Forint wilts as Brussels gets tough

The Hungarian forint took a tumble on Wednesday after the European Commission raised the ante in its high-profile row with Budapest – and froze €495m in European Union cohesion funds for 2013.

The Commission said archly that the planned move was an “incentive” not a “punishment” in its push to persuade Hungary to abide by EU rules on budget deficits.  And it’s given Budapest time to comply, since it won’t apply to 2012 money. But the message to prime minister Viktor Orbán’s government is clear – get on with it.

The forint slipped 0.6 per cent against the euro to Ft288.4, compared to the five-month high of Ft285.6 it reached on Tuesday. It is now well clear of the Ft320 level it touched in early January when the government was forced to abandon a go-it-alone financial strategy and seek support from the EU and the International Monetary Fund.

Budapest says it wants a deal with the EU and the IMF by April. But Brussels has demanded changes in Orbán’s recent moves to increase central control over institutions, including the central bank. And the IMF wants a clear commitment to sustainable macro-economic policies.

Hungary has pledged to comply, with legislative amendments. And it has repeated promises to keep within a 2012 budget deficit target of 2.5 per cent of GDP.

The figure is inside the EU’s 3 per cent limit. But Brussels is concerned that Hungary is meeting the limits only through unsustainable one-off measures, including special taxes on banks and last year’s nationalisation of private pension funds. The Commission says that once special measures are stripped out, Hungary has broken the 3 per cent ceiling every year since joining the union in 2004.

The IMF calculates that Hungary could get by without a financial rescue as long as things get no worse in the eurozone. But if there is a new eurozone shock, Budapest would struggle to meet its external financial obligations.

The IMF’s baseline forecast is for growth – but only of 0.3 per cent.  That does not leave a lot of scope for budgetary over-runs. And the Fund is not as bearish as some: the European Bank for Reconstruction and Development,  predicts a 1.5 per cent GDP contraction in 2012.

In this context, the sanctions are significant – amounting to around a third of the annual cohesion funds and 0.5 per cent of GDP.

Fortunately for Budapest, there is a little time, before the punishment can be implemented.  Orbán has pledged to be conciliatory. He loves a political fight but is a clever operator who will recognise when he can’t win.

Meanwhile, the sanctions have to be approved by all of the EU’s 26 other members.  Hostility to Orbán is running high, but surely he can find one friend.

Related reading:
IMF to Hungary: get some insurance, it’s a dangerous world, beyondbrics
Guest post: Orbán’s hazy memory of debts, cuts and economic policy, beyondbrics
Hungary: Orbán munches humble pie
, beyondbrics
Orban and the EU
, FT
Hungary’s leader ready to back down in EU dispute
, FT

 

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