the emerging gap of 0.9% of GDP relative to the Stability and Growth Pact requirements, namely the debt reduction rule, based on the Commission 2014 spring forecast. In 2015, and thereafter, significantly strengthen the budgetary strategy to ensure reaching the medium-term objective and compliance with the debt reduction requirements in order to keep the general government debt ratio on a sustained downward path."), he forgets his role beyond being the minister of finance, to be very polite. For the uninitiated: a lot of criticism and recommendations target the governments pet measures, denounced also in Hungary even by economists who supported FIDESZ before.

There are problems also in the social area (another superministry is the Ministry of Humnan Resources): "The proportion of early school leavers is on the rise and the adoption of an early
school leaving prevention strategy has been repeatedly delayed." - and this in the context when compulsory upper schooling age has been decreased.

A final quote: "Review the impact of energy price regulation on incentives to invest and on competition in the electricity and gas markets. Take further steps to ensure the autonomy of the national regulator in establishing network tariffs and conditions. Take measures to increase energy efficiency in particular in the residential sector." - Another pet project, the "decreasing utility charges" is under attack. If we look what was written above about the investment scenario, we see why. The criticism of the public procurement system is very diplomatic, but sstill, recommends improvement. THis would, however, stop the government from distributing public work contracts to its cronies. No surprise but very sad that the minister shows himself deaf.

End of the excessive deficit procedure and publicity tax

The European Commission is proposing to the Council to release Hungary from the excessive deficit procedure. This is good news as the procedure has already lasted so long that remaining in it would mean loss of cohesion funds for the country. Given that 95% of public investments are financed partially from EU funds, this would have meant a grave blow to the Hungarian economy and also food for further “liberty fight” demagogy against the EU. On the other hand, it is a triumph for the Orbán government and some fear that by that the EU is losing leverage in constraining the Hungarian government in its economic and political actions which are harming the country and going against European democratic principles. The dilemma is not easy to resolve, almost impossible, like most of the dilemmas which are caused by - the contradiction that whenever the government is sanctioned, it is the people who pay the price and - the communication tricks which make the EU a scapegoat if it is acting and a weakling if not. Whoever followed the developments can, however, see through these tricks. As if to help this, the European Commission reiterated again the need – in the form of concrete measures proposed – for a more sustainable public finance. Nevertheless, it could not deny that with the latest measures (actually with the latest but one package of measures – let’s return to that below) the deficit will be under 3% of GDP for the rest of the term of this government. And this is what counts when deciding about the procedure. The latest measures are already the second tranche since the new Minister of the Economy, old-time FIDESZ economic heavyweight Mihály Varga took over – saying in his inauguration address that no further measures are necessary. But a third tranche was also in preparation. This included a tax on publicity revenues of media. Varga said yesterday that it will be introduced only when measures announced before are not sufficient. Today András Giró-Szász, the government spokesman announced that “in the interest of common burden-sharing” it will still be introduced. The statement of Varga – taken into account that the European Commission has initiated infringement proceedings against the sectorial extra taxes already – could be seen as a clever blackmail: if the Commission does not release Hungary, they can be blamed for that tax, if they do, they gave in to save the multinationals from this tax and by threatening them, the government cleverly got out the country from the excessive deficit procedure. The tax will in fact cut further into the profits of the two commercial television channels, one of which, already making losses, is under negotiation to be purchased by the strongest company group which wins almost all public procurements in Hungary and whose owner is the main financial expert around FIDESZ – more exactly, he was treasurer of the party and is expert in party and campaign financing and also owns most of the poster sites in town – which may not be without link to the fact that election publicity is enabled on these posters while prohibited in a number of other commercial media, including commercial tv. No further comment is needed, I assume.

The Commission will soon publish its ‘strategy for e-procurement'. Public procurement should be enabled to use the internet.
Public procurement tender notices of all public authorities in the EEA are already published on the Internet and the submission of these documents is also continuously being streamlined. Notices can be submitted through a web-based for after registration or sent through computer-to-computer connections using the so-called e-sender network. The Commission's informatics directorate general is already doing some e-procurement. E-tendering is being phased in, first documents can be submitted, later the whole process will be possible on the net.

Meanwhile two commissioners, Michel Barnier, the commissioner for the internal market and services, and Karel De Gucht, the commissioner for trade are planning a regulation which would enable municipal authorities to reject bids from companies from countries where EU firms cannot bid in public procurement.

This is part of the EU's fight against discrimination in trade.