The European Commission said Hungary is still far from meeting three of four Maastricht criteria for adopting the euro in its Convergence Report published on Wednesday.
Of the ten countries assessed -- Bulgaria, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, Slovakia and Sweden --only Slovakia has qualified to introduce the euro at the start of 2009, the Commission said. The Commission said Hungary is far from reaching required reference values for the general government deficit, its level of state debt and inflation. Hungary’s ESA95 general government deficit is projected to reach 4% of GDP this year, in line with the government’s target but still above the 3% respective Maastricht criterion. With an average inflation rate of 7.5% in the twelve months to March 2008, Hungary surpassed the inflation criterion by 4.3 percentage points, and inflation is likely to stay well above the reference value in the months ahead, the Commission said, projecting 6.3% average inflation for 2008 and a 3.6% average rate for 2009. The Commission expects gross state debt to reach 66.5% of GDP by the end of 2008, up from 66% at the end of last year, well over the 60% Maastricht criterion.
Hungary’s long-term interest rates (ten-year government securities yields) averaged 6.9% in the twelve-month assessment period ending March, surpassing the reference value by a relatively modest 0.4 percentage points. The Commission repeated its call for Hungary to keep its 2008 fiscal deficit at bay and to take additional measures next year to cut its deficit to below the 3% Maastricht limit. While praising the improvements made since the government started making fiscal adjustments in 2006, the report noted again that some spending cuts planned for 2009 -- especially reductions of price subsidies, product support and public sector wages -- might not be carried out. The Commission also noted that risks to achieving budget targets grow from 2009, linked to possible expenditure overruns if the announced wide-ranging reform agenda is not fully carried out.
The Commission specifically warned that maintaining the 2007 structural primary fiscal balance would not be sufficient to reduce the high current debt ratio, and that the projected high and rising old-age-pension expenditure to a serious long-term sustainability risk. With regard to exchange rate developments, the Commission said that the forint has firmed -- albeit not steadily -- 4.5% to the euro in the past two years. It also noted that the forint’s intervention band was scrapped and a free-float regime introduced in February with the aim of giving the central bank better control over inflation. Repeating the findings of its long-term economic forecast published last week, the Commission noted that external factors make it more difficult for the Hungarian economy to overcome the current slowdown, and the country’s GDP growth will pick up only moderately, to 1.9% this year and to 3.2% next year. The report also noted that some points of Hungary’s Central Bank Act are still not fully compatible with the respective EU requirements.
HUNGARY COULD MEET 3% MAASTRICHT DEFICIT CRITERION BY 2009
Hungary could meet the 3% of GDP Maastricht fiscal deficit criterion by 2009 and could enter the ERM-2 thereafter, Finance Minister János Veres said on Wednesday. Veres was responding to a journalist’s question regarding the introduction of the euro in Slovakia next year. Veres reaffirmed that he saw no room for a tax reduction program worth several hundred billion forints in 2009. According to the 2007 update of its convergence program, Hungary targets to narrow its ESA95 general government deficit to 3.2% in 2009 from a targeted 4% in 2008. (MTI-Econews)