Recommendation for a COUNCIL RECOMMENDATION on the 2020 National Reform Programme of Hungary and delivering a Council opinion on the 2020 Convergence Programme of Hungary
Date: 2020-05-20
Institutions: European Commission, Secretariat-General
Subjects: Hungary, economic policy, economic recovery, economic reform, employment policy, epidemic, infectious disease, investment, stability pact, stability programme, tax system

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   EUROPEAN COMMISSION  Brussels, 20.5.2020  COM(2020) 517 final  Recommendation for a COUNCIL RECOMMENDATION on the 2020 National Reform Programme of Hungary and delivering a Council opinion on the 2020 Convergence Programme of Hungary  
 
Recommendation for a 

COUNCIL RECOMMENDATION 

on the 2020 National Reform Programme of Hungary and delivering a Council opinion 
on the 2020 Convergence Programme of Hungary 

THE COUNCIL OF THE EUROPEAN UNION, 

Having  regard  to  the  Treaty  on  the  Functioning  of  the  European  Union,  and  in  particular 
Articles 121(2) and 148(4) thereof, 

Having regard to Council Regulation (EC) No 1466/97 of 7 July 1997 on the strengthening of 
the  surveillance  of  budgetary  positions  and  the  surveillance  and  coordination  of  economic 
policies1, and in particular Article 9(2) thereof, 

Having regard to the recommendation of the European Commission, 

Having regard to the resolutions of the European Parliament, 

Having regard to the conclusions of the European Council, 

Having regard to the opinion of the Employment Committee, 

Having regard to the opinion of the Economic and Financial Committee, 

Having regard to the opinion of the Social Protection Committee, 

Having regard to the opinion of the Economic Policy Committee, 

Whereas: 

(1) 

(2) 

(3) 

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On  17  December  2019,  the  Commission  adopted  the  Annual  Sustainable  Growth 
Strategy,  marking  the  start  of  the  2020  European  Semester  for  economic  policy 
coordination. It took due account of the European Pillar of Social Rights, proclaimed 
by the European Parliament, the Council and the Commission on 17 November 2017. 
On  17  December  2019,  on  the  basis  of  Regulation  (EU)  No  1176/2011,  the 
Commission  also  adopted  the  Alert  Mechanism  Report,  in  which  it  did  not  identify 
Hungary as one of the Member States for which an in-depth review would be carried 
out.  
The 2020 country report for Hungary2 was published on 26 February 2020. It assessed 
Hungary’s  progress  in  addressing  the  country-specific  recommendations  adopted  by 
the Council on 9 July 20193, the follow-up given to the recommendations adopted in 
previous years and Hungary's progress towards its national Europe 2020 targets.  

On 11 March 2020, the World Health Organization officially declared the COVID-19 
outbreak  a  global  pandemic.  It  is  a  severe  public  health  emergency  for  citizens, 
societies  and  economies.  It  is  putting  national  health  systems  under  severe  strain, 

OJ L 209, 2.8.1997, p. 1. 
SWD(2020) 516 final. 
OJ C 301, 5.9.2019, p. 117 

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disrupting  global  supply  chains,  causing  volatility  in  financial  markets,  triggering 
consumer  demand  shocks  and  having  negative  effects  across  various  sectors.  It  is 
threatening  people’s  jobs,  their  incomes  and  companies’  business.  It  has  delivered  a 
major  economic  shock  that  is  already  having  serious  repercussions  in  the  European 
Union. On 13 March 2020, the Commission adopted a Communication4 calling for a 
coordinated economic response to the crisis, involving all actors at national and Union 
level. 

Several  Member States  have declared a state of  emergency or introduced emergency 
measures.  Any  emergency  measures  should  be  strictly  proportionate,  necessary, 
limited in time, and in line with European and international standards. They should be 
subject to democratic oversight and independent judicial review. 

On  20  March  2020,  the  Commission  adopted  a  Communication  on  the  activation  of 
the general escape clause of the Stability and Growth Pact5. The clause, as set out in 
Articles 5(1), 6(3), 9(1) and 10(3) of  Regulation  (EC) 1466/97 and Articles 3(5) and 
5(2) of Regulation (EC) 1467/97, facilitates the coordination of budgetary policies in 
times  of  severe  economic  downturn.  In  its  Communication,  the  Commission  shared 
with the Council its view that, given the expected severe economic downturn resulting 
from  the COVID-19 outbreak, the  current  conditions  permit  activation of the clause. 
On  23  March  2020,  the  Ministers  of  Finance  of  the  Member  States  agreed  with  the 
assessment of the Commission. The activation of the general escape clause allows for 
a temporary departure from the adjustment path  towards the medium-term budgetary 
objective,  provided  that  this  does  not  endanger  fiscal  sustainability  in  the  medium 
term. For the corrective arm, the Council may also decide, on a recommendation from 
the Commission,  to  adopt  a revised  fiscal  trajectory. The  general  escape  clause does 
not suspend the procedures of the Stability and Growth Pact It allows Member States 
to depart from the budgetary requirements that would normally apply while enabling 
the  Commission  and  the  Council  to  undertake  the  necessary  policy  coordination 
measures within the framework of the Pact.  

