Where will it end? Economic protectionism and exclusionarism in the regulation of the 2015 Hungarian state budget

 Marton Varju


Key pieces of legislation adopted in the run up towards the close of the autumn session of the Hungarian Parliament – which has traditionally been the period for the adoption of the state budget for the forthcoming year – reinforce the impression that the reigning Hungarian government is actively pursuing a policy of restructuring certain segments of the national economy based on ideas of economic protectionism and exclusionarism. The problematic measures are:

  • Act 2014:LXXIV on the modification of tax legislation in force, which increased the tax rate on advertising services from 40 to 50% for companies with a tax base of 20 billion HUF affecting exclusively foreign owned companies (e.g., RTL Hungary);
  • Act 2014:LXXIV on the modification of tax legislation in force, which brutally increased the food chain supervision fee for undertakings selling everyday consumer products with a net annual income over 50 billion HUF affecting nearly exclusively foreign owned supermarket chains (e.g., TESCO, SPAR, AUCHAN);
  • Act 2014:CXII modifying the Act on Commerce, which penalises undertakings selling everyday consumer products with an annual net income over 15 billion HUF which fail to report profits in two successive years with a compulsory suspension of commercial activities (affecting larger, predominantly foreign owned retail chains).

These measures are addressed indirectly to foreign undertakings dominating the relevant segments of the Hungarian market, and aim to reduce their market position for the benefit of other, predominantly Hungarian owned market operators by increasing their tax burden and penalising certain commercial practices. Although the measures have some – in our view rather moderately explained and justified – links with justifiable public policy aims (e.g., increasing diversity in the retail sector, fair contribution to taxation by successful, ‘non-producing’ undertakings), they seem to convey a clear message that Hungary is actively reconsidering its commitment to the integration of open markets in Europe in goods and services, and also to an integrated European capital market.

As far as the legal obligations of Hungary under the EU Treaties are concerned, the measures in question are extremely likely to violate the fundamental freedoms of movement (free movement of services and capital, and the freedom of establishment). This could follow from their indirect discriminatory impact on foreign owned undertakings, or from the fact that they are liable to discourage foreign economic operators from exercising their economic rights enjoyed under EU law (note that the rate imposed on RTL Hungary is being revoked by the government under pressure from the EU Commission, and following negotiations with the owner Bertelsmann). The regulatory solution that these new measures separate undertakings with higher level of annual tax base or income from those which perform more modestly, with sufficient information about the structure and the participants of the relevant Hungarian markets can hardly be defended under EU law’s clear demands for equal treatment irrespective of nationality and for refraining from raising impediments to cross-border economic activity. While the new burdens are unlikely to drive out the affected undertakings from the Hungarian market, the market positions abandoned by them as a result of the intervention of the Hungarian government are more than likely to be occupied by their so far more modestly performing Hungarian competitors.

And this is all fine for the Hungarian government. As the time since 2010 has shown, it is not going to be embarrassed by its failures to comply with EU economic law, and it may again brush aside potential infringement procedures or other legal challenges as addressing questions of regulatory detail and not objecting Hungarian economic policy as a whole. The stakes for the Hungarian government with these legal measures and with the related policy are much higher. Firstly, it wants to bring its policy of increasing the market share of government friendly Hungarian economic operators and of decreasing those of foreign investors to fruition. Secondly, with the extra tax income gained it wants to satisfy the sober deficit rules of the Treaties (Article 126 TFEU and Protocol 12) and to avoid the launch of an excessive deficit procedure against Hungary holding the threat of suspending the outpayment of Hungary’s EU development monies.

Since most public capital investment projects in Hungary are financed predominantly through EU funds – allowing the government that long desired fiscal freedom to spend domestic public monies on projects dear to its heart, compliance with Article 126 TFEU has been perhaps the main – if rather reduced and disappointing – benchmark of contemporary Hungarian EU politics. The fact that eventually the new measures may need to be corrected, even repealed under EU law does not particularly worry the government, as these are unlikely to challenge the politically extremely crucial fact that the excessive deficit procedure against Hungary has been avoided – even though by means of collecting potentially unlawful revenues – and that the structure of the relevant segments of the Hungarian market has been reshaped for the benefit of income-hungry Hungarian economic operators. Also, the eventual losing of the tax incomes expected from these measures under coercion from EU law will not cause sleepless nights for the makers of Hungarian fiscal policy as they can be replaced by newer tax burdens invented and imposed on the remaining profitable sectors of the Hungarian economy.

