26 July 2012

Mission to Hungary starts the negotiations on financial assistance

In light of a weak domestic and external environment, a frequently changing policy and institutional framework, and elevated risk perceptions, Hungary's economic outlook remains challenging also beyond the near-term. While exports continue to support economic activity, they are likely to lose momentum. Historically low investment ratio and weak private consumption remain key obstacles to growth, constrained by contracting credit, high domestic and external debt burdens, and declining confidence.

The Hungarian Government's commitment to further fiscal consolidation is to be welcomed. At the same time, meeting the targets in the Convergence Programme in a durable and balanced manner as recommended by the Council will require decisive steps. Moreover, in order to put the public debt ratio onto a firm downward path and maintain macro-economic stability, a stable policy and institutional framework is needed based on a more business friendly environment and continued structural reforms that enhance growth and employment.

An improved fiscal framework, as recommended by the Council in March in the context of the Excessive Deficit Procedure and the Country Specific Recommendations under the European Semester in July, will facilitate the envisaged fiscal adjustment. Expectations about fiscal sustainability could be reinforced by introducing a binding medium-term budgetary framework for the general government, further broadening the analytical remit of the Fiscal Council, and taking steps to ensure compliance with the new EU requirements for national budgetary frameworks.

The mission also had wide-ranging discussions with the Hungarian authorities on progress with implementing the Széll Kálmán Plan and on how to stimulate further structural changes notably in the area of tax policy, labour and product markets, as also recommended by the Council in the context of the European Semester. The focus should be on a tax system that is more employment and investment friendly. Economic policy should avoid ad hoc charges on various sectors of the economy including the central bank, and progress with reforms to restore the soundness of the banking system so that it can play its role in supporting the economic recovery. Moreover, it will be important to support labour participation notably of women as well as education and training, promote competition, reform loss making state-owned enterprises, especially in the area of transport, and put in place a regulatory level-playing field for all companies.

The European Commission plans to continue the constructive negotiations with the authorities on these issues in cooperation with the IMF and the ECB in the period ahead. On the Commission side, Barbara Kauffmann is the Head of Mission for Hungary.

Press release

© European Commission