The introduction of the euro in Hungary has once again moved to the centre of economic policy debates following the change of government. Although the target date is 2030, experts believe the starting position today is worse than it was 25 years ago.

An obligation, not a choice

By joining the European Union, Hungary committed to eventually adopting the euro, meaning its introduction is not optional.

Péter Ákos Bod economic expert argues that, moreover, “no serious arguments have ever been made in favour of the country keeping the forint.”

The frequently cited argument that having one’s own currency provides room for manoeuvre during a crisis has not been borne out in the Hungarian experience. In times of crisis, the significant weakening of the forint tended to exacerbate problems rather than ease them, as interest rate rises were required to stabilise the situation.

The cost of public debt is the key issue

One of the most tangible effects would be that the introduction of the euro would reduce the government’s financing costs. At present, servicing the national debt consumes 4–5 per cent of the budget, as Hungary can only access funding at high interest rates.

Péter Ákos Bod put it this way in an interview given to Telex:

“If someone would like better roads or schools, then whether they know it or not, they also want the Hungarian state to finance itself more cheaply.”

A deteriorating macroeconomic position

The current economic situation presents serious obstacles. The budget deficit currently stands above 5 per cent, whereas one of the basic conditions for joining the eurozone is a deficit below 3 per cent.

This means that the introduction of the euro in Hungary is starting from a less favourable position than in the early 2000s, when the country still met the Maastricht criteria. Since then, the deficit has spiralled on several occasions, particularly during periods of crisis and pre-election spending.

According to the economist, the functioning of the state must also be reformed: “a lean, fit state is needed, not one that is bloated and encroaches on everything.” This does not necessarily mean less state involvement, but it does mean more efficient operation.

The market will react before accession

According to Péter Csányi, the introduction of the euro in Hungary would make itself felt even before formal accession. If the government sets out a credible timetable and simultaneously reduces the deficit, interest rates could fall rapidly.

“Interest rates will not come down on the day of eurozone accession.”

– he told Forbes magazine, noting that financial markets respond to expectations as well. This could also make household and corporate loans cheaper, which in turn could stimulate investment.

For information on how the new leadership plans to reclaim European Union funding, we reported on it here.

A project spanning two governments

The introduction of the euro in Hungary is not a short-term political decision, but a process spanning multiple electoral cycles. Péter Csányi believes this requires a stable economic policy and broad political consensus, as achieving the goal demands four to five years of consistent effort.

Experts agree that whilst the euro will not solve every problem, it could strengthen financial stability and investor confidence.

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