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

Prime Minister Viktor Orbán on Tuesday said Hungary is not going to join the euro zone competitiveness pact for the moment, because the country wants to retain its independence in tax matters.

Other topics included in the competitiveness pact draft, such as pension and labor market issues and fiscal balance matters, coincide with the objectives of the Szell Kálmán Plan, the Hungarian government's restructuring plan, so Hungary would opt to sign the agreement if it was not for the point related to tax harmonization, he added.

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

Analysts are divided over Hungary's decision not to join the euro zone competitiveness pact.

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, but it will certainly not constitute an advantage, on the long run.Mellár noted that high economic competitiveness, such as in the Scandinavian countries, is not necessarily a result of low taxes.

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 on the periphery of the euro zone, which believe that joining the pact means that fiscal discipline will 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 sovereignty in economic policies.