Protectionism – the side-effect of Hungarian nationalism

Back in 2012, I wrote an article for Social Europe about protectionist actions by the Hungarian government – already back then, many of us knew that the state will have to pay compensation for some of its actions. Recently, two new awards were adopted by ICSID: in the UP case, according to the judgment adopted in October 2018, the Hungarian state had to pay 23 million Euro as compensation, and in the Sodexo case decided a couple of weeks ago, the compensation was 73 million euro. As Social Europe removed my article a couple of months ago (they faced technical difficulties, so they erased old articles), please find it below (again: it’s from 2012, since that time, hundreds of similar actions happened!!).

For the cases see Sodexo Pass International SAS v. Hungary (ICSID Case No. ARB/14/20), Edenred S.A. v. Hungary (ICSID Case No. ARB/13/21) and UP and C.D Holding Internationale v. Hungary (ICSID Case No. ARB/13/35); See also Sarthak Malhotra: ICSID tribunal finds Hungary in breach of expropriation clause in France–Hungary BIT Investment Treaty News at

Hungary’s government has lately found itself in the cross hairs of critics both international and domestic. Its detractors point to two major issues. First is the barrage of potentially anti-democratic and positively useless laws that have been adopted over a single year, including a new constitution, media law, acts affecting the judicial and electoral systems, governance of the national bank and more – three hundred laws so far. A consequence of this torrent of legislation is that several EU regulations have been violated. As a result, the European Commission has instigated proceedings against Hungary for infringements of EU law on three counts. Secondly, due to the economic crisis and the bad and unimaginative economic policies of the present and earlier governments in Budapest, fiscal policy has become subject to harsh criticism. Due to a chronic structural budget deficit, EU cohesion funds allocated to Hungary have now been suspended – a measure that will be reviewed in June. The government has tried to counter scathing international opinion with nationalistic, arrogant statements as part of an aggressive campaign against the EU and the IMF. The prime minister, Viktor Orbán has accused the EU of imperialism, of double standards hurting Hungary, and directly compared its methods to those of the communist regime and the Soviet Union.

However, besides fears for democracy and worries over economic problems, there is a third issue regarding Hungary which has been overlooked by the media – the conflict between the founding principles of the common European market and nationalistic protectionism: recently, free movement of goods into Hungary, the free establishment of companies and guaranteeing fair competition all seem to have been impaired. Over a year ago, the current Italian PM Mario Monti, former EU Commissioner and also a professor of economics (former Rector of Bocconi University) wrote a report for Commission President José Manuel Barroso concerning the effect of the financial crisis on the European Economic Area.[1] The report warned that the effects of ill-conceived fiscal policies together with the economic crisis could cause nationalistic governments to adopt a protectionist, “market defending” attitude that would contravene the fundamental rules of the EU.

That is exactly what seems to be happening in Hungary today. Stemming from the current nationalistic agenda, some of the recent legislation adversely affects the internal market, especially the free movement of goods, services and capital. The notion of protectionism in politics is not new in the country. Its governments of recent times, both left and right wing, have always attempted to propagandize the sale of Hungarian goods and to shore up the interests of domestic companies – a respectable aim when kept within certain limits. One motive for this was the lack of Hungarian economics to produce several types of valuable goods that could be distributed throughout Europe or even worldwide. Another cause was the lack of thinking internationally – while the European market of 500 million people certainly is a great historical achievement, utilising is yet to be learnt. Therefore, the government’s aim was to increase domestic consumption of Hungarian goods, especially foodstuffs and agricultural produce, which are major a major part of the country’s output. The fallacy of favouring a market of 10 million instead of a one of 500 million was never highlighted.

