Will Hungary indeed introduce the euro by the end of this decade?

HUNGARY - In Brief 24 Jul 2016 by Istvan Racz

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Well, hardly so, we believe. Yet economy minister Varga threw up the topic a week ago, in an interview to a local daily newspaper (Magyar Hírlap) that joining the Euro Area by the end of this decade 'cannot be baseless' if current macro trends continue and productivity keeps rising. According to Mr. Varga, it is yet to be decided if Hungary will really need the euro or not, suggesting that for the time being the country is safer with the forint as its national currency. But he reminded that according to the latest ECB convergence report, Hungary currently meets all of the 'more important' macro criteria for Euro Area membership, except for the one related to exchange rate stability, and even that one is only missing because the country is not a member of the ERM 2, the institutional ante-room of the Euro Area. For the criteria that Hungary complies with already, he mentioned the ones on inflation, the budget deficit, long-term interest rates and actual exchange rate stability vis-a-vis the euro.Clearly, he did not mention a number of important negatives. The government debt ratio is still around 75%, much higher than the 60% Maastricht ceiling. Inflation is likely to pick up soon to exceed the 0.7% reference value mentioned by the ECB report. The budget deficit ratio is set to increase in 2017 (even if to a lower level than the 3% of GDP criterion). More importantly, labour productivity (measured by the relation between real GDP growth and employment growth) has not risen at all over the last ten years. Hungary does not meet some of the legal entry conditions yet, including the one on central bank independence and the one on the prohibition of monetary financing to the...