Alter Euro: Hungary
Hungary still uses the forint since 1325. Today, as the country faces the risk of recession, the debate on the adoption of the euro is on the agenda again.
Hungary joined the European Union in 2004. Although they are legally required to accept the euro as their single currency, Hungarians still have the forint as their national currency. Hungary’s economic and political situation in 2023 is far from favorable for the adoption of a single currency by Budapest, but it is favored by the majority of Hungarians. A small analysis of the situation of the adoption of the euro in the Magyar Republic.
Hungary is a central European republic, and in the morning of 2023, it is a country in the middle of an economic hurricane. An economic crisis caused by global inflation caused by the post-pandemic recovery and exacerbated by Russia’s war in Ukraine, today combined with an energy crisis. The first victim of these combined crises: Europe, and especially Viktor Orban’s Hungary.
An economy in deficit
The fact that Hungary is still negotiating its membership of the euro zone is a concern, at least in an economic context. Hungary’s economic and monetary situation is characterized by its relative stagnation compared to the rest of the community bloc. Hungary’s annual growth at the end of 2022 was estimated by the European Commission at 5.5%, which is lower than in previous years, but well above the Hungarian National Bank’s (MNB) forecast of 0.1% in 2023. All growth projections for both 2022 and 2023 must be put into perspective with today’s inflation. The latter, according to the MNB, is 14.7% for the year just ended, which is one of the highest indicators in the European Union. The models for 2023 are hardly reassuring: the MNB, supported by the work of the European Commission, thus predicts inflation close to 20%. These two factors caused panic in the international currency markets. Result: On January 1, 2022, the Hungarian forint, which was 369 forints to 1 euro, fell to 420 forints to 1 euro in December of that year. A financial panic that forced Hungary to borrow 9% at less than 2% interest for the eurozone.
The main causes of the country’s economic decline are general inflation resulting from the recovery of economic and industrial activity after Covid-19. Russian President Vladimir Putin’s war in Ukraine has worsened inflation. However, these global factors are not enough to explain Hungary’s situation, the latter is influenced by two specific economic elements: high dependence on Russian energy resources and the freezing of European funds intended for Hungary by European institutions.
From 2000 to 2010, the Republic of Hungary organized its dependence on cheap fossil fuels offered by its Russian neighbor, like Gerhard Schröder’s Germany or, to a lesser extent, Silvio Berlusconi’s Italy. These options were accepted globally in Europe and even promoted by European institutions in the binary logic of pacifying Russian-European relations through free trade and trade. It was not until February 24, 2022 that this policy was called into question, apparently in a state of panic. Viktor Orban’s Hungary has subsequently opposed the imposition of economic sanctions that could directly affect his country’s economy, such as his reluctance to boycott Russian gas or the European Commission’s proposed fossil fuel price ceiling. The country was indeed ranked by Eurostat in 2020 as the country most exposed to the risks of Russian gas interruption, especially due to the share of this gas from the East in Hungary’s energy complex. The war in Ukraine has sent energy prices soaring, especially because of war-mongering Russia. Hungary’s dependence became the number one enemy of its economy at that time.
The Hungarian government also has to face the option of freezing funds proposed by the European Commission and voted by the European Council. Since the 2020 unanimous vote, the European executive has had a tool to freeze or even permanently suspend European funds and those from the recovery fund. A new generation EU It is intended for a member state that does not respect the core values of the EU. According to the European Commission, after the decision of the Court of Justice of the European Union, Hungary and its government have to respect these liberal values, especially Prime Minister Viktor Orban’s “” illiberal democracy “In his country. Therefore, the Council decided to freeze part of the funds intended for Hungary, in particular, it suspended them from 27 reforms related to ensuring the independence of the judiciary and transparency in the use of funds. Therefore, between the Orbán government on the one hand and the European institutions on the other a conflict over the availability of the same funds has begun.55% of the 13 billion intended for Hungary has been frozen in December 2022, which is about 5% of Hungary’s GDP.
While Budapest still uses its national currency, the forint, this economic disruption has revived debate over adopting the euro as its currency. However, from an economic point of view, Hungary is far from meeting the convergence criteria necessary for the introduction of a single currency. Its inflation is one of the highest in the EU, its currency is weakening internationally against an already weakened euro, its budget deficit is widening and now stands at 7% of GDP, and finally, Hungary still doesn’t. It is part of the European Exchange Rate Mechanism II (ERM II).
A political decision caused by distrust of European integration
Although the adoption of the euro today compromises the country’s economic situation, the situation was different in the 2010s. Indeed, at the beginning of this decade, the country was enjoying the benefits of EU membership and regaining its sovereignty after 50 years. During the Soviet occupation. The country practically met all the convergence criteria necessary for the adoption of the euro. However, the adoption of the euro is above all a political decision, as shown by the introduction of a single currency in Greece or Croatia, which do not (yet) meet all the criteria.
The Hungarian government is no exception and did not consider it appropriate to make such a decision. Since the 2010 legislative elections, the country has been led by Viktor Orbán’s ultra-conservative and Eurosceptic Fidesz government. Since 2010, the government has oscillated between favorable statements for the eurozone horizon and anti-European integration discourses. The adoption of the euro is actually perceived from a dual perspective: on the one hand, the euro is perceived as an element of monetary stability and economic opportunities, and on the other hand, as an instrument that affects national sovereignty and threatens the country’s economic competitiveness.
The euro is indeed seen by Hungarians as an opportunity to undermine the country’s monetary sovereignty, as well as a tool that will lead to uncontrollable price increases. This last element further undermines the population, as it is subject to exponential inflation, which has a direct impact on the daily lives of Hungarians today.
Euro adoption: ultimately a legal and political necessity
Although the present and near future seem to be shrouded in dark clouds, Hungary is still and will always be legally bound to adopt the euro as stipulated in the Maastricht Treaty. Therefore, Hungary is legally obliged to approach the convergence criteria and in the end accepting the euro as currency.
Moreover, the Hungarian population today is more in favor of their country’s entry into the euro zone. Therefore, about 60% of Hungarians are in favor of their country adopting a common currency. However, they are divided on the correct deadline for this adoption. Some have short-term, i.e. Hungarian, convergence criteria, while others have reservations, especially regarding price increases and, above all, a possible loss of competition from their own countries. Thus, the latter believe that the decision should be made when the Hungarian economy is “ready”. For Tibor Navracsics, Minister of European Affairs of the Orbán government, ” adoption [de l’euro] should be done when the economy is sufficiently developed “. Other officials noted that the adoption could not take place without Hungary being at the same level of development as its partners, particularly German or French.
In fact, Viktor Orbán’s government is now managing to take an unambiguous position, respecting its Euroscepticism on the one hand, and the people’s wishes and real legal commitment to the euro on the other. Since Fidesz and its ideas are still very popular in Hungary today – as demonstrated by the recent elections, despite the irregularities noted by several independent bodies – the adoption of the euro is not expected in the coming years. However, Hungary’s appetite for a single currency does not seem to be waning and will eventually force the government to make very concrete plans to replace the forint with the euro.