Following an initial delay, the European Commission (EC) asked for a delay of the approval of Hungary’s recovery plan by an additional two months over rule-of-law concerns. The EC has also given Poland until August 16 to comply with a European Court of Justice (ECJ) ruling that the existing system for disciplining judges is in breach of the Union’s legal framework. Both Poland and Hungary face funding delays and potential disruptions beyond 2021, as tensions between their governments and the EU continue to mount.
Hungary and Poland so far stand to receive around EUR 7.2 billion and EUR 23.2 billion in grants, respectively, but a renewed standoff with the EC poses a risk to the outlook. The approval of Hungary’s national recovery plan will likely be pushed back by more than two months. In the meantime, the government has vowed to finance planned investment projects through the consolidated budget and plug in gaps in the rising deficit once the money is made available. It is likely that the government will manage to find a compromise with the EC eventually, but similar issues are likely to emerge, potentially dampening the public investment outlook. Poland, on the other hand, is unlikely to comply with the ECJ’s recommendation and will be issued fines in September, but it is unlikely to lose access to funding, since its recovery plans have already been approved. Regardless, the EC will likely try to delay funding inflows to Poland beyond 2021 by using the rule-of-law conditionality attached to the EU funds. The delays may force the government to occasionally rely on the national budget to sustain planned public projects.
Potential delays to EU funding may postpone some of the expected recovery in B2C and B2B demand in late 2021 and early 2022. While the Hungarian government has vowed to sustain expenditures on planned projects, the unexpected need for extra-budgetary financing may translate into higher B2G demand volatility and higher price sensitivity. The expected decision to fine Poland should not have a direct impact on the business environment, but tensions between the EC and the government will likely weigh on overall business sentiment.
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