The Treaty on the Functioning of the European Union (TFEU) stresses that the Union shall comprise a customs union that shall cover all trade in goods.[2] Moreover, all discriminating taxes or quantitative restrictions on imports or exports and measures having equivalent effect shall be prohibited among member states.[3] In practice, this means that there is generally no room for discrimination between goods in the EU, irrespective of their origin. For example, if a company imports German beer into Hungary, it can be sold under the same conditions as Hungarian beer. These provisions have been unchanged for 40 years – ever since the free movement of goods between member states was established at the end of the sixties. The fundamental principles have been tested in numerous cases before the European Court of Justice (ECJ). They are taught all over Europe, including Hungary. One of the earliest rulings of the ECJ was in the “Buy Irish” case.[4] There, the ECJ decided that no member state had the right to advertise domestic products by declaring that “by organizing a campaign to promote the sale and purchase of Irish products within its territory, Ireland has failed to fulfil its European obligations” (at the time, under the Treaty Establishing the European Economic Community). While the ruling applies equally to organizations or associations funded by government, in another case,[5] the ECJ later ruled that the provisions of European law do not prevent such a body from drawing attention to the specific qualities of fruit produced within the member state. Yet it would still be clearly contrary to European law to discourage the purchase of products from other member states, as well as to disparage those products in the eyes of consumers, or to advise consumers to purchase domestic products solely by reason of their national origin.[6] Then in 1986, a Commission Communication was published as a guideline, which reemphasized and interpreted these rules.[7] The Communication laid down that an identification of the producing country by word or symbol may be made providing that a reasonable balance between references to the qualities and its national origin is kept.

With respect to the free movement of goods, there is no possibility available to discriminate foreign companies or the Hungarian subsidiaries, branches or agencies of foreign companies.[8] Moreover, any discrimination based on nationality shall be prohibited.[9]

The first Hungarian legislative efforts clearly conflicting with European rules were made by the left wing government that ran the country until 2010. Surprisingly, only five years after Hungary’s accession to the European Union, they wanted to adopt a law which would have forced shops and supermarkets in Hungary to sell at least 80% Hungarian. The law would have benefitted Hungarian producers, since agriculture and the food industry is traditionally strong in the country. However, it is obvious that the law would have caused a serious violation of the rules of the internal market – and especially of the provisions concerning the free movement of goods.[10] After realizing that passing such an act would have been contrary to EU law, the government pushed some of the representative organizations[11] of domestic food producing and vending companies into signing a so-called “Code of Ethics on the Food Production Chain” (“the Code”). The Code, which, legally speaking was “just” an agreement, contained similarly discriminatory provisions to the previously proposed legislation and its approach was also contrary to EU law, especially EU competition policy. In fact, it was also partially in conflict with Hungarian competition law. Consequently, the Hungarian Competition Authority (GVH) started an investigation into the case. After realizing that the signed Code had never entered into force and that the representative organizations did not have authority from their member companies to bind them to such an arrangement, the Competition Authority subsequently closed the case and ceased the investigation.[12] The second of such attempts, another damp squib, had failed.

And here we are in 2012, witnessing the third similar attempt. Recently, the nationalistic right wing government adopted a law that tries to discriminate against foreign companies and force the consumption of Hungarian-produced food in a new, crafty way. The government (or, to be more precise, a ministry) adopted a law (decree),[13] creating the so-called “Erzsébet voucher” (Erzsébet utalvány – “Voucher”). Previously, three major multinational firms were issuing the bulk of such food vouchers (Sodexo, Chèque Déjeuner and Edenred). The vouchers could be given to employees as a tax-free benefit – now only the state voucher can be given this way, wile the tax after the other three vouchers is 51%. The new voucher (bizarrely named after a saint of Hungary, Saint Elisabeth) is issued by a single governmental entity, the so-called Hungarian National Recreation Foundation (Magyar Nemzeti Üdülési Alapítvány).


