The Court of Justice of the European Union (CJEU) ruled on September 12 that price caps on food staples set by the Hungarian government and the mandatory stocking requirements for retailers were incompatible with EU rules and undermined fair competition.

The case was brought to the EU’s top court by Hungary’s second-largest retailer, Spar Magyarorszag, which had been fined for not maintaining an adequate stock of the price-capped products.

The government compelled shops to double their inventories to avoid shortages, due to surging demand at the beginning of 2023. A local court sought the EU court's clarification on whether the government’s decree adhered to competition laws.

Hungarian government set food price caps on more than half a dozen food staples, (sugar, flour, sunflower seed oil, pork leg, chicken breast and back, and UHT milk with 2.8% fat) in February 2022, two months before the election to combat inflation. Hungary’s food inflation peaked at 43% in February 2023, the highest in the EU.

The cabinet eventually phased out food price caps in July 2023, which was replaced by mandatory price discounts, also targeting foreign companies. 

Analysts said the food price cap, which often led to product shortages, and the 4% windfall tax were not effective in mitigating inflation as companies passed on higher operating costs to consumers.

In the ruling, the CJEU acknowledged that the government decree was appropriate for combating inflation, but said the measures were "not proportionate".

"The undermining of free access by traders to the market in conditions of effective competition and the disturbance of the entire supply chain caused by the regulated prices and quantities imposed on those traders go beyond what is necessary to attain the objectives pursued by the decree," the court said.

In a statement issued on Thursday afternoon, National Economy Minister Marton Nagy said Brussels had sided with "price-gouging", "profit-hungry" multinationals, instead of standing with families.

Mr Nagy said the behaviour of supermarket chain Spar, the European Commission and those advocating in the case "ran counter to the interests of Hungarian consumers".

He also accused Spar Magyarorszag of leveraging the court to mask its operational inefficiencies, suggesting that the company's legal challenges were motivated by financial struggles rather than genuine concern for competition laws. The minister insisted that the government would continue to fight for lower prices and protect Hungarian families from what he described as unjustified price increases

"We are confident that the Hungarian courts will resolve the hundreds of ongoing proceedings in line with the European Court of Justice's interpretation of the law,"  the retailer reacted in a statement.

It was not the first conflict between Spar and the government. The Dutch-based retailer filed a complaint with the EU earlier this year about the windfall tax in Hungary introduced in 2022, accusing the Hungarian government of breaking EU law, and called on Brussels to intervene. The government initially set a 2.5% rate on companies with net sales over HUF100bn (€250mn), which was later raised to 2.7% and 4.1% in 2023. 

Spar paid €76mn in special tax last year, which is expected to rise to €92mn in 2024, pushing the company deeply in the red.

"We are the second-largest food retailer in Hungary with over 600 stores, but these measures make it impossible to operate profitably in Hungary", Spar CEO Hans Reisch told German and Austrian media in March adding that the retailer was withdrawing assets from Hungary for fear of expropriation as part of a corporate restructuring.

The Austrian CEO openly spoke about the Orban government’s harassment and extortion, adding that the prime minister made the reduction of the windfall tax conditional to granting ownership to one of his relatives.

According to an April report by Vsquare, Kremlin-connected oligarch Megdet Rahimkulov and Viktor Orban’s son-in-law had approached Spar separately with bids backed by the government to buy stakes in the retailer in 2023.

The Orban government, which has used similar tactics to squeeze out foreign companies in sectors with interests in government-friendly business, reacted angrily to Spar's comments and threatened to sue the company. 

At Thursday’s weekly press briefing, head of the Prime Minister's Office Gergely Gulyas confirmed that no lawsuit had been initiated yet. Following the recent ruling by the CJEU, Spar is no longer required to pay the fine.