The Hungarian Way No Euro Until Maastricht 2.0 Criteria' Are Met

The Hungarian Way No Euro Until Maastricht 2.0 Criteria' Are Met Presented by: Dr. MARINKÁS Date: 11 – 13 January 2025 The 'Hungarian Euro' - Hungary and the Maastricht criteria - Hungary is a so called 'Member State with a derogation' under Article 139(1) of the TFEU - Hungary has never met the criterion set in Article 140(1) of the TFEU so far, thus the mechanism according to Article 140(3) has been never triggered. • Intentionally? (The statement of Mihály Varga in 2017). - Judit Menich-Jónás (2007): in 2002 it was unrealistic to expect accession in 2007; - Péter Mihályi (2012): fulfilling the Maastricht Criteria has become more and more at the bottom of the list of priorities of successive governments; - Co-authors Neményi and Oblath (2012): short-term political considerations have successively overridden medium-term stability-oriented macroeconomic policies; - Ákos Péter Bod (2007): 'The peculiarly Hungarian story is that we were closer to meet the Maastricht criteria in 2000 than in 2006, which is - if I may say so a laughing stock.' - Neszmélyi and Pócsik (2021) we were not far from reaching compliance (despite the COVID-19). - Personal conclusion: • Before 2014 it was not realistic to expect accession. • Between 2014 and 2020 Hungary could have fulfilled the Maastricht criteria with some extra effort exerted. • After 2020 Hungary's indicators started to depart from the Maastricht criteria. Hungarian Convergence Data - 2004 • Price stability (inflation): 6.5% - above reference value • Government finance:  Annual government deficit: 6.2% above reference value  Government debt: 59.1% - below reference value - • Exchange rate: non-participating in ERM II • Long-term interest rates: 8.2% - above reference value • Legal compliance: non-complete 2010 • Price stability (inflation): 4.8% - above reference value • Government finance:  Annual government deficit: 4% - above reference value  Government debt: - 78.3% below reference value - • Exchange rate: non-participating in ERM II • Long-term interest rates: 8.4% - above reference value • Legal compliance: non-complete 2022 • Price stability (inflation): 6.8% - above reference value • Government finance:  Annual government deficit: - 7.17% above reference value  Government debt: 76% - above reference value - • Exchange rate: non-participating ERM II • Long-term interest rates: - 4.1% above reference value • Legal compliance: non-complete What these data show us? The 'Hungarian Euro' - Pros and Cons - HCB: accession to the Eurozone does not result in 'automatic real convergence', on the other hand failure is sure if the country introduces the common currency before a given level of real convergence is reached. - In order to avoid such a scenario, the HCB elaborated the so called: 'Maastricht 2.0' criteria: • GDP per capita and wage levels should reach at least 90% of the euro area; • Synchronized business and financial cycles - as well - available, effective as countercyclical political toolkit should be established; • The economy should be close to full employment; • Advanced, stable and competitive financial sector with some 90% convergence should be established and structural balance should be achieved dependent on government debt between 0 and -2% of GDP, with a debt target of 50%. - Hungarian academics: • In the last 20-25 years the basic thesis agreed by the majority of academics and the practicing economists (Péter Mihályi (2005), Darvas and Szapáry (2008), Zsolt Darvas (2018), Kutasi and Nagy (2019), Péter Gottfried (2021) became that:  Premature, politically motivated accession, without economic convergence o =>serious economic harm • Disciplined economic policy and reaching a level of real convergence is important even if the country does not wish to access the Eurozone. • - Conclusion: a country may be successful with our without Euro as well. Other considerations related to the Euro: • It means belonging to the core and has prestige value (György Surányi, 2017) vs. it does not provide any additional value (Péter Gottfried, 2021). • Loosing monetary sovereignty is a too great price to pay (HCB studies mainly) vs. monetary sovereignty is only an illusion (György Surányi, 2018; István Pál Székely, 2018). The Legislative Framework Of The HCB's Functioning And The Academic Opinions - The legislative framework of the HCB's structure and functioning is set out in the Fundamental Law of Hungary (FLH), which in its Article 41(6) - states that the detailed provisions are to be settled in a so called cardinal act (organic law). - The currently effective cardinal act is 139 of 2013 on the Magyar Nemzeti Bank. - The HCB shall be responsible for: Monetary policy (Article 41(1) of the FLH) and • The supervision of the financial intermediary system (Article 41(2) of the FLH) - enacted by the Fifth Amendment of the FLH in 2013. - Article 3(1) of the HCB Act states that the primary objective of the HCB shall be to