In any case, we do not suffer from economic crises, there is one – sometimes more – almost every decade (for example, in the last thirty years there have been at least 5-6 crises that have also affected the Hungarian economy). Let us not doubt that the next crisis in the 1920s could be faced after the crisis with the crown. Unfortunately, this is inevitable.
What will be the cause of the next crisis, and thus its nature, is impossible to predict exactly today. However, for any crisis, these are side effects that recur one after the other. In financial markets, investors then become cautious, risk averse, try to avoid their money in safe investments, and the demand for riskier financial instruments declines. Currencies in emerging markets usually depreciate. Hungary still belongs to this group with a higher risk on the map of investors.
The first striking symptom of the economic crisis is the weakening of the forint – now and in the past (Chart 1). The weaker forint causes higher inflation and relative wealth loss for the majority of Hungarians. Both rapid and unpredictable course changes are a problem in business planning. In such cases, central bank interest rates also rise, making corporate lending more and more expensive. This, in turn, discourages investment and consumption. like that financial crisis related to economic crises results in significant additional social assistance losses.
The above scenario obviously does not sound good. The main interest of Hungarian citizens and companies operating in Hungary is a stable exchange rate and low interest rates. But as long as Hungary belongs to the group of emerging countries and has an independent currency, economic policy cannot provide both at the same time. Certainly not in the next crisis, but it is very likely that in the inter-crisis period of rest.
Now the domestic interbank interest rate is five times higher than in previous years (0.75%) – it is true that from a historical perspective it is not high. Due to the perhaps ingenuity of the MNB, the increase in interest rates is not reflected in the prices of new loans, and the average interest rates on home loans, personal loans (especially) and corporate loans are slightly lower this fall than last or last year. But in the meantime, the exchange rate of the euro was 365 forints, while last year it was 330. However, it hurts many.
On “Impossible threesome” one of the basic principles of the university’s international finance courses. That’s what it’s about the triad of an open capital market, a stable exchange rate and an independent monetary policy cannot be achieved simultaneously. One should give up for the sake of the other two. In the case of Hungary, open capital markets are a gift that cannot be said to be no. Thus, the choice is between a stable currency and an independent monetary policy. The domestic example illustrates well the truth of the “impossible trinity” theorem. In recent years and this year, we have had an environment with low domestic interest rates, which supports investment and economic growth, and an unpredictable but substantially weakening forint. In previous periods, the relative stability of the exchange rate was typically high, ie. in conditions of domestic interest rate that did not support economic growth. Good news for that there is a way out of this situation in a trap. Eurozone membership also provides a stable (fixed) exchange rate and a consistently low interest rate, which is lower than in Hungary. However, the issue of the introduction of the euro has been left out of the current issues of domestic economic policy.
It is common to argue against the introduction of the euro that The interest rate policy set out in Frankfurt may not be ideal for a Hungarian economy with peripherals, attractiveness and special features. However, in my opinion, the environment with low interest rates in the euro area and the programs for buying funds in the euro area provide more effective protection in a crisis than we can create ourselves. However, even out of crisis. The other argument is against the introduction of the euro the danger of fixing the exchange rate is about that competitiveness management tool through forint devaluation in this case definitely we lose. There are many desirable ways to improve competitiveness. These would include, for example, a society of educated and healthy people, a strong institutional system, a high degree of social trust, a high rate of investment and support for innovation. I could not list the devaluation of the forint with a good heart. Interpreted with Slovakia’s past 12 years of eurozone membership and the step-by-step representation it presents, and even the example of the Baltic states it is difficult for me to consider the above objections to be justified.
In addition to open capital markets, the introduction of the euro is accompanied by a stable (fixed) exchange rate and low interest rates. Like that As a member of the eurozone, neither rising interest rates nor the depreciation of the domestic exchange rate would cause a loss of social assistance for Hungarian society in the next crisis. The interpretation of the phenomena experienced during the current crisis provides an opportunity for Hungarian economic society to put the topic of the introduction of the euro in Hungary back on the agenda and for Hungarian economic policy leaders to reconsider Hungary’s official position on the introduction of the euro. I think this can be one of the positive benefits of coronavirus.
This article reflects the views of the author and does not necessarily reflect the views of the Portfolio Editorial Board.
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