Today's forint is actually the "third best" solution - Péter Ákos Bod
This picture looks very different when viewed up close, as if we were slightly removed from the present moment in time and space.
As we enter our third decade of EU membership, it begs the question of why we still have the forint.
How did it happen that we maintain an independent currency system in a country that contributes only 1.1% to the EU's gross domestic product?
The first years of the new millennium are slowly becoming history, when the National Bank of Hungary (MNB) and several research institutes prepared analyses taking into account the circumstances at the time, assessing the impact and consequences of adopting the common European currency following the ongoing process of EU accession. The various economic calculations showed slightly different but equally positive growth effects, taking into account that, as with any significant change, the transition would entail adjustment burdens and transition costs. The economic and financial conditions for adopting the euro have not changed significantly. The currency area, which originally started with 11 members, has since expanded to 20, and will consist of 21 members from January 2026, when Bulgaria joins. Romania has also committed itself to joining, and although its stubborn budgetary problems have forced it to postpone the target date several times, it still intends to join.
In contrast, Hungary is among the permanent holdouts, along with two northern countries (Denmark and Sweden) and two Visegrad countries (the Czech Republic and Poland).
Since the beginning of the 2000s, a wealth of experience has been gained in the task of switching to the euro, which most of the new member states have completed. Numerous analyses have also been produced on the economic and social consequences of euro area membership. We now have relatively good estimates of both the scale and feasibility of the transition tasks and the expected growth and balance gains. The cases of Bulgaria and Croatia are particularly noteworthy, as Bulgaria joined the EU shortly after us, while Croatia joined well after the 2004 "eastern enlargement boom" and fulfilled the Maastricht criteria in a very short time. In terms of economic development, these two countries are at the bottom of the EU rankings, where we now also find ourselves in terms of GDP per capita and specific consumption indicators.
Incidentally, the relative level of development compared to existing members or the EU average is not included among the accepted indicators of euro readiness. Only the Orbán government has come up with such an additional criterion, albeit not on the basis of economic theory, but rather in search of an argument, or rather an excuse, to justify its intention to remain outside the currency area:
when we reach 90% of the EU's GDP per capita.
Since then, the prime minister has been much clearer on the issue: as long as he is in office, giving up the national currency is out of the question. This strong stance is in contrast to what he said during his first term in office, when he talked about adopting the euro early, pointing to the expected economic benefits and Hungary's favorable position in terms of euro readiness compared to other countries in the region—which was totally legit.
This historic moment is now a thing of the past. Prior to joining the EU and for some time afterwards, Hungary's public finances entered a period of rapid indebtedness. One of the many consequences of this was that Hungary quickly moved further away from meeting the accession criteria. Today, when Hungary has the highest gross public debt relative to GDP among all the new Member States, at around 75%, it sounds almost unbelievable that in 2002, of all the Maastricht criteria, it was precisely the public debt criterion that we would have met, as our debt ratio remained well below the 60% threshold at that time. As for the other criteria, government influence is indirect when it comes to inflation and long-term interest rates, but compliance with the 3% budget deficit norm is essentially a matter of political will.
However, this desire no longer existed, and the fierce competition between the two major political blocs (MSZP-SZDSZ [Hungarian Socialist Party and Union of Free Democrats] on the one hand and FIDESZ-KDNP on the other) resulted in numerous campaign promises, including the introduction of a 13th and 14th monthly pension payments and tax reductions, which implied an increase in the public deficit, pushing it well above the Maastricht limit. Irresponsible politicking with the budget also led to problems with inflation, and then, following the central bank's corrective efforts, interest rates rose well above the Maastricht norm, which then memorably triggered the indebtedness of the population in foreign currency. The EU's corrective excessive deficit procedure got off to a slow start after we joined the EU, giving the government plenty of time to continue spending. There was still talk of joining the euro area, but it soon became clear that the criteria could not be met.
Then came the 2008 financial crisis, which resulted in a deeper economic downturn in Hungary than in other new member states, accelerating inflation, and a crisis in foreign currency loans to households. From 2010, a qualitatively new political phase began, with completely different priorities, which did not include joining the euro area, which is part of the EU's inner circle, as soon as possible, implementing the macroeconomic adjustments necessary for accession, or making temporary sacrifices for growth.
The situation is now clear in that both the willingness and the ability to join are lacking.
Hungary does not meet any of the Maastricht criteria; in fact, we are significantly far from the threshold values, whether we consider the feasibility of fiscal indicators (3% deficit, 60% debt stock) or the nominal interest rate and consumer price inflation rate. We have not even entered the ERM 2 exchange rate system (where we would have to spend at least 24 months without major shocks).
The "first best" option at the time, i.e., early adoption of the euro, did not materialize. We have remained in the group of countries operating their own currency systems.
Denmark, Sweden, the Czech Republic—that doesn't sound too bad, and now we can't even dismiss the Polish comparison. In any case, it gives ammunition to those who, knowing the state of the Hungarian economy and, of course, the lack of political will, believe that it is worth taking advantage of the possibility of a temporary exemption (derogation) from adopting the euro for as long as possible.
Second-best solutions can indeed be used successfully on a long-term basis. Second best: when we cannot achieve the theoretical optimum, but we find a workable solution. One that will do for a good while. Optimality usually has strict criteria, but real life is full of satisfactory, albeit suboptimal, versions. Writing about the Hungarian exchange rate system, the standard keyboard layout (starting from the top left: QWERTZ) reminds us that a better layout could be created based on ergonomic considerations and the frequency of letters in the Hungarian language, but we can still manage with this suboptimal keyboard. Similarly, there are professional, rational arguments for maintaining our own currency system, as we hear from our Czech colleagues. Sometimes, however, even the second-best solution cannot be found, and even more disadvantageous ("suboptimal") situations arise. But even then, it matters how far we are from the best possible solution. It is no consolation that there are even more disadvantageous situations.
