Monday, June 13, 2005

Hungary and the Euro

Further to my post of Friday on Hungary. Today the Financial Times runs a report entitled Hungary “committed” to join euro by end of the decade Finance Minister János Veres is quoted as saying

Hungary had no option but to continue aiming to join the eurozone in 2010.

"I do not think Hungary has any other playing field," said Mr Veres. "The Hungarian forint is not the Swiss franc. It cannot be maintained independently for decades."
The report then continues to explain that
Among the eight central European countries which joined the EU last year, Hungary is considered one of the farthest from the eurozone's rules on deficits, inflation, interest rates and debt which must be met two years before a state can join the single currency.

But Mr Veres, whose left-liberal government faces elections next spring, rejected calls for deep spending cuts that many economists view as necessary to keep Hungary on track for joining the single currency.

Mr Veres insisted the government would meet this year's budget deficit target of 3.6 per cent of gross domestic product - though analysts predict the figure will be over 5 per cent. In the five months to the end of May, the government had already accumulated a deficit equalling 82 per cent of the year-end target. Some analysts said only accounting manoeuvres would make the official target attainable. Such tactics, they warned, would not reduce real spending and would only weaken the government's battered credibility among investors.

Mr Veres said Hungary would not adopt a flat tax system similar to other central and eastern European countries, but he would seek changes aimed at boosting revenues by broadening the tax base. He said ministries and offices would be given less money for salaries in 2006 than in 2005.
Given that Mr. Veres and the Hungarian Socialist Party (MSZP) are unlikely to be in office this time next year his remarks on eurozone membership are largely academic, not to mention predictable. Predictable because the EU accession treaty signed by the 10 new member states requires them to join the Euro when the conditions are right - there is no opt out - so in that respect Mr. Veres is theoretically correct that there is no option.

Personally I think the FT would have been better to get the view of the opposition FIDESZ Party. Hungarians have changed their government in every general election since the change of political system.

A FIDESZ led government in power next May, taking a similar view on Eurozone membership, is going to find the challenge of joining the single currency by 2010 is immense; they will of course blame the present Socialist incumbents for grossly mismanging the economy should they have to postpone.

Yesterday evening the leaders of the Socialist Party and the Liberal Party, the junior coalition partner, were interviewed live on television – at times their facial expressions and body language, let alone their responses to questions, told viewers more about the state of the relationship between the two Parties than they themselves would openly admit – there is a distinct air of disharmony to put it mildly. I believe that the coalition might just about be able muddle through to the election next May, but the prospect of early elections should not be discounted.