Thanks, Erik for that analysis!

Now that seems plausible and may actually work out good for Hungary (and the EU) if Fidesz really does enough to make Hungary ready for the € in 2014.

On the other hand that would limit their ability to give "presents" to their clientele in exchange for votes or good service ...

Anyway as the old joke about the blind man goes: We'll just wait and see ...

And maybe this also is a chance for the left to get rid of their "Altlasten" from communist times - can't find a good translation for that, "legacy" is too neutral

Hi Wolfi,

Would "old leftovers" be an acceptable translation?

@FL:

Thanks! "Leftovers" has the right negative connotation - still I wonder why MSZP did not get rid of them in the last 20 years or at least push them into second row, for now it's probably too late. Let's hope Fidesz does use their second (or third ?) chance.

For Bulgaria to make it to the € before Hungary - well I don't believe that ...

What is the compelling argument for joining the Euro anyway? Giving away almost all of the control over your money supply...why?

Well, the benefits and costs are different depending on the country. If a country doesn't know how to manage its money (not pointing fingers here) it can be a very good thing for it (as distinct for its political class) to pool responsibility for monetary policy with other, potentially more adept countries. And overall, it's great for trade - as a counter-example, just imagine if individual provinces in countries minted their own money... would be some major sand in the gears of commerce, no? Finally, there are potentially meaningful economies of scale in terms of just operating an independent national bank, though obviously these will only be truly meaningful if the jurisdiction is pretty tiny. So there are certainly good arguments for it.

The Transition? Hungary's transition from communism to free market democracy. If this has happened we haven't noticed.
The Bulgarian lev has been "pegged" to the euro for sometime. By this I mean no large fluctuation like
the forint/euro volatility would/could be acceptable to euro bureaucrats..
Hungary has to get its act together regarding reform
and fighting endemic corruption. And only then can we expects improvements in commerce and trade that will ultimately see us reap the benefits- whether it is in euro of forint denominations.

There is also the cost and incovenience of currency conversion otherwise. You "pay up" on both ends, i.e. getting the currency and dumping it. For those who do it often, or who convert a larger quantity, such as a business, this represents a big cost. Those who remember what travelling from country to country in Europe was like before the Euro can well appreciate the point.

Erik also has a good point about management of value. When a small country has it's own currency, then the value can be affected by an over-large budget deficit or the printing of too much money (inflation). You would then need a disciplined political class to avoid such pitfalls.

But couldn't Hungary adopt the Euro right now? If it's that important to handover monetary policy to Brussels just Euroize or peg the ft.

Dear C'est Moi,

Managing the Euro and it's value is a collectively shared responsibility. It's not enough for an outsider nation to say "I'm ready now!"; their use of the Euro has to be approved, and this is dependent on the new member adhering to certain requirements pertaining to inflation control and budget deficits. If one member gets carried away with those things, the value of the shared currency decreases for all.

@FL:

You forgot to mention another reason, that you're probably well aware of:

The risk of someone spekulating against a small country's currency - surely we remember the case of the British Pound some years ago

LF,
Actually all, unless I am mistaken, all Hungary needs to do to be a Euro nation is adopt it as its currency, though not join the currency union. Sure you give up having your own swell notes and coins but you still get to have the Euro. There are several nations which use the USD as it currency, if Hungary wants the Euro just take it.

Hello Wolfi,

Of course, a good point. A Seperate currency is a "thing", meaning a commodity that can be bought and sold. The smaller the national economy, the less currency. The less currency, the easier it is for speculators to influnece the value, or rather, the less money it takes to swing the value. What you get is a fertile playground for corrupt collusion between speculators and finance ministers.

Of course these things can happen on a large scale, with a larger currency. They are harder to do, or attract more attention and response than when these things are occuring in an economic backwater.

Hello again C'est Moi,

That too is a good point. What you are talking about is a "de facto" adoption of a currency. One cute example of such a thing can be seen in the Bahamas, where the Bahamian dollar is pegged 1:1 with the US dollar. You can pay in either currency, or even a combination of both. Your change can be in either currency or a combination of both! (For such a scheme to work smoothly, you have to maintain parity, otherwise double pricing is necessary, which is hard on retail vendors and businesses.)

What we've been talking about when we speak of Hungary "adopting the Euro" means giving up the minting of forints altogether.

Actually I was thinking of Equador where they use the USD as the currency. Bosnia has a defacto Euro currency as its set at the DM rate at Euro adoption. My example would also make Hungary give up minting currency. My point is, if they really want the Euro they can go ahead a take it right now, just without any say with how it would be run, as if that would really change with joining the currency union.

People in the world of finance view giving up the minting of your own currency as giving up your own central banking function.

The traditional role of a central bank is to regulate the currency by determining how much should be in circulation and to make sure there is not too much (or too little) of it around. If you have too much, there is inflation; too little, and you have deflation and recession.

The two means by which a central bank accomplishes this function is through regulating interest rates and banking reserves. (Raising interst rates increases the cost of borrowing money, hence reduces borrowing and money in circulation. Raising bank reserve requirements means less money lent out, hence less money in circulation.)

As long as Hungary maintains it's own currency, these functions are the responsibility of Hungary's central bank. Once the Forint is gone, these responsibilities transfer to Brussels and it's central bank.

