Blog Post

Hungary is no Turkey

Somewhat unexpectedly, the European Commission concluded on 25 April, following the meeting of Hungarian Prime Minister Viktor Orbán and Commission President José Manual Barroso on 24 April, that negotiations for financial assistance for Hungary can begin, once the relevant legislation is adopted. On 23 April, just a day before the meeting of the two Heads, […]

By: Date: April 26, 2012 Topic: Macroeconomic policy

Somewhat unexpectedly, the European Commission concluded on 25 April, following the meeting of Hungarian Prime Minister Viktor Orbán and Commission President José Manual Barroso on 24 April, that negotiations for financial assistance for Hungary can begin, once the relevant legislation is adopted. On 23 April, just a day before the meeting of the two Heads, the exchange rate of the Hungarian forint reached a low of several weeks and government bonds yields were on the rise, suggesting that the Commission’s decision was indeed unexpected. Markets have reacted very positively: the exchange rate of the forint strengthened by four percent from 23 to 25 April, long term government bond yields have fallen from about 9 percent to 8 percent, and the stock market rose by four percent in a few hours.

Even though the Hungarian government continuously communicated its commitment to fulfilling the expectations for the start of such negotiations, the progress has been painfully slow since the first indication of financial assistance request in November 2011. Several observes concluded that Hungary may wish to play a Turkish strategy: Turkey started negotiations for financial assistance with the IMF in the height of the crisis, which boosted confidence, but as time passed and the situation improved, the negotiations were not concluded. But Hungary is no Turkey: public debt is about 80% of GDP in Hungary and 40% in Turkey, and Turkey has a great growth potential, as reflected by the 9.0 and 8.5 percent annual real growth rate in 2010 and 2011, respectively, in contrast to the 1.3 and 1.7 percent growth of Hungary during the same years. And there are several other important differences as well, such as net external debt, which is in Turkey only about one-third of the Hungarian figure as a percent of GDP.

What has changed the Commission’s view? One possible explanation is that budget anxieties of Spain and the Netherlands (eg the IMF forecasts 5.7 and 4.9 percent of GDP deficit in 2013, respectively for the two countries, way above the 3.0 percent target) underlined that the Commission cannot be equally tough for all EU countries and therefore it became more lenient. (Indeed, there are strong reasons not to enforce the 3.0 percent deficit target by 2013 for both Spain and the Netherlands.) But I continue to think that the Hungarian government has a very strong incentive to comply: market pressure earlier this year and the continued very high borrowing cost made it clear that without an agreement, Hungary is running a serious risk of insolvency. Borrowing at 9 percent per year in a country with weak growth outlook, high external debt, still high share of foreign currency loans and sinking trust is not just very expensive, but not really sustainable. Regaining market confidence without the support of the Commission and IMF is not a real option.

The negotiations will likely be tough, but will be helped by the new fiscal adjustment plan announced earlier this week, which was generally well received. The willingness to agree form the side of the Hungarian government is also helped by the result of some recent opinion polls, which suggested that the majority of voters, including voters of the current governing party, would favour such an agreement. An eventual conclusion of the negotiations would help to restore trust, thereby further lowering borrowing costs from the market, because the current 8 percent rate is still too high. But the country should also make use of the very low interest rate of official lending, even though current communication of the Hungarian government suggests that the programme is seen as precautionary. While maintaining market access certainly makes sense, not exploiting the borrowing opportunity at about 3 percent per year, when the market rate will likely be still much higher, would be unnecessarily costly. A fifty-fifty reliance on market and official funding would be a good benchmark. And we should never forget: Hungary is no Turkey


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint. Anyone is free to republish and/or quote this post without prior consent. Please provide a full reference, clearly stating Bruegel and the relevant author as the source, and include a prominent hyperlink to the original post.

Read about event More on this topic
 

Upcoming Event

May
25
14:30

How can we support and restructure firms hit by the COVID-19 crisis?

What are the vulnerabilities and risks in the enterprise sector and how prepared are countries to handle a large-scale restructuring of businesses?