Continued  action  is  required  to  limit  and  control  the  spread  of  the  pandemic, 
strengthen  the  resilience  of  the  national  health  systems,  mitigate  the  socio-economic 
consequences through supportive measures for business and households and to ensure 
adequate  health  and  safety  conditions  at  the  workplace  with  a  view  to  resuming 
economic  activity.  The  Union  should  fully  use  the  various  tools  at  its  disposal  to 
support  Member  States’  efforts  in  those  areas.  In  parallel,  Member  States  and  the 
Union should work together to prepare the measures necessary to get back to a normal 
functioning of our societies and economies and to sustainable growth, integrating inter 
alia  the  green  transition  and  the  digital  transformation,  and  drawing  all  lessons  from 
the crisis. 

The  COVID-19  crisis  has  highlighted  the  flexibility  that  the  single  market  offers  to 
adapt  to  extraordinary  situations.  However,  in  order  to  ensure  a  swift  and  smooth 
transition to the recovery phase and the free movement of goods, services and workers, 
exceptional  measures that prevent  the single market  from  functioning  normally must 
be removed as soon as they are no longer indispensable. The current crisis has shown 
the need for crisis preparedness plans in the health sector, which include in particular 
improved  purchasing  strategies,  diversified  supply  chains  and  strategic  reserves  of 

(4) 

(5) 

(6) 

(7) 

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COM(2020) 112 final. 
COM(2020) 123 final. 

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(8) 

(9) 

essential  supplies.  They  are  key  elements  for  developing  broader  crisis  preparedness 
plans. 
The  Union  legislator  has  already  amended  the  relevant  legislative  frameworks6  to 
allow  Member  States  to  mobilise  all  unused  resources  from  the  European  Structural 
and  Investment  Funds  so  they  can  address  the  exceptional  effects  of  the  COVID-19 
pandemic. Those amendments will provide additional flexibility, as well as simplified 
and streamlined procedures. To alleviate cash flow pressures, Member States can also 
benefit  from  a  100%  co-financing  rate  from  the  Union  budget  in  the  2020-2021 
accounting year. Hungary is encouraged to make full use of those possibilities to help 
the individuals and sectors most affected by the challenges. 

The  socio-economic  consequences  of  the  pandemic  are  likely  to  be  unevenly 
distributed  across  territories  due  to  different  specialisation  patterns  in  particular  in 
regions lacking endowment in key assets or markedly relying on sectors depending on 
face-to-face  business  to  consumers.  This  entails  a  substantial  risk  of  widening 
territorial  inequalities  within  Hungary,  aggravating  the  already  observed  trend  of 
widening  disparities  between  urban  and  rural  areas.  Combined  with  the  risk  of  a 
temporary unravelling of the convergence process between Member States, the current 
situation calls for targeted policy responses. 

(10)  On 5 May 2020, Hungary submitted its 2020 National Reform Programme and, on 4 
May  2020,  its  2020  Convergence  Programme.  In  order  to  take  account  of  their 
interlinkages, the two programmes have been assessed at the same time. 

(11)  Hungary  is  currently  in  the  preventive  arm  of  the  Stability  and  Growth  Pact  and 

subject to the debt rule.  

(12)  On  14  June  2019,  the  Council  recommended  Hungary  to  ensure  that  the  nominal 
growth  rate  of  net  primary  government  expenditure7  does  not  exceed  3,3%  in  2019, 
corresponding to an annual structural adjustment of 1,0% of GDP. The Commission’s 
overall assessment confirms a significant deviation from the recommended adjustment 
path  towards the medium-term  budgetary objective in  2019 and over 2018 and 2019 
taken together. However, in light of the activation of the general escape clause, further 
steps under the Significant Deviation Procedure for Hungary are not warranted. 

(13) 

In  its  2020  Convergence  Programme,  the  government  plans  the  headline  balance  to 
deteriorate from a deficit of 2,0% of GDP in 2019 to a deficit of 3,8% of GDP in 2020. 
The  deficit  is  projected  to  decline  to  2,7%  of  GDP  in  2021  and  to  gradually  reach 
1,0%  of  GDP  by  2024.  After  decreasing  to  66,3%  of  GDP  in  2019,  the  general 
government debt-to-GDP ratio is expected to increase to 72,6% in 2020 according to 

