The European Commission said today Hungary must do more to tackle its excessive budget deficit, just hours before the government starts what are likely to be tough talks with the IMF on a new loan deal needed to keep the country solvent.
With pressure to secure a deal rising after the forint currency plunged to an historic low last week, Hungarian prime minister Viktor Orban's conservative government has softened its defiant stance, even offering to modify laws including disputed legislation on the central bank.
The climbdown comes after Hungary raised the ire of the European Union with a series of laws also sharply criticised by the United States for curbing democratic rights, including a media law and legislation on the judiciary.
"The European Commission concluded that Hungary has not made sufficient progress towards a timely and sustainable correction of its excessive deficit," the EU's executive body said in a statement today.
"The European Commission proposes to move to the next stage of the Excessive Deficit Procedure and recommends that the Council of Ministers decides that no effective action has been taken to bring the deficit below 3 percent of GDP in a sustainable manner."
The commission said that although Hungary had formally met the EU's 3 per cent deficit target last year, it had done so only with the help of one-off measures, while there was a severe deterioration in the underlying structural budget balance.
It added that while further one-off measures would keep the budget deficit below 3 per cent of GDP again in 2012, it would exceed 3 per cent next year.
Speaking in Brussels, EU economic and monetary affairs commissioner Olli Rehn said Hungary may face the suspension of so-called cohesion funds if it fails to correct its budget deficit.
Hungary's deficits have exceeded the European Union's threshold of 3 per cent of economic output ever since it joined in 2004, and last year the budget posted a surplus only thanks to a renationalisation of private pension assets.
Mr Orban's spokesman said earlier today that the government is ready to discuss any laws with the European Commission, including a new central bank law seen as curbing the bank's independence.
Hungarian officials are to hold talks with the IMF in Washington today and tomorrow.
Mr Orban, for whom the return to the IMF represents a big political defeat, has seen his Fidesz party's public support decline sharply since a sweeping election victory in 2010 which granted Fidesz a two-thirds majority in parliament.
Mr Orban had promised to put the economy back on a growth track and create jobs but Hungary faces recession this year and people feel the crunch, with many saying Fidesz let them down.
Analysts say Hungary will have to give up its unorthodox and often ad hoc policies in order to be able to secure the new standby arrangement from the International Monetary Fund, which comes with regular monitoring and strict conditions.
The government imposed Europe's biggest tax on banks and selected business sectors and grabbed pension assets worth some €10 billion in early 2011 among unconventional moves which allowed it to introduce a flat tax on all personal income.
