The Hungarian forint’s foreign exchange rate fell on currency markets today after the EU’s executive arm said that it plans to withhold euro 495 million in EU bailout funds from Hungary after the country failed to reduce its deficit.
The proposal to withhold the funds is the latest stage in a protracted dispute over the country’s finances and suspected violation of civil rights. Before it can be applied, it has to be endorsed by the EU’s other 26 member states.
Hungary denounced the proposal “unfounded and unfair” and drew attention to the fact that the country’s budget deficit was below 3 percent of gross domestic product in 2011 and is forecast to remain below that critical level in 2012.
“The facts prove that the government’s economic policy is taking Hungary in a good direction,” the government said in a statement that also highlighted the country’s 1.7 percent growth rate in 2011. That was 0.1 percentage point higher than the 27-nation EU as a whole.
It is the first time the European Commission has proposed to suspend development funds from one of its members over an excessive deficit. The so-called cohesion funds, which are targeted in the sanction, support transport and environmental projects in the EU’s poorer regions.
The Commission has been pressuring Hungary to cut its budget deficit, which has been breaking the bloc’s limit of 3 percent of economic output ever since the country joined the bloc in 2004 when one-off measures are stripped out.
Despite several warnings, the government in Budapest has so far failed to take any more structural actions to reduce its spending. “This decision today is to be regarded as an incentive to correct a deviation, not as a punishment,” said Olli Rehn, the EU’s economic affairs commissioner.
Since the funds that the Commission is threatening to withhold are for 2013, Hungary has until January next year to take action and avoid sanctions.
The Hungarian forint’s exchange rate fell 0.6 percent against the euro to Ft288.4, compared to the five month high of Ft285.6 it reached on Tuesday.
It is now well clear of the Ft320 level it touched in early January when the government was forced to abandon a go it alone financial strategy and seek support from the EU and the IMF.