6 
Regulation (EU) 2020/460 of the European Parliament and of the Council of 30 March 2020 amending 
Regulations  (EU)  No  1301/2013,  (EU)  No  1303/2013  and  (EU)  No  508/2014  as  regards  specific  measures  to 
mobilise  investments  in  the  healthcare  systems  of  Member  States  and  in  other  sectors  of  their  economies  in 
response to the COVID-19 outbreak (Coronavirus Response Investment Initiative) (OJ L 99, 31.3.2020, p. 5) and 
Regulation  (EU)  2020/558  of  the  European  Parliament  and  of  the  Council  of  23  April  2020  amending 
Regulations  (EU)  No  1301/2013  and  (EU)  No  1303/2013 as  regards  specific  measures  to  provide  exceptional 
flexibility for the use of the European Structural and Investments Funds in response to the COVID-19 outbreak 
(OJ L 130, 24.4.2020, p. 1). 
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Net  primary  government  expenditure  comprises  total  government  expenditure  excluding  interest 
expenditure,  expenditure  on  Union  programmes  fully  matched  by  Union  funds  revenue  and  non-discretionary 
changes  in  unemployment  benefit  expenditure.  Nationally  financed  gross  fixed  capital  formation  is  smoothed 
over a four-year period. Discretionary revenue measures or revenue increases mandated by law are factored in. 
One-off measures on both the revenue and expenditure sides are netted out. 

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(14) 

the 2020 Convergence Programme. The macroeconomic and fiscal outlook is affected 
by high uncertainty due to the COVID-19 pandemic. There are country-specific risks 
underlying  the  budgetary  projections,  namely  risks  linked  to  higher-than-projected 
expenditures  (in  line  with  past  trends  on  high  end-of-year  spending),  as  well  as 
potentially  lower-than-projected  revenue  as  the  projection  seems  to  rely  on  some 
revenue buoyancy. 

In response to the COVID-19 pandemic, and as part of a coordinated Union approach, 
Hungary has adopted budgetary measures to increase the intensive care capacity of its 
health  system,  contain  the  pandemic,  and  provide  relief  to  those  individuals  and 
sectors  that  have  been  particularly  affected.  According  to  the  2020  Convergence 
Programme,  those  budgetary  measures  amounted  to  2,8%  of  GDP  in  2020,  and  are 
entirely financed through reallocation of expenditures within the budget, reserves and 
new taxes.  They include measures aimed  at  supporting the labour market, tax reliefs 
for  businesses  and  costs  related  to  the  medical  emergency.  Additional  measures  to 
support the recovery (1,4% of GDP) and to support the labour market (0,4% of GDP) 
have  been  announced  but  have  not  yet  been  specified.  In  addition,  Hungary  has 
adopted measures that, while not having a direct budgetary impact, will contribute to 
supporting liquidity to businesses, which the 2020 Convergence Programme estimates 
at 1,5% of GDP. The authorities are working on additional measures for 0,3% of GDP. 
Those  measures  include  credit  guarantee  programmes  and  government-guaranteed 
loans.  The  overall  budgetary  impact  of  the  fiscal  measures  reported  in  the  2020 
Convergence Programmes  differs from  that included in  the Commission 2020 spring 
forecast since only those that were sufficiently specified were assessed and taken into 
account  by  the  Commission.  Overall,  the  measures  adopted  by  Hungary  are  in  line 
with  the  guidelines  set  out  in  the  Commission  Communication  on  a  coordinated 
economic response to the COVID-19 outbreak. The full specification and adoption of 
all announced measures, followed by a refocusing of fiscal policies towards achieving 
prudent medium-term fiscal positions when economic conditions allow, will contribute 
to preserving fiscal sustainability in the medium term. 

(15)  Based on the Commission 2020 spring forecast under unchanged policies, Hungary’s 
general government balance is forecast at -5,2% of GDP in 2020 and -4,0% in 2021. 
The general government debt ratio is projected to reach 75,0% of GDP in 2020. 

(16)  On 14 June 2019, the Council decided in accordance with Article 121(4) of the Treaty 
on the Functioning of the European Union that a significant observed deviation from 
the  medium-term  budgetary  objective  occurred  in  Hungary  in  2018.  In  view  of  the 
established significant deviation, on 14 June 2019 the Council recommended Hungary 
to take the necessary measures to ensure that the nominal growth rate of net primary 
government  expenditure  would  not  exceed  3,3%  in  2019  and  4,7%  in  2020, 
corresponding  to  an  annual  structural  adjustment  of  1,0%  and  0,75%  of  GDP.  On  5 
December  2019,  the  Council  adopted  Decision  (EU)  2019/21728,  establishing  that 
Hungary had not taken effective action in response to its Recommendation of 14 June 
2019, and issued a revised recommendation.  In the Recommendation of 5 December 
2019,  the  Council  asked  Hungary  to  take  the  necessary  measures  to  ensure  that  the 
nominal growth rate of net primary government expenditure would not exceed 4,7% in 
2020,  corresponding  to  an  annual  structural  adjustment  of  0,75%  of  GDP  in  2020. 
Based  on  the  Commission’s  overall  assessment  and  in  light  of  the  activation  of  the 
general  escape  clause  for  2020,  which  allows  for  a  temporary  departure  from  the 

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OJ L 329, 19.12.2019, p. 91–93 

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adjustment path towards the medium-term budgetary objective, Hungary is considered 
to  have  taken  effective  action  in  response  to  the  Recommendation  of  5  December 
2019. 

