Eu maturity
Claiming that Hungary’s march toward EU maturity is far from being over, analysts at Germany’s Deka-Bank recently left Hungary off a list of top performers, along with Poland, Latvia, Lithuania and Slovakia. Out of a maximum score of 100, Hungary scored 85 for progress toward EU levels on the basis of institutional and real economic indices, 65 for monetary policies and 60 for fiscal performance. The level of EU maturity had only risen by a single point in eight months from June 2003 to 72 points. Prime Minister Péter Medgyessy, nonetheless, believes Hungary is ready for accession and has always been among the top three candidate countries in the past 13 years.

Economic overview
In addition to unwelcome consequences of global recession, a long list of factors weigh heavily on Hungary’s economy. Such causes include defective fiscal and monetary policies, a soaring budget expenditure, massive deficit and state debt, inflation, a lack of reform in welfare systems and a long-time failure to ease public dues that burden entrepreneurs.

Tibor Draskovics

At the same time, Hungary’s Finance Minister Tibor Draskovics, famous for pushing a fiscal austerity package through the cabinet, has recently talked of improving fiscal and real indices. He is convinced 3.5 percent in economic growth and a 4.6 percent state deficit are realistic goals. He claims that out of all the government’s forecasted figures, inflation is the only one that may require slight adjustment; estimating inflation now to be around 6.5 percent. Zsigmond Járai, president of the National Bank of Hungary, has more ambitious goals: inflation must be brought down to below 3.5 percent, the deficit reduced to under 3 percent of GDP and government expenditure not exceeding 44 percent of GDP.

growth With 5.2 percent in growth in 2000, Hungary had surpassed the EU’s 3.5 percent growth rate. Due in part to the global economic recession last year, the Hungarian economy expanded by only 2.9 percent, but analysts predict recovery will pick up full momentum this year. The Economist Intelligence Unit forecasts an annual growth of around 4 percent in the medium-run for Hungary.

Convergence
Per capita GDP in Hungary (calculated at purchasing power parity) in 1996 amounted to 46 percent of the EU average, by 2002 it had reached 53 percent, and last year it was 54 percent. These are the same results produced by Portugal when it acceded the EU in 1986. Since then, the index of the Iberian country has steadily grown to 69 percent today. The other possible alternative is that of Ireland, which joined the EU in 1973 with 61 percent, after which in 2002 it dazzled the rest of Europe with 122 percent growth – a success largely owed to export-driven growth. If the Hungarian economy is capable of surpassing the EU rate of growth by 3 percent, it will take 22 years, whereas if the gain is only 2 percent, it will take 33 years for economic performance to reach the EU average. Hungary has not yet made a decision on the method of convergence it would pursue or the areas that will serve as economic drivers. According to optimistic predictions, 11 years might just be enough to reach 75 percent of the EU average per capita GDP if the appropriate development strategies were applied.

National Development Plan (NDP)
The EU voted to grant Hungary approximately EUR 4 billion of community support from its structural and cohesion funds in the first years of accession. The community support scheme of Brussels, together with domestic co-financing, and building on the five operative strategies of the program, would support investment projects with grants totaling HUF 1.35 trillion billion between 2004 and 2008 – with a view to improving economic competitiveness, promoting human resources, agrarian, rural and regional development, as well as environmental protection and infrastructure.

István Csillag

According to preliminary calculations, these developments may – in addition to the EU funds – bring Hungary a further EUR 1.5 billion in surplus resources. Meanwhile, two-thirds of the increment in FDI and growth rate is expected to stem from NDP investment projects. Projects implemented as part of the NDP are expected to present construction companies with exceptional opportunities. While these projects will only have tangible effects after 2005, because of necessary preliminary works, support grants promoting vocational training and acquisition, as well as the emergence of fresh competition, will have favorable impacts on the sector already this year. All this may lead to a cleansing of the market, which would be a positive development for companies observing and respecting market rules.

Competitiveness
In recent years, many have expressed concern over Hungary’s deteriorating competitiveness. István Csillag, Minister of Economic Affairs and Transport, has promised to work out and implement a national strategy of competitiveness that will span over a number of government cycles. He said Hungary may, as a result, become the Holland of Central Europe with respect to capital attraction, capital export and employment.

The strategy is designed not only to provide answers to the questions of taxation but also treat areas like effective public administration, innovation and trade policies, education and vocational training. According to a report by SN, the Confederation of Swedish Enterprise, many older EU members could be left behind by new ones in attainment of the Lisbon objectives by 2010. The report emphasizes that Hungary is ranked second in the European top list directly behind Ireland with respect to the number of people employed in high-tech.

