The idea is anything but new. It first arose in 2011 as another chapter in the Orbán government’s unwavering efforts to make the National Bank of Hungary more compliant and supportive of central policies. At the time, the new model would have demoted central bank governor András Simor to a deputy in the newly formed giant regulatory institution, essentially ousting him from his position by reshuffling the playing field.
The European Central Bank firmly objected to the measure. It saw the revised legislation, especially how it would have handled Simor, as a clear violation of the central bank’s institutional independence. The governing Fidesz party nonetheless went ahead and passed the law.
As a result, delegates from the European Union and the International Monetary Fund, who were conducting informal talks in Budapest at the time after the Economy Ministry’s surprise application for a credit line, cut off negotiations and left Hungary early.
After markets reopened from the holidays, the forint embarked on a calamitous-looking slide against the euro, reaching historic lows of 324, which compelled the government to backpedal regarding the central bank to avoid the total collapse of the economy.
The ECB said that it has also stared evaluating the resurfaced version of the plan.
It is difficult to speculate what the criteria of its evaluation will be. Earlier it said that a concentrated financial regulatory institution would suit the Hungarian financial system and only objected because the merger was clearly aimed at Simor, who was also the regular target of political attacks, and government rhetoric was frequently hostile towards the MNB management.
Now, with former economy minister György Matolcsy in charge at the central bank, not to mention a Monetary Policy Council exclusively comprising Fidesz-delegated members, the MNB is already highly cooperative not only in monetary policy, but also through taking action to support growth.
The merger would mean that the entirety of the Hungarian financial sector would be under Matolcsy’s supervision for his six-year term. The ECB will have to decide which one of its positions to stick to in the matter. Either way, there is currently nothing in the way of international pressure as there was in 2012 that could stop the move.
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