(17)  On 20 May 2020, the Commission issued a report prepared in accordance with Article 
126(3)  of  the  Treaty  due  to  Hungary’s  planned  breach  of  the  3%  of  GDP  deficit 
threshold in 2020. Overall, the analysis suggests that the deficit criterion as defined in 
the Treaty and in Regulation (EC) No 1467/1997 is not fulfilled. 

(18)  The  government  announced  a  state  of  danger  on  11  March  2020.  On  12  March, 
borders  were  closed  for  travellers,  except  for  returning  citizens  and  European 
Economic  Area  residents  as  well  as  regular  cross-border  commuters.  Goods  transit 
remained  permitted.  On  16  March  2020,  early  child  education  facilities,  schools  and 
universities were closed and teaching started to be given online. As of 17 March 2020, 
non-essential  shops  were  obliged  to  close  at  3pm  and  restaurants  could  remain  open 
only  for  takeaway  service.  A  partial  curfew  was  introduced  on  28  March  2020, 
meaning people could only leave their area of residence for duly justified reasons, and 
keeping a distance from other people. Before the COVID-19 outbreak, the Hungarian 
economy  was  on  track  for  a  gradual  slowdown  after  several  years  of  outstanding 
growth. Real GDP rose by 4,9% in 2019. After the outbreak of the virus, containment 
measures were implemented relatively quickly, and official case numbers have so far 
remained limited. However, the global recession is expected to hit exports particularly 
strongly due to the dominant role of highly cyclical industries, such as the automotive 
industry. It is also expected to hit tourism and transport services, which are affected by 
travel  restrictions.  Overall,  a  sharp  recession  is  projected  starting  in  March,  then  a 
gradual  economic  recovery  is  projected  from  the  second  half  of  the  year  as 
containment  measures  are  assumed  to  be  gradually  lifted.  Unemployment  could  rise 
rapidly due to the flexibility of the labour market. Economic performance in 2020 will 
be  contingent  on  the  length  of  the  confinement  period  as  well  as  on  the  economic 
policy response. The European Commission’s Spring Forecast projects a 7% decrease 
of real GDP in 2020, followed by a recovery of 6% in 2021. 

(19)  The  government  has  announced  several  waves  of  measures  since  mid-March  to 
mitigate  the  economic,  social  and  economic  impact  of  the  COVID-19  crisis.  The 
central  bank  has  adopted  measures  to  provide  liquidity  to  the  financial  sector.  Other 
liquidity-enhancing  measures  for  households  and  businesses  include  (i)  a  payment 
moratorium  until  31  December  2020  for  loans  and  financial  lease  contracts  for 
companies and households, and (ii) a capping of the interest rate on consumer credits. 
In  the  process  of  designing  and  implementing  these  measures  the  resilience  of  the 
banking sector needs to be taken into account. Further measures, mostly targeting the 
sectors  hardest  hit  by  the  crisis,  such  as  tourism  and  services  include  temporary  tax 
reductions  and  exemptions,  investment  subsidies,    infrastructure  development, 
subsidised  and  guaranteed  loans,  and  capital  programmes.  In  order  to  preserve  jobs, 
the government launched two types of short-time working arrangements. The general 
scheme covers up to  70% of lost wages  for 3 months under certain  conditions  and a 
specific scheme targets research and development (R&D) personnel. The government 
advanced a previously planned cut in social security contributions by one quarter and 
announced  a  one-off  wage  supplement  in  the  health  care  sector.  Overall,  while  the 
fiscal  measures  aim  at  supporting  businesses  and  preserving  jobs,  their  scope  and 
coverage  remains  limited  compared  to  most  Member  States.  Moreover,  they  are 
planned to be financed through reallocations across budget chapters and newly raised 

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taxes,  and  are  thus  expected  to  have  a  limited  effect  from  a  macroeconomic 
stabilisation perspective. 

