The open conflict between Budapest and Brussels is completely shaking Viktor Orban’s plans to revive the economy. The EU and Hungary are at odds over a veto that the Magyar Republic wields over European aid to Ukraine, thus blocking the sending of about 50 billion euros to the invaded country, which is expected to be resolved at an emergency summit of European leaders this year. Must be approved. Thursday. This situation could lead to a strong diplomatic conflict that affects the country’s financing.
At the moment, the tensions have already changed the direction of its central bank as it has resulted in a record decline in the florin, raising inflation fears. Its currency fell 3% from its high January until the central bank meeting this Tuesday. This was the biggest decline in currencies against the euro. Finally, the rebound has been driven by more limited rate cuts by a more cautious central bank. However the currency is still 1.9% off its all-time high. The fall of the florin is completely against the interests of the country, which has defended on several occasions that it needs a strong currency to get out of one of the most complex crises in all of Europe.
The Hungarian economy experienced a pronounced recession from mid-2022 until registering a strong rebound in the last quarter of 2023, with its GDP growing by 0.9%. However, this could not save him There was a strong contraction of 0.7% in global terms last year, According to BNP Paribas experts, the country has experienced very high inflation (up to 25% in 2023), a major factor in its poor economic performance.
Regarding the cause of this inflation wave, “the difference with other Central European countries can be explained by the lifting of the limit on fuel prices last December”, as the real situation of artificially limited prices was transmitted to the economy. Was. Additionally, there were shortages of certain food items “which led to shortage situations.” 34% increase in these products”,
Against this backdrop, the central bank has launched an aggressive campaign of interest rate hikes, led by value of money up 13.5% And it will be left there from September 2022 to October 2023. This is the highest limit in the entire EU for a very long period. According to the BNP, the central bank achieved its objective by cooling the economy, a movement that explains the entry into recession. “As well as wages being hit by inflation, the level of interest rates has hampered new loans and its fiscal policy is becoming too weak to compensate.”
Now the country was seeing the light at the end of the tunnel and with rate cuts on the way, the EU itself is talking about it. Its economy rebounded by 1.7%, According to the forecast of the European Commission. In that sense, the country’s own government says they are not only going to accelerate rate cuts, but they also want to change their ‘reference rate’ model to facilitate an even sharper decline. The Economy Ministry presented a plan to replace the interest rates affecting most loans (interbank loans) with the yield on three-month government bills.
These flexibilities have been funded by a highly depreciated currency. Although a large part of this decline has come from the Budapest Plan with its aggressive rate cuts and reference rates, the reality is that EU tensions have increased pressures that have changed its central bank’s dynamics. The ongoing tug of war with the ‘Club of 27’ in the country is creating uncertainty which is troubling investors. Buy short assets valued in forints.
Actually, the country’s own central bank announced a cut of 75 basis points this Tuesday Due to which the value of money reached 10%. Market consensus before the meeting expected the cut would be more than 1%. The central bank’s vice president himself acknowledged that “macroeconomic trends would have allowed us to cut more” but “there are a number of risks that warrant greater caution.” Among these problems, he highlighted tensions in the Middle East, or the political conflict with the European Union.
“While it was surprising that the National Bank of Hungary cut the rate by only 75 basis points, it is clear that it is choosing a more cautious path in the face of currency market volatility in recent days,” explains František Taborsky, an analyst at ING. The Dutch bank makes clear that the pace at which the country’s central bank has a clear path to reduction “will require progress.” Negotiations between the European Union and Hungary, Especially at the summit this Thursday.” The reason put forward by experts is that a detente would be “a buying signal for assets valued in the forint”, giving the central bank oxygen to continue supporting its economy’s recovery. Will get the moment.
“In the event of no agreement on 1 February, the heads of state and government publicly declare that in the light of the behavior of the Hungarian President, they cannot envisage Budapest receiving funds from the EU”
In fact, investors fear that if Viktor Orban remains adamant in his desire not to provide aid to Ukraine, a conflict with the EU could arise. can enter a very different level And dangerous for the Balkan countries. In fact, in recent days, the Financial Times published an alleged secret plan from Brussels that would cause investor confidence to decline and Hungary’s currency to collapse if it refused to concede defeat.
“In the event of no agreement on 1 February, the heads of state and government publicly declare that in the light of the behavior of the Hungarian President, they cannot envisage Budapest receiving EU funds.” The idea with these statements is that confidence in Florin will suddenly sink, fearing that More than 21,000 million euros seized Will never reach the country’s treasury.
That is to say, Hungary is placing its entire economic bet on a rapid rate cut at the summit this Thursday. In that sense, the country has shown a more constructive attitude, warning that they are willing to compromise despite Disagree with sending aid to Ukraine, as expressed by its President on several occasions. Balazs Orbán, political director of the Hungarian Presidency, told ex-Twitter that they had already sent a proposal in which they were open to the possibility.
Hungary does not succumb to blackmail!
Document, prepared by #brussels The bureaucrats only confirm what the Hungarian government has been saying for a long time: access to EU funds is used by Brussels for political blackmailing. https://t.co/x5NExCufYm
– Boka Janos (@JanosBoka_HU) 28 January 2024
However, from Budapest they have also shown their anger over an alleged document containing plans for an attack on Florin, to which the Minister of European Affairs János Bocca gave full credibility this Monday. “The document confirms what we have been saying for a long time, that the EU is using Fund for political blackmail,
In any case, either for the direct attack against their currency or for the custody they can obtain. The swords are high and Hungary is experiencing one of the most tense moments in its fight against inflation. with CPI declined to 5.5% in December, the country needs more than ever to raise the florin for investors, giving it the scope to continue supporting its economy without, thanks to it, reviving the specter of prices rising by 20%. Facing its decisive hours, Brussels faces major threats to the country’s ability to deliver on its plans amid a world that is preparing for economic recession.