Speakers: Ceyla Pazarbasioglu and Guntram B. Wolff Topic: Macroeconomic policy Location: Bruegel, Rue de la Charité 33, 1210 Brussels
Read about event More on this topic
 

Upcoming Event

May - Jun
31-1
10:30

MICROPROD Final Event

Final conference of the MICROPROD project

Speakers: Carlo Altomonte, Eric Bartelsman, Marta Bisztray, Italo Colantone, Maria Demertzis, Wolfhard Kaus, Javier Miranda, Steffen Müller, Verena Plümpe, Niclas Poitiers, Andrea Roventini, Gianluca Santoni, Valerie Smeets, Nicola Viegi and Markus Zimmermann Topic: Macroeconomic policy Location: Bruegel, Rue de la Charité 33, 1210 Brussels
Read about event
 

Past Event

Past Event

[Cancelled] Shifting taxes in order to achieve green goals

[This event is cancelled until further notice] How could shifting the tax burden from labour to pollution and resources help the EU reach its climate goals?

Speakers: Niclas Poitiers and Femke Groothuis Topic: Green economy, Macroeconomic policy Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: May 12, 2022
Read about event More on this topic
 

Past Event

Past Event

How are crises changing central bank doctrines?

How is monetary policy evolving in the face of recent crises? With central banks taking on new roles, how accountable are they to democratic institutions?

Speakers: Maria Demertzis, Benoît Coeuré, Pervenche Berès, Hans-Helmut Kotz and Athanasios Orphanides Topic: Macroeconomic policy Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: May 11, 2022
Read article Download PDF More by this author
 

Book/Special report

European governanceInclusive growth

Bruegel annual report 2021

The Bruegel annual report provides a broad overview of the organisation's work in the previous year.

By: Bruegel Topic: Banking and capital markets, Digital economy and innovation, European governance, Global economy and trade, Green economy, Inclusive growth, Macroeconomic policy Date: May 6, 2022
Read article Download PDF
 

Policy Contribution

European governance

Fiscal support and monetary vigilance: economic policy implications of the Russia-Ukraine war for the European Union

Policymakers must think coherently about the joint implications of their actions, from sanctions on Russia to subsidies and transfers to their own citizens, and avoid taking measures that contradict each other. This is what we try to do in this Policy Contribution, focusing on the macroeconomic aspects of relevance for Europe.

By: Olivier Blanchard and Jean Pisani-Ferry Topic: European governance, Macroeconomic policy Date: April 29, 2022
Read article Download PDF More on this topic
 

Working Paper

The low productivity of European firms: how can policies enhance the allocation of resources?

A summary of the most important policy lessons from research undertaken in the MICROPROD project work package 4, related to the allocation of the factors of production, with a special focus on the weak dynamism of European small and medium-sized enterprises (SMEs).

By: Grégory Claeys, Marie Le Mouel and Giovanni Sgaravatti Topic: Macroeconomic policy Date: April 25, 2022
Read article More on this topic
 

External Publication

What drives implementation of the European Union’s policy recommendations to its member countries?

Article published in the Journal of Economic Policy Reform.

By: Konstantinos Efstathiou and Guntram B. Wolff Topic: Macroeconomic policy Date: April 13, 2022
Read article Download PDF More on this topic More by this author
 

Working Paper

Measuring the intangible economy to address policy challenges

The purpose of the first work package of the MICROPROD project was to improve the firm-level data infrastructure, expand the measurement of intangible assets and enable cross-country analyses of these productivity trends.

By: Marie Le Mouel Topic: Macroeconomic policy Date: April 11, 2022
Read about event More on this topic
 

Past Event

Past Event

Macroeconomic and financial stability in changing times: conversation with Andrew Bailey

Guntram Wolff will be joined in conversation by Andrew Bailey, Governor of the Bank of England.

Speakers: Andrew Bailey and Guntram B. Wolff Topic: Macroeconomic policy Date: March 28, 2022
Read article
 

Opinion

European governance

How to reconcile increased green public investment needs with fiscal consolidation

The EU’s ambitious emissions reduction targets will require a major increase in green investments. This column considers options for increasing public green investment when major consolidations are needed after the fiscal support provided during the pandemic. The authors make the case for a green golden rule allowing green investment to be funded by deficits that would not count in the fiscal rules. Concerns about ‘greenwashing’ could be addressed through a narrow definition of green investments and strong institutional scrutiny, while countries with debt sustainability concerns could initially rely only on NGEU for their green investment.

By: Zsolt Darvas and Guntram B. Wolff Topic: European governance, Green economy, Macroeconomic policy Date: March 8, 2022
Read article More on this topic More by this author
 

Opinion

The week inflation became entrenched

The events that have unfolded since 24 February have solved one dispute: inflation is no longer temporary.

By: Maria Demertzis Topic: Macroeconomic policy Date: March 8, 2022
Load more posts