(20)  Various  aspects  of  health  outcomes  remained  worse  than  in  most  Member  States, 
reflecting, among others, the high prevalence of risk factors in the population and the 
limited effectiveness of health care provision. The public share of health spending in 
Hungary was considerably lower than the EU average. An above-EU average number 
of Hungarians rely on out-of-pocket expenditure and are increasingly pushed to turn to 
private  health  services.  This  aggravates  risks  of  financial  hardship  for  Hungarian 
households,  with  repercussions  for  social  equity  and  health  outcomes.  Additional 
investment  and  comprehensive  reforms  are  necessary  to  rationalise  the  use  of 
resources within the health system, reduce inequities in access and increase the quality 
of care. Preventive and primary care services are underfinanced and their potential to 
improve  the  quality,  accessibility  and  cost-effectiveness  of  the  health  system  remain 
underexploited.  Although  the  authorities  have  started  working  towards  alleviating 
Hungary's  considerable  shortage  of  health  workers,  regional  disparities  in  the 
distribution of health personnel continue hindering access to care in some areas and for 
some vulnerable groups, such as marginalised Roma, but also people with disabilities 
face particular barriers. In the face of the demand shock for health systems generated 
by  the  COVID-19  pandemic,  rapid  action  is  required  to  start  addressing  these 
structural challenges and increase the resilience of the Hungarian health system. 

(21)  The socio-economic consequences of the outbreak may be significant and the impact 
of the government decree of 18 March 2020 permitting bilaterally agreed derogations 
from  the  Labour  Code  still  needs  to  be  assessed.  According  to  the  Commission 
forecast,  unemployment  is  expected  to  rise  to  7,0%  in  2020  and  recover  to  6,1%  in 
2021. Sectors excessively hit by the crisis account for a large share of the Hungarian 
economy,  employing  low-to-medium-skilled  workforce  on  highly  flexible  work 
contracts. Until early 2020, the overall employment rate continued to improve amid a 
strong  economic  expansion,  but  this  did  not  benefit  all  groups  equally.  The  gaps  in 
employment  between  skills  groups  and  between  men  and  women  remained  wide  in 
comparison with the EU average, the latter due partly to the limited supply of quality 
childcare.  Despite  being  scaled  down,  the  public  works  scheme,  which  was  not 
effective  in  leading  participants  to  jobs  in  the  primary  labour  market,  remained 
sizeable.  There  is  scope  for  strengthening  other  policies  to  effectively  help 
unemployed or inactive people find work or access training to improve their targeting. 
The  duration  of  unemployment  benefits  is  the  shortest  in  the  EU,  at  a  maximum  of 
three  months,  which  even  in  favourable  economic  conditions  was  well  below  the 
average time needed to find a job. In line with the principles of the European Pillar of 
Social Rights, social protection schemes and measures need to protect those at risk of 
losing  their  employment,  as  well  as  the  self-employed  and  unemployed.  Short-time 
work schemes, where employees receive income support from the State for the hours 
not worked, are a good way to protect employment. During the pandemic, short-time 
work  schemes  are  most  efficient  if  their  administration  is  simple  and  quick,  and 
eligibility is not restricted to certain sectors or business types. 

(22)  While  Hungary's  overall  poverty  situation  improved  before  the  crisis,  the  trend  can 
reverse  quickly  during  the  downturn.  Income  inequalities  increased  over  the  past 
decade, due in part to changes in the tax and benefit system. Even before the COVID-
19 outbreak, both severe material deprivation and material and social deprivation were 
high,  particularly  among  households  with  several  children  and  among  the  Roma 
population.  The  shortage  of  municipal  flats  for  social  rental  and  a  lack  of  financial 

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support  for  renters  hinders  mobility.  The  minimum  income  benefit  has  remained 
nominally unchanged since 2012 and is one of the lowest in the EU. The pandemic is 
expected  to  hit  hardest  the  vulnerable  groups  who  lack  access  to  care  and  essential 
services and who live in overcrowded households. Measures fostering their activation 
and integration in the labour market will be needed when economies recover. Already 
before  the  crisis,  education  outcomes  were  below  the  Union  average  and  strongly 
influenced by the pupils' socio-economic background. Early school leaving rates were 
high, particularly among Roma pupils.  The low participation of vulnerable groups in 
quality education is a missed opportunity to build human capital and social cohesion. 
Teachers’  salary  is  one  of  the  lowest  in  the  EU.  The  low  number  of  students 
participating  in  higher  education  is  not  in  line  with  the  strong  demand  for  highly 
skilled workers. The unexpected shift to distance learning is likely to further increase 
inequalities.  Evidence  from  the  yearly  national  competence  tests  suggests  that  it  is 
difficult to reach many pupils through digital education because of the lack of digital 
tools.  Learners  from  disadvantaged  backgrounds  experience  negative  effects  of 
distance  learning  also  due  to  overcrowded  households  and  low  education  of  parents. 
Recent  and  ongoing  investments  in  digitalisation  of  education  have  been  important 
and need to conitnue.  

In  the  context  of  the  COVID-19  crisis,  it  is  particularly  important  to  ensure  the 
functioning  of  critical  infrastructure  and  the  free  circulation  of  goods  throughout  the 
Single Market  and to  monitor and ensure the correct  functioning of supply chains  in 
cooperation  with  neighbouring  countries.  Hungary  is  a  small  open  economy  with 
intensive cross-border transport of goods. In addition, many Hungarians work abroad 
and commute on a weekly basis. Hungary may also need seasonal frontier workers in 
agriculture.  Currently  imposed  travel  restrictions  may  delay  the  circulation  of  goods 
and workers but could be alleviated by ensuring the Green Lanes at borders.  

