DOC/97/13
Brussels, 15th July 1997
Commission Opinion on Hungary’s Application
for Membership of the European Union
Contents
A.  INTRODUCTION
a)   Preface
The Application for Membership
The Context of the OpinionThe Contents of the Opinion
b)   Relations Between the European Union and Hungary
Historical and Geopolitical Context
Hungary’s Position Concerning the European UnionContractual RelationsThe Pre-Accession StrategyTrade RelationsGeneral Evaluation
B.  CRITERIA FOR MEMBERSHIP
1.   Political Criteria
1.1  Democracy and the Rule of Law
Parliament and Legislative Powers: Structure
Functioning of ParliamentThe Executive: StructureFunctioning of the ExecutiveThe Judiciary: StructureFunctioning of the Judiciary
1.2  Human Rights and the Protection of Minorities
Civil and Political Rights
Economic, Social and Cultural RightsMinority Rights and the Protection of Minorities
1.3  General Evaluation
2.   Economic Criteria
2.1  The Economic Situation
Background
LiberalisationStabilisation of the EconomyStructural ChangeFinancial SectorEconomic and Social Development
2.2  The Economy in the Perspective of Membership
Introduction
The Existence of a Functioning Market EconomyThe Capacity to Cope with Competitive Pressure and Market ForcesProspects and Priorities
2.3  General Evaluation
3.   Ability to Assume the Obligations of Membership
3.1  Internal Market Without Frontiers
The Four Freedoms
- General Framework- Free Movement of Goods- Free Movement of Capital- Free Movement of Services- Free Movement of Persons- General Evaluation
Competition
3.2  Innovation
Information Society
Education, Training and YouthResearch and Technological DevelopmentTelecommunicationsAudio-visual
3.3  Economic and Fiscal Affairs
Economic and Monetary Union
TaxationStatistics
3.4  Sectoral Policies
Industry
AgricultureFisheriesEnergyTransportSmall and Medium Enterprises
3.5  Economic and Social Cohesion
Employment and Social Affairs
Regional Policy and Cohesion
3.6  Quality of Life and Environment
Environment
Consumer Protection
3.7  Justice and Home Affairs
3.8  External Policies
Trade and International Economic Relations
DevelopmentCustomsCommon Foreign and Security Policy
3.9  Financial Questions
Financial Control
Budgetary Implications
4.  Administrative capacity to apply the Acquis
4.1  Administrative Structures
4.2  Administrative and Judicial Capacity4.3  General Evaluation
C.  SUMMARY AND CONCLUSION
Annexes
Composition of Parliament
Single Market:  White Paper MeasuresStatistical Data
A. INTRODUCTION
 a) Preface
The Application for Membership
Hungary presented its application for membership of the European Union on 31 March
1994, and the Council of Ministers decided on 18 April 1995 to implement the procedure
laid down in Article 0 of the Treaty, which provides for consultation of the Commission.
That is the framework in which the Commission submits the present Opinion, responding
to the request of the European Council in Madrid in December 1995 to present the
Opinion as soon as possible after the conclusion of the Intergovernmental Conference,
which commenced in March 1996 and concluded in June 1997.
The Context of the Opinion
The Hungarian application for membership is being examined at the same time as
applications from nine other associated countries.  Hungary’s accession is to be seen as
part of an historic process, in which the countries of Central and Eastern Europe
overcome the division of the continent which has lasted for more than 40 years, and join
the area of peace, stability and prosperity created by the Union.
The European Council in Copenhagen in June 1993 concluded that:“The associated countries in Central and Eastern Europe that so desire shall become
members of the Union.  Accession will take place as soon as a country is able to assume
the obligations of membership by satisfying the economic and political conditions.
Membership requires:
-  that the candidate country has achieved stability of institutions guaranteeing democracy,
the rule of law, human rights and respect for and protection of minorities;
-  the existence of a functioning market economy, as well as the capacity to cope with
competitive pressure and market forces within the Union;
-  the ability to take on the obligations of membership, including adherence to the aims of
political, economic and monetary union.
The Union’s capacity to absorb new members, while maintaining the momentum of
European integration, is also an important consideration in the general interest of both the
Union and the candidate countries”.
This declaration spelled out the political and economic criteria for examining the accession
requests of the associated countries of Central and Eastern Europe.
The European Council in Madrid in December 1995 referred to the need, in the context of
the pre-accession strategy, “to create the conditions for the gradual, harmonious
integration of the applicant countries, particularly through:
- the development of the market economy,- the adjustment of their administrative structure,- the creation of a stable economic and monetary environment”.In its Opinion, the Commission analyses the Hungarian application on its merits, but
according to the same criteria as the other applications, on which it is delivering Opinions
at the same time.  This way of proceeding respects the wish, expressed by the European
Council in Madrid, to ensure that the applicant countries are treated on an equal basis.
In addition to the individual Opinions the Commission is presenting separately to the
Council, in the framework of its communication “Agenda 2000”, a general assessment of
the accession requests, and its recommendations concerning the strategy for successful
enlargement of the Union.  At the same time, it is presenting an evaluation of the impact
of enlargement on the Union’s policies.
The Contents of the Opinion
The structure of the Opinion takes account of the conclusions of the European Council in
Copenhagen.  It:
-  describes the relations up to now between Hungary and the Union, particularly in the
framework of the association agreement;
-  analyses the situation in respect of the political conditions mentioned by the European
Council (democracy, rule of law, human rights, protection of minorities);
-  assesses Hungary’s situation and prospects in respect of the economic conditions
mentioned by the European Council (market economy, capacity to cope with competitive
pressure);
-  addresses the question of Hungary’s capacity to adopt the obligations of membership,
that is the acquis of the Union as expressed in the Treaty, the secondary legislation, and
the policies of the Union;
-  makes finally a general evaluation of Hungary’s situation and prospects in respect of the
conditions for membership of the Union, and a recommendation concerning accession
negotiations.
