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Successful euro adoption will require a new growth model, MNB says

Financing growth from foreign borrowing can no longer be sustained, he economy will need to rely on a greater proportion of domestic savings to finance economic growth, the National Bank of Hungary (MNB) said on Wednesday in its Report on the Convergence Process.

Hungary's public and external debts is the key to sustainable growth and successful euro adoption. The benefits of adopting the single European currency can only be exploited if backed by sustainable, stable and disciplined economic policy, the bank said.

In the past, the pick-up in economic growth was often associated with a sharp deterioration in external balance. However, the financial crisis revealed the unsustainability of this growth model. Consequently, Hungary’s convergence will only be successful if economic growth is financed by a greater proportion of domestic savings in the future.

The Hungarian economy is sensitive to the crisis through two channels. First, due to the cautious attitude of investors and the high level of domestic debt, the country may find it more expensive and harder to access credit than in the past. Second, the slow expansion in Hungary’s export markets makes it more difficult to reduce debts accumulated in previous years. For this reason, the economy may remain vulnerable to financial shocks for quite a long time, even if it pursues a disciplined economic policy, MNB said.

Reducing the country’s vulnerability requires a fiscal policy which does not act as a drain on domestic savings and, consequently, savings can be made available to finance the private sector. However, a tight fiscal policy is a necessary but not sufficient condition for this. It will also be indispensable to restructure the government budget, in order to improve the country’s competitiveness, i.e. to create the conditions for sustainable economic growth.

Hungary currently does not meet any of the Maastricht criteria. However, fiscal adjustment made necessary by the economic crisis may help fulfill the criteria relating to government deficit and inflation. Meeting the Maastricht criteria over the medium term is insufficient for successful euro adoption. A fiscal policy is required which gives sufficient scope to manage economic shocks and contributes to the gradual reduction in the country’s high public and external debts. Anchoring inflation expectations is key to meeting the inflation criterion on a sustained basis, MNB said in its report. (MTI-Econews)