After a surprise victory in Sunday’s Hungarian election, the opposition party Tisza is bound to hit the ground running. When they take over governing, possibly as early as May 5th, they will make euro zone accession for Hungary one of their top priorities.
On January 30th, in an interview with PrivateBanker.hu, Tisza’s economic spokesman István Kapitány explained that
one of the most important goals of the Tisza Party is the introduction of the euro as soon as possible depending on the country’s economic performance, plans are already being prepared for the date of this.
Their widely publicized ambition to bring Hungary into the euro fold aligns well with ambitions in Brussels to extend currency zone membership to all EU member states. Adding another country to the ECB’s domain would be a welcome victory for the EU at a time when tensions are high between the Eurocracy and some EU states. Those tensions span from the EU’s gradually expanding tax collection ambitions to the questions of funds and even union membership for Ukraine.
By solidifying the euro as the common currency for all members, the EU can at least give the perception of strength on one of the key issues for its own existence. With 21 of its 27 member states already in the euro zone, Brussels has indeed come close to its goal of a unionwide common currency area.
With Croatia joining in 2023 and Bulgaria—against better judgment—this past January, the euro zone expansion is likely going to welcome Sweden as its 22nd member after the euro-focused election in September.
So far, Hungary has steered clear of euro membership, and for good reasons. The common currency is a major reason why the European economy is in poor shape and is unlikely to regain any strength in the foreseeable future. It would be a hard blow to the Hungarian economy if it were forced into the same one-size-fits-all monetary fold where most of the EU is currently trapped.
There are a host of reasons why Hungary should not join the euro, one being the inevitable drift into economic stagnation. The reason for this stagnation is found in something called asymmetric business cycles. It is a technical term that carries enormous practical weight in any evaluation of the gains and losses from a Hungarian euro accession.
It is perfectly normal for two neighboring countries to be in different phases of a business cycle. For example, Hungary can be in the growth phase of the cycle, with declining unemployment and accelerating GDP growth. At the same time, Austria can be on its way into a recession with rising unemployment.
The difference between Hungary and Austria in terms of where their economies are is referred to as a business cycle asymmetry.
If Austria and Hungary have different currencies, the business cycle difference will be neutralized by a change in the exchange rate between the currencies. All other things equal, the Austrian currency will depreciate—get weaker—against the Hungarian currency. That way, trade between the two countries will shift in such a way that the business cycle differences are smoothened out and eventually disappear.
If the two countries have the same currency, some other variable has to neutralize the differences. Economists have proposed that fluctuations in wages—the price of labor—can serve this purpose. The problem is that unlike exchange rates, wages tend to be rigid, i.e., they do not change easily.
Without some kind of price mechanism to harmonize asymmetric business cycles, a currency union is subjected to increasingly destabilizing forces of disintegration. We have already seen one such major event in the euro zone: the Greek crisis 15 years ago. Greece paid an enormous price for its deviation from the macroeconomic ‘norm’ in the euro zone: in an effort to keep Greece from breaking away from the common currency area, the EU and the ECB fought the macroeconomic asymmetries with fiscal austerity.
By mandating that all members minimize budget deficits and government debts, the EU has effectively turned austerity-oriented fiscal policy into a non-negotiable norm for the member states. Hungary, wisely remaining outside the euro zone under Fidesz, has thus far been able to use expansionary fiscal policy to help generate economic growth; within the euro zone, on the other hand, economic growth has slowed down universally precisely because austerity is the fiscal-policy norm.
When austerity reigns, economic activity gradually cools off. The business-cycle asymmetries between euro zone members disappear as economic growth tends toward zero.
Economic stagnation is a formidable price to pay for joining a club that brings no real advantages. Hungary should remain outside; given Tisza’s declared ambition to bring Hungary into the currency union, euro skeptics had better get ready to fight for the forint.
It may seem tempting to simply say that ‘we can always leave the euro again’ if membership does not work out. However, exiting the euro zone is almost as risky, as complex, and as unprecedented as the British exit from the EU. Nobody has ever left a currency area of the euro zone’s dignity and economic prominence; in addition to the lack of empirical precedent, there is also a gaping hole in the economics literature on the macroeconomic side of a return- toa national currency.
In other words, although the forint is always preferable to the euro, institutional complexities and macroeconomic risks put an enormous price of genuine uncertainty on reversing a currency area membership. Therefore, the best way forward for Hungary under Péter Magyar’s government will be to keep the forint and maintain the monetary independence that has served Hungary so well under Fidesz.
