Hungary's minister of economy takes tentative steps towards economic stability

Q. What are the short- and long-term prospects for the Hungarian economy?

A. Many people tend to forget that it was Hungary that was first to ask the International Monetary Fund and the European Commission for foreign aid to avoid bankruptcy in 2008. And, while Greece is still trying to find its way out of the problem, Hungary has practically repaid its debts to these international organisations. 

Last year, the country was able to achieve an excellent growth rate – particularly when compared with other EU member states – of 3.6%. And, in the short term, I expect that we will maintain this rate of growth.

In the long term, I am less certain – because of foreign uncertainties. Our most important export markets, the member states of the eurozone, are only recording modest economic growth, and there is a very serious conflict between Ukraine and Russia, which could have a serious impact on the Hungarian economy. We also fear the risk of deflation, [which is spreading throughout] the region.

Apart from these risks, I am very optimistic that we can achieve [economic] growth of more than 3%... The demand for car industry products is stable, we [have] experienced an expansion in the labour market, and the low oil price also supports the growth in demand [for cars]. So our long-term prospects are even better than what we saw a few years ago.

Q. The car industry and trade are largely responsible for driving growth in the Hungarian economy in the past year. Is there a need for further investment in the economy to continue on this growth path?

A. If, as minister for the economy, I could wish for something, I would like to have investments that improve competitiveness in the economy in the long term, as this would contribute to long-term economic growth. Car manufacturing, for example, is [an area in which we would like to attract investment]. Because we do not foresee having [any domestic] car manufacturing capacity in the foreseeable future, we are happy to receive investment in the sector.

At the moment, German and Japanese car manufacturers operate in Hungary. We would like to see [these companies expand] and would be happy to support investors who see potential in investments in Hungary in the long term. 

It is also of utmost importance to further our competitive advantage through competitive energy prices. And, of course, I would also like to attract companies to Hungary who are forerunners in research and development and in the field of innovation.

We also have access to funding from the EU, although a country cannot build long-term growth on that resource. These funds help strengthen economic development in Hungary, but an economy is strong when it is able to grow without such funds, and we are satisfied [that we are capable of doing this].

Q. Where do you see the need for structural reform in Hungary?

A. I feel that the reform of the tax system, the transformation of the social benefit system and the removal of so-called ‘early retirement schemes’ are important for our economy. It was very important to implement the new labour market law, which is far more flexible than what we had before. We decreased the duration of unemployment benefits from nine months to three, so we made a significant step from a ‘welfare’ to ‘workfare’ society.

But, we are not yet at the end of the process; for example, the efficiency of state operations can and must still be improved. We need to improve with regards to the number of days it takes to register a new company – in terms of EU statistics, Hungary is a top performer, but the government aims for further improvement – how long it takes to complete a tax return, and how easy it is to find a new job in the labour market.

Also, my ministry believes that it is very important to introduce dual-vocational training this year – a copy of the German system – which derives the necessity for introducing different kinds of vocational training from the demand in the economy.

Q. Moving back to the bigger picture, with the eurozone your most important trading partner, do you expect the European Central Bank’s quantitative easing decision to have a positive impact on the Hungarian economy?

A. This is something we expect, but in itself that would probably not be sufficient. In the past few years, we have opened up our economy towards the East. This is why we have a significant current account surplus and, with more active economic diplomacy in the eastern region, we were able to significantly boost our exports as well.

In the past year, exports grew by 8% and it was not only due to trade with the EU, but we also achieved some growth in the Asian market, Turkey and in Arab countries. In Turkey, we were able to improve export growth by 16% during the past year. It is a favourable market for Hungary and Hungarian entrepreneurs. I think there are opportunities for us in Asia, Turkey and the Arabic region.

Q. What is the right geostrategic positioning for Hungary to achieve the best economic performance?

A. We are interested in maintaining co-operation among central European countries because the average growth in these countries is higher than the average growth rate in the EU. 

We [the Visegrád Four (V4), comprising Poland, Czech Republic, Slovakia and Hungary] enjoy very close co-operation and are very dependent on the economic performance of Germany. In fact, one of the reasons for the strong growth in the German economy is the competitiveness of the central European economies. 

With regards to economic activity, Romania is on its way to catching up with the V4 countries, so it is in our interest to avoid any damage to competitiveness in the region and sustain a high level of growth.

We think that this is good for Europe as well, because we now look at the [V4] countries as the potential engine of growth in the EU in the coming years.

[Despite] the many strong Hungarian companies present in Ukraine and Russia, the conflict in the region has not cast its shadow on Hungary or Poland – at least not to the extent that was expected. We have strong fundamentals and a current account surplus in these countries and the foreign exchange [FX] exposures in the private sector are getting smaller. So, we look at the central European countries as the supplier to the locomotive of Germany, which is driving the whole of the European economy.

Q. Of the V4, only Slovakia is currently a member of the eurozone. Where is Hungary on the road to eurozone membership?

A. When I first became minister of finance in 2001, I was very proud that at that time we were able to say – together with Slovenia – that we would join the eurozone in 2007. But then, in 2002, we [the Fidesz party] lost the general election and the governments that followed lost the possibilities that we had in 2001 and could not join.

The proportion of FX-[denominated] loans was extremely high in Hungary and because of that, in 2009 to 2010, we would have been very happy to have been a member of the eurozone, because it could have saved us many of the FX loan problems [created through changes in the exchange rate].

Interestingly, based on the experiences during the crisis of 2008, the situation has changed. The [Maastricht] criteria, with regards to inflation, interest rates and deficit, are met and our debt-to-GDP level has decreased from 83% to 77%. However, since the crisis, the advantages of having an independent monetary policy have become more evident. Based on the examples of Greece, Portugal and Italy, we can conclude that if we joined the eurozone with an inadequate level of development, it could have very destructive consequences.

The euro offers the same conditions for the strong and the weak.

So, what we can see now is that, while the pressure on the currency of the small countries has not disappeared, we might be at an advantage in having an independent monetary policy. But what we can witness at the moment is that, within the eurozone, institutions are starting to get stronger. The eurozone is developing into a sort of political force and, in the long term, it will [pay] to be a member of it. 

Mihály Varga is Hungary's minister of the economy.