achieve and maintain price stability. However, second paragraph set other goals (e.g. supporting the government's economic policy) provided that these do not prejudice to its primary objective. - The Governor and Deputy Governors (2 or 3) of the Hungarian National Bank shall be appointed for six years by the President of the Republic (Article 41(3) of the FLH) on the prime minister's proposal (Articles 10 and 11 of the HCB Act). - The bodies of the HCB are: • Monetary Council: the main decision making body. Presided by the Governor. Composition: Governor, Deputy Governors and other members elected by the Parliament; • The Executive Board is responsible for implementing the decisions of the Monetary Council and consist of the Governor of the HCB as chairman of the Executive Board; • Financial Stability Council; • Supervisory Board is the body responsible for the continuous supervision of the HCB on behalf of the owner (the State). Monetary Aspect of the Crisis Management The Eurozone Crisis - The 'post-crisis' monetary policy framework brought two major changes in the 'Western World' (Oliver Blanchard (2012, co-authors Kolozsi and Novák, 2017): • Financial stability also became a priority for central banks in addition to price stability, and • Some unconventional elements were added to the central banking toolkit, as a result of which central banks started to play a greater role in crisis management. - Why? Since disinflation trends allowed the central banks to focus on other tools without jeopardizing the inflation goal. - Csaba Lentner (2021): argues that crisis management was a success story with a view to the result detailed in the previous slides. - László Csaba (2022): argues that the success is highly attributable to external, one-time factors, including: low global energy prices, growth recovery in the EU, and sustaining zero bound interest rate on global capital markets. - In his view it is hard not to see how European trends are followed by Hungarian ones. - György Matolcsy (2020): the HCB's targeted measures have helped to put the Hungarian economy on a sustainable catching-up path, while also strengthening the economy's immune system. - Csortos and Nagy-Kékesi (2020): the HCB has sufficient 'firepower' to deal with the challenges posed by the COVID-19 epidemic's economic effects kicked in. Monetary Aspect of the Crisis Management - The COVID-19 induced crisis - Just like the ECB and most central banks from the region, the HCB: • Stuck to the low interest rates (reaching the lowest rate with 0.6% in July 2020). • Upheld its refinancing role:  enhanced the FGS and the relatively new Bond Funding for Growth Scheme;  enhanced its asset purchase programs (9.1% of GDP instead of the prepandemic 1.2%); and  temporarily suspended penalization for breach of reserve requirements. - 'A return to a normalcy': • In June 2021, the Monetary Council decided to increase the base rate from 0.60% to 0.90% (by February 2022 it reached 3.40%) • August 2021, the HCB decided to moderate its refinancing role and gradually phase out purchase programs. Monetary Aspect of the Crisis Management - The Russo-Ukrainian War induced crisis - Contrary to the disinflation trends of the COVID-19 crisis which required low or near zero interest rates and quantitative easing - the challenges of the new crisis required a return to the 'good-old' restrictive monetary policy with: • High interest rates (by September 2022 it reached 13% and remained at the peak until October 2023. Current: 10%) and • Abandoning the refinancing role. Summarizing Thoughts - As for the 'Hungarian Euro' one may conclude that: 'the ship has gone for a while', since the 2022 Convergence Report shows that indicators started to deteriorate - compared to those between 2014 and 2020 as a result of the COVID-19 pandemic and the RussoUkrainian War; - The decision of the drafters of the FLH namely to grant a constitutional rank to the Forint by nominating it as the legal tender of Hungary, is praised and criticized at the same time; - The Eurozone crisis found Hungary in a vulnerable condition, mainly because of the country's dependence on foreign founding denominated on foreign currency, which applied both to government and household debts. After the change of direction in the monetary policy in 2013, the Hungarian Central Bank considered the reduction of external vulnerability to be a strategic goal and accomplished it with a success. - The tools used to tackle the Euro crisis proved to be effective in mitigating the negative economic effects of the COVID-19 pandemic as well: the Funding for Growth Scheme which came to light as a response to the Eurozone crisis - proved to be an effective tool alongside with its derivatives. - The negative economic effects of the Russo-Ukrainian War required a rather different approach, however: restrictive monetary policy with high interest rates and abandoning the refinancing role. The cut in the interest rate proves that the chosen path was correct.