Industry
The largest share of gross added value, 25.2 percent, is produced by industry. Many expect that the EU may give further momentum to machinery and heavy industry sectors, but will probably fail to shake up the textile industry. This year export sales seem to propel the industry, whose production in February was 12 percent higher than a year ago. Production of electric machines and instruments – accounting for nearly one-third of the manufacturing industry – expanded by more than 40 percent at an annual level. According to the Central Statistical Office, this was largely due to above-average export sales of office equipment and computer manufacturing. Production of metalworking and car manufacturing is also promising.

Agriculture
The voice of those concerned about the state of agriculture is the loudest, and many fear that the entire segment, including farmers, will implode. This was the feeling conveyed by responses given to a joint survey carried out by the Department of European Integration of the Ministry of Agriculture and the Hungarian Marketing Association. The survey revealed that almost everyone engaged in large-scale farming, and nearly half of the producers in medium-and small-scale farming, believe they will be personally affected by accession. However, the new member states will not have to fear that the EU may implement trade restrictions or protective clauses on grounds of incomplete adoption of food safety and animal health regulations. Further relief was brought by the decision of the European Commission giving 21 milk and 15 meat producing plants temporary exemption from meeting EU food safety requirements. The Commission had also identified and selected the 37 border-crossing points that will be used for transporting food products and livestock to the EU. The list includes Ferihegy Airport, Letenye, Nagylak, Röszke and Záhony. Hungarian food safety regulations are often stricter than in the EU.

Agrarian support
Hungarian farmers can fundamentally expect four different types of support: 1) direct income support from the EU-budget (EUR 70/hectare and cattle/sheep); 2) 30 percent national contribution payable on land size or number of livestock (direct payment from national budget); 3) national co-financed rural development support (agrarian environment protection, investment, etc.) – resources are shared 75-25 percent between the EU and the given state; 4) market support (intervention, private storage, export subsidies), the benefits of which are not directly enjoyed by farmers (but rather by the manufacturing industry and exporters).

Concern over the agricultural sector was voiced the loudest

Based on the calculations of the Commission, direct support payable to Hungary this year will amount to EUR 305.81 million. As part of the Single Area Payment Scheme (SAPS) Hungarian agrarian producers (not only the sectors that are considered the beneficiaries of the direct support scheme) will get an automatic (i.e. not subject to production) uniform, single, direct payment. The amount of support will be EUR 70/hectare throughout the country (this is known as the SAPS envelope). This will be coupled with a maximum 30 percent national contribution each year.

Land purchase
Pursuant to the Act on Arable Land, amended in consistency with the obligations assumed in the accession agreement, EU citizens may purchase arable land in Hungary if they wish to settle down in the country as self-employed entrepreneurs, and have been legally living in the country and engaged in agriculture for at least three years.

According to relevant surveys, only 12-16 EU states met such criteria at their moment of accession; nonetheless, the question of how demands for arable land and incoming migration will change in the future hangs in the air. Those that meet the criteria can buy up to 300 hectares of arable land – the same applies to Hungarian citizens as well. In all other cases, Hungary will maintain the presently effective seven-year prohibition on the purchase of land titles by foreigners, which may be prolonged by a further three years if there was still significant difference between land prices in the EU and Hungary after seven years.

Movement of labor
Presumably due to lack of successful communication, movement of labor has become a delicate subject. New members, including Hungary, are somewhat resentful seeing that despite the gallant promises made in Copenhagen, the old member states, one after the other, tried to prevent the free movement of labor on the pretext of social and welfare considerations. Hungary would like to build the most liberal labor force market, but resorting to the principle of reciprocity – as announced by government spokesman Zoltán J. Gál – Hungary has imposed the very same restrictions on employees in present member states that imposed restrictions on Hungarians in the first seven years after accession.

Industry is expected to benefit from European Union accession

Pursuant to the accession agreement, the present EU member states ought to apply the principle of community preference, the 21-month rule, and the allowances pertaining to family members with respect to Hungarian employees. According to a study prepared on request from the Commission, less than 1 percent of the employable population of the new members will have the option to set off West in the first five years after accession, whereas the risks of brain-drain from the West are quite high. From May, Hungarian job-seekers and employers will be able to use the free European Job Mobility Portal, EURES. Opportunities are also available in towns from Szeged to Győr, Debrecen, Eger, Veszprém and Budapest, to get information on the conditions of foreign employment, or information on living conditions of foreigners in target countries.