Hungarian economy in horse-drawn carriage while others driving in cars

Members of the European Commission reiterated numerous concerns from this year's Country Report on Hungary at a seminar held on Wednesday in Budapest, to discuss the document and the recommendations issued alongside it.

The European Commission has maintained an enhanced dialogue with the government and has held consultations with the Hungarian authorities and stakeholders, Kees van Duin emphasized at the event organized by the EC's representation in Hungary. Among the EU's recommendations, the head of the unit mentioned, for example, that the implementation of the plan financed from the one-off recovery fund set up to address the effects of the coronavirus pandemic should be accelerated. (The reason why this is becoming increasingly urgent is because the EU program is set to expire in 2026, but the Hungarian government is the only country that cannot yet submit a regular payment request due to preconditions related to the rule of law concerns.)

Van Duin pointed out that although participation in higher education has improved in the EU, this is not the case in Hungary, where the level of education needs to be improved. Many people are working, but mainly in low-productivity jobs, and in certain areas and for certain groups, the labor market is not operating well. Energy dependence on Russia is a structural risk, electricity infrastructure and storage are weak, the market is not flexible, while subsidies for fossil fuels are high.

After an initial, rapid convergence, “things have somehow changed,”

said Stefan Ciobanu. The Commission's Head of Unit pointed out that several member states in the region had overtaken Hungary in terms of gross domestic product (GDP) per capita, and labor productivity has remained virtually unchanged, while it has increased elsewhere in the region. Additionally, in the long term, Hungary is likely to have the third-highest increase in pension expenditure among EU member states.

The Hungarian budget, which triggered an EU procedure last year due to its excessive deficit, is consolidating, but according to forecasts, this will “slow down” and only a “slight growth” is expected in 2026. Ciobanu said it was expected that after a slight increase this year, GDP growth will strengthen next year due to rising consumption and new factories, while unemployment would fall and the labor market would remain tight. Several factors, such as state subsidies, have made Hungary attractive, especially for industrial investments, but there are also serious challenges, such as unpredictable changes in regulations, and there is also room for improvement in government efficiency.

The government's response to the report

The seminar also provided an opportunity for the government to express its views directly. Deputy State Secretary at the Ministry for National Economy, Márton Bókay welcomed the fact that the European Commission had consulted with them and said that

several of their “corrections” had been incorporated. They had also highlighted Hungarian initiatives that were previously not included. At the same time, several of their proposals were rejected by the European Commission, which was, according to the government accompanied by detailed explanations – in some cases based on outdated data.

Even with all the crises, the Hungarian economy is stable, and thanks to the government's steps, global inflation has been overcome and could drop sharply, he said, referring to the government's recent introduction of margin caps, while speaking about the Hungarian figures, which were the highest in the EU in 2023 as well as at the beginning of this year. (Although fresh data from the Hungarian Central Statistical Office showing renewed growth was just released on Wednesday.) Efforts are being made to stimulate domestic consumption by increasing purchasing power, providing affordable housing, and supporting small and medium-sized enterprises through programs such as the Sándor Demján Program.

In Bókay's view, Hungary remained an attractive investment destination with one of the highest investment ratios in the EU. Although the recent slowdown in the German automotive industry has cast a shadow over the Hungarian economy as well, foreign trade has shifted into surplus and investments that have gradually started production in recent years (such as those by China's BYD) could boost growth. In 2022, Hungary saw the highest wage increase in the EU, and this rate remained among the highest in the years that followed, with real earnings also above the EU average, Bókay said.

The dilemma: a runaway budget or a recovery plan that is not fast enough?

Bókay emphasized that, according to the assessment, the Hungarian authorities are making significant efforts to strengthen anti-corruption systems and the judiciary, as well as to improve competition in public procurements.

The European Commission is urging member states to implement their recovery plans as quickly as possible.

