EU referendum in Hungary: “yes” vote - the chance to boost growth
- EU accession to lift growth rate.
- Still ground to make up on Maastricht criteria.
On 12 April 2003 the Hungarian people will be voting on their country’s accession to the European Union. Following Malta and Slovenia, Hungary will be the third country out of ten in the May 2004 enlargement round to hold a referendum on accession. Opinion polls point to an overwhelming majority in favour of EU membership.
“The Hungarian economy has been headed towards EU membership for a long time now. Hungary’s “yes” vote will now make politics catch up on the economic development,” said Marianne Kager, Chief Economist at Bank Austria Creditanstalt (BA-CA), adding: “The Hungarian economy will profit, as will Austrian exports.” Hungary is Austria’s leading trading partner in Central and Eastern Europe today. Last year it took EUR 3.3 billion in Austrian goods and services, ranking sixth in the export league table, after Germany, Italy, Switzerland, the UK and France. Since 1989 the share of Austrian exports accounted for by Hungary has climbed from 2 per cent to 4.3 per cent.
EU accession in May 2004 will mark a new milestone in the longstanding trend towards Hungarian integration in the European economy. Hungary has benefited greatly from soaring foreign trade since the fall of the Iron Curtain. Exports increased almost fivefold between 1990–2002, to stand at some EUR 36.5 billion. Almost 75 per cent of the country’s exports now go to the European Union (1990: 42.1 per cent). Hungary is thus the EU candidate country with the highest dependence on exports to the Union. Moreover, some 65 per cent of foreign direct investment (FDI) comes from EU member states. In 2002 Hungarian inward FDI totalled some EUR 27 billion or EUR 2,700 per capita. Of the candidate countries, only the Czech Republic attracts higher per capita FDI, at EUR 3,800.
EU membership to boost growth
Since the mid-1990s the Hungarian economy has been expanding by an average of four per cent — more than twice as fast as that of the EU — taking per capita GDP at purchasing power parity to EUR 12,600, or over 50 per cent of the EU average.
GDP growth was 3.3 per cent last year, and the economists at BA-CA see it running at 3.6 per cent in 2003. The pace should pick up next year, with help from a stronger world economy. “While personal consumption is losing momentum, investment will take up the slack,“ forecasts Walter Pudschedl, an analyst at BA-CA who specialises in Hungary. Export demand should also provide a new stimulus, helping to lift GDP growth to some 4 per cent in 2004. The medium-term outlook is thus for a return to the potential growth rate of between 4–4½ per cent per annum.
The Hungarian economy will profit from the European single market and the resultant sustained expansion in external trade. Moreover, the National Development Plan on which the distribution of EU resources from the structural funds and Cohesion Fund will be based, provides for HUF 1,200 billion (approx. EUR 5 billion) in additional investment from 2004–2006. “That alone will raise growth by more than half a per cent a year,“ said Pudschedl.
A long way to Maastricht
However, according to the assessment of the BA-CA experts Hungary still has a long way to go before it is ready to join the euro. “The current weaknesses are inflation and the budget deficit,” Kager noted. “Bringing them into line with the Maastricht criteria within the next two years looks like a tough task,“ she added. Inflation will top 5 per cent again this year, driven by strong domestic demand and high oil prices.
In 2003 the budget deficit will be well below last year’s record 9.6 per cent of GDP, but it will probably overshoot the Government’s 4.5 per cent target. This could mean that public debt exceeds the Maastricht limit of 60 per cent of GDP. “Hungary needs to take appropriate action now,” Kager argued. “Otherwise it will have to pursue highly restrictive policies later on to meet the convergence criteria.”
Contact: Bank Austria Creditanstalt Group Public Relations
Ildiko Füredi, tel. +43 (0)5 0505 56102;