In assessing Hungary in respect of the economic criteria and its capacity to assume the
acquis, the Commission has included a prospective assessment; it has attempted to
evaluate the progress which can reasonably be expected on the part of Hungary in the
coming years, before accession, taking account of the fact that the acquis itself will
continue to develop.  For this purpose, and without prejudging the actual date of
accession, the Opinion is based on a medium-term time horizon of approximately five
years.
During the preparation of the Opinion, the Commission has obtained a wealth of
information on Hungary’s situation from the Hungarian authorities, and has utilised many
other sources of info rmation, including the member states and numerous international
organisations.
b) Relations Between the European Union and Hungary
Historical and Geopolitical Context
Hungary is a landlocked country in the centre of Europe, which borders Austria, Slovenia,
Croatia, the Federal Republic of Yugoslavia, Romania, Slovakia, and Ukraine. The
country’s area amounts to 93,033 km² and its population to 10.2 million.
The Magyars migrated into the Carpathian Basin in the 9th century and in the year 1000
established the Kingdom of Hungary. In the centuries up to occupation by the Ottoman
Turks in 1526, Hungary developed its economic and cultural links with Western Europe.
Following a period of Turkish rule, then division i nto three parts, the Habsburgs
conquered and reunited Hungary in the late seventeenth century.  In 1867 the creation ofthe Dual Monarchy gave Hungary equal status within the Austro-Hungarian Empire.
After the empire’s defeat in World War I and the Trianon Treaty of 1920, Hungary gained
full independence but lost important parts of its territory and population to its newly
created neighbours.  Between the Wars Hungary pursued recovery of its ethnic territories
and, to this end, allied itself with Germany and Italy in World War II.
After the war the country was occupied by Soviet troops and the Communists established
a “People’s Democracy” under Soviet influence.  An uprising in October 1956 pressed for
a return to a democratic and independent state. This revolution was brutally put down by
Soviet intervention and followed by a period of strong repression under the Co mmunist
Party Secretary-General J <nos K<d<r.
During the period of Communist rule, a command economy was progressively established
and private property nationalised. However, from 1968 the Government began to
introduce modest market-oriented economic reforms.  In 1982 Hungary became the first
country in Central and Eastern Europe to join IMF and IBRD. The economic reforms
were nevertheless not sufficient to prevent a major economic crisis in the early 1980s.
This crisis, coupled with pressure for political reform, led to gradual and peaceful change
culminating in the resignation of K <dar in May 1989 and the adoption of a democratic
constitution in October that year.
The previous month, by opening its border to Austria for refugees from East Germany,
Hungary had made an important contribution to the dissolution of the Iron Curtain.  Therewere free parliamentary elections in 1990 and 1994, and a peaceful alternation of power
from the conservative Hungarian Democratic Forum to a socialist-liberal coalition after
the second elections.
Since its return to democracy, Hungary has consolidated and strengthened its relations
with its neighbours.  Hungary participates fully in the EU initiative for a Pact for Stability
in Europe, and has concluded Basic Treaties with Ukraine, Slovenia, Croatia,  Slovakia
and Romania.  These Basic Treaties recognise the inviolability of borders, as well as the
principles of the Council of Europe, OSCE, UN and other international organisations in
relation to the treatment of national minorities.  Hungary also participates actively in
OSCE; it was Chairman in Office in 1995 and hosted the Budapest OSCE Summit at the
end of 1994.
Hungary’s Position Concerning the European Union
Since 1989 there has been a large degree of consensus among Hungarian political forces
in support of Hungary’s objective of EU membership.  As stated in the April 1994
Memorandum accompanying Hungary’s application for EU membership, “Since the
formation of an independent Hungarian State 1,000 years ago, this country has been
closely linked to Western cultures and values ...  Within the newly established democratic
institutional framework the political conditions for reintegration into the main trend of
European development are now fulfilled.  For Hungary, joining this process and using the
achievements of European integration to carry out fully its social and economic
modernisation is a historical necessity.  It is also a unique possibility, for which there is no
real alternative.”
Successive Governments since 1990 have maintained this as the essential objective of
Hungary’s foreign and domestic policy.  As stated by Prime Minister Horn in June 1996
during the Florence European Council, “The decisions of the European Council in Madrid
made the process of accession calculable for Hungary.  Euro-Atlantic integration is not
only the basic condition but also the substance of Hungary’s social and economic
transformation and modernisation.  It means a clear and attractive perspective for the
Hungarian society undertaking the burden of transformation”.
Hungarian commitment to an ever closer political Union was stated by President Göncz
during the 1996 Hungarian National Day:“... Europe of the future will, let us all hope, irrevocably and protectively embrace
Hungary in a full-grown European Union.  This will be the shared homeland of European
countries all with equal rights.  It will offer a viable, though not altogether care-free life to
such European countries which are able and p repared to undertake membership of their
own free will.  It offers a possibility for us to answer together all those economic and
political challenges, some of them known and others yet unknown, that the future holds.
It promises peace after the sufferings caused by two wars that brought unparalleled
destruction and two dictatorships of unparalleled evil.
 It promises a predictable future to countries that have suffered immense misery, having
been torn, divided and herded into forced union.  It promises the strength of unity so that
these countries may be able to defend their security, their legal system, the full
enforcement of human rights, their made and natural environment, and multi-coloured andyet unified culture and economy of Europe...”
Contractual Relations
Diplomatic relations between the European Community and Hungary were established in
1988. A Trade and Economic Co-operation Agreement was concluded that year,
providing for reciprocal most-favoured nation (MFN) treatment and foreseeing thegradual abolition by 1994 of quantitative restrictions applied by the Community on
imports originating in Hungary.
