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Experts divided on Hungary's decision to stay out of euro zone competitiveness pact

Reacting to Orbán's statement about staying out of the euro zone competitiveness pact, analysts expressed mixed opinion. Some claim that the fiscal discipline outlined in the pact could only be achieved at the expense of fiscal flexibility, while others look at fiscal discipline as a tool for creating greater fiscal flexibility.

Prime Minister Viktor Orbán said on Tuesday that Hungary is not going to join the euro zone competitiveness pact for the moment because the country wants to retain its independence on tax matters. Other issues included in the competitiveness pact - such as the issues of pension, the labor market or fiscal balance - effectively coincide with the points of the Széll Kálmán Plan, the Hungarian government's new budget restructuring plan. Thus, the Hungarian government could easily sign the agreement if it was not for the point relating to tax harmonization.

The Czech prime minister said on Wednesday that his country would not join the agreement either.

Szabolcs Vámosi-Nagy, tax consultant of Ernst & Young, agrees with the decision not to join the pact because he thinks that would put Hungary at a competitive disadvantage in tax matters in comparison to larger, more developed countries such as France and Germany.

Tamás Mellár of the economic research institute Századvég said it was a hasty decision to stay out of the pact. Mellár said the preservation of an independent tax system can have certain advantages temporarily and in the short term, but it will certainly not represent a major advantage in the long term.

The decision means that taxes do not have to be harmonized with EU taxes, he said, which allows Hungary to enjoy a temporary advantage in the long term. In the long term, however, if we are “not members of the club”, Hungary could have less influence on which direction the regulations should take, he said.

Mellár noted that in countries where economic competitiveness is high - like the Scandinavian countries - this is not necessarily a result of the low taxes, but partly of other factors as well.

The analysts of the London-based global financial risk assessment group Eurasia Group said the debate of the proposal package aimed at improving the competitiveness of EU member states has divided member states into two main camps.

One of these includes central and eastern Europeans as well as the UK and the countries of the periphery of the euro zone, whose position is that under the program fiscal discipline would be achieved at the expense of fiscal flexibility. The other group, which includes Germany, the Netherlands, Scandinavian countries and the EU institutions, is of the view that fiscal discipline is a tool for creating greater fiscal flexibility.

The analysts said the risk of the planned changes is that while they will not necessarily lead to a great improvement in competitiveness and economic convergence, they could result in “political divergence”, primarily due to friction between countries within and outside of the euro zone, and because some member states could interpret the reforms as curbing their economic political sovereignty.