(23) 

(24)  Among  services,  retail  is  one  of  the  most  affected  sectors  due  to  the  measures  that 
prevented  many  businesses  from  functioning  altogether  or  limited  their  operations 
significantly.  Regulatory  flexibility  would  help  retail  rebound  in  the  aftermath  of 
COVID-19.  Hungary  has  the  highest  number  of  regulated  professions  in  the  EU. 
Professional  services  will  play  an  important  role  in  facilitating  the  exit  from  and 
recovery  after  the  crisis.  Ensuring  smooth  access  to  and  exercise  of  professions, 
through  streamlining 
their  regulatory  frameworks  and  related  administrative 
procedures, is therefore of crucial importance, especially for small and medium-sized 
enterprises  and  micro  enterprises  including  sole  practitioners,  who  were  particularly 
hit by the crisis. Liquidity support to businesses through loans and guarantees, with a 
focus  on  small  and  medium-sized  enterprises,  is  of  utmost  importance,  and  the 
distribution of liquidity support to firms must be effectively and swiftly implemented 
by  intermediaries.  In  the  process  of  designing  and  implementing  these  measures  the 
resilience  of  the  banking  sector  needs  to  be  taken  into  account.  Allowing  deferred 
payments  of taxes  and social contributions  and speeding up contractual payments  by 
public  authorities  can  also  help  improve  the  cash-flow  of  small  and  medium-sized 
enterprises.  Newly-founded  start-ups  and  scale-ups  may  need  specific  support,  for 
example  incentives  for  venture  capital  fund  to  increase  their  investments  in  these 
firms.  These  support  measures  will  also  help  to  avoid  fire  sales  of  strategically 
important European firms. 

(25)  Research and innovation is a critical driver for long-term growth and competitiveness. 
Hungary  ranks  as  a  moderate  innovator.  The  shortage  of  highly  skilled  workers  is  a 
key  obstacle  to  innovation.  Spending  on  research  and  development  (R&D)  is 

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increasing slow and was mainly fueled by the business sector, which benefits from the 
largest  public  support  in  the  EU.  However,  R&D  spending  in  the  public  sector 
decreased  over  the  last  decade.  Investment  in  innovative  small-  and  medium  sized-
enterprises (SMEs), as well as strengthening cooperation between business, research, 
academia and the public sector, increase the country's research and innovation capacity 
called for by the COVID-19 crisis. Investments in public research and innovation, and 
a supportive research environment is necessary for recovery. 

(26)  To  foster  the  economic  recovery,  it  will  be  important  to  front-load  mature  public 
investment  projects  and  promote  private  investment,  including  through  relevant 
reforms. Hungary’s National Energy and Climate Plan identifies investment needed to 
tackle the climate and energy transition. Together with investment in digitalisation and 
the  green  transition,  these  will  make  the  Hungarian  economy  more  sustainable  and 
resilient once the country recovers from the crisis. Currently energy efficiency in the 
residential  sector  is  low,  which  also  contributes  to  air  pollution.  The  persistent 
breaches of air quality standards have severe health and environmental repercussions. 
The main sources of air pollution include residential solid fuel combustion, agriculture 
and transport emissions. Just 1% of gross inland energy consumption is covered from 
low-carbon  renewable  sources,  and  highly  polluting  biomass  contributes 
to 
approximately  10%.  From  a  low  base,  solar  installations  have  been  showing  a  rapid 
increase.  In  accordance  with  its  National  Energy  and  Climate  Plan  and  long  term 
climate neutrality, Hungary intends to rely more on renewable energy sources, mainly 
solar  energy.  In  the  current  economic  situation  energy  policy  can  generate  green 
growth  and  can  contribute  to  the  economic  recovery.  Road  congestion  has  been  a 
growing  challenge  until  the  outbreak  of  the  COVID-19  pandemic,  entailing  negative 
economic  impacts  and  increasing  greenhouse  gas  emissions  and  air  pollution.  More 
widespread telework opportunities and more attractive public transport systems would 
also help mitigate the environmental impact of transport. The circular economy is still 
in  an  initial  phase,  recycling  of  municipal  waste  is  underdeveloped  and  economic 
instruments do not provide sufficient incentives. Landfilling remains the predominant 
waste  management  method.  Water  quality  and  supply  remain  concerns.  Hungarians’ 
digital  skills  and  the  use  of  digital  technologies  by  firms  and  public  services  remain 
below  the  EU  average.  Efforts  should  be  maintained  to  offer  efficient  digital  public 
services for citizens and businesses. The programming of the Just Transition Fund for 
the period 2021-2027 could help Hungary to address some of the challenges posed by 
the transition to a climate neutral economy, in particular in the territories covered by 
Annex  D  to  the  country  report9.  This  would  allow  Hungary  to  make  the  best  use  of 
that fund. 