An Association Agreement, to be known as a Europe Agreement between the European
Communities and Hungary was signed on 16 December 1991 and came into force on 1
February 1994.  Its trade provisions entered into force earlier, under an Interim
Agreement, on 1 March 1992.
The Europe Agreement is now the legal basis for relations between Hungary and the
Union.  Its aim is to provide a framework for political dialogue, promote the expansion of
trade and economic relations between the parties, provide a basis for Community technical
and financial assistance, and an appropriate framework to support Hungary’s gradual
integration into the Union.  The institutional framework of the Agreement provides the
necessary mechanisms for implementation, management and monitoring of all areas of
relations.  Subcommittees examine questions at a technical level.  The Association
Committee, at senior official level, provides for in-depth discussion of issues and often
finds solutions to problems arising under the Agreement.  The Association Co uncil
examines the overall status of relations and provides the opportunity to re view Hungary’s
progress in preparing for accession.
The Hungarian Government has established a coordinated institutional framework for
dealing with European integration matters. Political guidance is exercised by a European
Integration Cabinet chaired by the Prime Minister and assisted by a Strategic Task Force
on Integration. An Inter-Ministerial Committee for European Integration is chaired by theMinister of Foreign Affairs and seerviced by the European Integration Department of the
Ministry of Foreign Affairs. The Integration State Secretariat coordinates the conduct of
European integration policy. Each Hungarian ministry has a department responsible for
EU related matters. A Parliamentary Committee on European Integration is closely
involved in the formulation and monitoring of Hungary’s EU integration policy.
The Pre-Accession Strategy
Implementation of the Europe Agreement and White Paper
The EU/Hungary Europe Agreement is fully functioning, according to the timetable
foreseen.  Progressive removal of tariffs on the few remaining industrial goods was
completed in January 1995 except for steel and textiles products for which duty free
imports were initiated respectively in 1 January 1996 and 1997.
The Association Council has met at ministerial level once each year, supported by the
Association Committee and a structure of ten multidisciplinary sub-committees. A Joint
Association Parliamentary Committee comprising representatives of the Hungarian and
European Parliament has been set up.  A Joint Con sultative Committee comprising
economic and social representatives from the EU’s Economic and Social Committee as
well as relevant Hungarian bodies was established in 1997.
All areas of cooperation covered by the Agreement are addressed.  Main successes in its
implementation have been: significant liberalisation of movement of industrial andagricultural products, resolution of several trade issues (eg regarding wine exports, goose
liver, citrus fruits VAT), conclusion of a specific protocol (covering agricultural and
processed agricultural products) to take into account the results of the Uruguay Round
negotiations as well as the accession of Austria, Finland and Sweden to the EU, adoption
of implementing rules for competition, improvement of the protection of intellectual,
commercial and industrial property rights in Hungary, adoption of the additional protocol
for the opening of Community programmes to Hungary, adoption of a new regime of
rules of origin integrating Hungary into the new pan-European cumulated regime.
Current discussions seek to accelerate the approximation process, and to progress in areas
like competition, state aid related issues, adoption of an equivalency protocol on
phytosanitary and veterinary issues, mutual recognition of professional qualification and
diplomas and industrial standards and conformity assessment.
Some trade problems have arisen in the implementation of the Europe Agreement  but
have been successfully resolved.
The Commission’s White Paper of 1995 on the Internal Market set out the legislation
which the candidate countries would need to transpose and implement in order to apply
the acquis, and identified elements essential for the implementation of the single market
(known as Stage I measures) which would need priority attention. Hungary has attached
considerable importance to this work. 23 working groups have been set up in the
ministries concerned.  There has also been collaboration with trade unions, business
associations, and professional chambers, as well as with the Parliamentary Committee on
European Integration.  The Hungarian Government published a strategy for the
implementation of the White Paper in December 1995, and a revised version in 1997.
Progress in legislative alignment is advanced in Hungary, particularly concerning measures
requiring new laws.  Most of the remaining legislative alignment work refers to
Government decrees. The Hungarian Government anticipates having almost all the Stage
1 measures in place before the end of 1997.
Relations with Hungary under the Europe Agreement are good.  There are few trade
problems, and Hungary has made good progress in implementing the Agreement.
Hungary is committed to sustaining a comprehensive dialogue and to advancing quickly in
cooperation.
Structured Dialogue
Hungary has participated in the structured dialogue, considering it to be an important
component in preparing for accession.  The Government delivered policy papers for both
the Essen and Cannes European Councils, calling for a more effective pre-accession
strategy and for an extension of the Europe Agreement to CFSP as well as Justice and
Home Affairs.  The Hungarian authorities also expressed the hope to make discussion of
issues in the reinforced pre-accession strategy more substantive.
Phare
For the period 1990-1996, 672.8 MECU was allocated to Hungary.  The allocation for
1996 was 90 MECU. Principal sectors addressed have b een economic restructuring,
agriculture, environment and nuclear safety, infrastructure, human resources development,
public administration reform, social development, employment and health.
Hungary has also benefited from cross-border co-operation programmes with Austria (18
MECU) and Romania (5 MECU), focusing in particular on economic, environment and
infrastructure co-operation.
There has been evidence of slow implementation and a lack of impact in some areas, due
to an overwide spread of programmes, limited absorption and management capacity, and
cumbersome administrative procedures.Participation in Community Programmes
In accordance with the Additional Protocol to the Europe Agreement, Hungary can
participate in Community programmes.  It will shortly start to participate in Socrates,
Leonardo, Socrates and Youth for Europe.  It will be able to join MEDIA II, Ariane,
Kaleidoscope, LIFE, SAVE and SME and health programmes as from 1988.