An Erzsébet voucher to the value of HUF 500

The voucher’s introduction served two main purposes. First of all, the international firms former dealing with the distribution of such vouchers may well be pushed out of the Hungarian market. Government offices and state universities have started to end contracts with them in favour of using the new, state sponsored vouchers. Secondly – and this is a very crude violation of Hungary’s obligations – when launched, the new vouchers could only be used at three supermarket chains, all under sole Hungarian ownership: CBA, Coop and Reál. No foreign-owned chains such as Tesco, Lidl and Spar were allowed to accept the vouchers. Only after the European Commission started its investigation into violations of EU law, was one additional supermarket, Tesco also included in the voucher scheme, starting 15 April 2012. Therefore, barring future changes, there are only three Hungarian chains and a single foreign one approved by the issuing authority to accept the vouchers, with all other supermarkets excluded. According to the latest news, these new vouchers are also planned to be used by the state in place of cash for issuing social and family benefits – the details of these rules are so far unclear. This voucher system in its present – and likely future – state clearly violates Art. 56 of the TFEU, which states that restrictions on the freedom to provide services within the Union shall be prohibited in respect of nationals of Member States. Moreover, there may also be an effect on the freedom of establishment since the activities of foreign companies are being limited by current rules. The European Commission has warned the ministries responsible in Hungary that if the voucher scheme is not changed, it will start further proceedings against the country for infringement of EU law. Moreover, there exist another, less important discriminating type of the vouchers. Latter is called SZÉP kártya (SZÉP Card), and is used as a voucher for holiday purposes – to pay at hotels, bathes, etc. However, it can not be used at branches of foreign companies. EU law and the expectation of cooperation with other countries aside, the regime may well remind us of communist era and its food stamp system. Back then, people received food stamps instead of money to buy groceries. That time round, history proved that such thinking is incapable of survival – but to reach the very bottom takes a long time, sometimes decades.

Besides the free movement of goods and services there are numerous other legal measures which are being debated, and which may have a debasing effect on the free market – regardless of whether or not they are found legal. For example, the Hungarian state is in the process of establishing a Hungarian state-owned mobile telecommunications company.[14] According to officials, this is necessary because government branches and municipalities are not satisfied with the quality of mobile telecoms services provided by the existing three providers Vodafone, T-Mobile and Telenor – a hilarious argument by any standards. We expect that central and municipal bodies of government and state agencies will be “recommended” to choose the services of the new state company instead of the present ones.

Moreover, in one of the latest scandals, several Hungarian right wing newspapers have received money directly from municipalities and state agencies – essentially, money from taxpayers, while a privately owned research institute called Századvég has received funds from the government amount to an enormous €10 million. Századvég is close to the governing party Fidesz, with its former president István Stumpf – currently a judge in the Constitutional Court of Hungary – who has previously served as chief of staff at the prime minister’s office.

In addition to the above, in order to gain funds to survive fiscally, this government has nationalized the private pension system. As a result of dire state of the economy and a feeling of hopes lost, younger people with marketable skills are fleeing Hungary en masse – this is particularly visible in the case of low paid medics. The government’s answer is to make students who did not themselves pay for their studies to pay tuition if they leave the country after graduation. This approach is – in our opinion – not contrary to EU law, provided that an agreement including these conditions is concluded when a student commences studies, as it is now being done. However, in many instances foreign students have to pay a tuition fee, even when local students do not have to pay, which may well violate European law. In the EU, students from an EU country should have the same rights and obligations as local students, a point reiterated by the ECJ.[15]

Talking about the free movement of people: in our opinion the banning of Hungary’s former president, Mr László Sólyom from entering the Slovak Republic in 2009 was also a great mistake in the region irrespective of the opinion of the Advocate General and the factual and legal background.[16] It is surely wrong for one EU member state’s president to be denied into another just because this was believed to score popularity points in national politics.

In closing, we can be certain that nationalism has a very strong effect on the internal market, and it can be costly for all of us in Europe. The fuzziness of democracy in Hungary, which infringes the rights of domestic citizens goes hand in hand with the lost profits of foreign companies. The only strategy that can lead Hungary and other EU “newcomers” forward is that of co-operation.