(27) 

In response to the COVID-19 epidemic, on 11 March 2020, the government declared a 
‘state of danger’. Its duration is not pre-defined and the government has discretionary 
power to maintain it or to terminate it. The concrete measures taken by the government 
last until the termination of the ‘state of danger’. On 30 March 2020, the Parliament 
passed  a  new  law  that  allows  the  government  to  set  aside  by  decree  any  law.  The 
emergency powers granted appear more extensive than those adopted in other Member 
States, in light of the combined effect of broadly defined powers and the absence of a 
clear  time  limit.  Certain  emergency  measures  using  those  powers  raise  questions  as 
regards  their  necessity  and  proportionality  and  interfere  with  business  activities  and 
the  stability  of  the  regulatory  environment.  Such  measures  include  allowing 
derogation from labour laws, deploying military liaison officers in strategic companies 

9 

SWD(2019) 1016 final 

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and placing under State supervision a publicly traded company.  As stated on 15 May 
2020  Prime  Minister  Viktor  Orbán  expects  that  at  the  end  of  the  month  the 
government will be able to return to Parliament the special mandate it was given due 
to  the  coronavirus  epidemic.  Strengthening  judicial  independence  would  also  be 
crucial for an effective oversight over the emergency measures concerned. 

(28)  Social  partners’  involvement  in  policy  initiatives  and  implementation  has  been 
insufficient  in  recent  years,  which  has  weakened  the  quality  and  predictability  of 
policy-making and increased the chances of policy mistakes. Consultations and impact 
legislative 
assessments  have  been  recurrently  bypassed  by  applying  special 
procedures, such as individual member’s bills and urgent procedures. The involvement 
of  stakeholders  has  been  weakened  further  during  the  current  system  of  ruling  by 
government  decree.,  also  in  light  of  the  goverrnment  decree  of  18  March  2020  that 
permits bilateral derogations from the Labour Code. 

(29)  The  lack  of  competition  in  public  procurement  remains  an  important  concern,  since 
wider  opening  to  competition  is  a  key  solution  to  face  the  crisis,  revive  the  small 
business  sector and help the economy to  restart.  Despite the new legislative changes 
and  digitalisation  of  public  procurement,  nearly  half  of  all  public  tenders  result  in  a 
single-bid procedure. The high number of single bids undermines the effectiveness of 
the  public  procurement  system.  The  professionalisation  of  public  procurement  could 
help  to  improve  compliance  with  Union  rules  and  enable  strategic  procurement. 
Commission audits on public procurement related to projects co-funded by the Union 
and carried out in recent years identified systemic deficiencies and showed weaknesses 
in  the  public  procurement  control  system.  In  2019,  the  Commission  imposed  around 
EUR 1 billion of financial corrections on Hungary due to these deficiencies. 

(30)  Tackling aggressive tax planning is key to improve the efficiency and fairness of tax 
systems.  Spill-over  effects  of  taxpayers'  aggressive  tax  planning  strategies  between 
Member  States  call  for  a  coordinated  action  of  national  policies  to  complement  EU 
legislation.  Hungary  has  taken  measures  against  aggressive  tax  planning  by 
implementing previously agreed international and European agreed initiatives, but the 
absence  of  withholding  taxes  in  Hungary  on  outgoing  income  to  offshore  financial 
centres could provide an escape route for profits to leave the EU without paying their 
fair  share  of  taxes.  While  the  outgoing  income  flows  such  as  royalties,  interest  and 
dividends  towards  offshore  financial  centres  were  relatively  small  in  2013-2017, 
Hungary  records  volatile  and  relatively  high  capital  inflows  and  outflows  through 
special  purpose  entities  suggesting  potential  vulnerability  to  aggressive  tax  planning 
practices. 

(31) 

In  the  context  of  the  COVID-19  crisis,  it  is  particularly  important  to  ensure  the 
functioning  of  critical  infrastructure  and  the  free  circulation  of  goods  throughout  the 
single  market  and  to  monitor  and  ensure  the  correct  functioning  of  supply  chains  in 
cooperation with  neighbouring countries.  Hence, lifting measures  adopted during the 
COVID-19  crisis,  in  particular  restricting  the  exports  of  medicinal  substances  and 
products, to primarily supply them in Hungary, will contribute to addressing the needs 
of  citizens  across  the  EU  coherently  and  in  a  spirit  of  solidarity,  avoid  the  risk  of 
shortages  and  disruptions  of  supply  chains.  Ultimately,  it  will  pave  the  way  to  a 
successful EU coordinated COVID-exit strategy. 