Trade Relations
Between 1989 and 1995, trade between the EU and Hungary increased substantially.  EU
imports from Hungary jumped from 2.6 to 8.7 billion ECU (+335%), while EC exports to
Hungary increased from 3 to 9.9 billion ECU (+330%).  The trade balance has presented asteady deficit for Hungary, except in 1990 and 1991, where it registered a surplus of 0.1
billion ECU.  Despite the efforts of the Hungarian authorities, the deficit increased in 1995and 1996 mainly due to the accession to the EU of Austria, Finland and Sweden, and to
the needs of re-equipping the Hungarian economy.
Since German reunification, Germany has become Hungary’s most important trading
partner.  In 1996, Germany secured 24% of the total Hungarian foreign trade, followed
among EU member states by Austria and Italy.
Hungary has been a founding and active member of the Central Europe Free Trade
Agreement (CEFTA).
General Evaluation
Implementation of the EU/Hungary Europe Agreement has generally been successful.
Bilateral relations between Hungary and the European Union are considered by both sides
to be satisfactory. Obligations resulting from the Europe Agreement have generally been
met on time. There is a broad and comprehensive dialogue backed up by a desire to
advance quickly on trade and cooperation issues. Hungary has adopted a  realistic
negotiating position during bilateral discussions, which has greatly assisted the resolution
of potential difficulties.
B. CRITERIA FOR MEMBERSHIP
1. Political Criteria
The European Council in Copenhagen decided on a number of “political”  criteria for
accession to be met by the candidate countries in Central and Eastern Europe. These
countries must have achieved “stability of institutions guaranteeing democracy, the rule of
law, human rights and respect for and protection of minorities”.
In carrying out the assessment required in this connection, the European Commission has
drawn on numerous sources of information: answers given by the Hungarian authorities to
the questionnaire sent to them by  the Commission services in April 1996, bilateral follow-
up meetings, reports from Member States’ embassies and the Commission’s delegation,
assessments by international organisations (in particular the Council of Europe and the
OSCE), reports produced by non-governmental organisations, etc.
The following assessment involves a systematic examination for each of the candidate
contries  of the main ways in which the public authorities are organised and operate, and
the mechanisms for the  protection of   fundamental rights.  It does not confine itself to a
formal description but seeks to assess the extent to which democracy and the rule of law
actually operate.
This assessment relates to the situation in June 1997.  It does not examine in detail any
changes which have taken place in the past or which may come about in the future, thoughit generally takes account of any stated intention to reform a particular sector.  The
situation of the administrative structures is mentioned here only in passing: it will be
examined in greater depth in chapter 4.
1.1 Democracy and the Rule of Law
The far-reaching reform in October 1989 of the Hungarian Constitution of 1949, which
gave rise to the new Constitution of December 1990, led to a smooth transition to a
parliamentary democracy.  Parliament is still working on the revision of the Constitution.
The Hungarian institutions work smoothly, the various authorities being mindful of the
limits of their powers and of the need for cooperation.
Parliament and Legislative Powers:  Structure
Parliament consists of a single house - the National Assembly.  Its 386 members are
elected for four years under a system which combines “first-past-the- post” single-member
constituencies and proportional representation (with a minimum threshold of 4% of the
votes for obtaining a seat in the latter case).  The Constitution, and the 1993 law on
minorities, provide for the principle of the representation of minorities in Parliament, but
these provisions have not always been given practical application.  A bill is being prepared
which would make it possible to designate representatives for the minorities as soon as thelist in which they are included obtains over 10 000 votes.
The President of the Republic may dissolve the National Assembly if it overrules the
Government at least four times in a twelve-month period, or if it does not succeed in
appointing the Prime Minister within 40 days.  Elections must be held within three months
of dissolution.  The Assembly cannot be dissolved if a state of emergency is declared.
Members of Parliament have a traditional system of immunity.   The role and participation
of the opposition in the operation of the institutions are recognised in Hungary.  They are
expressed in particular through the setting-up of committees of parliamentary inquiry
(made up of one-fifth of the members of the National Assembly) which are traditionally
chaired by a member of the opposition.
Political parties can easily be set up in Hungary (120 took part in the 1994 elections) and
they receive financing from the state budget on the basis of their electoral results.
Parliament exercises legislative power.  It shares its right of initiative with the President of
the Republic and the Government.  The Government can be authorised by Parliament in
the event of a crisis to adopt rules which derogate from the laws.  The law on the “state ofcrisis” (which, according to the Constitution, must be adopted by a two-thirds majority of
Parliament) has still not been adopted.
The Hungarian Constitution also provides for the referendum procedure, either on a
decision of Parliament which may be initiated by the President, the Government or 50
Members of Parliament and must be adopted by a two-thirds majority, or at the initiative
of at least 100 000 citizens.  The Constitutional Court judged that the Constitution could
not be amended by referendum.
Functioning of Parliament
Elections have taken place in free and fair conditions.  A centre-left coalition won in 1994,
(see Annex for the election results) taking over from the conservative coalition which had
been successful at the previous general elections in 1990.  Hungary presents the
characteristics of a democracy the smooth working of which allows the peaceful
alternation of political power.
Parliament functions satisfactorily:  its powers are respected and the opposition plays a
full part in its activities.
The Executive: Structure
The President of the Republic, who is elected by Parliament for a four-year term, which
may be renewed once, has essentially a representational function, save in exceptional
circumstances.  The Government is accountable to the National Assembly.  It is made up
of a Prime Minister, designated by Parliament upon a proposal from the President of the
Republic, and ministers appointed by the President upon a proposal from the Prime
Minister and individually responsible to Parliament and the Government.
Following the annulment by the Constitutional Court in October 1996 of ministerial
status, a new bill is being examined which would strengthen ministers’ immunity, give the
Prime Minister the power to initiate without any special reason the procedure for
dismissing ministers and draw a sharper distinction between ministries’ political
management and administrative management functions.
