Hungary’s Euro Dilemma: Economic and Political Barriers to Adopting the Common Currency
The Euro crisis that began in 2009 with Greece’s financial collapse marked a pivotal moment in the history of the European Union. Triggered by excessive debt levels, poor economic oversight by the central government, and mismanagement of fiscal policies, this crisis severely undermined the EU’s foundations and cast doubt on the future of member-state integration. However, Greece was not the only country to experience such turmoil. The crisis reverberated throughout other Eurozone economies including Ireland, Spain, Italy, and Portugal, revealing and exacerbating deep-seated economic controversies and structural weaknesses within the Union. Those mentioned above and further problems concerning the disparity of the common currency and rivalry about how to deal with the economic crisis and problems of the Euro led to not only turmoil but also the stability question and it led to intense debates about the sustainability of the EU’s ambitious project of economic and monetary integration.
As the strongest economy in the union, Germany played a central role in addressing the crisis, offering various perspectives on how to manage and overcome the economic challenges that had precipitated the turmoil. Being in the same line with Germany, other creditor countries also advocated for strict austerity measures in exchange for financial bailouts nonetheless the debtor members of the union struggled with recession and unemployment, thereby resisting the harsh measures and demands. These disagreements within the EU and miscellaneous opinion on its economic handling of crises highlighted the economic, social, and political divides within the organization and led to an increase in Euroscepticism, that questioned the benefits of staying in the union.
Following the financial chaos among the EU members and separately in the domestic economies, it became clear that the economic governance of the organization was insufficient in overcoming these kinds of challenges. The members and the organization as a whole had to rethink the already-existing financial policies, develop new mechanisms to manage the economic lack of correspondence and prevent possible catastrophes in the future.
The crisis led to the fear of some European Union members to adopt the euro as the main currency of the country and mobilize the economic structure under the Eurozone. As other member states such as Czechia, Poland, Romania, and Sweden have not adopted the Euro yet, the Hungarian government has been planning to switch to the Euro since 2007 however, as of now, there is no clear sign from the Budapest in this matter. Nonetheless, several economic studies found that the adoption of the Euro would increase the investment capacity of the country by 30%, the current governor of the Hungarian National Bank said they did not want to hand over the country’s freedom regarding tax matters. This paper will explore the political and economic reasons for Hungary’s reluctance to accept the euro as a main currency and possible future scenarios if the Euro is adopted in the Central and Eastern European countries. The next section will delve into the annals of Hungary’s Euro path and its specific features.
Economic Reasons
Hungary hasn’t joined the Euro yet because it has not complied with the strict convergence requirements. Their particular issue is a national debt that is 19 percentage points more than the 60% of GDP maximum that is allowed. ERM II, which was created in January 1999 to ensure that changes in exchange rates between the Euro and other EU currencies do not jeopardize financial stability in the single market, still does not include the Hungarian forint. It also helped non-euro area countries get ready to enter the eurozone. Hungary joined the EU in 2004, although like with other non-eurozone countries, there is currently no deadline for adopting the Euro.
In the case of adoption, the Hungarian national bank would lose its capacity to manipulate currency rates and artificially improve export conditions for Hungarian exports. Hungary may be sidelined along with the ECB’s decision-making process, which would be based mostly on the standards of the core nations (France, Germany, the Netherlands, and Italy) and the loss of an autonomous monetary policy. When the Hungarian government starts buying too many Euros, the value of the HUF (Hungarian Forint) falls, making items created in Hungary appear cheaper. However, this option is somewhat limited because nearly all raw resources for production, including electricity, are imported. This means that they are just brief windows of opportunity and short-term objectives. The primary cause of this effect is that Hungary exports mostly to the EU, specifically to Germany.
The other examples of the adoption of the Euro as the main currency also influence the decision-making process of the Budapest government. Slovakia is a perfect example of how the problems cannot be solved by adopting the euro on its own. In 2005, Hungary’s purchasing power parity (PPP) was lower than Slovakia’s. The northern neighbour joined the eurozone in 2009, but the indicator started to decline following that year. Hungary’s PPP is 77 per cent of the EU average, whereas Slovakia’s is between 66 and 67 per cent. Even without the euro, the Czech Republic has made far more economic progress, with a PPP level above 90%. Croatia’s adoption of the euro is not the best example for the Hungarian government as they claim that tourism, generating 20 per cent of the output of the Croatian economy and whose revenues are in euros, was not a risky sector for the adoption of the single currency. The 2008 crisis had shaken confidence in the kuna (Croatia’s national currency replaced by the euro in 2023) and that the country had already unofficially adopted the euro.
Political Reasons
Domestic approach
The views of Hungarian political parties on the possible adoption of the Euro as the main currency vary widely. For example, under the leadership of Prime Minister Viktor Orbán, Fidesz has never supported the Euro adoption. They stated worries about Hungary’s economy and the possible loss of authority over monetary policy. Fidesz underlined the necessity for Hungary to fulfil specific economic requirements and guarantee that adoption would be advantageous for the nation, however, the party has not explicitly dismissed the concept of adopting the Euro in the long run.
