In a recent interview with economx.hu, Hungary’s Prime Minister Viktor Orbán made clear that his country is not going to join the euro.
His prime opponent in the upcoming election, Péter Magyar, appears open to replacing the forint with the euro. Therefore, it is easy to reduce Viktor Orbán’s reaffirmation of Hungary’s currency independence to election campaign jib-jabbing.
That would be a mistake. The prime minister’s comment about Hungary and the euro zone has considerable substance behind it. Orbán is one of Europe’s most capable prime ministers, and the foremost at successfully integrating economic policy with a broader set of policy goals. His firm no to the euro is best understood in this long-term context.
In his interview, Prime Minister Orbán made clear that euro membership “will certainly not be on my table” should he win re-election in April. To explain that his no is more than a patriotic gesture—which in itself is respectable—Orbán provided a thorough argument in support of his Euroskepticism:
Viktor Orbán said that the government does not have an exchange rate target, but at the same time they should not think about government interest subsidies if the … central bank … would reduce the base interest rate so that businesses would also get cheap loans
This is an intelligent point in defense of the forint. Maintaining the national currency is a matter of policy substance, enough so that the economic outcomes can be measured in macroeconomic terms.
With a national currency, the Hungarian central bank can play with three monetary policy variables to bring about the best possible conditions for business investment and production in Hungary. A lower interest rate, which is what the prime minister points at, cuts the cost of financing investments—or, in the case where businesses have internal funds for investments, raises the alternative cost to investing those funds elsewhere.
A depreciation of the Hungarian currency has a broader stimulative effect than interest rate cuts on the allocation of business investments. A cheaper forint works de facto as a rebate on the cost of labor for foreign direct investors. Products manufactured in Hungary can be sold in the euro zone at the same price as those produced in the euro zone, but yield higher profit margins due to Hungary’s weaker currency. Alternatively, the manufacturer who locates production to Hungary can cut prices and grow its market share, thereby profiting from volume rather than price mark-ups.
An increase in money supply increases the liquidity in the Hungarian banking system. By providing more cheap money, the central bank encourages private banks to lend more to businesses for capital formation. They can also provide such important services as export credits, which on the margin can motivate export-oriented businesses on where to locate new investments and what production volumes to plan for.
All these instruments—the interest rate, the exchange rate, and the money supply—are connected; if the central bank wants to lower its policy-setting interest rate, it prints more money and supplies it to the banking system. This monetary expansion increases the supply of forints vs., e.g., euros; the immediate consequence is a decline in the value of the forint.
However, by placing policy emphasis, so to speak, on one of these three instruments, the central bank can achieve a wide range of different policy goals. In short, it has considerable latitude in what policy mixes it applies in order to help the Hungarian economy grow and thrive.
All of these policy instruments disappear if Hungary joins the euro. It is refreshing to see that Prime Minister Orbán is clear in his opposition to the euro; if anything, it seems as if the general euro skepticism among policy makers in Budapest has grown stronger in recent years.
Two years ago, György Matolcsy, president of the Hungarian National Bank, publicly ruled out Hungarian euro membership before 2030. The central bank president left the door open for currency-area membership beyond that year.
In an analysis of Matolcsy’s comments, I gave three reasons why Hungary should not join the euro, either now or in the future, the first of which is the loss of economic policy independence. The austerity crisis 15 years ago showed with brutal clarity that once a country gives up its monetary-policy independence, it surrenders sovereignty over its fiscal policy as well. I explained:
Bluntly speaking: under the euro, the government in Budapest will be demoted from leading their nation economically to stewarding its fiscal accounts. This will bring Hungarian economic prowess down to levels more in tune with lackluster European averages.
Hungary would also suffer a decline in business friendliness. Many of the policy instruments used by the Hungarian government over the past 15 years to grow the economy, create more jobs, and attract foreign direct investment would be hampered or lost altogether.
Last but not least, there is a risk for political blackmail under euro membership. Currency independence allows for the use of monetary policy to regulate the inflow of foreign direct investments. It also prevents situations where, as I noted in 2023, the European Union could
gain a position to exercise political blackmail toward Budapest. While Hungary does not currently have a problem with runaway government debt, that situation is more likely under the currency union.
Under a euro membership, any situation with runaway public finances would open for the EU to strong-arm the Hungarian government into compliance on non-economic policy issues. These issues can stretch anywhere from LGBT demands to Ukrainian EU membership.
The choice between the euro and the forint is entirely one-sided: once a country joins the currency area, it is practically impossible to withdraw from it. The reversibility may look good in some economics textbooks, but in reality it is an endeavor more complex than Brexit. Given the differences between the candidates on the euro, next year’s election in Hungary is ramping up to be the most consequential one in many years.