The administrative organisation of the country is based on decentralised units of the
central state administration (30 at regional level) and on local authorities whose leaders
are elected for four years (1990 and 1994 elections) either at county level (19 plus
Budapest) or at the level of towns and villages.  The 3 168 local authorities have extensivepowers, protected by the Constitutional Court.  It should nevertheless be noted that most
of their resources come from the state budget.  In certain cases they may be assisted by
local governments for minorities.  The law of 1996 provided for the establishment of local
authorities at regional level (six plus Budapest).
The Administration is governed by a Statute which was adopted in 1992.  The
Government announced in February 1997 that it would be amended.  The Hungarian
Government has launched a programme to combat corruption under the action plan for
reforming public administration launched in February 1997.
The army, the secret services and the police are controlled by the civilian authorities.  The
constitutionality of some provisions of the law on the police is questionable, and they run
counter to certain standards of the Council of Europe (procedures for arrest, use of
personal data and “plea bargaining” procedures).  The secret services are controlled by a
Parliamentary Commission with wide powers of investigation.
Functioning of the Executive
The central institutions of the State function smoothly.
The public administration is still facing certain difficulties:  salaries and wages are still low
compared with earnings in the private sector and there are certain shortcomings in the
training system.  The Government has tried to improve the situation by increasing civil
servants’ pay using the resources made available by the manpower reduction programmes.
There have been a number of cases of corruption in the Hungarian police in the last few
years and its effectiveness in combating organised crime has also been called i nto question
(as when in November 1996 top national and local police officials were removed from
their posts following a number of violent settlements of account in Budapest).
The Judiciary: Structure
The Hungarian Constitution ensures the independence of the legal system.  The judges are
appointed, following probation of two years, for an indefinite period.  The President of theRepublic appoints them upon a proposal from the Minister of Justice, which is in turn
submitted to the President and Council of Judges of the Court of Appeal. Judges can be
removed from their posts only for serious reasons and in accordance with a procedure laid
down by law.  The President of the Supreme Court is elected by Parliament on a proposal
from the President of the Republic.  The Supreme Court judges are appointed by the
President of the Republic on a joint proposal of the President of the Supreme Court and
the Minister of Justice.  Judges are not allowed to engage in political activities or join a
party.
The Procurator General is elected by the National Assembly, on a proposal from the
President of the Republic, and is answerable to it.  He determines the organisation of the
various public prosecution offices.  The procurators are subject solely to the laws and
instructions given by the Procurator General.
In addition, administrative acts are subject to judicial review by the ordinary courts.  The
military courts, which are qualified in particular to deal with matters concerning the secret
services, follow the civil procedure and appeals may be made against their decisions to the
Supreme Court.
Under Chapter 5 of the Hungarian Constitution, Parliament has appointed a number of
ombudsmen to investigate individual complaints in different sectors:  individual rights
(two parliamentary commissioners), data protection and minority rights (the last was
elected in July 1995).
Since 1989 the Constitutional Court has been keeping a check on the constitutionality of
laws and international treaties.  It should be made up of 11 members elected by the
National Assembly by a two-thirds majority for a nine-year term which may be renewed
just once (with an age limit of 70).
Matters may be put to the Court in advance - in this case it has only a consultative role -
or subsequently, in which case it can cancel any unconstitutional provisions.  The right to
refer matters to it is extensive since any party may put matters subsequently to the Court
and the Court may even refer matters to itself in certain cases.  The Court may also
provide interpretations of the text of the Constitution and settle disputes regarding public
authorities’ powers.
Functioning of the Judiciary
Justice does not yet operate in a satisfactory way at all levels in Hungary.  The courts are
overloaded; the number of cases put to them has increased greatly in recent years and it
takes longer for rulings to be given.  The complexity of the rules of procedure and the fact
that judges still lack the necessary professional qualifications and that courts have been
accorded much greater powers in recent years generally explain this situation.  The
Hungarian Government has launched a programme to ensure that rulings can be delivered
more quickly (reform of rules of procedure and improvement of court facilities) and
judges can be trained to a higher standard.
The Constitutional Court has in recent years been in a transitional stage with only nine
members, since the parties represented in Parliament have not succeeded in agreeing on
who should fill the two vacant posts.  Although a solution was recently found, the two-
thirds qualified majority needed to appoint judges is still difficult to attain.  If no
alternative solution is found, this situation could recur in 1998 when two of the terms
expire.
1.2 Human Rights and the Protection of Minorities
Hungary has introduced a number of national standards for ensuring that human rights andminority rights are observed.  A further guarantee is provided by the application of certain
international conventions, in the forefront of which is the European Human Rights
Convention and its additional protocols. Under Article F of the Treaty on European
Union, these aspects taken together constitute part of the acquis  any country wishing to
join the European Union must first have ratified these texts.
In November 1992, Hungary, which has been a member of the Council of Europe since
November 1990, ratified the European Convention on Human Rights and its additional
protocols.  It also permits individuals to take their case to the European Court if they
consider that their rights under this Convention have been violated.
Among the other international conventions protecting human rights and minority rights,
Hungary has ratified the Convention on the Prevention of Torture and the Framework
Convention on minorities.  It has not signed the European Social Charter, however.  It hasalso ratified the main United Nations Conventions concerning human rights.
Hungary applies the agreements only if they have first of all been incorporated by
Parliament into internal law.
Civil and Political Rights
Access to justice is guaranteed in Hungary, in particular by very easily accessible appeal
procedures and relatively well-developed legal aid machinery.  The rights of the defence
seem to be properly covered, except in the case of certain categories of foreigners and
gypsies, who have difficulty in asserting their rights before the law.
