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UPDATE 2 - Hungary may join eurozone at end of decade, says MNB

MNB

Hungary may join the eurozone at the end of the decade if its structural general government deficit is consistently 1.5% of GDP or lower and state debt is reduced to 56-57% of GDP, an analysis published by the National Bank of Hungary (MNB) on Monday shows.

Conscientious preparation is necessary in four areas to achieve the benefits of eurozone membership, according to the fresh report on the convergence process prepared by the MNB each year.

Achieving the criteria in the analysis does not appear impossible, considering next year's budget bill targets a structural deficit of just 2% of GDP, said MNB director for macroeconomics Ágnes Csermely, answering a question.

Preparations for adopting the euro include a monetary policy that anchors inflationary expectations at the level of the eurozone, that is at 2%, chief researcher Mihály András Kovács said.

The MNB recently confirmed Hungary's mid-term inflation target of 3% although it did not exclude adopting a lower target before the next review is due in three years, Csermely noted.

Another point in the preparation is to create sufficient room for fiscal maneuver, Kovács said. Many planned measures in the 2012 budget are moves in the right direction, although there are many implementation risks, Kovács he added.

In the researchers' view, Hungary should aim to bring its state debt ratio under the 60% Maastricht target in order to have sufficient fiscal room for maneuver. The staff noted the relatively low wealth of Hungarian households, the structure of state debt and the high level of implicit state obligations as vulnerabilities.

Fiscal leeway could be narrow for a long time, the report said. It calculated that Hungary's state debt to GDP ratio would fall to 56%-57% of GDP by 2020, assuming the full implementation of next year's budget and a stable structural deficit -- the fiscal deficit excluding cyclical and one-off effects -- of 1.5% of GDP in the mid-term.

The report called for the creation of a clear and efficient macro-prudential system with rights delegated to a single authority. The authority should have the task and the means to detect and halt, in time, any overheating of the private sector. Responsibilities are not sufficiently clear under the present mixed system, which includes a Financial Stability Council, made up of the heads of the MNB, the market regulator PSzÁF and the Economy Ministry. The council is just a consultative body without genuine powers.

The fourth field of eurozone preparations is the creation of a labor market which could efficiently respond to increased competition resulting from adopting the single currency. Hungary's corporate sector could flexibly adapt to the crisis, and the costs of layoffs and hiring has been relatively low, the researchers said. Similar flexibility is lacking, however, at the low end of the wage scale, they said, blaming the way minimum wages are set, the lack of rental homes, the high cost of commuting and the lack of childcare services. The key in Hungary remains raising the employment of inactive people, and the re-employment of those who have lost their jobs, the report said.



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