Difficulties on the Danube

Hungary faces both political and economic dilemmas concerning their potential adoption of the euro

Robert Csehi
7 February 2018

Hungary, as all East-Central European countries that joined the European Union (EU) after 2004, is obliged to introduce the euro as its currency at some point in the future. Yet, with the exception of sporadic, ad hoc academic discussions, there is no real public or political debate on Hungary’s euro accession.

Statements from the government and the National Bank are rather obscure about a potential accession date, while self-imposed additional requirements (e.g. GDP/capita level in relation to EU average, or debt/GDP ratio lower than the Maastricht criteria) to join the euro area add to the ambiguity of Hungary’s bid to enter the currency zone.

This confusion and lack of discourse are rather surprising given the increased politicisation that has surrounded euro crisis management and the reforms initiated on the EU’s Economic and Monetary Union (EMU), which created a different economic governance structure compared to the one the country was committed to joining in 2004.

Although the introduction of the euro as a currency is considered to be a question of economics by many, it is always decided by politicians; therefore, the political arguments cannot be neglected, especially in a country where any steps to further integrate at the European level is received sceptically by the government.

Three sides of the same coin

Discourse in Hungary on whether or not to join the new euro area oscillates between two extremes. Some commentators argue that the country’s euro accession would bring greater benefits through the elimination of transaction costs and risks attached to exchange rate volatility. As risks decrease, trust in the economy increases which would lead to higher levels of investment, and therefore to greater economic output.

At the other extreme, it is often highlighted that economies suffering from structural difficulties could face greater challenges. If exchange rates are wrongly determined at the time of accession this could easily lead to unsustainability. Furthermore, if ‘imported’ nominal interest rates are too low, this could lead to ‘bubbles’ in the economy and an increase in nominal wages that do not correspond with increases in productivity; a potential source of economic trouble.

The anti-euro camp likes to refer to the euro area crisis to underline these economic threats. However, this myopic approach tends to forget the many reforms that were introduced to rid the euro area of its systemic, structural deficiencies and risks. The macroeconomic imbalance procedure (MIP) – with its alert mechanism in place focusing on a number of economic indicators that were previously neglected – was introduced in 2011 in order to prevent adverse economic developments in individual member states.

The specific steps that strengthened the Stability and Growth Pact (SGP), namely the Six Pack, the Two pack, and the Fiscal Compact were initiated to ensure greater fiscal coordination.

Last, but not least, the partial establishment of a banking union serves a stabilizing purpose in the European financial markets. The current euro area seems to be better equipped to prevent economic imbalances and thus present smaller risks for candidate countries.

This, however, does not take the responsibility off of politicians to carry out sound, sustainable economic policies and reforms where needed. Measures strengthening the wage bargaining scheme, promoting labour mobility, and an effective macro-prudential regulatory system are still key elements for a successful euro accession.

Yet, current economic policy developments in Hungary do not entirely line up with these aims, and until they do, it would be rather risky to join the euro area.

To provide a full picture, one has to add that there is the third group of experts in the debate that would favour an in-between situation, namely pegging the Hungarian forint to the euro. They argue that this would allow the country to reap the stability benefits of the euro area, while it would not constrain economic and monetary policy in case crisis responses are needed.

However, this approach seems to downplay the potential risks pegging involves, namely the increased risk of speculation leading to uncontrollable inflation, and a potential trade disequilibrium.

Political Predicaments

As far as the political considerations are concerned, once again there are two extreme positions within Hungary. There are those who emphasise the potential gain in political influence and argue that joining the euro area would allow Hungary to get involved in ‘core’ European discussions about the economy.

Instead of being passive receivers of information and quasi decisions, Hungary could actively engage in political and economic debates inside the Euro Summits, the Eurogroup and its preparatory body the Eurogroup Working Group.

Although the “pecking order” within the euro area would not change, greater levels of politicisation of EMU matters could increase the political leverage of Hungary, similar to the example of Slovakia. There, the government gained concessions with regards to the second Greek bailout, and its mandatory contribution to the European Stability Mechanism (ESM), due to the extreme level of politicisation that surrounded euro crisis management in the country.

At the other end of the spectrum, analysts fear a great loss of power and autonomy in economic and monetary decisions. In fact, the new euro area requires more commitment from its members and prescribes more obligations to them that was the case in 2004. Here, I will only mention three.

First, there is going to be great pressure on Hungary to be bound by Title III (Fiscal Compact) of the Treaty on Stability, Coordination, and Governance (TSCG). In practice, this would mean that there shall not only be a balanced budget rule in the national legal framework (which is partly the case already) but also there have to be clear mechanisms which outline convergence to the medium-term budgetary objective (MTO) as outlined in the reformed SGP framework.

Additionally, correction mechanisms have to be set in place in case there is a breach of the balanced budget rule, and there has to be an independent, national institution (with all necessary resources) that would monitor compliance with the balanced budget rule.

In case of non-compliance, Hungary can be taken to court by another member state. In general, however, joining the Fiscal Compact of the TSCG would mean a certain loss of budgetary autonomy, and also increased levels of supranational and intergovernmental oversight, something the current Hungarian government is trying to avoid at all costs.

However, the ratification of the entirety of the TSCG is also a precondition to access the EU’s bailout fund (ESM). Provided the Orbán government fails to deem itself bound by the Fiscal Compact, it cannot be rescued with ESM money if there was an economic and financial crisis in the country.

Second, joining the euro area would also mean that Hungary would have to contribute to the ESM fund. Depending on the computing formula the Hungarian government manages to get an agreement on (if it manages to change it at all), the country’s participation in the ESM fund could mean some loss of political capital for a government that often relies on anti-Brussels rhetoric.

Third, joining the euro area would also put considerable pressure on the government to join the Euro Plus Pact, which was initiated to increase the competitiveness of the euro area back in 2011. Although the Orbán government rhetorically endorses greater competitiveness, it fails to do so from a common European perspective.

One of the reasons the government did not sign up to the Euro Plus Pact was the fact that it wanted to preserve its competitive advantage in its tax regime. Orbán wanted, and still wants, to avoid any discussion on the coordination of taxes, one which would include a harmonisation of the common consolidated corporate tax base (CCCTB), a point explicitly mentioned in the Euro Plus Pact.

Although discussions on the matter are still ongoing, this would effectively mean that Hungary has to give up some of its taxing power in exchange for greater coordination at the European level. Once again, this runs against the current government’s approach to European integration: more intergovernmentalism, less supranational coordination.

The Way Ahead

One could argue that economically it would be worthwhile for Hungary to join the euro area provided the government does its homework and carries out the necessary economic reforms that were mentioned above.

Politically speaking, the potential of a Hungarian euro is rather limited. Unless major economic developments take place that would upset the political landscape in Hungary, there is no pressure on the government to actively engage itself with the issue.

However, as the future of the EU and the EMU is becoming the centre of political discussions once again, it will be crucial for smaller states, such as Hungary, to have a greater say in the potential developments.

Nevertheless, the Hungarian government faces a great internal tension in its European policy framework: it wants to influence the debates as much as possible, yet it fails to commit itself to further coordination which would allow it to have a greater say. Hungary’s approach to euro area accession is a perfect print of this internal divergence. The question is how long Hungary can sit on the fence?

Robert Csehi is a lecturer and researcher at the Bavarian School of Public Policy, an independent institution within the Technical University of Munich.

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