Hungary’s economy policy cannot be changed in the short term – no matter who will form the next government, Prime Minister Gordon Bajnai said in an interview published in German weekly Die Zeit on Thursday.
For another year Hungary will be under surveillance by the International Monetary Fund and subject to the European Union’s excessive deficit procedure, Bajnai argued. He added that 1.7 million people of Hungary’s population of 10 million had taken out foreign currency denominated loans.
“Should anyone wish to return to the irresponsible policies of the past, the markets would retaliate through the devaluation of the Hungarian currency, which would immediately increase debt service for the man in the street. A populist party will think twice before taking that risk,” the paper quoted Bajnai as saying.
Concerning Hungary’s aspirations to join the euro-zone Bajnai said that the common currency should be introduced as early as possible, but added that “no shortcut can be made to the euro.” He added, however, that he thought that Hungary would be in the euro-zone before Poland or the Czech Republic. He noted that Hungary would be the fifth country in the EU with the lowest public finance deficit in 2010.
Why are we so obsessed with the euro entry? Hungary is nowhere near ready for it. We lack competitiveness and we are way behind other euro member countries in terms of GDP. In other words, we are too poor. I think entering the euro at all costs is the most unintelligent way to go about it.
The ECB will always set the interest rates according to the core countries (Germany and France). The periphery (Greece, Slovakia, Spain, Ireland) are not as important. Imagine the scenario where Hungary enters the euro. With growth rates hopefully larger than the euro zone (catch-up effect), interest rates should be set accordingly. The same would happen to Hungary as it happened to Spain. They entered the euro having growth rates above european average. Therefore interest rates were set high at 8-9%. Joining the single currency lowered interest rates to 3-4% overnight, fuelling the economy with cheap cash, creating a bubble with high inflation without the means to control it via interest rates. Look at Greece today. The euro is an obstacle, as it does not have any way of devaluating its cheap products which are extremely uncompetitive.
“As early as possible” as Bajnai is saying, is a dangerous logic. I think joining the euro should be the final goal, but at the right time under the right circumstances. It should never be a question of prestige.
Reasoned and argumented disagreements are more than welcome. I need to have my statement challenged to see if I got it wrong. Thanks.
Hi Robi
Interesting comments … again !
I’m guessing that Bajnai’s see’s the Euro as another crutch for the ailing economy, limiting any loan fluctuations caused by the prospect of a devalued forint (does he know something we dont?).
Your scenario is interesting since the very “cheap cash” you refered to has somewhat already happened with the banks offering these foreign currency loans. I don’t blame people so much for taking them as I doubt they were made aware of the real dangers of the exchange rate fluctuations.
Would it be any worse with the Euro? Perhaps.
Certainly Bajnai wouldn’t have a currency to prop up, I mean honestly the current strength of the Forint is more down to smoke and mirrors than actual value (perhaps interests rates help a little but it is a volatile, minor currency).
I would propose that Bajnai’s statement is more about political posturing, short termism and again not focussing on root cause than actually benefitting the economy.
There are bigger economic fish to fry over here.
JD,
Can you imagine Hungary in its current crisis with the euro? It would have been a disaster like Greece. The reason why we don’t have a GDP fall of 10% or more is because of the low value of the fornit when it was around 300 to the EUR shaved a significant number of percentage points off (bad for foreign currency borrowers, great for exports). Removing the peg to the euro made Hungary avoid GDP decrease like Latvia of around 15%. I think many people regard joining the euro as a safe heaven, a kind of modern garden of Eden, where you somehow cross a magical line where all our troubles will be over. Euro talk is irrelevant, short term minded and irresponsible as long as you are dealing with deep structural problems like the ones we are dealing with. Get your house in order first: aim at 0% budget deficit, reduce state debt, improve current accounts, reduce household debt, trim the public administration and lower taxes. This will allow us to gradually catch up with the core euro area, eventually allowing us to join the euro on real terms. No back door entrance, as it always backfires.
Slovakia has joined the euro too soon. Time will eventually show this, just like it has done for Greece/Spain now. The Maastricht criteria may have been in order for Slovakia, but the country is too poor compared with the rest: higher growth rates should equal higher interest rates. The ECB sets the interest rate based on French/German growth prospects, not Slovakian, Spanish or Greek.
Hungarian governments over the past twenty years have destroyed any chance we ever had of climbing the economic ladder to success. The IMF and EU
control what goes on here now. Remember that and you will have one foot in the real world.
The forint’s level will be controlled on what the so-called experts believe to be its true value against the euro. (Not speculators playtime anymore).
Mass unemployment, frightened investors, together with dodgy politicians, a woeful tax system, and a bureaucracy that belongs to the dark ages all contribute to the nation sinking ever-deeper into
the quagmire.
Doom and gloom, yes. But these problems have not only to be addressed- they have to be sorted.But by whom, we all may ask!