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Brexit may trigger unrest in East, says Varga

The U.K.ʼs exit from the European Union may accelerate the creation of a two-speed EU, threatening the development of Eastern members outside the euro area and potentially igniting social unrest, Hungaryʼs Minister for National Economy Mihály Varga was quoted as saying in a Monday interview on business news site bloomberg.com.

The single-currency zone may prove a dividing line between core European states and the rest, Varga said in an interview in Budapest Monday, detailed in a report on bloomberg.com. He nonetheless reiterated that Hungary remains uninterested in adopting the euro for now. The U.K.’s exit from the EU, which will almost inevitably lead to the imposition of trade tariffs on Britain, he added, will reduce Hungary’s economic growth by as much as 0.4 percent percentage points over three years.

“There’s a real threat that with Britain leaving the EU, some very strong actors who favor a two-speed Europe will say that those who are in the euro area are in and those who are out of the euro are out,” Varga said. “The threat is that the gap between developed and less developed EU member states won’t narrow significantly,” he added, and that this may carry with it “the potential to generate social unrest.”

Hungary’s economy will be bruised by Brexit, Varga predicted, citing its surplus of 2% of economic output as well as the impact on EU trading partners, the destination of almost 78% of the countryʼs exports.

“It looks like the imposition of trade tariffs is inevitable,” Varga said. “The EU-27’s common interest is to maintain preferential treatment within the bloc and not extend that to a country that is about to leave the community. There’s simply no reason to do that.”

Hungary will be losing a key ally in the EU, Varga added, one with which it has agreed on strict interpretation of the EU’s deficit rules. The U.K., a net contributor to the common budget, was also a strong proponent of Eastern Europe catching up in terms of living standards with the richer West, he added.

Since the euro crisis, Hungarian Prime Minister Viktor Orbán has cited the discrepancy in wealth with Western, mostly euro-area nations for Hungary’s indefinite delay of euro adoption, the bloomberg.com report noted.

“It’s a new ballgame,” Varga said. “And in this new ballgame it’s our economic convergence that’s being challenged.”