The Rule of Law and the Single Market: a New Era of Enforcement in Hungary?

Tensions Flare in the European Parliament

When Hungarian Prime Minister Viktor Orbán visited the European Parliament on 9 October 2024 to present the program of Hungary’s Council Presidency, he faced frustration and anger from his European partners. MEPs harshly criticized Orbán regarding the continuing deterioration of the rule of law in Hungary −particularly, the “foreign agent law” against which legal proceedings are pending in the CJEU − and regarding his pro-Russian and pro-Chinese foreign policy. But it was not only MEPs who lashed out; Commission President Ursula von der Leyen herself directly attacked Orbán:

„How can a government attract more European investments if at the same time it discriminates against European companies by taxing them more than others? […]  And how can a government be trusted by European businesses if it targets them with arbitrary inspections, blocks their permits, if public contracts mostly go to a small group of beneficiaries?“

Von der Leyen’s remarks refer to the increasing pressure being put on foreign businesses by the Hungarian government; an issue which has not received much attention in the past but which, with the current intense debate about European competitiveness and the Single Market, has now moved into the spotlight.

For years, European debates about Viktor Orbán’s Hungarian government have (rightly) focused on the dismantling of checks and balances, the capture of state institutions and the media, and the shrinking space for NGOs and political opposition. Although the EU in its “toolbox decade” developed more supranational instruments to enforce adherence to the rule of law in the member states, these tools were not able to stop or even roll back Hungary’s autocratisation. Today, experts regard the country as a “hybrid regime” or “electoral autocracy”.

Although the EU’s “Hungary problem” has been discussed extensively, the economic implications of Fidesz’s state capture in Hungary have received less attention. This is despite the fact that Orbán’s “illiberal state” has also given rise to severe interference in the structure of Hungary’s economy. More precisely, Fidesz has gradually nationalized energy and telecommunications markets and built up national champions and a fair share of state-dependent crony companies. The Hungarian “Mafia State”, as Balínt Magyar called it, exemplifies not the capture of the state by oligarchs, but rather the capture of oligarchs by the state.

The Hungarian Economy under “Mafia State” Influence

For a long time, despite severe distortions in some markets, European companies did not join in with the critics of the Hungarian government. Orbán made sure that powerful economic actors, such as large German manufacturers, enjoyed excellent investment incentives through tax cuts and close relations with high-ranking officials. Since 2010, Fidesz’s economic policies have largely been a mix of neoliberal and statist elements. FDI-centered instruments have aimed to attract large Western (especially German) multinational companies with tax incentives, the EU’s lowest rate of corporate tax and a crackdown on union rights and workers’ participation. At the same time, Fidesz’s strong grip on companies and the nationalization of important sectors, such as the energy supply, have also enabled floating voters (especially from the middle class) to vote for Fidesz through the “power of the purse”.

Von der Leyen’s recent remarks, however, may well signify the end of Hungary’s era as an Eldorado for Western European multinational companies. Certainly, Hungary remains an important market for the automotive industry and aims to become a global leader in the production of batteries for electric vehicles. However, in other areas of the economy, companies are facing severe market interventions, pressure and even outright harassment from the government. For the Hungarian government national sovereignty is defined by the national ownership of strategically relevant industries. Only at first glance, this strategy  appears to be in line with discussions in Brussels and the European capitals about strategic autonomy. However, precedent in Hungary has shown that nationalization of companies has favored cronies who, in turn, support Fidesz in elections or invest in pro-government media, and allowed the government to increase its control of the economy.

Illiberal Economic Interventions: Three Key Policies

In that sense, the regression of the rule of law in Hungary has not only increased executive power but also the scope for policymaking enjoyed by the government in economic affairs. A study by Berlin-based think tank Institut für Europäische Politik, identified three so-called ‘illiberal economic policies’.

Instrumentalization of Competition Law

First, intense instrumentalization of competition law is observable. Ministerial decrees are used to exempt company mergers and concentrations in key strategic sectors from competition law requirements and judicial review. Such instrumentalization leads to considerable legal uncertainty, unpredictability, and a lack of transparency around government actions. For instance, the introduction of Article 24/A into the Competition Act in 2013 enables the government to allow by decree company mergers that are in the public interest, if they are of strategic national importance, for example in terms of securing jobs or supply. This was used extensively to nationalize the energy sector. Between 2013 and 2020, the provision was used 31 times, exceeding its German precursor which was applied a total of 23 times between 1973 and 2020.