The death penalty was abolished in 1990 in all circumstances.The right not to be arbitrarily arrested is assured since no citizen can remain in detention
for over 72 hours without being charged.
All citizens aged 18 or over have the right to vote.Freedom of association and peaceful assembly are also guaranteed;  evidence of this
includes the increase in the number of non-governmental organisations from 8 396 in 1989
to 44 167 in 1995.
Freedom of expression is assured by the Constitution, which prohibits censorship and
guarantees journalists’ rights.
The public sector still plays a very large role in the media, with a monopoly of television
and a dominant position in radio (only one private national channel).  The Prime Minister
controls, in particular, the budget given to the channels.  The question of the opposition’s
access to the media arose during the campaign preceding the 1994 elections.  The lack of
legislation on this matter applicable to all the media does not give the opposition all the
appropriate guarantees for fair access to new channels resulting from future privatisation.
This sector is still not open to foreign operators.
Under the Law of December 1995, however, the Government launched an invitation to
tender in December 1996 for the establishment of a private channel to start broadcasting
from 1 September 1997.  The regulatory body (ORTT), which under the Law of
December 1995 is responsible for issuing operating licences for private channels, is made
up of representatives of all the political formations present in Parliament.
The right of ownership is guaranteed and expropriation must be in the public interest, with
fair prior compensation. For people previously expropriated, the Government has
introduced a system of partial compensation with coupons for the purchase of rural
property and real estate.  A 1990 law provided for restoring to the church the property
which the Communist regime had taken away from it.   An October 1996 decree provided
for the restoration of property to the families of victims of the Holocaust through a
Foundation set up for that purpose.
The Hungarian legislation in force limits foreigners’ right of ownership of agricultural land
to a maximum of 300 ha.  A bill before Parliament provides for possible foreign
investment in public bodies which own agricultural land.  The land register is
computerised and at present covers virtually all the land, with almost 99% of the
7.5 million deeds of ownership having been registered.
Respect for privacy is assured by the need to obtain a warrant from the judicial authorities
before property can be searched or telephone communications tapped.
As Hungary acceded to the Geneva Convention on refugees only in respect of refugees
from other European countries and has still not provided satisfactory access to justice and
shelter for these people, the situation regarding political refugees seemed worrying, but
the Government has put a bill before Parliament abolishing geographical restrictions on
the application of the Geneva Convention and has agreed to close the Kirstarcsa refugee
camp, which had been very strongly criticised by the United Nations High Commissioner
for Refugees.
A number of organisations have reported cases of inhumane, degrading treatment by the
police with no steps having been systematically taken to punish the perpetrators.  There
have also been instances of such treatment in the prisons, despite the steps recently taken
by the Hungarian authorities.
Economic, Social and Cultural Rights
The right to social security is ensured without discrimination pursuant to Article 70E of
the Hungarian Constitution.
Trade union freedom is recognised in Hungary.  Trade union representatives have legal
protection against any measures which employers might take against them.   The rate of
union membership is almost 40%, and most members belong to one of three unions.
A law issued in 1989 guarantees the right to strike, except for the armed forces, police,
judiciary and civil defence.  It is laid down in the law that in the civil service, exercise of
the right to strike depends on an agreement between the government and the trade unions
and that it is prohibited where it could prove prejudicial to the population or the
environment.  A system of minimum service is also provided for in the essential public
services (transport, telecommunications, water, gas, etc.).
Free access to education and freedom of religion are also guaranteed.  The church is
separate f rom the state but the state provides aid for recognised denominations (in 1995,
ECU 110 million was granted for 36 religious groups).
Minority Rights and the Protection of Minorities
Minorities represent some 6% of the population (4% to 5% gypsies (Roma) and the
remainder are mainly German, Slovaks, Croats and Romanians).
There are first of all a number of international standards to ensure the protection of
minorities.  Hungary ratified the Framework Convention on minorities in September 1995
and subscribes to the principles of Recommendation 1201 of the Parliamentary Assembly
of the Council of Europe providing for the recognition of collective rights for minorities,
although this text is not legally binding.
The law of July 1993 recognises as a minority any ethnic or national group which has been
living in Hungary for over 100 years and the members of which have Hungarian
citizenship.  The law recognises the exercise of minorities’ collective rights, in particular
through the setting-up of minorities’ local governments, which have been established to
date in 817 municipalities.  Under the 1993 law, they have the right of veto over matters
concerning education, culture, local media, efforts to sustain traditions and the use of the
minorities’ languages.   In other areas, their function is a consultative one.  The Hungarian
Government undertook in a report approved by Parliament in March 1997 to specify these
local governments’ spheres of competence and the areas in which they would have
decision-making powers in the future.  The financial procedures for these institutions mustalso be established.
Minorities also have an Ombudsman (see above) and a National Council (KET), which
has a consultative function.  Each minority also has a “national autonomous government”,
the members of which are elected by the minority communities themselves.  Between
1994 and 1996 the state aid for minorities increased by 68% from 2.6 billion to 4.6 billion
forints.  The establishment of a number of public foundations to administer operations to
help minorities has made it possible to involve minorities’ representatives in the financial
decision-making procedure.
Contrary to the provisions of the Constitution and the Law of 1993, minorities still do not
benefit from a special method of representation in Parliament.   The Constitutional Court
ruled in 1991 that this shortcoming was a violation by default of Hungary’s Constitution.
According to the evaluation carried out by the OSCE High Commissioner on National
Minorities, the Law of July 1993 allows education to be provided satisfactorily in the
minority languages.  The German and Slovak minorities have educational establishments
in their language for all stages of schooling, including higher education.  The Hungarian
Government is at present examining various measures which could encourage the
maintenance of minority languages in a context where knowledge of them is constantly
declining.   The 1996 law on the media makes it compulsory for the public-sector channels
to broadest information in the languages of the various minorities and to include
programmes about the minorities’ life and culture.  Publications and radio and television
broadcasts are provided in all the minorities’ languages.
