Hungary: Tensions Rise Between Hungary and The EU

Consensus Forecasts

Early indicators for Q2 remain patchy, but the Hungarian economy seems to have continued a mild recovery, having exited recession in Q1. Local assets came under pressure in June on jitters over US interest rates and weakness in China. Foreign investors currently hold about half of Hungary’s debt and a rapid sell off could lead to a spike in government borrowing costs. The National Bank cut rates by 25 basis points to 4.25% on June 25, in an effort to kickstart the recovery and revive domestic demand. Policy makers hinted at scope for further ‘cautious monetary policy easing’ due to a sharp decline in price risks.

The outlook for Hungary remains fragile for reasons other than debt, with a heavy reliance on exports to the euro zone, where demand is weak. Tensions between Hungary and the EU are high after a report by the European Commission accused Hungary of rolling back democratic checks and balances in recent controversial changes to the Hungarian constitution, something Prime Minister Victor Orban denies. If found to be in breach of the treaty, Hungary could face a sizable fine from the EU. Further discussions are being held in August to determine ways to ensure that fundamental values set out in the EU treaty are observed.

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