Informal talks have begun with the European Central Bank (ECB) on Hungary's membership in the ERM II mechanism, Zsigmond Jarai, governor of central bank MNB confirmed at an inflation conference on Tuesday. Hungary seeks to join the exchange rate mechanism shortly after EU accession next May, Jarai said, noting the government and central bank have already agreed on this.
There will eventually be three signatures on the agreement to enter ERM II, Jarai noted - those of MNB, the Hungarian government and the ECB. However, the agreement will then go Ecofin, the council of finance ministers of the (enlarged) European Union, for approval.
An agreement in principle has already been reached that the central exchange rate in ERM II should be an equilibrium rate, Jarai said. MNB has prepared four different models to determine the equilibrium rate. "If we were setting an equilibrium rate today, it could not be far from the market rate," Jarai declared - adding that much can change by next year.
The ECB stresses that an equilibrium rate is one that will remain credible until the country adopts the euro. Also, they stress the need for an economic program that is believable on a 3-4 year horizon, and one that would be accepted and implemented by whatever government happens to be in power at the moment, according to Jarai.
The path to the adoption of the euro in 2008, as agreed between the government and Hungary's central bank MNB, will be difficult, requiring a "disciplined fiscal policy," the governor declared. He also noted that the EU is wary of "tricks" being used to meet the Maastricht criteria - such as cuts in VAT rates to reduce inflation.
Hungary was formerly much closer to the Maastricht criteria, and that meeting these criteria would not have required a "major sacrifice," Jarai said. "Now the situation is different," and the country will only meet its stated goal of adopting the euro in 2008 if the government "fulfills the economic program that it submitted to the European Union in August," he added.
Jarai noted that some dispute whether the Maastricht criteria are reasonable, and whether, for example, the 3% public sector deficit requirement is really needed. "Maastricht gives the best system of criteria possible, but it's not perfect," Jarai countered. "But we don't want to argue or barter on the Maastricht criteria, we want to fulfill them. We're the ones who want to join the club," he said.