Euro introduction: Matolcsy raised the stakes even higher

The MNB is “committed to the successful and safe introduction of the euro in Hungary,” he wrote in his reply György Matolcsy governor of the central bank Peter Balassa parliamentarian. The father-in-law from Jobbik asked the head of monetary policy what conditions are necessary for the introduction of the euro, which Hungary cannot fulfill – read on

In the answer, the head of the MNB explained that, in their opinion, it is not enough to measure the conditions for joining the eurozone with the traditional Maastricht criteria. That is why, Matolcsy added, the Hungarian central bank developed and published in 2020 the system of conditions called Maastricht 2.0, which “in addition to fine-tuning the original nominal criteria, also takes into account new real criteria”. The governor of the central bank sees it, taking this set of criteria into account

Hungary is not yet at the appropriate level of euro maturity.

He adds that in the high inflation environment of recent years, even the nominal Maastricht criteria are not met, as both our inflation and long-term loan interest rate indicators exceed the upper limit.

The introduction of the euro is basically linked to four conditions, the so-called Maastricht convergence criteria:

  • inflation can be no more than 1.5 percentage points higher than the average inflation rate of the three Member States with the lowest indicators
  • the interest rate of long-term loans may exceed the average interest rate of the three countries with the lowest inflation indicators by a maximum of 2 percentage points
  • the budget deficit can be no more than 3 percent, and the gross public debt can be no more than 60 percent of the country’s gross domestic product (GDP).
  • the national currency of the given country cannot exceed the specified exchange rate band for two years, which also means that the country must enter the European Exchange Rate Mechanism (ERM) system.

According to György Matolcsy, in order to introduce the euro, a country would have to fulfill many more conditions than those defined by the Maastricht criteria system. Based on the MNB’s publication (available here), the current convergence criteria would also be adjusted.

for example, for the inflation index and the long-term loan interest rate index, you would only consider the average of the three countries with the lowest positive inflation. According to the MNB, in the case of a persistently low inflation environment, this indicator can be negative in some reference countries, but – as they say – “with regard to joining the eurozone, neither too high nor too low inflation is desirable”.

The debt target would be reduced to 50 percent, and the budget deficit would be maximized, depending on the level of public debt to GDP, at 2 percent below 50 percent, 1 percent between 50 and 90 percent, and zero percent above 90 percent.

In addition to the above changes, the Matolcsy’s would consider it desirable to consider additional macroeconomic indicators before a country joins the euro zone. Among other things, they set such an ambitious goal that

reach 90 percent of the eurozone’s GDP per capita, as well as the wage rate (at purchasing power parity)!

The publication shows with empirical data that above this level the inflationary surplus resulting from catching up is negligible.

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