Strong Fiscal Policies, Increasingly Global Outlook

Pál Schmitt, President
Pál Schmitt, President

Hungary, a powerful force in Europe for many centuries, aims to carve out a bigger niche for itself in the modern global economy. Adopting free market principles and a democratic government in 1990, Hungary jointed NATO in 1999 and the EU in 2004, and took on the rotating EU presidency in 2011. As Pál Schmitt, Hungary’s President since 2010, pointed out in a recent interview, “We Hungarians have always considered ourselves Europeans. We did not enter Europe [when Hungary joined the EU]; we returned to Europe.”

Beginning with its official founding as a Christian nation by Saint Stephen on December 25, 1000, Hungary served for generations as a bulwark in Europe against Ottoman Turkish expansion. Hungary has always been prized for its strategic location on key trade routes between Western Europe and the Balkan Peninsula as well as between Ukraine and the Mediterranean basin. Crossed by the great Danube as well as the Tisza River, Hungary is a true European crossroads and natural trade hub. It shares its borders with seven countries: Austria, Croatia, Romania, Serbia, Slovakia, Slovenia and Ukraine.

Successful transition to free market economy

Part of the Austro-Hungarian Empire, Hungary declared its independence in 1918 but came under Communist rule after World War II. Beginning in 1990, Hungary has successfully made the transition to an open economy. Hungary has brought its average per capita income up to nearly two thirds the EU 25 average, and the private sector now accounts for more than 80% of Hungary’s GDP. Hungary has opened its doors to foreign investors, and cumulative FDI in Hungary totalled more than US$70 billion (€52.8 billion) in 2011. The government’s austerity measures, imposed since late 2006, reduced the budget deficit from over 9% of GDP in 2006 to 4.2% in 2010 and 2.9% in 2011.

Hungary has developed a diverse economy in which key industries are mining, metallurgy, construction materials, processed foods, textiles, chemicals (especially pharmaceuticals) and motor vehicles. Hungary also has a successful agriculture sector and is actively developing new industries, including renewable energy. Hungary’s leading exports in 2010 were machinery and equipment (61.1%), other manufactured goods (28.7%), food products (6.5%), raw materials (2%), and fuels and electricity (1.6%).

In recent years Hungary has faced economic challenges linked to the global economic crisis and the European downturn. In 2008, Hungary obtained an IMF/EU/ World Bank financial assistance package, and in 2010 a new government, led by Pál Schmitt, launched ambitious new reforms designed to cope with the crisis, including cutting business and personal income taxes and imposing “crisis taxes” on certain enterprises. The government also drafted a new Hungarian constitution in 2011 which went into effect in January this year. The Hungarian economy began to recover in 2010 largely thanks to rising exports, especially to Germany, and achieved growth of approximately 1.8% in 2011, although unemployment remains at around 11%.

Maintaining strict fiscal policies

Commenting on a recent Moody’s downgrade and the low Hungarian forint, a major challenge for Hungary since its debts are calculated in US dollars and Euros, Pál Schmitt says, “At the inception of this government, we formulated certain goals that we are not going to give up. The first thing is to cut down our current indebtedness, which is 80% of GDP. This is so important that we actually incorporated it into our new constitution. The government cannot take on more debt until this percentage is reduced to 50%.” He added that job creation is another priority.

Hungary remains committed to the EU and to adopting the euro. Pál Schmitt says, “A strong Europe, and within that a strong Hungary, is in our best interest. Even though we are outside of the euro zone currently, we know that the stability of the euro zone is what is best for Hungary.” He added, “We will continue to make our economy strong again.”

The EU, and particularly Germany, is Hungary’s top trade partner by far. In 2011, Germany accounted for 25% of Hungary’s exports and 26.1% of its imports. Hungary’s other top export markets (each accounting for around 4% to 5%) are Italy, the UK, Romania, Slovakia, France and Austria. Top sources of imports after Germany are Russia (7%), China (6.8%), Austria (5.9%), the Netherlands (4.4%), Poland (4.3%), and Italy (4.2%).

Forging connections with Asia

While Hungary will continue to strengthen its EU ties, it is beginning to look towards Asia for future investment and trade. Pál Schmitt, who recently met with Chinese Premier Wen Jiabao, explains, “The philosophy of Hungarian foreign policy has changed. We have opened towards the East, not only China, but including India and the Central Asian countries. Our focus of interest is wider now. Of course, China could be a natural partner for us, and I want to establish some institutions in Hungary in order to position Hungary as a gateway into Europe for Asian companies and investors.”