Viktor Orbán’s defeat has revived a familiar question in Brussels: how and when to release the billions in EU funds frozen due to rule of law concerns. Hungary’s prime minister-designate, Péter Magyar, has already signalled his intention to meet the Commission’s conditions to unlock the roughly EUR 18 billion withheld since 2022.
The sums at stake are substantial and time sensitive. They include EUR 10.4 billion from the Recovery and Resilience Facility, with the deadline for accessing the money expiring at the end of August, and EUR 7.4 billion in cohesion funds. Time is short, and the reform agenda is demanding, ranging from strengthening judicial independence and anti-corruption safeguards to restoring academic freedom and media pluralism.
Beyond the question of releasing the frozen funds, Hungary’s experience should encourage a broader reflection on how the EU should design rule of law conditionality to make it more effective and fairer. The current EU rule of law conditionality toolbox can put pressure on governments, but it also causes significant unintended effects.
As argued by Budapest’s mayor, Gergely Karácsony, freezing funds imposes real costs not only on central governments but also on municipalities and civil society actors that depend on EU support. In countries where rule of law breaches are systemic, these actors are often the very ones the EU seeks to protect – yet they’re among the first to suffer when funds are suspended.
Why the current system falls short – Hungary’s case
The 2020 EU Rule of Law Conditionality Regulation requires governments to continue honouring payments to final beneficiaries even when EU cohesion programmes are suspended. In practice, however, this has proven largely ineffective.
In Hungary’s case, the suspension of 55 % of budgetary commitments from three cohesion policy programmes for the 2021-27 period occurred before the programmes had even started. Since no legal entitlement existed for beneficiaries, there was nothing to ‘honour’.
At the same time, the government retained full discretion to manage the remaining funds, despite the suspension being triggered by systemic deficiencies such as irregular public procurement. Evidence suggests that this discretion was used by the central government to discriminate against politically non-aligned beneficiaries, notably Budapest.
Lastly, the EU ban on politically controlled universities from participating in Horizon and Erasmus+ programmes, while justified, was poorly communicated. It had negative repercussions on students and researchers, ultimately weakening public support for the EU’s measure.
‘Smart conditionality’ – appealing but difficult to implement
This tension has revived interest in ‘smart conditionality’, the idea of redirecting suspended EU funds away from central governments and towards local or pro-democratic actors. While appealing, implementing it would be administratively and politically challenging.
The point of suspending EU payments is to incentivise central governments to enact reforms. But for this to work, suspensions must create some costs. If final beneficiaries are fully shielded, they won’t exert any pressure on their government, weakening the intended leverage.
Additionally, in countries where the central government systematically infringes rule of law principles, it’s difficult to distinguish between ‘innocent’ recipients and those complicit in such violations. Local authorities, businesses and universities must often maintain a certain level of connivance with the central government to operate within the system.
In Hungary, one may wonder if universities could have resisted the changes imposed by the central government (which made them ineligible for EU funds), given their financial dependence on the state.
A more promising approach
Rather than attempting to protect specific beneficiaries upfront, the Commission’s 2028-34 Multiannual Financial Framework (MFF) offers a more indirect form of ‘smart conditionality’ that could be more effective.
The draft National and Regional Partnership Plans (NRPP) Regulation links payments to respect for the EU Charter of Fundamental Rights and rule of law principles, allowing suspensions for non-compliance. After a year, the amounts suspended are definitively lost and can be reallocated to other EU programmes (and Member States), particularly those supporting democracy, civil society and anti-corruption efforts.
These provisions establish a legal and operational framework which would overcome the two main challenges for implementing smart conditionality. Reallocation happens shortly after the government loses the funds, meaning the government bears the financial and political cost. Additionally, the reallocated funds aren’t redirected to specific ‘deserving’ beneficiaries, which are difficult to identify, but are used to finance EU efforts to promote democracy and the rule of law more broadly.
However appealing, the proposal can be improved. First, the rigid one-year deadline to redress rule of law violations risks backfiring. If compliance cannot realistically be achieved within that timeframe, the Commission may hesitate to trigger the mechanism. A more flexible system – allowing extensions to two to three years if properly justified – would make enforcement more credible.
Second, decisions on reallocating funds shouldn’t rest solely with the Commission. Involving the Council and the European Parliament would increase legitimacy and reduce the risk that reallocated funds are used for unrelated budgetary priorities. This could be done by taking these decisions through the annual steering mechanism that must precede the negotiations over the EU’s annual budget.
Third, to qualify as genuine ‘smart conditionality’, reallocated funds should be earmarked for the Member State concerned. The Commission should publish a sound and rigorous assessment of the economic and social impact of rule of law violations and related fund suspensions in the affected country and build on this to re-allocate the funds. Supporting civil society, municipalities or independent institutions within that country would ensure that ‘smart conditionality’ mitigates harm.
A narrow political window
Orbán’s defeat creates an opportunity to reset EU relations with Hungary and unlock the suspended funding. But it should also be a catalyst for reforming the governance of the next MFF.
‘Smart conditionality’ alone won’t deliver a more effective post-2027 rule of law regime. One of the system’s main weaknesses has been uneven and politically cautious enforcement. All too often, the Commission has applied (or avoided applying) suspension procedures in an opaque and hesitant manner.
That’s why a more systematic and transparent use of the existing toolbox is essential. This requires clear and robust indicators to monitor compliance with rule of law standards, as well as triggering decisions grounded in independent assessments, to minimise politicisation and guarantee equal treatment among Member States.
Introducing automatic de-commitment and the mandatory reallocation of suspended amounts would provide a necessary complement. It would make suspensions easier to trigger but also more politically sustainable by ensuring that funds aren’t simply frozen but rather redirected to support those who truly do uphold EU values.