In view of the upcoming 2026 deadline, “we agree that it is necessary to step up current efforts,” but at the same time, “in the case of our country, we question this element of the recommendation in its current form,”

given that Hungary has not received any funds from the facility except for an advance payment, he said. The implementation of the plan “by using domestic sources to the extent required by the Commission would increase budgetary expenditure, which would make the deficit target unsustainable.”

As previously reported, when publishing its country reports, the European Commission did not change the deadlines for the recovery fund – which are fast approaching – so the body really did urge governments to act amidst mounting delays. Hungary, however, is in an even worse position than the others, as it is now the only country that has not fulfilled the rule of law preconditions required for receiving the regular payments. As we noted at the time, it is theoretically still possible for the government to pre-finance everything and fulfill the conditions at the last minute.

However, the Hungarian government's previous response revealed that since the adoption of the Hungarian recovery plan at the end of 2022, of the HUF 4,200 billion planned, only HUF 2,090 billion have been allocated and a bit more than HUF 1,200 billion have been paid out, which means that there is still a long way to go. The statements made on Wednesday suggest that the pre-financing requirements for the proposed acceleration would be so high that it would blow the budget. (The recovery fund was partly the government's explanation for why it needs to take out twice as much foreign currency loans this year as previously planned.)

The considerable growth in employment sacrificed productivity

From 2010 onwards, there was significant growth in employment and the economy has expanded extensively, which came at the expense of productivity, Gergely Suppan said, commenting on the report's findings. The deputy state secretary responsible for macroeconomic policy called attention to the fact that the EU average grew faster, and Hungary managed to catch up somewhat around 2015-2016, but since 2020, the Hungarian economy has been hit by a series of shocks.

Romania is not inclusive at all, there has been no such jump in employment. While one may be working in the assembly line, just entering the labor market is itself a significant step forward. At the same time, Suppan acknowledged that the productivity of Hungarian companies lags far behind that of bigger firms, especially in the case of micro-enterprises, which are the main beneficiaries of the Demján program.

He also spoke about the venture capital market, which he said was poorly developed, but this is true for the entire region, with Europe being light years behind the US and Israel. Some particularly attractive hubs have sprung up within Europe, and these are generating a strong international draw. There is government support for the field in Hungary, which is perhaps not enough, but the changes are rapid and tectonic, and Europe will likely be chasing China sooner or later. Efforts are being made to develop an ecosystem of universities, research institutes, and dual training, he said citing the Zalazone test track as an example.

Is the glass half full or half empty?

According to Éva Palócz, CEO of Kopint-Tárki Zrt., the glass can be seen as either half full or half empty. Increasing employment, which has been lacking since the regime change, is indeed important, but this has not been accompanied by more effective ways of employing workers.

Excessive centralization and intense government intervention are both holding businesses back, with the World Bank also seeing a serious deterioration in government indicators. For example, we've dropped to 26th place among EU members in terms of anti-corruption controls and to the last, 27th place in terms of the quality of regulation. The structure of public spending has shifted from traditional tasks to economic intervention both compared to 2010 and when compared with the rest of the region, which she believes is not at all beneficial.

Zoltán Pogátsa stressed that Balázs Orbán, the Prime Minister's advisor, had identified that we have fallen into the trap of a middle-income economy. The economist and associate professor pointed out that many are stuck in this situation, but said that there is a wide range of literature on how to get out of it: those who have managed to escape have done so by strengthening human capital. However, the innovative potential of companies here is severely limited by the fact that Hungary's human capital indicators are not on a par with those of other Visegrád countries, from healthcare and language skills to reading comprehension. He expects change to come only when the most important ministers will be those responsible for healthcare or education, but these areas currently do not even have their own ministries.

For a few years, Hungarian productivity did indeed grow, but this is relative. Compared to walking, a horse-drawn carriage is very fast, but not when surrounded by cars – and the Hungarian economy has jumped onto a horse-drawn carriage, while everyone else is driving cars. We are trying to pull the economy up from the top instead of pushing it up from the bottom. In conversations, we always end up talking about Prezi and the like, but the Hungarian economy is hardly made up of Prezis.