The European Commission recommended on Wednesday that €7.5 billion of EU funds be withheld from Hungary over rule of law concerns.
Budapest had until November 19 to pass 17 reforms negotiated with the EU's executive over the summer in order to avoid the freeze threatened by Brussels as part of its rule of law mechanism.
"While a number of reforms have been undertaken or are underway, Hungary failed to adequately implement central aspects of the necessary 17 remedial measures...as it had committed to," the Commission said.
"As a result, the Commission has decided to maintain its initial proposal of 18 September to suspend 65% of the commitments for three operational programmes under cohesion policy, amounting to €7.5 billion," it added.
Budget Commissioner Johannes Hahn argued that the new rule of law conditionality mechanism was "the right tool to apply" as those reforms "would never have happened otherwise."
Meanwhile, the Commission has endorsed Hungary's €5.8 billion post-COVID Recovery Plan — a step that is required before the end of the year with Hungary the only member state not to have had its plan approved yet.
But Brussels attached some strings and demanded Budapest attain 27 so-called "super milestones" in order to secure the funds.
The 27 reforms include the 17 steps already negotiated as part of the rule of law conditionality regulation as well as reforms to strengthen judiciary independence and new rules on auditing and reporting on EU funds.
These measures include setting up new independent anti-corruption bodies, and rules that would introduce the possibility to challenge decisions not to investigate or prosecute corruption if the relevant authorities fail to act.
They also provide for increased transparency in asset declarations, stronger rules on conflicts of interest, as well as improvements in competition and transparency in public procurement.
On the judicial side, the Commission is calling for reforms to strengthen the independence of the country's Supreme Court, by eliminating the possibility that the president and other judges can be appointed outside of the normal procedures and thus remove risks of political interference.
Executive Vice-President Commissioner Valdis Dombrovskis stressed that "the essential milestones must all be met in full before Hungary can submit its payment request."
"In short, no funds will flow until the essential milestones are properly implemented," he added.
EU countries will have to vote on whether to endorse the two Commission recommendations with qualified majorities necessary for both votes to pass.
Hungary to 'convince the Commission'
Member states could vote on December 6 when economy ministers gather in Brussels for an Ecofin meeting where Budapest has blocked the adoption of a global corporate tax.
Such vetoes by Budapest have been decried as blackmail by other member states and attempts by Hungary to secure concessions on other files, including access to EU funds, support to Ukraine and sanctions against Russia.
Speaking to reporters in Budapest, Hungarian Minister for Regional Development Tibor Navracsics assured on Wednesday that the government "will put in place the additional measures required and in 2023 we have no doubt that we will succeed in convincing the Commission (...) that it is not necessary to suspend the funds."
The European Commission expects that Hungary could fulfil most of the "super milestones" by the end of February 2023 and make its request for payments under both the Recovery Plan and conditionality regulation then.
Additionally, a senior Commission official said that Budapest and Brussels have agreed to regular reporting and monitoring which would leave the latter able to reopen the conditionality mechanism "if ever there were a problem with the implementation of the measures or a reversal."
Asked by Euronews' Sándor Zsíros as to whether Hungary could try to leverage its veto over the European Commission's plan to raise €18 billion for Ukraine by issuing common debt, Hahn said "there is no argument not to participate."
"If you apply a rather conservative calculation," he explained, "the share of Hungary would be €6 million, not billion, €6 million."
The Hungarian government said last week that it will provide €187 million in assistance to Ukraine, which it said was the share Hungary would have to pay under the Commission's plan for a joint EU loan.
"I am very confident that at the end of the day the problem will be resolved but, you know, the Commission quite well, we always have a plan B," Hahn said.
'Historic moment for the rule of law'
Finnish MEP Petri Sarvamaa (EPP), who sits on the European Parliament's Committee on Budgetary Control, has welcomed the Commission's decision to freeze the funds as a "historic moment for the rule of law".
"The Hungarian Government had a lot of time to implement the requested measures but it did not do enough.
"I am glad that the Commission came to the same conclusion as we in the European Parliament did. Now, the onus is on the EU Member States to confirm the same. If EU citizens’ money cannot be protected against irregularities, then it cannot be disbursed," he said in a statement.
MEPs last week overwhelmingly backed a resolution calling for EU funds for Hungary to be frozen due to rule of law breaches with 416 votes in favour and 124 against the resolution.
Several Hungarian NGOs, including Hungarian Helsinki Committee, K-Monitor and Transparency International (TI) Hungary, have also endorsed the EU's decision, saying it is "fair and serves the interests of Hungary."
"We welcome that the European Commission has reacted in time to the recent acceleration of the alarming processes in relation to the judiciary, the administrative and political manoeuvres regarding the courts, and is sticking to its expectations, thus also wanting to protect the independence of the Hungarian courts," they said in a joint statement.