Friday, 4 June 2010

EU: Convergence programme Hungary

For some background remarks on economic policy coordination in the European Union, you can read the blog post EU: Useful stability and convergence programmes? (3 June 2010).

The EU Council opinion on the convergence programme of Hungary has been published in the Official Journal of the European Union (OJEU):

COUNCIL OPINION on the updated convergence programme of Hungary, 2009-2012;
OJEU 1.6.2010 C 142/1

The Council began its 26 April 2010 assessment of the updated convergence programme of Hungary, which covers the period 2009 to 2012, with the following introductory remarks:

Hungary was in a fragile economic condition when the financial crisis broke out in autumn 2008. The mid- 2006 fiscal policy reversal, which was aimed at correcting the existing economic imbalances and restraining the accumulation of the public debt, successfully reduced the budget deficit to 3.8 % of GDP by 2008 (compared to 9.3 % of GDP in 2006) but the adjustment was incomplete when the global financial crisis hit. Moreover, the share of foreign-exchange-denominated debt was relatively high.

Gross financing needs became more difficult to meet, reflecting investors’ concerns about the sustainability of the budgetary position, the country's high external debt, and the drop in potential growth. Taken together, these factors required a stronger economic policy response, measures to support the banking sector, and significant external assistance from international institutions of EUR 20 billion, including EUR 6.5 billion from the EU (of which EUR 5.5 billion have been disbursed). Since the second half of March 2009, against the background of strong stabilisation and adjustment efforts, access to market-based financing has been regained. Moreover, due to the significant contraction in domestic demand in 2009, a dramatic improvement was registered in the current account, mostly through the trade balance. The exchange rate remained broadly stable since July 2009 and the central bank was able to cut the main policy rate by cumulative 375 basis points between mid-2009 and early 2010. Given the lack of fiscal space and investors’ concerns, the Government has continued to implement its fiscal consolidation policy and only adopted budgetary neutral measures to support the economic recovery. Continuing fiscal consolidation to bring the debt on a declining path and further improve the long-term sustainability of public finances remains a key challenge for Hungary.

Council recommendation

After a detailed discussion, and in the light of the recommendation under Article 104(7) TCE of 7 July 2009, the EU Council invited Hungary to:

(i) ensure that the 3,8 % of GDP deficit target for 2010 is achieved through tight expenditure control as well as through a possible freezing of budgetary reserves and the implementation of contingency expenditure cuts if needed;

(ii) specify the measures underlying the budgetary targets from 2011 onwards and stand ready to strengthen the fiscal effort in case risks related to the fact that the programme scenario is more favourable than the scenario underpinning the Article 104(7) TEC recommendation materialise to ensure that the deficit is brought below 3 % of GDP in 2011; and considerably strengthen the strategy for 2012 to ensure an adjustment towards the MTO [medium-term objective] in line with the requirements of Stability and Growth Pact;

(iii) improve the quality of public finances by preparing and adopting a 2011 budget in full compliance with the fiscal framework and by supporting expenditure moderation through a further reform of public administration and by addressing the situation of loss-making enterprises through structural reforms.

These assessments and Council opinions are hardly “media sexy”, but they are important. Should you take an interest?

Ralf Grahn