Hungary may lose EU grants on deficit

The European Union issued a final warning to Hungary's government to control the widening budget deficit or risk losing regional aid payments. „So far, the commission has not considered the use of this possibility,” EU Monetary Affairs Commissioner Joaquin Almunia told reporters in Luxembourg yesterday. „This possibility will emerge” if Hungary defies today's deficit-cut order, he said. EU governments have the power to suspend regional development aid to countries that stray from the deficit-cutting path. Finance ministers yesterday gave Hungary six months to present more measures backing up a pledge to bring the deficit within EU limits by 2009. The meeting in Luxembourg labeled the plan „realistic,” though it warned that the country's economy remains at „high risk.” Reducing the deficit hinges on a „rigorous” implementation of measures the government presented to the EU on August 30, it said. The forint rose to 270.42 per euro by 3:40 p.m. in Budapest from 271.29 late yesterday. That's the currency's strongest level in two months. The Hungarian plan pledged to cut the shortfall to less than 3% of gross domestic product, the limit for euro adoption, from this year's estimated 10.1% by 2009. The government earlier scrapped a plan to meet the goal by 2008 and adopt the euro in 2010.

„This new deadline, which implies a substantial correction of the structural deficit by more than 6% of GDP over three years, seems realistic,” EU ministers said in a ruling yesterday. Prime Minister Ferenc Gyurcsány is facing a fourth week of protests calling for his resignation. Demonstrators have demanded his removal since it was revealed he lied about the economy. Almunia asked Hungarians to be patient for the sake of a healthy economy. „The citizens of Hungary feel the pressure of this adjustment but at the same time should know that this is the only alternative to put public finances in the country in order,” Almunia said.

EU ministers, who will check on Hungary's progress twice a year after the government missed its deficit targets every year since 2001, will require Gyurcsány’s cabinet to present detailed plans for reducing the shortfall further by April 10. By then, Hungary should „take effective action regarding the measures to achieve the deficit targets for 2006 and 2007 and the further specification of the multi-annual program of budgetary consolidation,” the ruling said. Hungarian Finance Minister János Veres yesterday said the government's 2007 budget draft, which the cabinet will debate in the first reading on October 18, will contain the measures required by the EU. Gyurcsány already raised taxes and cut subsidies this year to cut the deficit. The EU's ruling urges Hungary to „rigorously implement” the measures and to do most of the deficit cuts next year. The government should also be prepared to make additional reductions if there are slippages, it said.

„The planned correction of the excessive deficit by 2009 will require the Hungarian government to strictly achieve its budgetary targets, which hinges upon an effective implementation of all the measures announced in the program,” the EU said. The EU still considers Hungary at „high risk” because of its budget deficit, according to the ruling. It warned that the government may not be able to execute spending cuts as planned and pointed out that the plan has no margin of error. „There is a concern about the substantial deterioration of public finances in Hungary,” said Finnish Finance Minister Eero Heinaeluoma, chairman of yesterday's meeting. „The situation in Hungary requires urgent, determined and sustained action.” Hungary should also strengthen the institutional framework of its budget execution and specify fiscal rules to prevent more deficit overruns, the EU said. (Bloomberg)