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Hungary must do more to meet EU rules on euro, budget, ECB says

Hungary, which has announced plans to slash spending and narrow its budget deficit, must do even more to meet European Union rules for adopting the euro and keeping fiscal discipline, the European Central Bank said.

“Further consolidation is required if Hungary is to bring the deficit below the 3% of gross domestic product” level and “comply with the medium-term objective specified in the Stability and Growth Pact,” the Frankfurt-based ECB said in a report today about the progress of new member states in preparing for the euro. Hungarian Prime Minister Ferenc Gyurcsány's government is struggling to cut the EU's widest budget deficit as it scrapped plans to adopt the euro in 2010. His government raised taxes and cut subsidies, aiming to reduce the shortfall to a fifth by 2009. “Beyond the immediate need for consolidation, Hungary faces a range of further fiscal challenges,” the ECB report said. “Persistently high deficit rations, volatile fiscal policy outcomes and systematic overshooting of fiscal targets point to problems in the domestic framework for fiscal policy, especially on the expenditure side.”

The ECB report also said “prudent fiscal policies are warranted not only by the need to ensure fiscal sustainability but also by Hungary's large external deficit.” The country will face a “substantial increase” in spending on retired and elderly through 2050 amounting to 7% of gross domestic product, the report said. “This increase would take place despite the implementation of structural pension reforms in the past,” the ECB said. Hungary can cope with the increase in spending on the elderly if it deals sufficiently with its current problems in the budget, the ECB said. Inflation, harmonized by EU standards, is expected to pick up “significantly” in 2007 as a result of the tax increases and the “lagged effect of the weakening in the forint-euro exchange rate earlier in 2006,” the ECB report said. To make the switch to Europe's common currency, countries must rein in public debt, curb the state budget deficit and inflation, and test their currency's stability against the euro at least for two years. Slovenia is the only of the 10 mostly East European countries to adopt the euro next year. The Czech Republic this year also abandoned it 2010 deadline while the three Baltic countries also dropped their original euro-region entry dates. (Bloomberg)