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Could we be paying with euros in 4 years?

Economy Minister Mihály Varga raised the possibility that we could switch to the common currency by the end of the decade, but it is not clear that Hungary needs to rush to join the eurozone.

Economy Minister Mihály Varga, left, gives a lecture during a free university event in Baile Tusnad, Romania on July 21, the day he gave an interview seeking to cool expectations on Hungary’s entry into the eurozone. (Photo: MTI/Zoltán Máthé) 

Hungary’s economy minister said in a July 19 interview that the country would be ready to join the eurozone by the end of the decade. Mihály Varga’s statement came as something of a novelty given the government’s recent anti-Brussels rhetoric, and indeed a couple of days later, he was backpedaling, saying there is no rush to join the currency union. But there is, indeed, a good chance for Hungary to adopt the common currency in the foreseeable future. The question is, does it really need it?

From time to time, Hungary’s accession to the eurozone comes up as an issue to discuss, although it has not been on the table for quite a while now. The first accession date was set back in 2003, when Hungary was not even a member of the European Union, and the then-governing Medgyessy-administration suggested a date of 2008. Hungary became an EU member state in 2004, but due to the worsening macroeconomic environment, the target date was delayed to 2009. The global crisis, which hit Hungary in 2008, paired with an all-time weak forint (a record that has since been broken) further postponed any possible accession. Viktor Orbán’s second government, which came into power in 2010, talked at one time of a possible target date of 2014-15, a prediction backed by a forecast released by the Fitch Ratings agency that said Hungary might able to meet all the criteria for adopting the common currency by 2015. Orbán, however, said at a press conference at the beginning of 2011 that introducing the euro in Hungary before 2020 was not a realistic target. The fact that the National Bank of Hungary started to replace its old banknotes in 2014 (which is expected to cost about HUF 15-20 billion until 2017) also shows that Hungary has not been very keen on joining the common currency area lately. But then came Varga’s statement in an interview published in the daily newspaper Magyar Hírlap in mid-July, saying that Hungary has by now met all the requirements for introduction. However, according to the economy minister, the first and foremost question is whether Hungary needs the single European currency or not.

Most criteria met

As for the criteria, Hungary has never been as close as it now is to meeting them. There are five euro-convergence criteria stated in the Maastricht-treaty: the inflation rate should not be any higher than 1.5 percentage points of the average of the three best performing (lowest inflation) member states of the EU (Hungary sits at 0.7%); the ratio of the annual government deficit to the GDP must not exceed 3% (currently 2% in Hungary); the ratio of gross government debt to GDP must not exceed 60% (75.3% in Hungary); the nominal long-term interest rate must not be more than 2 percentage points higher than that in the three lowest inflation member states, a target that now sits at 4% and is 3.4% in Hungary. Finally, an applicant country should have joined the exchange-rate mechanism (ERM II) under the European Monetary System for two consecutive years and should not have devalued its currency during that period.

But exchange rate stability is still an issue in Hungary, with the Hungarian forint showing a relatively high degree of volatility against the euro over the past two years.

In addition to this, the European Central Bank noted in its latest convergence report in June 2016 that, while Hungary’s general government deficit complied with the Maastricht criteria, its debt exceeded the reference value.

And while Hungary meets three out of the five objective criteria, there are subjective factors as well. The ECB emphasizes in the report that while Hungary is not experiencing macroeconomic imbalances, it would benefit from structural reforms aimed at promoting private sector-led growth, such as improving the governance of institutions, removing red tape and excessive tax burdens, and fostering private credit growth. The ECB also says that Hungarian law does not comply with all the requirements for central bank independence, the prohibition of monetary financing, the requirements for the single spelling of the euro and legal integration into the euro system.

Tight timing, if any

If the government really wants to introduce the euro in Hungary, the country would need to join ERM2, which is the anteroom for euro adoption, as soon as spring of 2017. For the time being, there are no signs the government is willing to do so. All in all, according to business and economic site portfolio.hu, the 2020 target date for Hungary to join the eurozone seems a bit too ambitious; a 2021-22 target date is more realistic, if there is the supporting political will, the site notes.

A report issued by Fitch Ratings Inc. in April about euro adoption in non-eurozone countries in the Central and Eastern European region says that the biggest beneficiaries would be Croatia and Bulgaria, while Czech Republic and Poland would likely benefit least. Hungary and Romania are more intermediate cases. The report explains that Hungary would lose the benefits of independent monetary policy. Given the country’s sizeable net external debt, the adoption of a reserve currency would strengthen external finances, and Hungary’s open economy would benefit from reduced transaction costs, the Fitch Ratings report concluded. It also notes, however, that “euro membership remains a remote prospect as it has disappeared from the political agenda in all six countries”.

Hungarians are divided in the issue: according to a Eurobarometer poll conducted in May, while 61% of Hungarians think member states in general benefit from joining the eurozone, 52% of them said that adopting the euro might cause higher prices immediately. In May, only one-fifth of Hungarians thought that Hungary was ready to join the common currency zone, and 30% believed that the country would never adopt the euro.

Reports to watch for in the coming weeks

We expect only a few important macro figures to stir up the last month of the summer: retail trade data for June will be published on August 3, followed by industrial output, also for June, on August 5. The consumer price index for July will come out on August 9, and the state of the construction sector, which has been disappointing in recent reports, will be revealed on August 11. A flash estimate for the GDP in the second quarter of the year will be in the limelight on August 12, when we find out if the dip in the first quarter was an anomoly. Second quarter investment data will be released on the last day of August.