Macro: EU urges action on deficit

In line with press speculation earlier in the week, the European Commission allowed Hungary to submit its amended euro convergence plan only in September, in order to avoid any kind of interference from national politics ahead of general elections scheduled for April–May. According to press information, EU Finance Commissioner Joaquin Almunia told the Commission that Hungary's euro convergence plan as revised in December was a step in the right direction, but specific measures underpinning the changes were needed. Reflecting the ruling of the Commission, Hungary’s Finance Minister Veres underlined that the EC had left it up to Hungary to decide which steps to take to reduce its budget deficit and complete structural reforms. According to Mr Veres reforms in the public, education and healthcare sectors are much needed in order to reduce budget spending, and a greater effort must also be made in collecting tax revenue due to the state. The finance minister reiterated the government's commitment to meeting the Maastricht criteria by 2008 in order to adopt the euro in 2010.

In our view there are very high expectations in the market regarding the government’s new restrictive measures, which should arrive in the summer. However, it also seems to us that investors have already accepted that none of the parties will unveil such measures before the elections. Thus the market is unlikely to react sharply to any news concerning the Hungarian budget in the first few months of 2006. Fortunately, the major parties have not yet started to make any significant social promises, which could make it somewhat easier for the new government to take measures to improve the budget after the elections.