New infringement procedures: “pálinka” and big box stores

The European Commission most likely waited until the election was over before handing down some bad news to the Hungarian government. The first to reach Budapest was a court ruling on the issue of tax-free “pálinka,” a powerful alcoholic drink made out of various kinds of fruit. The Orbán government’s decision to allow country folk to produce tax-free home brew from fruit grown on their own land came early. It was one of the twenty-two proposals presented by Viktor Orbán to solve the “economic crisis,” and it went into effect on July 1, 2010 despite warnings that it was in contravention of EU law. The announcement that home-distilled pálinka would no longer be taxed was described as the pinnacle of ninety years of struggle for liberation against the backdrop of the tyranny of the state. The “tyranny” referred to was the sensible regulation that owners of orchards who wanted to distill pálinka had to take their fruit to a state distillery and pay tax on the product.

This hasty decision to please Fidesz’s rural voters had all sorts of negative effects. First of all, since these amateur distillers can produce up to 50 liters of pálinka a year without paying taxes, the Hungarian state nowadays receives considerably less revenue from excise taxes on liquor. Second, the professional pálinka producers worried about the hard-won fame of good pálinka, which is considered by the European Union a “hungaricum” and is highly regulated. It must be made from fruits or herbs indigenous to the Carpathian Basin and grown in Hungary. It must be produced and bottled in Hungary, and its alcohol content must be between 37.5% and 86% ABV (alcohol by volume).

To make a long story short, a few days ago the European Court of Justice handed down its ruling: Hungarian home brewers must pay taxes on their products even if they produce no more than 50 liters a year. The reaction? The typical Fidesz one. Instead of telling Brussels’ real objections, they lie and claim that “the bureaucrats in Brussels want to abolish the national heritage of pálinka distillation which is a hungaricum.” Sándor Fazekas, minister of agriculture, called the court’s decision a provocation.

As long as the Hungarian government distorts the rulings of the European Court of Justice we shouldn’t be surprised if the ordinary Hungarian farmer in the countryside accuses the European Union of interfering with the values and traditions of their nation and if he develops a hatred of all those anti-Hungarian foreign bureaucrats. But I guess this is the purpose of the government rhetoric.

The second infringement procedure is about the “plaza stop.”  This particular infringement procedure hasn’t yet ended up at the European Court of Justice and it may never land there because of the extreme slowness of EU bureaucracy. For some background on this particular piece of legislation I suggest reading an old post of mine from November 2011. It started as an LMP draft bill and was then taken up and completely rewritten (and distorted) by the government party. The bill stated that between January 1, 2012 and December 31, 2014 no establishments greater than  300 m² (3,230 ft²) can be built. Real estate developers protested, not without reason. Moreover, the law inflicted economic pain on the country. Hungary was in the midst of an economic crisis in which unemployment was high and the construction industry had almost collapsed. At that time there were at least five such retail outlets in the planning stages. All work on the construction had to be stopped.

Today the European Commission launched an infringement procedure against Hungary over the country’s ban on the construction of “hypermarkets” as it may be against the competition rule applicable in the territory of the European Union. The reaction? The usual Fidesz demagoguery. “The European Commission once again put the interests of large multinational companies before that of the small Hungarian businesses.”

But who is going to defend the Hungarian consumer from the higher prices which are inevitable in smaller retail stores? And what about the variety of goods that only large establishments can offer?  Small, individually owned stores can never compete with chains on price or availability. I know all the arguments pro and con on this sensitive issue, but the fact is that forcibly stopping economic developments that seem inevitable is not good for anyone, including the consumer.

Retail is always changing. Think, for instance, of the mail order catalogs of businesses like Montgomery Ward and Sears that not only revolutionized nineteenth-century retail but also improved the lives of the rural poor and the segregated blacks in the South. That was in the 1870-1880s. Today online companies like Amazon have disrupted retail yet again.

Yes, big box stores tend to squeeze out small retailers just as mail order catalogs were hard on ma and pa stores in the nineteenth century. But this is how modern economies function. The state’s role is not to forbid the normal flow of goods and services but to regulate their activities.