The gypsies (Roma) have a special place.  The Hungarian Government’s report on the
situation regarding the national and ethnic minorities approved by Parliament in
March 1997 recognises that the gypsies (Roma) are still frequently subjected to attacks
and discriminatory measures and considers that the situation is in danger of worsening
over the next few years.  The same document states that present legislation does not make
it possible effectively to prevent the outbreak of “ethnic conflicts” of which the gypsies
(Roma) are victims.
Their social situation is often very difficult.  According to the government report on this
matter, inequality of opportunity between the gypsies (Roma) and the rest of the
Hungarian population has increased in recent years, while the standard of education of the
gypsies (Roma) has improved.   Similarly, the unemployment rate among this population
is four to five times that of the national average and life expectancy is ten years less than
for the rest of the population.  This situation can largely be explained by sociological
factors.   The gypsies (Roma) are also subject to discrimination on the labour market.
The Hungarian Government has undertaken to implement a programme to reduce the
inequality of opportunities between the gypsies (Roma) and the rest of the population.
The Council for coordinating matters concerning the gypsies has since the end of 1995
been supervising all the action taken by the various state institutions in this area.  The
Committee for the Gypsy Programme, established in March 1996, examines the political
and social problems encountered by the gypsy community, under the direct authority of
the Prime Minister.  This community benefits from the protective provisions of the 1993
Law and has 477 local governments for minorities.
1.3 General Evaluation
The Hungarian institutions work smoothly, the various authorities being mindful of the
limits of their powers and of the need for cooperation.  Elections have taken place in free
and fair conditions and have allowed a switch in political power in 1990 and 1994.  The
opposition plays the customary part in the operation of the institutions.
There are no major problems regarding observance of fundamental rights in the country.
The rights of minorities are guaranteed and protected.  Although some improvement is
still needed, progress has been made in the form of measures recently taken by the
government to ensure justice and protection for the Roma (gypsies).  Efforts to combat
corruption need to be made more effective.
Hungary presents the characteristics of a democracy with stable institutions which
guarantee the rule of law, human rights and respect for, and the protection of, minorities.
2. Economic Criteria
In examining the economic situation and prospects of Hungary, the Commission’s
approach is guided in particular by the conclusions of the European Council in
Copenhagen in June 1993, which stated that membership of the Union requires “the
existence of a functioning market economy as well as the capacity to cope with
competitive pressure and market forces within the Union”.
This section of the Opinion therefore gives a concise survey of the economic situation and
background, followed by a review of Hungary’s progress in key areas of economic
transformation (liberalisation of the price and trade system, stabilization of the economy,
structural change, reforms of the financial sector) as well as its economic and social
development. It concludes with a general evaluation of Hungary in relation to the criteria
mentioned by the European Council and a review of prospects and priorities for further
reform.
2.1 The Economic Situation
Background
Hungary, with a population of 10.2 million, has a gross domestic product ( GDP) of 65
billion ECU (expressed in purchasing power parity). Its population is thus about 3 percent
of that of the Union, while its economy is only about 1 percent and GDP per capita is about
40 percent of the Union average. Wages are low by Western standards: the average non-
agricultural gross wage is equivalent to about 230-275 ECU per month.
Hungary joined the GATT in 1973, and was a founder member of the WTO and CEFTA. In
1996, it became a member of the OECD.
Progress in Economic Transformation
Hungary has a long-established record of a gradualist approach to economic reform.
Rigorous central planning was abolished as long ago as 1968 when the “New Eco nomic
Mechanism” was introduced, while more systematic economic reforms began in 1985.
Thus, some elements of the institutional and legal infrastructure for a market economy
have been in place for almost a decade: a two-tier banking system was established in
1987; import liberalisation and personal income and value added taxes were introduced
from 1988.
Building upon the gradual introduction of reforms from the mid-1980s, Hungary did not
implement the “shock therapy” approach to economic reform applied in some other
Central European countries. The gradualist approach adopted ent ailed substantial further
liberalisation of trade and prices and the creation of the main institutional and legal
foundations of a market economy.
Economic and political developments, however, caused the Hungarian authorities to slow
down reform and this resulted in deadlocks in key areas such as agriculture, the financial
sector, public finances and privatisation. However, reforms were success fully relaunched
in 1995, with dramatic impact. Set-backs in the privatisation of the banking sector were
reversed, and large parts of the energy and utilities sector were sold to private investors.
Private involvement in sectors such as electricity and gas supply now surpasses the levels
in many EU member states.
Notwithstanding the early start to market reforms in Hungary, state enterprise ini tially
remained the dominant form of economic activity: in 1989, the private sector generated
about 16% of GDP. Solid progress with privatisation, and strong growth in the number of
new private firms resulted in a private sector share in GDP of 60-70% by the end of 1995.
Foreign Direct Investment
Reflecting the sharp acceleration in the pace of privatisation, and Hungary's improving
standing with international investors, foreign direct investment ( FDI) has been very
significant, totalling more than ECU 10 billion (~ECU 1000 per head) by the end of 1996
(source : EBRD).
Economic Structure
Agriculture  accounts for about 7.2% of gross value added, and employs 8% of the
working population. These figures are above the EU average, but roughly comparable to
those of some Member States.
The agricultural and food sectors account for 21% of Hungary's exports (close to 15% of
exports to the EU). This is the only major sector in which Hungary is a net exporter.
Although the EU is the destination of over three-fifths of Hungary's total exports - a share
not much different from that of several member states - only two-fifths of agricultural and
food exports are sold on the Union market.
