Future sanctions from Brussels over budget deficit not the only reason for concern for Hungary

The European Commission has found that Hungary, along with six other member states, has a budget deficit exceeding the European Union’s target. Therefore, the fiscal intervention mechanism is back on track. However, it is not just the potential fines associated with EU intervention that are cause for concern. Experts say market reactions could negatively impact the Hungarian economy much sooner.

Several EU members warned over excessive budget deficits

Overspending is not just a problem for Hungary within the European Union. Six other Member States – Belgium, France, Italy, Malta, Poland and Slovakia – are also struggling with fiscal imbalances. In the case of Romania, Brussels suggests that the country has failed to follow previous warnings over profligacy.

The EU’s fiscal rule states that the imbalance in national fiscal positions should not exceed 3 per cent of GDP, and overall debt must be kept under 60 per cent.

Economx points out that last year Hungary had the second-highest budget deficit in the EU at -6.7 per cent, with only Italy’s -7.4 per cent ahead of it. What is more, this year, Hungary has already accumulated a significant budget deficit by March, reaching HUF 2,321.4 billion (EUR 5.87 billion), 92.3 per cent of the HUF 2,514 billion (EUR 6.36 billion) planned and authorised in the Budget Law for the whole year.

As we previously reported, has published a recommendation that “[Hungary should] significantly accelerate the implementation of cohesion policy programmes and the recovery and resilience plan, including the REPowerEU chapter, ensuring completion of reforms and investments by August 2026.” Moreover, the country should improve its social protection system, reduce its reliance on fossil fuels, and, perhaps most importantly, address its budget deficit.

In June this year, the European Commission relaunched its fiscal intervention framework in response to the budget deficits and overspending of member states. By the end of the summer, Hungary could trigger the excessive deficit procedure, which it was under continuously between 2004 and 2013. In the long run, this could lead to new fines if the EU deems the country a threat to the financial stability of the region.

The markets may judge quicker than the EU

Economix spoke to two experts about the potential impact of the relaunched mechanism. Zoltán Ember, of the Iránytű Institute, pointed out that it could take up to 4-7 years before any sanctions are imposed under the procedure. Moreover, the size of the sanction could be much smaller than the recent EUR 200 million fine imposed by the Court of Justice of the European Union for non-compliance with its obligations. According to the analyst, Hungary does not have to fear a very large fine under the procedure in the coming years.

However, he added that even if the EU is not quick to take action, the markets are more capable of responding swiftly. This news can potentially lead market actors to conclude that it is not worth buying government bonds because Hungary is too indebted and no longer satisfies interest rate demands. This, in turn, might set in motion a global process where governments that have been overspending find themselves without the funds to finance their budget deficits, potentially leading to a global debt crisis.

This possibility, the expert said, could incentivise countries to reduce their budget deficits as soon as possible after the launch of the excessive deficit procedure to avoid financial instability.

Are the expectations of Brussels unrealistic?

Zoltán Lomnici, Jr., lead expert at the government-close Századvég think-tank, believes that “Brussels’ expectations are increasingly out of touch with the realities of the member states, making the demands on these countries less and less realistic. The 60 per cent debt-to-GDP ratio is exceeded by most EU countries.”

Moreover, the recent sudden changes in legislation (the application of the Maastricht criteria was suspended by the Commission until the end of 2022 due to the pandemic, and then tightened) have created uncertainty for states. This uncertainty may discourage entrepreneurship and, in the long run, reduce confidence in governments and the EU itself.

The expert added that he believes the Hungarian economy is not lagging in the EU but rather is in the middle of the pack, as evidenced by the fact that Hungary is ahead of Bulgaria, Greece, Latvia, Slovakia, and Croatia in terms of GDP per capita. Further, Hungarian GDP grew by 0.8 per cent in the first quarter of 2024 compared to the previous quarter, and inflation has been in single digits and falling steadily since October 2023.

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Source: Economx