These likely scenarios indicate that the Hungarian government seems to be playing a rather different game of compliance than that normally expected from the Member States, in particular, under the loyalty clause embedded in Article 4(3) TEU. The troubling ultra-realism of Hungarian EU politics, which clearly favors domestic politics and policies being undisturbed by Brussels (e.g., under Article 126 TFEU) irrespective of its broader costs, sees compliance with EU obligations – when they contradict the Hungarian interests of the moment – as obstacles which can be sidestepped on a whim. Its approach of ‘breach EU law first and suffer the legal consequences later’ is based on the strategy that the changes introduced in the market and in society by unlawful government action are extremely unlikely to be reversed, restituted, or effectively remedied by the subsequent direct or indirect enforcement of EU law. The Hungarian government sees it clearly that EU law is unlikely to be able to demand the reinstatement of destroyed markets and lost market positions, or request the destruction of (public and private) infrastructure created through the use of legally suspicious opportunities and monies.

In such circumstances, ordinary Hungarian courts prepared to issue rapid legal remedies could provide the only effective and quick legal control of government conduct under EU law. Using their powers under EU law to order interim relief against legislation and administrative action violating EU law (see Factortame case), applying the principle of supremacy against unlawful Hungarian legislation – possibly without turning to the EU Court of Justice for a preliminary ruling, and taking Frankovich/Factortame state liability seriously could present the only effective instrument to defeat the government’s cagey strategy of non-compliance in pursuance of protectionist and exclusionarist intentions. The responsibility of ordinary Hungarian courts is particularly high as the Constitutional Court have repeatedly rejected establishing its jurisdiction under Hungarian law to review the compatibility of Hungarian legislation with EU law, and it has failed to assume any responsibility for examining abuses of public power and violations of individual rights by Hungarian governments under EU law. For the Commission to be of any assistance, it needs to revise its enforcement strategy so that it could adequately respond to the ‘scorched earth’ strategy of the Hungarian government in economic policy making.

Ultimately, the greatest losers of the economic policy of the Hungarian government are Hungarian consumers. Within incomes well below the EU average and with food prices constantly on the increase, the penalizing of foreign owned food retail chains could be very painful for the extremely price sensitive Hungarian populace. In most parts of Hungary, where the supply side of the food retail industry – in terms of its quality, price, accessibility etc. – is just able to meet consumer demands through the presence of these economic operators, consumers are very likely to feel disfavored by government policy. It is unlikely that Hungarian owned food retailers – irrespective of their determination to increase their market share and income – will be able to provide a sufficient alternative to consumers in the near future. It is questionable that the likely, but insufficiently established and justified longer term policy aim of these measures of increasing supply side diversity in the food retail sector should come with such a price tag, and that Hungarian owned retailers will be able to dedicate more resources than their foreign owned competitors to increasing the sales of locally sourced products.

Interestingly, the extra taxing of RTL Hungary has in fact contributed to increasing media pluralism and consumer choice in television broadcasting, as since the introduction of the advertising tax RTL has radically changed its programming policy.

The very real damages of Hungarian economic and fiscal policy should indicate to the Hungarian government that protectionism and exclusionarism are counterproductive policy approaches in a market environment characterized by significant internal and cross-border interdependencies. Policy making and regulation pursuing the Hungarian interest of the time – especially, the economic interests of Hungarian entrepreneurs waiting for the government to restructure markets to their benefit – undermines the very interest for which Hungary entered the European Union in 2004: the availability of effectively competing open integrated markets capable of benefiting Hungarian consumers, investors, producers, and retailers. By closing down segments of the Hungarian market and by following a policy of ‘selective’ regional capitalism (i.e., certain foreign investors and enterprises are welcome, others are not), Hungary is depriving itself of the benefits offered by European integration, which benefits Hungary alone as a state will not be able to secure. Furthermore, the Hungarian government must not forget that if Hungary can be so clever to introduce new barriers to economic activities in Europe, other Member States can also follow suit. With the Hungarian economic performance depending so much on exports to the European Union, retaliation by other Member States of Hungarian economic policy will be very painful to domestic economic operators, workers, consumers, politicians, and to the Hungarian state.

The aims of the Hungarian governments can only be pursued legitimately, if it made clear that the measures in questions were adopted on the basis of well-prepared, well-regulated and justifiable policy aims (e.g., diversifying the Hungarian food retail or media market, ensuring access of local producers and locally sourced products to the Hungarian food retail chain, ensuring a high degree of efficiency for Hungarian food safety administration, and, potentially, lowering the exposure of the Hungarian economy to adverse foreign influences), and if it made sure that the measures will in fact be applied to realize these valid policy aims and not to subject foreign investors and employers in Hungary to blatant discriminatory treatment in pursuance of a hazy vision of a ‘national’ Hungarian economy. After all, the Single Market as a policy is not devoid of failures and deficits, and its operation may undermine otherwise legitimate competing policy aims formulated at the national level.

The views expressed above belong to the author and do not in any way represent the views of the HAS Centre for Social Sciences.