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Hungary economy minister gets back at European Commission

National Economy Ministry György Matolcsy took issue with the European Commission's reference to a "back-loaded" fiscal consolidation strategy presented by the Hungarian government in a letter addressed to Commissioner for Economic and Financial Affairs Olli Rehn dated June 9, 2011 and published on the ministry's website.

In country-specific recommendations released on Tuesday, the Commission called the government's fiscal adjustment strategy "back-loaded" and said the 3% of GDP deficit threshold could be breached in 2012 unless further measures are taken.

Matolcsy argued in the letter that the government's structural reform program, dubbed the Széll Kálmán Plan, "will unfold in full size in 2012 and 2013". The program will have the greatest impact on the structural balance in 2012, reaching more than 1% of GDP, and affect an improvement of almost 1% of GDP in 2013, he said.

In its recommendations, the Commission said Hungary would bring its general government deficit under the 3% of GDP threshold by the 2011 deadline in its excessive deficit procedure only because of one-off revenue from the transfer of assets from private pension funds.

"Structural improvement will not begin until 2012 and, taking into account the implementation risks, it cannot be excluded that the threshold may be breached again in that year unless further measures are taken," it added.

Matolcsy defended the decision to transfer assets in private pension funds to the state in the letter and called the Commission's reference to the move to be "misleading".

"The pension system has been reformed in order to avoid further accumulation of the negative effects of the mandatory private pension pillar and to improve the sustainability of public finances as a whole," he explained.

"The reforms reduce the explicit public debt in the short, medium and also in the long term, and at the same time they address the problem of increasing implicit public debt in the long term," he added.

Matolcsy also defended the macroeconomic forecast in Hungary's Convergence Program, arguing that it was "based on a conservative macroeconomic path that takes both upside and downside risks regarding domestic demand into consideration".

The Commission said on the European Council deemed the macroeconomic expectations that underpin the government’s fiscal projections to be "slightly too favorable, in particular regarding the development of domestic demand".

Matolcsy said government measures to assist troubled foreign currency borrowers and the payout of real yields on private pension fund assets would give Hungarians more disposable income and boost consumption.

Investment growth could be supported by a possible decrease in risk premiums, which would improve credit conditions, while banks' propensity to lend is expected to improve significantly because of the impact on their portfolio of a lifting of the moratorium on foreclosures and evictions, he added.

The Commission said fiscal consolidation "remains a major challenge". "Without rigorous implementation of the measures announced and additional measures of a structural nature it cannot be ensured that the excessive deficit is corrected on a sustainable basis and appropriate progress is made towards the medium-term objective," it added.

"Hungary is committed to a strict implementation of the announced structural reform plan, and we have demonstrated this commitment by the speedy and timely adoption of the announced measures" Matolcsy said.