Discrimination Against Foreign Companies

Second, the Hungarian government increasingly discriminates against foreign companies by means of extensive regulatory infringements. In particular, economic pressure is exerted on companies by way of special, sector-specific taxes, which force them to sell to Hungarian businesspeople close to the government. Given the length of proceedings before national or European courts, companies tend to refrain from taking legal action. In some cases, they fear that any public criticism will lead to further restrictions on their activities. Alternatively, the government can also arbitrarily revoke permits or pester selected companies with extensive controls by state authorities.

Distortion of Public Procurement

Third, the systematic distortion of public procurement procedures to benefit favoured companies has long been public knowledge. Thus, the Conditionality Regulation aimed at addressing the systematic misuse of EU funds. As a result of the Conditionality Regulation, the risk of tender manipulation has transferred from EU funds to the national budget, as recent data indicates. However, the systematic significance of corruption in the maintenance of a state-protected economic

sector remains undimmed. As a result of these Hungarian economic policies, researchers have observed the country’s development away from a liberal competitive economy towards a ‘patronage state.’

German Companies Face a Dilemma

Looking at German companies active in Hungary, interviews show that they are increasingly aware of threats to investment security and to free and fair competition as laid out by the EU’s single market acquis communautaire. Nevertheless, a large majority of German businesses are still enjoying favorable conditions and are not directly affected by illiberal market interventions. There seems to be a lack of awareness among companies of the fundamental importance for businesses of a sound rule of law, checks of executive powers and impartial, independent courts.

Additionally, a ‘double coordination trap’ is apparent. Firstly, those companies not affected by illiberal interventions rarely use their influence on the Hungarian government to support firms that are pushed out of the market. This subsequently impedes German politicians from taking more decisive action to address problems of investment security because they do not want to be perceived as campaigning for particularistic interests. In sum, the ancient strategy of “divide et impera” is still working effectively for Orbán.

Hungary’s “Economic Neutrality”: A New Strategy?

Looking ahead, the political and economic friction between Hungary and the EU looks likely to escalate even further. Very recently, Orbán introduced the term “economic neutrality” into his policy toolkit. Orbán has observed the formation of geopolitical blocs reminiscent of the Cold War and, instead of choosing sides, he believes that Hungary’s key task is “to remain a neutral country in a world of economic bloc formation.” According to Orbán, Budapest should act as a broker between both blocs and choose its trading partners not ideologically but only based on profitability and competitiveness.

Consequently, the Hungarian government has put much effort into building relationships with African, Asian and Arab countries. According to the Mercator Institute for China Studies (MERICS), 44 percent of all Chinese FDIs in Europe in 2023 went to Hungary, 69 percent of which were investments in the electric vehicle sector. Additionally, Hungary’s role as intermediary between “East and West” also serves the political function of increasing its significance as an indispensable broker in solving geopolitical conflicts.

“Economic neutrality” also illustrates that the Hungarian government does not see Hungary as part of the West − despite its membership of both EU and NATO. Regarding its EU membership, this illustrates that Budapest is first and foremost in it for the money. The fundamental values on which the project is based seem not to matter.

Skyrocketing inflation, high food and energy prices and frozen EU funds have put a serious dent in the Hungarian economy. This has also sparked growing public discontent with the ruling party. The investments from China, the Gulf States and even Russia are meant to pump much needed funds into the economy thereby foiling the EU’s security and competitiveness goals.

The Future of the Rule of Law in the EU

In sum, the severe interference with free and fair competition rules in Hungary shows that violations of the rule of law are increasing Fidesz’s control not only of the political but also the economic system with the aim of consolidating its power. To address the challenge of the “illiberal state” and its “economic neutrality” the European Commission must make better use of its competences on competition policy and the single market. President von der Leyen’s remarks may indicate a welcome change of strategy in this regard. However, this also calls for better coordination between relevant DGs inside the Berlaymont building. For instance, companies have regularly lamented the lack of understanding of the relevance of market restrictions for the rule of law when filing complaints.

Additionally, it is of the utmost importance that the Commission does not become more lenient on “core” rule of law issues. Its failure to file for interim measures when referring its infringement procedure against the Sovereign Protection Law to the CJEU, shows how crucial it is to use all tools at its disposal.

Lastly, the new legislative cycle will be crucial for the future of Europe. Defending the rule of law and liberal democracy is imperative for European citizens, but businesses, too, as they depend on these principles for their success. This calls for companies to show more engagement in preserving the foundation of Europe’s economic model.