My goodness C'est Moi!

I didn't imagine such a lively discussion of currency policy for today, but it's part of the give and take possible on a blog!

The example you give of from a Latin American nation like Ecuador is very interesting. Latin American nations have long had serious problems with political corruption impacting the national currency. Argentina and Brazil have seen inflation of over 500% and more per annum in the past. One reason for this is a large public sector and it's unions who make wage increase demands, especially when inflation heats up. The politicians take the easy way out by printing still more money, hence fueling inflation further. (Brazil has had to repeatedly introduce new currency; "Cruzieros" became "Cruzados", only to be replaced by "Nuevo Cruzados" etc. etc- (pass the barf bag!)

It is therefore no wonder that talk of adopting a more diciplined currency such as the dollar remains a live issue in that part of the world. When a Latin nation adopts the dollar, it is an admission that it's politicians can't be trusted to maintain their own currency. It's like leaving a candy store in the hands of a bunch of 6 year olds.

If I'm not mistaken, Zimbabwe made the US dollar its reference currency, and have now moved on to the Rand. It makes sense in a situation like Zimbabwe's that is way out of control. I don't know if it would be such a great idea for Hungary. Sure Hungary has big problems, but it is no Zimbabwe.

Hello Cináed,

Examples of two tiered currency use abound throughout the world, especially in lesser developed nations.

A long time ago, a principle of finance was discovered called "Gresham's Law", which holds that "bad" money drives out the "good" money. (Good money is defined as something that holds its value better and which enables a more consistent value of commodities to be purchased.) When you have two (or more)currencies in use, people hoard the "good" money, and pay with the "bad", thereby increasing the amount of "bad" money in circulation.

In the case of Hungary, you also risk running up transaction costs when you are constantly converting Euros into Forints and vice versa.

It doesn't look like this will be the long term plan though. After 2014, or whenever we go to full Euro use, the Hungarian central bank, the Magyar Nemzeti Bank, will have to suordinate it's central banking functions to Brussels.

C'est Moi, etc. - A few further details on this. Yes, it's true that some countries "unilaterally" adopt another country/currency union's currency, Montenegro being the most obvious example in the neighborhood. But Hungary can't really do that, because it is a member of the EU, and is thus expected to follow a long-thought-out official process for euro adoption. Meanwhile, linking a currency's value to that of another can and usually is done on a sliding scale, from a broad trading band to a hard peg in which a currency's rate vis-a-vis the reference currency is managed by the central bank. Hungary has a sort of unofficial trading band right now, though I believe the "top" and "bottom" are only known to the national bank. Meanwhile, before a country joins the eurozone using the "approved" method, it will make a rather firm band, supervised by the ECB, the so-called ERM-II. But what people often forget is that a country has to choose between maintaining a band/peg and a bunch of other, often competing needs, most obviously control of local interest rates and inflation. You can't control both the value of a currency vis-a-vis another one and fully control local monetary conditions. And this is partly why Hungary is still stuck halfway - the country tends to avoid making concrete decisions with real consequences.

Good discussion. I have watched the forint rate against a basket of currencies everyday for more than a year. Volatile to say the least. Speculators paradise. Wolfi was correct when he said earlier that it is open to predators like George Soros who stamped his footprint on the British pound culminating in the "Black Wednesday" debacle in the mid eighties. The floundering British chancellor of the exchequer Norman Lamont was left in a pickle. He blamed the French and Germans alternatively when the pound was attacked after it was floated on the Exchange Rate Mechanism, or some such.
Here in Hungary though,corruption and bad government doesn't help the currency issue. Need to sort this, and soon.
The forint rate at the moment I think is artificial. Andras Simor bought wagon loads of forint with the EU/IMF loan money designated in the euro denomination.
The MSZP austerity package and fiscal policy to all intent and purposes is courtesy of the EUs strict guidelines as a pre-condition of getting the loans.

The MSZP austerity package and fiscal policy to all intent and purposes is courtesy of the EUs strict guidelines as a pre-condition of getting the loans.
YMCA at January 13, 2010 8:57 PM
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Which is the reality all players have to deal with, even after April 11.
Of course, we can always ask Russia and China for money instead and peg against their currencies instead.

China and Russia. Russky have their own problems at the minute..wouldn't go there. And, if you borrowed money from the Chinese and weren't able to pay it back..well, er, er, oops!
I don't know why the EU as to be the b-all and end-all of everything. It was the Common Market once. It is very common now and everybody wants to join including the Serbs and Turks.
Hungary has lost its way irrevocably I feel. Gyurscany Ferenc and the MSZP have sealed the fate of this country for some time to come.
(Bajnai is just a caretaker. A Candide figure one might say.)

It was not exactly any opposition to join the EU from the other parties in the Parliament.
And before Hungary got the EU/IMF-loans Viktor Orban wanted to borrow 20 BEuro to use to stimulate the Hungarian economy, like the Germans were doing at that time with their economy.
The difference was though that the Germans used their own money (which are finished now) and Viktor wanted to borrow.
Was just a problem that no one wanted to lend him some money for just nice spending, so the Hungarians would not feel the crisis.