“Eurosation”: will the euro displace the forint in the Hungarian economy?

It seems like the process of eurosation, the euro spontaneously eclipsing the forint in the Hungarian economy has started. Although there are significant administrative obstacles to this, there are sectors where a possible further weakening of the forint exchange rate represents an unacceptable business risk.

It seems that “eurosation”, the process whereby the euro pushes Hungary’s own currency into the background, has begun. One of the many administrative obstacles of this is that wages cannot be paid in euros. However, there are some sectors where the further weakening of the Hungarian currency represents an unacceptable business risk, napi.hu reports.

The forint plummets, the euro becomes more appealing

As the forint has experienced an unprecedented fall in recent months, some Hungarians prefer the euro instead. The forint has lost more than half of its value since the change of political regime in 2010, Reuters reports. Like its neighbours the Czech Republic, Poland and Romania, Hungary is nowhere near meeting the conditions for adopting the euro. Even the Hungarian government explicitly rules this out.

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However, the forint is the region’s most underperforming currency, partly because of the twin deficits (trade and fiscal) and partly because of the rule of law disputes with the EU. As a result, some Hungarians are trying to take the currency problem into their own hands.

Massive weakening

Interest in the euro is boosted by the fact that the Hungarian currency has weakened by eight percent against the euro this year alone. In July, the forint lost four percent of its value in two days.

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Since wages cannot be paid in euros under Hungarian law, most companies that wanted to make such a gesture to their employees gave them an extraordinary pay rise of 5-10%. Others pay compensation at the end of the month in line with the forint exchange rate, Reuters quotes lawyer László Szűcs as saying.

Szűcs, a lawyer at Réti, Várszegi & Partners Law Firm PwC Legal, also shared that in the IT sector, where many companies operate independently and there are many orders from abroad, new projects have been contracted exclusively in euros for the last three to four months.

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Source: napi.hu, Reuters.com