Harsh Decades of the Forint

It was on August 1, 1946 that the National Bank of Hungary introduced a new currency, the Forint. The move came as after World War II, Hungary experienced the largest inflation to that date in world history. The new currency was issued to deal with a situation that had become unmanageable.

Seventy-five is not a round anniversary, yet, the fact that a new currency was successfully introduced to replace the hyperinflationary Pengő in war-torn, semi-sovereign Hungary in August 1946 provides an opportunity to look back at the history of the Forint (HUF). Still, amidst the celebration, obvious questions arise. Hungary, an EU member since 2004, with an economy highly integrated into European production chains, surrounded by countries using or preparing to use euro, remains outside the Eurozone (EZ) – why? Back in the 1990s, the then candidate countries regarded the adoption of the common European currency as part of their membership package; it was understood in the capitals that no member state may indefinitely retain the national currency. Thus, how long will the Forint exist as a legal tender?

Far from compliance with EUR requirements
The simplest point of departure is that Hungary doesn’t meet the so-called Maastricht criteria of euro adoption. The consumer price index is now about 5%, against 2% Eurozone average; budget deficit and debt figures are too high; HUF has not yet entered the Exchange Rate Mechanism in which a candidate currency must spend two years without stress. The European Central Bank may find some faults with the Hungarian central banking law. Honestly, Hungary is not ready yet to make good on the obligation to enter. No target date for entry is declared.

No political intention
And here start the complications. At present, there seems to be no political intention to replace the Forint. Well before the EU accession in 2004, it was understood in policy circles that Hungary would be among the first to adopt euro. However, fiscal policy slippages starting in 2001 forced consecutive governments to postpone the original 2006 date to 2008, and later to 2010. Then came the 2008 financial crisis that hit indebted Hungary particularly hard; the euro adoption process was quickly forgotten. It became clear soon that the incoming Orbán government had no intention whatever to give up ‘monetary sovereignty’. The new one-party constitution (‘Basic law’) of 2011 pointedly referred to Forint as the legal tender of Hungary – with the effect that a parliamentary supermajority would be needed to remove that section when a new government manages to fulfil the EZ entry tests.

The public is in favor
Thus, euro is not at the corner for Hungary, as it stands now. Hesitation and second guessing about the pros and cons of adopting the euro have been common in the region. The crucial factor is political will. Countries that have entered EZ so far had early reached national consensus on euro adoption and, in some way, becoming part of the European core. In Hungary, in contrast, no such consensus has been forged. The euro issue has mostly remained a professional topic, defined in economic cost-benefit terms. Yet, it is noteworthy that, despite the euro-sceptic language of the official media, the general public is still predominantly in favor of adopting the euro. The attitude of the present management of the central bank (MNB) is rather skeptical in this respect. Instead of trying to fulfil the Maastricht criteria, MNB – and occasionally the prime minister – propose new and harder entry tests (“we join when our GDP/ capita is higher than x% of EU average”) – a not too subtle way of saying no to euro adoption.

Poor government tool
Concerning monetary sovereignty, officials may declare that having a national currency is good for the country, yet sovereignty is, in fact, an illusion for a small, financially open, trade-dependent economy, such as middle-income Hungary with less than ten million inhabitants. Keeping a local currency is a source of additional risk to businesses and the public; just see how volatile is the external value of HUF, a floating currency exposed to all sorts of shocks. A fragile and inflationary currency is a poor government tool in times of crisis.

Losing purchasing power
History proves that the value of the Forint throughout its existence has been shaped by both domestic politics and external events. Back in 1946, the Forint was declared to have an 11.74:1 exchange rate to USD under nominal gold content but, as Hungary remained outside the IMF and the Marshall Aid, it soon suffered a deep depreciation. Under decades of central planning, with artificial prices and frequent shortages, the Forint kept losing its purchasing power. Price liberalization during the regime change led to a further wave of price increases, yielding a 100 HUF/USD rate by 1993 (today, a US dollar costs HUF 300). Yet, the fact that we managed to avoid hyperinflation during the transition years, partly explains the lack of strong domestic pressures to drop Forint and adopt euro.

Still a political choice
Right now, we are in an intermediate situation: Hungary has no EZ target date, the currency is inflationary, Hungarian banks remain outside the protective cover of the Banking Union. One of the common themes of policy statements of opposition parties is to bring Hungary into the EZ, conditions permitting. Currency regime, at the end of the day, is a political choice. The elections of 2022 may be crucial also in this respect.
Yet, given Hungary’s budgetary situation and inflationary trends, it will take time to say goodbye to the Forint.

(This article, by a former governor of the National Bank of Hungary, was published in the August issue of Diplomacy&Trade.)