The "third best" is a situation that is far from the best possible, and even from what is quite good, but is still better than what we have already experienced or what could happen in the worst case.
To put it bluntly, this is how I see our monetary situation. It could be worse, and it has been worse, not so long ago.
According to official consumer price statistics, the forint has lost 4% to 5% of its purchasing power domestically on an annual basis, while we have recently been hit by double-digit inflation. The forint exchange rate showed significant fluctuations and worrying weakening not long ago, but the value of our currency has been stable for some time now when measured against the European single currency, and can even be said to be strengthening.
This is also a question of time: the forint has regained a third of the value it lost over the past five years in recent months. The forint exchange rate against the euro reached a historic high of 434.11 in October 2022: compared to this, the current range of between 380 and 390, and its continued stability, is definitely a significant step forward.
So why don't I consider the situation to be the second best? If it's good for the Czechs and Danes, why shouldn't their argument apply to the Hungarian case as well?
In fact, there are many significant differences between countries outside the euro area, especially when compared to our situation. Denmark has an opt-out clause allowing it to retain its national currency, but the Danish krone is part of the ERM 2 exchange rate mechanism, and its exchange rate moves in tandem with that of the euro. Danish economic actors are thus not exposed to exchange rate risk vis-à-vis their main trading partners. The Danish government and central bank do not pretend to pursue their own exchange rate policy or monetary policy in this highly open, wealthy country that is intensively integrated into European value chains.
Denmark's sovereign risk rating from the major credit rating agencies is AAA, which is the best possible rating.
This corresponds to the rating assigned to the European Union for its financial market operations. The yield spread between Denmark and the bonds of member states with the best financial standing and excellent risk ratings is around zero. If it does differ by a few dozen basis points from the yield on German Bund, this is an interesting technical matter, but it does not affect the cost of financing the Danish government's debt.
The same can be said about Sweden. The Swedish state also has strong economic and financial foundations and an AAA rating. The yield on 10-year Swedish government bonds is currently around 2.6%, which is practically identical to the corresponding value for Bunds. At the same time, Sweden has no option to opt out, so, like us, it is exercising a derogation with regard to entering the final stage of monetary union. The Swedish state has the capacity to pass the entry test, and social and political will may change, as demonstrated by the shift away from neutrality and toward NATO membership after 2022.
The Czech Republic has an AA- rating with a stable outlook; the yield on ten-year government bonds is 4.5%, which is a yield spread of 190 basis points compared to the best in Europe – but not 420 (!) basis points, as in the case of Hungary. When we joined the EU, one euro cost 31 Czech korunas and 253 forints.
Now, one euro costs 24 korunas, the Czech koruna having strengthened against the single European currency, with minor fluctuations.
In any case, the exchange rate risk was much lower throughout than in our case.
The Polish złoty has fluctuated somewhat more in recent years. Currently, the HUF is the star among the currencies of the three Visegrad countries, but this is also a matter of time: over a longer period, the złoty has also maintained its value against the euro: twenty years ago, one euro cost 4.7, while now one euro is worth 4.2 złotys.
The export capacity of the Czech Republic, just like that of Hungary, Poland, or Slovakia, does not fundamentally depend on the exchange rate.
This is especially true in economic structures where exported products and services have a high import content, and domestic economic actors' products are deeply integrated into value chains that cross national borders. In such cases, the devaluation of the domestic currency would not mean much to exporters if a predictable, well-thought-out exchange rate policy were in place. This is particularly not the case in Hungary: we have seen on several occasions that a volatile national currency exposed to external financial and "news" effects can suffer alarmingly large losses in value in difficult times. In such cases, exchange rate fluctuations do not help at all, but rather worsen the economic situation as an additional risk factor and may even force the central bank to raise interest rates drastically.
The situation of member states outside the euro area is therefore quite different from ours. The inflation and exchange rate performance of the Hungarian currency lags far behind that of the Danish, Swedish, Czech, and Polish currencies. The contrast with the HUF is striking: the forint reached a historic low of 227.57 in the summer of 2008, when we had to explain why the forint was so strong and how long it would remain so. This has now become the current "strong" exchange rate of 380-400 forints to the euro.
This is all part of the picture that the forint is showing us today. With by far the highest base rate in the region and regular verbal intervention, the MNB has successfully stabilized the exchange rate in recent months. As the interest rates that are relevant to us have moderated (i.e., in addition to the ECB, the Polish and Czech base rates are also falling), the numerical advantage of Hungarian interest rates is growing even further. Amid unchanged country risk conditions, the large and even growing interest rate premium argues in favor of acquiring and holding forint assets.
However, this considerable Hungarian interest rate premium is a problem both for the indebted Hungarian state and for the business sector, which is already reluctant to invest. Maintaining a "strong" exchange rate comes at the cost of certain growth sacrifices and fiscal burdens.
The situation is sustainable, but only with great effort: indeed, we are far from where the Visegrad countries have reached, and especially far from the countries that seized the momentum of the first years of membership. However, that is now in the past, and at times like this we need to think about how we can move forward from the current situation towards better solutions.
THIS IS ON THE OTHER HAND, THE PORTFOLIO OPINION COLUMN.
The articles reflect the opinions of the authors, which do not necessarily coincide with the position of the Portfolio editorial board.
Cover photo (for illustration purposes only) Getty Images