Speaking of the main opposition party now, over time, Jobbik’s position on the Euro has changed. The party had previously opposed the Euro adoption more forcefully, citing worries about losing economic autonomy and possible harm to Hungarian companies and people. After burning EU flags and facing widespread accusations of racism and anti-Semitism, Jobbik has made an effort in recent years to persuade voters that it has evolved into a more moderate conservative party that supports civil rights and democratic institutions and that it no longer views the adoption of the Euro as a threat.
In contrast, the Hungarian Socialist Party always supported the Euro and viewed it as a reflection of Hungary’s commitment to European cooperation and principles. The party thinks that adopting the Euro will help Hungarian businesses and consumers economically by increasing trade and investment while providing more stability. Hungarian Socialists (MSZP) has advocated for a phased approach to Euro adoption to ensure that Hungary’s economy is ready for the transition and that the essential economic conditions exist.
In the meanwhile, the left-wing groups Together (Együtt), Democratic Coalition (DK), and MSZP firmly support adopting the euro. They claim that doing so would guarantee the nation’s future in Europe. They think that in the near future, a core group of Member nations centred on the monetary union will emerge and that nations that decline to join the EU will be marginalised on the political and economic fronts. However, despite all the domestic reasons for the issue, the region’s geopolitics also plays an important role.
Geopolitical considerations
The geopolitical situation created by Russia’s war with Ukraine has an influence on Hungary’s financial markets. Hungary’s closeness to the war zone, as well as its economy’s exposure to Russia and Ukraine, have resulted in a greater risk premium. This background information is critical to understanding the debate over Hungary’s prospective euro adoption.
First, the ongoing situation between Russia and Ukraine has a significant influence on investor reaction towards Hungary. Threats are exacerbated by its economic ties with both countries, which account for around 6% of the country’s GDP. As a result, trading volumes at the Budapest Stock Exchange fell by 20 to 25 per cent, indicating investor concern. Hungary’s closeness to a conflict zone raises concerns about stability and security among many international investors, particularly those from the United States.
Even with these geopolitical dangers, Hungary’s investment patterns may not be greatly affected by entry into the eurozone. One explanation for this is that large-scale transactions may still be completed smoothly since the Hungarian forint is still a very liquid and easily exchangeable currency. Due to its liquidity, investing is not significantly hampered by the euro’s status as a trade currency. Furthermore, the potential advantages of adopting the euro in terms of transactional convenience are outweighed by the ease with which investors may change euros and dollars into forints.
What Future for Hungary in the Eurozone?
Following Russia’s invasion of Ukraine, the Hungarian forint saw devaluation and it made Hungary’s economic vulnerabilities worse and sparked public discussion about embracing the euro. The forint has lost more than half of its value since Prime Minister Viktor Orban assumed power in 2010, and the currency’s volatility and leading some Hungarians to support the stability provided by the euro.
The declining power of the forint is not only the result of outside geopolitical events. The weakening of the currency was exacerbated by Hungary’s twin deficits. Hungary’s currency is now the least valuable in the area due to the ensuing financial turmoil and it is escalating the discussion of adopting the euro. While reading some stories in “Quora” about the local perceptions of the euro and attitudes towards its adoption, I noticed that some individuals in Hungary have started to use euros for property rents and used vehicle sales, in reaction to these pressures.
Moreover, as shown in the poll conducted in April 2023 by Eurobarometer, which found strong support for the euro in Hungary, public opinion is moving towards adopting the euro. However, Central Bank Governor Gyorgy Matolcsy encourages caution despite the public’s backing. In his argument against adopting the euro before 2030, Matolcsy cited Hungary’s need to catch up to almost 90% of the EU average in terms of economic development. He cautions that if Hungary’s economy is not competitive enough, joining the eurozone too soon might have negative effects.
In my opinion, first of all, losing economic policy independence would result from adopting the euro. Hungary would not be able to employ its recent economic successes as easily. Rather, it would be constrained by the Stability and Growth Pact of the Eurozone, which would make budgetary restraint more important than economic growth. This change might render Hungary less of an economic leader and more of a budgetary supervisor.
Second, Hungary’s business-friendly environment, which is defined by minimum regulations and low corporation taxes, may suffer. With a tighter fiscal strategy, the government would have less room to assist firms through spending, potentially depleting its deregulation and tax-cutting efforts. This constraint may weaken Hungary’s appeal to international investors, who now benefit from the country’s proactive economic measures.
Third, the adoption of the euro will subject Hungary to political blackmail. Increased competition for foreign direct investment will drive Hungary to meet investor expectations. Furthermore, in the case of a fiscal crisis, Hungary is likely to seek aid from the EU and the European Central Bank, exposing it to tough terms and political pressures similar to the austerity measures imposed on Greece as happened in 2006 and the following years.