Co-operation is needed by domestic companies and individuals to be able to produce more marketable goods. Government projects are necessary to boost such business activities. The system of the EU was built to be favourable to those states which are able to conduct business worldwide. In the wake of the economic crisis, we believe that the problem is not with the private sector but the public one. The response of governments all over has been similar: austerity measures. However, this cannot be their strategy forever: we have seen governments in Hungary use this corrective method repeatedly since the return to democracy in 1990. The stimulation of growth in business, which would bring with it increased tax receipts, was not a favoured measure. Prolonged austerity may lead to a negative spiral with cuts leading to poorer public services but public funds that are still lacking. If cutting expenses is a must, this should be done alongside measures and packages designed to stimulate growth.

Co-operation with foreign investors is also a necessity: capital is visibly flowing out of Hungary. For foreign entities to invest, a stable and constructive tax system and carefully considered economic policies are required – which of course also means that domestic cliques are relegated to the background and politicians do not play games with the national currency and send shock waves through the business world every other day with news of new taxes and bizarre announcements.

Finally, Hungary needs better connections with foreign business actors. This may sound odd, but one of the keys would be education, where the government has recently made sweeping reforms, without any attempt to Europeanise the education system – the changes only served fiscal purposes. In fact, we need more foreign language programs and more educated, mature people who are able to see the world outside their home country. PM Monti was right: isolationism is not the answer to our problems. We have seen several mid-sized European countries left at the sidelines for decades because a selfish and narrow-minded political elite, kept in power by a population lacking productivity together set back economic growth. It’s 2012, not the middle ages: the days when we could live by ourselves are gone and hopefully will never return again.

[1] A New Strategy For the Single Market at the Service of Europe’s Economy and Society, Report to the President of the European Commission José Manuel Barroso by Mario Monti.

[2] See Art. 28 TFEU. Cf. Paul Craig & Grainne de Búrca: EU LAW, 2008 637 et seq.

[3] See Art. 34-35 thereof.

[4] Case 249/81. Judgment of the Court of 24 November 1982. Commission of the European Communities v Ireland. European Court Reports 1982 Page 04005. Cf. Consensus au sein des partis politique sur la question du «made inFrance». Le Monde, 5 April 2012.

[5] Case 222/82. Judgment of the Court of 13 December 1983. Apple and Pear Development Council v K.J. Lewis Ltd and others. European Court reports 1983 Page 04083.

[6] See Art. 1B of the Operative part of the judgement thereof.

[7] Commission communication concerning State involvement in the promotion of agricultural and fisheries products. Official Journal C 272, 28/10/1986 P. 0003 – 0005.

[8] See Art 49 TFEU.

[9] See Art 12 and 61 thereof.

[10] Hungarian Government Declares War on Foreign Food.

[11] The organizations were the Hungarian Association of Agricultural Allies and Producers, Hungarian Chamber of Agriculture, Association of Food Processors, Product Council of Milk and Diary Products. Hungarian Organisation and Product Council of Vegetables and Fruits, Professional Organisation and Product Council of Fat Stock and Meat, Product Council of Poultry, Hungarian Trade Association, Hungarian Association of Everyday Consumption Co-ops and Trade Associations.

[12] No Food Production Chain Code, No Proceedings, GVH,

[13] Decree No. 39 of 2011 of the Minister Responsible for Public Governance and Justice on the issuing of the Erzsébet voucher.

[14] See Hungarian State Group Wins Mobile Phone Licence. Reuters,

[15] Case C-147/03. Commission of the European Communities v Republic of Austria. European Court reports 2005 Page I-05969. As a consequence, Austrian universities had to admit a large number of German medical students, who were not admitted in Germany to universities.

[16] See Case C-364/10. Advocate General’s Opinion – 6 March 2012. Hungary v Slovakia.