While recent news articles often focus on the immediate political dynamics of Central Europe, the underlying structural shifts in the region’s economies require careful analysis. At a recent lecture hosted by the House of European Affairs and Diplomacy (HEAD) at Corvinus University of Budapest, György Surányi, former Governor of the Hungarian National Bank (MNB) and private professor at the university, provided a comprehensive assessment of the Hungarian economy. His address connected the historical transitions of the 1990s to contemporary challenges, ultimately arguing that Hungary must take deliberate steps toward euro introduction to secure its long-term European integration.
Historical Context: The Transition to a Market Economy
To understand Surányi’s current perspective on the Hungarian economy, one must look back at the foundational changes following the regime change in 1989. Surányi highlighted that the period between 1989 and 2001 was the most defining era for the nation’s economic structure. Prior to this, Hungary’s growth in the 1960s was largely sustained by cheap Soviet energy, a model that had become entirely unsustainable by the end of the 1980s. The system was burdened by heavy foreign debt and incapable of generating independent growth.
A critical milestone during this transition was the establishment of a two-tier banking system in the mid-1980s, followed by the introduction of a modern tax system, the Companies Act, and the Accounting Act. These legal frameworks were essential for the rehabilitation of private property and the establishment of the rule of law in a commercial context. Surányi also pointed out a detail often lost on younger generations: the Hungarian forint was not fully convertible until January 1, 1997. During the transition, a 100 percent difference existed between the official and black-market exchange rates, illustrating the severe distortions in the financial system.
The adoption of the Bankruptcy Law, the Accounting Act, and the Bank Act between 1991 and 1992 eliminated non-money mechanisms that had previously coordinated the failing system. By filtering out uncompetitive companies, these laws allowed market forces to begin functioning properly, paving the way for the influx of foreign capital through privatization.
The 1995 Stabilization and Current Economic Disparities
Surányi’s second term as central bank governor began during a period of acute financial crisis. The Hungarian economy faced a “twin deficit”—simultaneous shortfalls in the state budget and the current account. Public debt had reached 92 percent of GDP, and external debt was approaching 100 percent. Inflation was rampant at 32 percent in the summer of 1995.
Through coordinated efforts between the government and the central bank, inflation was systematically reduced, and growth increased from 1 percent to 4 percent annually. This was achieved without the free funds from the EU that Hungary benefits from today. Real wages began to rise visibly by 1996–97, marking a successful stabilization period.
Despite this historical success, Surányi offered a stark assessment of the present reality. He noted that in terms of consumption per capita, Hungary ranks last in the European Union. While the country maintains a high investment rate, Surányi criticized the efficiency of these expenditures. He cited the Mohács bridge—which cost HUF 350 billion yet sees only 200 vehicles cross it daily, compared to the 2,000 that used the Chain Bridge before its closure to passenger cars—and the Budapest-Belgrade railway as examples of overpriced and wasteful projects. He argued that a lack of predictability, high corruption levels, and the suppression of market competition have allowed uncompetitive businesses to survive solely through state subsidies.
Drivers of Inflation and Monetary Policy Critiques
Addressing the inflationary pressures that have affected Hungary in recent years, Surányi argued that the root causes were domestic rather than purely external. He traced the overheating of the economy back to 2017, a time when EU funds were still arriving in abundance but were spent inefficiently. The situation was exacerbated in the second half of 2021 when the government significantly loosened the budget to secure electoral victory in 2022, injecting massive amounts of money into the economy. Subsequently, the inflow of EU funds ceased due to rule-of-law disputes.
Surányi also expressed strong disagreement with the MNB’s decision to purchase gold for approximately USD 6 billion. He argued that because gold yields no interest, this strategy results in annual interest losses of hundreds of billions of forints. While fluctuations in the exchange rate create unrealized paper gains, the volatility makes this a poor substitute for interest-bearing reserves.
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The Strategic Imperative of Euro Introduction
The centerpiece of Surányi’s lecture was the topic of euro introduction. He described the creation of the euro as the EU’s most successful and innovative product, despite the contradictions in its operating framework. Historically, Surányi had been cautious about Hungary joining the eurozone quickly. He noted that the European Central Bank (ECB) formulates policy for the entire eurozone and is poorly equipped to accommodate the specific circumstances of small, open economies. This mismatch, he observed, has previously caused issues like high inflation and prolonged recession in countries like Estonia.
However, Surányi detailed a significant shift in his stance. The primary factor influencing this change is the geopolitical and legal reality of EU membership. As an Economic and Monetary Union (EMU) member, a country cannot legally withdraw from the EU without first leaving the euro. Surányi stated that adopting the euro is the definitive mechanism to ensure Hungary can never leave the EU, framing the currency not just as a monetary tool, but as a geopolitical anchor.
He emphasized that Hungary must take the concrete steps required to bring it closer to euro introduction. However, he tempered this urgency with realism, stating that the transition cannot be achieved within a four-year timeline. This is particularly true, he warned, if the new government retains the widespread benefit systems introduced by the previous administration while simultaneously promising new subsidies.
Fiscal Policy: Subsidies, Taxes, and Pension Reforms
Surányi concluded his analysis by critiquing specific fiscal policies that hinder the country’s economic health. He argued that the current tax system is fundamentally unbalanced, pointing out that effectively half the country does not pay personal income tax due to exemptions for those under 25, mothers, and family tax allowances. While he supports a substantial increase in family allowances, he questioned the logic of exempting hundreds of millions in interest and exchange-rate income from taxation, even if he supports exemptions for long-term investment accounts (TBSZ) up to a certain threshold. He firmly rejected the idea of a wealth tax.
Regarding pensions, Surányi labeled the 13th-month pension as unfounded, noting that contributions were never collected to fund it. He advocated instead for targeted social benefits directed specifically at those who retired long ago and receive low pensions, rather than a blanket payment that benefits higher-income retirees as well.
Finally, Surányi addressed regulated prices, which he termed a discredited and harmful legacy of socialism. He argued that price caps and utility price reductions lead to waste, shortages, and corruption. The current utility reduction scheme costs the budget HUF 1,000 billion annually but fails to target those genuinely in need. Because the subsidy is delivered through distorted prices rather than direct cash transfers, it removes the financial incentive for households to conserve energy. For the Hungarian economy to stabilize and meet the criteria for euro introduction, moving away from these market-distorting subsidies will be a necessary step.
Conclusion
György Surányi’s analysis at Corvinus University paints a picture of an economy that has successfully navigated severe transitions in the past but currently faces structural inefficiencies. The path forward, according to his assessment, requires abandoning populist fiscal tools like broad price caps and inefficient public investments in favor of market-driven policies. Most importantly, it requires a strategic commitment to euro introduction—not as an immediate fix, but as a long-term necessity to secure Hungary’s economic stability and its place within the European Union.
