EC: Hungary fulfils none of convergence criteria for euro adoption.

By bne IntelliNews May 13, 2010
Hungary met none of the Maastricht criteria for eurozone entry, the EC concluded in its annual convergence report about the non-eurozone member states. It evaluated the country according to four criteria in March: inflation, budget balance, long-term interest rates and exchange rates; as well as the relevant legal requirements and several other additional factors. In terms of the legal framework, the EC pointed out that the relevant legislation, including the Constitution, the act and the statutes of the central bank, and the credit institutions act did not correspond to the EU regulations. Significant differences included insufficient guarantees of the central bank independence, the lack of an explicit prohibition of monetary financing and the lack of provisions for the bank integration in the European System of Central Banks at the time of euro adoption. Minor gaps were found in other areas as well. The twelve-month average inflation in the country was 4.8% y/y and was thus significantly above the 1% y/y benchmark level of the respective criterion. Moreover, the EC stressed that inflation was likely to continue exceeding the reference level in the future months despite that it was projected to drop below 3% y/y in H2/2011 due to fading away of the one-off pro-inflationary measures in 2009. On the other hand, however, price level in Hungary was just 65% of the eurozone average, revealing upward potential for the prices due to the convergence process. The country was also clearly in breach of the budget deficit criterion since it was in an excessive deficit procedure with a 4% of GDP deficit for 2009, expected to remain more or less flat in 2010 and 2011. Government debt reached close to 80% of GDP at the end of last year and also exceeded the 60% benchmark level. Long-term interest rates in the country were 8.4% in March as opposed to the reference value of 6% with the difference being attributed to a high risk premium on account of a vulnerable economic position. The local currency forint was not part of the ERM II and consequently, Hungary did not comply with the exchange rate criterion either. Additional factors considered included the country's high degree of integration in EU trade and capital flows and in the financial intermediation network. On the negative side, external imbalances still persisted, requiring an EU and IMF bailout package in October 2008, despite that the current account managed to turn into a surplus of 1.6% of GDP in 2009.

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