(32)  While the present recommendations focus on tackling the socio-economic impacts of 
the  pandemic  and  facilitating  the  economic  recovery,  the  2019  country-specific 
recommendations adopted by the Council on 9 July 2019 also covered reforms that are 

EN 

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to 

long-term 

to  address  medium- 

essential 
structural  challenges.  Those 
recommendations remain pertinent and will continue to be monitored throughout next 
year’s  European  Semester  annual  cycle.  That  also  applies  to  recommendations 
regarding investment-related economic policies. The latter recommendations should be 
taken  into  account  for  the  strategic  programming  of  cohesion  policy  funding  post-
2020, including for mitigating measures and exit strategies with regard to the current 
crisis. 

(33)  Corruption,  access  to  public  information  and  media  freedom  caused  concerns  even 
before  the  crisis.  These  areas  are  even  more  exposed  to  further  deterioration  in  the 
state  of  danger  as  control  mechanisms  have  become  weaker.  Investigation  and 
prosecution  appears  less  effective  in  Hungary  than  in  other  Member  States. 
Determined  systematic  action 
lacking. 
Accountability  for  decisions  to  close  investigations  remains  a  matter  of  concern  as 
there  are  no  effective  remedies  against  decisions  of  the  prosecution  service  not  to 
prosecute  alleged criminal  activity. Restrictions  on access  to  information  continue to 
hinder  the  fight  against  corruption.  Dissuasive  practices  for  accessing  public 
information  can  deter  citizens  and  non-governmental  organisations  from  exercising 
their constitutional rights. 

to  prosecute  high-level  corruption 

is 

(34)  The  European  Semester  provides  the  framework  for  continuous  economic  and 
employment  policy  coordination  in  the  Union,  which  can  contribute  to  a  sustainable 
economy.  Member  States  have  taken  stock  of  progress  regarding United  Nations’ 
Sustainable  Development  Goals  (SDGs)  implementation  in  their  2020  National 
Reform  Programmes.  By  ensuring  the  full  implementation  of  the  recommendations 
below, Hungary will contribute to the progress towards the SDGs and to the common 
effort of ensuring competitive sustainability in the Union.  

(35) 

In  the  context  of  the  2020  European  Semester,  the  Commission  has  carried  out  a 
comprehensive  analysis  of  Hungary’s  economic  policy  and  published  it  in  the  2020 
country  report.  It  has  also  assessed  the  2020  Convergence  Programme  and  the  2020 
National  Reform  Programme  and  the  follow-up  given  to  the  recommendations 
addressed  to  Hungary  in  previous  years.  It  has  taken  into  account  not  only  their 
relevance  for  sustainable  fiscal  and  socioeconomic  policy  in  Hungary,  but  also  their 
compliance with Union rules and guidance, given the need to strengthen the Union’s 
overall  economic  governance  by  providing  Union-level  input  into  future  national 
decisions. 

(36) 

In  the  light  of  that  assessment,  the  Council  has  examined  the  2020  Convergence 
Programme and its opinion10 is reflected in particular in recommendation (1) below,  

HEREBY RECOMMENDS that Hungary take action in 2020 and 2021 to: 

1. 

In  line  with  the  general  escape  clause,  take  all  necessary  measures  to  effectively 
address the pandemic, sustain the economy and support the ensuing recovery. When 
economic  conditions  allow,  pursue  fiscal  policies aimed  at  achieving  prudent 
medium-term  fiscal  positions  and  ensuring  debt  sustainability, while  enhancing 
investment.  Address  shortages  of  health  workers  and  ensure  an  adequate  supply  of 
critical  medical  products  and  infrastructure  to  increase  the  resilience  of  the  health 
system. Improve access to quality preventive and primary care services.  

10 

Under Article 9(2) of Council Regulation (EC) No 1466/97. 

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2. 

3. 

4. 

Protect  employment  through  enhanced  short-time  working  arrangements  and 
effective  active  labour  market  policies  and  extend  the  duration  of  unemployment 
benefits.  Improve  the  adequacy  of  social  assistance  and  ensure  access  to  essential 
services and quality education for all.  

Ensure  liquidity  support  to  small  and  medium-sized  enterprises.  Front-load  mature 
public  investment  projects  and  promote  private  investment  to  foster  the  economic 
recovery. Focus investment on the green and digital transition, in particular clean and 
efficient  production  and  use  of  energy,  sustainable  transport,  water  and  waste 
management, research and innovation, and digital infrastructure for schools.   

Ensure that any emergency measures be strictly proportionate, limited in time, in line 
with  European  and  international  standards  and  should  not  interfere  with  business 
activities  and  the  stability  of  the  regulatory  environment.  Ensure  effective 
involvement  of  social  partners  and  stakeholders  in  the  policy-making  process. 
Improve competition in public procurement.  

5. 

Strengthen the tax system against the risk of aggressive tax planning.  

Done at Brussels, 

The President 

For the Council 

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