Hungarian budget goulash signals next phase in euro crisis

08/25/2010 9:54 am EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

 Hungary’s budget crisis isn’t large in size in comparison to those of Greece or Spain, but Hungary’s crisis is a harbinger of the next crisis euro debt crisis.

Hungary’s budget crisis raises the question What happens when a country reaches a bailout agreement with the European Union and the IMF (International Monetary Fund) and then doesn’t live up to that agreement?

You can understand why that question might be important since the solution to the euro crisis depends on exactly that kind of agreement between national governments and the IMF and the European Union.

 The previous Hungarian government promised to reduce its budget gap to below 3% in 2011 as a condition for a bailout led by the European Union and the IMF. The current government of Prime Minister Viktor Orban, elected in April, is resisting the terms of that deal. The current government was elected on a pledge to increase economic growth. It will be hard to achieve that goal while cutting the budget deficit.

In contrast to the size of the Greek or Spanish budget deficit, Hungary’s crisis involves relatively little money. The last government promised to reduce its deficit to 3.8% of Hungary’s gross domestic product of less in 2010 and to less than 3% for 2011. 

Right now, the Fiscal Council, the official budget watchdog, sees the deficit as 4% of GDP in 2010, 4.2% in 2011 and 3.4% in 2012. That’s not a whole lot short of the promised budget reduction in forint, but it is on the wrong side of the agreement.

The government could reduce the deficit to meet the target by passing a special financial tax in 2011 and 2012, but it hasn’t yet pushed through legislation to put the tax in place. The tax would impose a levy of 0.5% on the assets of all lenders.

So what happens if the government doesn’t fulfill its promises?

The government says it won’t need IMF support after the current $26 billion bailout program expires in October.

The IMF and the European Union can’t afford to be exposed as toothless when they’ve got so much at stake in Greece and Spain, but it’s not clear what they can or will do. 

The next stage of the euro crisis is cooking away in a goulash in Budapest.

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