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Hungary's euro adoption hinges on economy overhaul

Hungary's government will delay setting a target date for adopting the euro until it has completed a plan to overhaul the social welfare system, the country's deputy finance minister said.

The government's „road map” for euro adoption, which it will prepare together with the central bank by mid-2008, probably won't contain a date, said Miklós Tátrai, who has been second in charge at the ministry since October. Hungary was forced to abandon a plan to switch currencies in 2010 after running up the European Union's widest budget deficit last year. Prime Minister Ferenc Gyurcsány's government is working to overhaul pensions, health care, public administration and education to trim the shortfall. „When the government has done everything possible in the public sphere and market developments show that the private sector is also prepared, that's when the euro can be adopted,” Tátrai said in an interview in his office yesterday.

Countries across Eastern Europe have been forced to abandon or postpone euro adoption target dates because they have been unable to meet the criteria. Estonia on March 21 said its inflation rate will exceed required levels through 2011, which will probably lead to a third delay for the switchover. The euro is open to countries that pass tests for inflation, deficits, debt, long-term interest rates and currency stability. Lithuania's bid to adopt the euro this year was rejected by the EU last year, because its inflation was too fast and Latvia also abandoned its 2008 goal.

Those examples show that countries are better off moving to euro adoption when economic conditions otherwise allow it. Focusing on a date also circumvents efforts to make economies more competitive and accelerate growth, Tátrai said. „An artificially quick adoption makes it impossible to carry out the structural reforms that are needed to accelerate economic growth in each country,” he said. Gyurcsány's government will also look to stoke growth, which is set to decelerate to the slowest in a decade as austerity measures sap consumer demand. Hungary is counting on EU grants, reducing bureaucracy and lifting the number of working people to help economic expansion, according to Tátrai.

The budget measures, such as government job cuts, higher taxes and utility bills and lower subsidies are working quicker than investors had expected, he said. Hungary on March 20 cut its forecast for this year's budget deficit to 6.7% from 6.8%. Gyurcsány in a January 31 interview estimated last year's shortfall at about 9.6%. The forint is the world's best performer over the past six months, having gained 12.8% versus the euro. That's in part because the effects of austerity have lured back investors even while Gyurcsány faces constant calls for his resignations and as riot police clashed with demonstrators several times since September. „The credibility, trust and the faith in the possibility that Hungarian finances can be stabilized has been restored,” Tátrai said.