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Hungary unblocks EU stalemate

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Good morning and welcome to Europe Express.

The widening EU-Qatar corruption probe may be dominating the headlines this morning, but at least there was some good news last night when it emerged that Thursday’s summit is less likely to descend into a bunfight over Hungary. There are still some wrinkles to be ironed out before the summit, raised not by Budapest, but Warsaw.

We’ll also look at the elusive gas price cap energy ministers are discussing in Brussels today.

And in Paris, France’s Emmanuel Macron is hosting a Ukraine winter aid conference today, with nearly 50 countries represented and President Volodymyr Zelenskyy tuning in virtually from Kyiv.

Hungarian truce

The messy and disruptive stand-off between Hungary and its partners over EU funding was last night finally heading towards a resolution — at least for the time being, write Sam Fleming and Valentina Pop in Brussels.

The dispute centred on Hungary’s longstanding inability to win approval for its €5.8bn pitch for EU recovery funding, which it first lodged in Brussels in May 2021. The stalemate was the result of deep concerns in the European Commission over graft and corruption in the country.

Other EU capitals have accused Hungary of vetoing unrelated legislative files as it seeks leverage in the negotiations. The highest-profile of these are the implementation of the 15 per cent minimum effective tax rate in the EU, and the commission’s plan to advance loans of €18bn to Ukraine next year.

All this was potentially heading to an unpleasant showdown at a European Council summit on Thursday this week, but Viktor Orbán, the Hungarian prime minister, appeared to opt for the path of de-escalation yesterday.

Under a complex political deal struck late last night, the Hungarians will lift their vetoes of the corporate tax directive and of Ukraine funding, while the other member states will vote through Hungary’s recovery fund bid.

At the same time, member states have decided to freeze €6.3bn of cohesion funding to Hungary, after the commission found early this month that Budapest had fallen short in delivering on 17 commitments to reform the rule of law. The amount of money being held back is slightly lower than the €7.5bn the commission earlier proposed should be suspended, in a relatively minor concession to Hungary.

The rule of law reform requirements will be integrated into Hungary’s recovery plan, meaning Budapest can only start accessing its cash once it has fulfilled all of the milestones.

Orbán’s decision to come to terms underscores his urgent need for EU funding, given the parlous state of the Hungarian economy. If Hungary hadn’t won backing for its recovery plan in the Council of the EU before the end of the year, it risked losing 70 per cent of its entitlement to the funding.

But the political agreement struck doesn’t resolve all the bits of tricky EU business pending ahead of the summit. Ambassadors have also been trying to seal the deal on the union’s ninth package of sanctions, which will include a ban on fresh mining investment in Russia as well as export controls aimed at interrupting supplies of drones to the country.

The sanctions package got snarled up on Monday because of differences over the impact of EU penalties on trade in Russian grain and fertiliser.

As the Financial Times reported last week, a group of EU member states including Germany, France and the Netherlands have been asking the commission to revise its sanctions on Moscow to make a clearer exemption for supplies of Russian grain and fertiliser, claiming the current rules are delaying vital shipments to poor countries.

The changes come as African nations blame the EU for shortages of food and agricultural feedstocks.

The latest text under discussion has failed to win over the member states looking for clear carve-outs, while hawkish capitals are opposed to anything that appears to water down the EU’s penalties on Russia. Member states will have to make a new attempt at finding a consensus today.

Chart du jour: Investor crypto-nite

The collapse of crypto exchange FTX has prompted investors to pull a record of nearly $1.5bn from trading venues for digital coins. Exchange founder Sam Bankman-Fried was arrested overnight in the Bahamas at the request of US prosecutors.

Mind the cap

EU governments are inching towards agreement on a gas price cap but even as energy ministers arrive in Brussels to discuss it today there are only dim glimmers of hope for a deal, writes Alice Hancock in Brussels.

The so-called market correction mechanism, proposed by the European Commission last month, was designed to put a ceiling on gas prices when they reached a level that was considered “excessive”. In the commission’s mind this was when prices on the European benchmark index hit €275 per megawatt hour for 10 days and were €58 per MWh above global liquefied natural gas prices.

Member states have been steadily bringing that number down and cutting the number of days as they attempt to negotiate a compromise that will satisfy a contingent of around 15 countries in favour of a cap and a hardline of mostly northern European countries, including the Netherlands and Germany, which are vehemently against.

The latest proposal suggests a cap at €220 per MWh for five days — a difference of €35 per MWh to the LNG price — a widening of the number of references used to monitor LNG prices and a near-rewrite of the mechanism used to suspend and review the cap.

“Member states are moving very reluctantly,” a senior EU diplomat said. “Where the two opposing camps are coming from, they are coming from two different worlds.”

With freezing temperatures across the continent this week, ministers are finding themselves under increasing pressure and not just from citizens to reach an accord.

Commission president Ursula von der Leyen said yesterday that “a lot of work has been done, the technicalities are set, so what we need now is agreement on what kind of price cap . . . I very much hope we will come to a conclusion within the next days”.

Meanwhile the Intercontinental Exchange revised its warning about a price cap, saying that gas traders would be forced to find another $47bn in margin payments, double current levels, if the revised cap was approved.

Two other proposals that would help ease the critical energy situation — an agreement for member states to combine forces to buy gas and another to speed up the permitting procedure for renewable power — are being held until an agreement can be reached on the elusive price cap.

Von der Leyen noted that there was “drastically increasing” interest in the joint purchasing platform and repeated that she hoped a deal would be reached “in the coming days”.

But despite nudges from the commission, diplomats were not enthusiastic about progress at a last-ditch meeting of EU ambassadors, who have already met for more than 20 hours on the topic since Wednesday.

One senior EU diplomat said tentatively that “a landing zone is beginning to form”, but another disputed this saying there were still “incompatible expectations as to what this thing is going to do [and] when that is the case it is very very difficult to reconcile incompatible expectations”.

If ministers cannot agree today, the issue could get bumped up to leaders when they meet in Brussels on Thursday.

Given the technicality of the proposal, diplomats are trying to avoid this at all costs. But with the International Energy Agency warning of a 30bn cubic metre shortfall in EU gas supply next year and amid fears of similar price spikes to those witnessed by the bloc in the summer as a result, every meeting between member states on the subject will count.

What to watch today

  1. EU energy ministers and separately EU affairs ministers meet in Brussels

  2. France hosts an international conference to address Ukraine’s needs for the winter

Notable, Quotable

  • Crisis mode: Guy Chazan in Berlin is looking back at a year of coalition government under Olaf Scholz and how they had to put aside their lofty ambitions following Russia’s invasion of Ukraine, rising inflation and scarce energy supplies.

  • EU sanctions tsar: David O’Sullivan, a former EU ambassador to the US, will be appointed sanctions envoy from January, as the bloc seeks to push for tighter enforcement of its penalties in countries including Turkey and crack down on circumvention of its measures against Russia.

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