Should Hungary introduce the euro?

Although with inconsistent intensity, the question of introducing the euro has been an ongoing part of the Hungarian public discussion since 2002, therefore since the creation of the Eurozone and before Hungary’s accession to the EU. The last time the question made it to the front page was in 2016 when in an interview given to the journal Magyar Hírlap, the Minister for National Economy Mihály Varga stated that Hungary can be ready to introduce the euro by 2020, provided that it can hold its current rate of growth. A year before Antal Rogán – the current Minister leading the Cabinet Office of the Prime Minister – also spoke of a similar perspective.

In the flood of the analyses following Mihály Varga’s statement one could often hear the voice of economist Zoltán Pogátsa who consistently started his interviews by saying that the introduction of the euro is not a political but an economical question. This is not entirely true. To be more precise, it should not be a political question but in reality it is. A good indicator of this is the continuation of the above-mentioned interview two days later, in which Mihály Varga claimed to the channel Hír TV that for now, Hungary has no intention of joining the Eurozone despite the fact that the Orbán-government had fulfilled all but one criterion of accession. This event sheds light on a contradiction within the governing FIDESZ party; experts say the introduction of the euro would be beneficial to the Hungarian economy however it appears to be against the FIDESZ’s party politics. Although Hungary is performing well on paper, the currency machination going on in the National Bank weakens transparency, creating mistrust in foreign investors. By introducing the euro, this is precisely the margin the government would lose. The question is how this would affect the country.

A good example of our neighbour

Probably because of the similar economic and geopolitical conditions, it is reasonable to look at the Slovakian example. The introduction of the euro in 2009 had improved the possibilities of job creation and economic growth in the country, not to mention its competitiveness. Contrary to the region’s other Eurosceptic countries such as Hungary, Czech Republic and Poland, Slovakia got into positional advantage because, as a result of the disappearance of transactional costs and exchange rate risk, it became a more attractive target to foreign investments. In addition, Slovakia’s well-timed accession during the economic crisis extended the shielding of the Eurozone upon the country and this resulted in much less negative impact of the recession than for example in Hungary. And we have not even mentioned French Prime Minister Emmanuel Macron’s plan of a two-speed union; if it came true, the countries refusing to enter the Eurozone would shift to the periphery for good.

The sides of the coin

But what does all of this mean to Hungary? Would it be worth introducing the euro here? Hungarian experts agree that Hungary’s economy could use the introduction of the euro. The National Bank is constantly dealing with the question; according to its studies Hungary would benefit from the euro if it could introduce the currency on an adequate exchange rate. Viktor Orbán passed over the governance to Prime Minister Péter Medgyessy in 2002, also by agreeing that in 2007 the country has to join the Eurozone. But how would Hungarians benefit from this? For the ordinary citizen, the most obvious advantage would be the lack of money exchange. 90% of the Hungarians travelling abroad target one of the EU Member States and in these, they would be freed from the financial disadvantages caused by exchanging money. From a macro-economic point of view, besides greater transparency and more stable exchange rates, trade indicators would also improve. One of the most crucial billions-worth questions of the post-crises restoration, the saving of the foreign currency borrowers, would also be settled. In addition to this, experts foresee shrinkage of the unemployment rate and growing of wages.

Naturally, the picture is not this perfect. The example of the southern states like Portugal, Spain, Cyprus and especially Greece shows that the premature introduction of the euro can easily throw the country on the brink of crises and can also affect negatively the economy of the whole Monetary Union. If the country’s performance is not stable enough, if sufficient potential of growth is missing and if the domestic currency is being calculated on a low rate compared to the euro, the newest one of the cyclically recurring world-economic crises can make the country bankrupt. As a result, it can get into a spiral of indebtedness from which it would take great sacrifices to get out. The devaluation of the domestic currency as a measure applied in these situations, would not be available because of the lack of independent monetary politics. But for now, Hungary’s situation resembles more Slovakia’s than Greece’s and for the first country’s economy, being part of the Eurozone during the crisis was beneficial, although it was also deeply affected by the participation in the aid package given to Greece.

Hungary would probably benefit the best from an intermediate solution that is often called the Danish method. Denmark has not installed the euro but tied its own currency to it and as a result, the country enjoys the advantages of the Eurozone and avoids its disadvantages at the same time. For Hungary, this method would be especially logical because, except for joining the ERM II system, the country has fulfilled all of its convergence criteria by 2013, when the excessive deficit procedure against Hungary stopped. Moreover, the fixing of exchange rate is treated flexibly by the EU; there is no provision about how long the countries can stay in the entrance-hall of the Monetary Union meaning that Hungary could get a taste of the conditions following the accession.