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Abandoned trading band shows resignation to distant euro

Hungary’s decision to change its exchange rate policy is an admission of defeat for its bid for early euro entry, the Financial Times wrote in a comment.

A prerequisite for the euro is two years' membership in the ERM-2 currency system, in which candidate countries' currencies trade in a band against the euro, just as in the policy Hungary has now scrapped, FT wrote. It noted that new member states Slovenia, which has already adopted the euro, and Slovakia which plans to do the same in 2009, had floating exchange rates before they joined the ERM-2, but these were not the main determinants for their success.

FT commented that the real lesson is that sound exchange rate policies contribute to economic progress, but what matters most is the solid management of public finances.

Hungary is in the throes of painful restructuring after years of profligate public spending that drove the budget and current account deficits to record levels. With inflation still high at 7% last month, Budapest may have to tighten the fiscal and monetary screws if it is to properly stabilize the economy. Worse, Hungary remains burdened by an oversized public sector that swallows about half of GDP, FT noted. (MTI-Econew)