Industry accounts for 23% of gross value added, and a similar proportion of
employment. Recent years have seen significant restructuring of the sector. Above
average growth has been recorded in machinery manufacture, and modern metallurgy,
while there has been a decline in those branches which are heavy users of energy. Industry
has attracted substantial inflows of foreign capital, which should help to modernize the
sector and improve its competitiveness in the years ahead. Productivity has been rising
rapidly - in excess of 10% per year - since 1993, and manufacturing goods accounted for
above 50% of exports in 1996. There has been a huge growth in the number of
enterprises, with well over 100,000 limited liability enterprises regis tered by late 1996.
These are almost entirely SMEs. The above points to a fairly dynamic industrial sector, able
to sell a large part of its output on EU markets.
The services sector may be schematically divided into an expanding private sector, and a
public services sector which is still in the course of defining and adapting to its role in a
market economy.
Main indicators of economic structure
(all data for 1996 unless otherwise indicated)
Population million      10.2
GDP per head PPS-ECU (1995)    6300
as % of EU-15 average per cent (1995)    37
Share of agriculture in:
gross value added per cent (1995)     7.2
employment per cent (1995)     8
Gross foreign debt/ GDP per cent   62
Exports of goods & services/ GDP per cent   34
Stock of foreign direct investment1billion ECU     10.6
ECU per head 1040
Source: Commission services, national sources, EBRD
1FDI stock converted at end -1996 exchange rate of 1 ECU= $1.25299
Privatisation of a majority stake in the fixed-line telecommunications company, and
progress made from late 1995 with privatisation of state banks will contribute to the
development of effective services to business in these areas. Developments in these
sectors are likely to pose challenges for the ability of state institutions to ensure the
maintenance of competition and/or prevent abuse of dominant position by privatemonopolies. These issues are also being confronted by member states.
High rates of taxation coupled with the difficulties encountered by the tax administration
to keep track of the rapid expansion of private enterprise have led to the emergence of a
sizeable informal sector . According to Hungarian estimates the size of the “black”
economy is between 20-30% of 
GDP. The growth of the informal sec tor, however, is
believed to have stopped in recent years thanks to the introduction of new legislation and
stricter controls on tax compliance.
Liberalisation
Price Regime
Price liberalisation was substantially completed by 1992. A progressive removal of
subsidies supported the move to market prices: subsidies as a percentage of GDP
decreased from 13% in 1989 to 4% as early as 1992. Price controls still remaining
concern for the most part services supplied by “natural monopolies”, such as postal rates,
train fares, telephone charges, and household gas and electricity prices. There are some
concerns that the priority the government currently attaches to reducing in flation may
conflict with the needs of the energy companies which were privatised at the end of 1995.
Trade Regime
Liberalisation of foreign trade began in 1987. A number of restrictive measures relat ing to
foreign trade still exist. First, there is a global quota on the value of imports of consumer
goods. This has both been reduced in scope and increased in value in re cent years.
Second, in order to protect domestic industry, textiles, clothing products, footwear, cars,
medicines, telecommunications equipment and detergents are subject to import licensing.
Third, an import surcharge of 8% was introduced in March 1995, but was phased outcompletely by July 1997. Fourth, licensing requirements are also in force for some export
goods. With the exception of those sectors covered by the global consumer goods quota,
import licensing appears to be an administrative formality in practice.  In l ine with the
Europe Agreement, quantitative restrictions are being abolished in stages.
Foreign Exchange Regime
From January 1996, the Hungarian forint became fully convertible for current account
transactions. Some types of capital account transactions have also been liberal ized. The
central bank operates a “crawling peg” exchange rate policy, whereby the forint is
devalued each month by a fixed, pre-announced rate against a basket of currencies.
Stabilisation of the Economy
Domestic
The disruption to foreign trade caused by the break-up of the CMEA was a major
contributory factor to the deep recession which Hungary suffered from 1989 to 1993,
during which period GDP fell by almost one-fifth. From 1994, the economy began a
gradual recovery which continued in 1995 ( GDP +1.5%) and 1996 ( GDP +1%). Growth
remains somewhat subdued and may be exp ected to remain so in the short-to-medium-
term as Hungary still needs to contain public and external deficits and red uce its for eign
debt.
Employment fell substantially during the recession, by over 1 million in a labour force of
around 5 million. Job losses in the state sector were only partly compensated by private
sector job growth. Withdrawals from the labour market, facilitated by relatively generous
disability and early retirement schemes, have also played a significant role in reducing the
level of employment. Unemployment, which had previously been concealed, rose rapidly
to reach 12% of the labour force by early 1993. It has since fallen to under 10%, due to a
decline in the labour force participation rate. Because of the moderate rate of growth
Hungary has not yet seen rising employment.
The pattern of falling employment and a rising number of unemployed and pensioners, so
that the tax base shrank while the number of claimants on public expenditures rose, was
one factor in the deterioration of the public finances. This threat ened to arrest Hungary's
recovery from recession. The general government budget deficit reached 8% of GDP in
1994, and public debt, roughly 70% of which is owed abroad, climbed towards 90% of
GDP. The unfavourable trend in the public finances was halted in 1995.
Fiscal adjustment was consolidated in 1996 and projections are for a continued
improvement. This, however, is dependent on implementation of a wi de-ranging reform of
the public finances, notably in the area of pensions, which is currently being prepared. This
reform is important not only for fiscal sustainability, but also in order to reduce the overall
burden of taxation, which will help enterprise competitiveness.
Inflation had already reached double-digit levels by the late 1980s, and accelerated to peak
at 35% in 1991, the deepest year of recession. Thereafter, there was a gradual
deceleration, and the annual rate of price increase fell to under 20% in 1994. This
declining trend was temporarily interrupted in 1995 under the impact of measures taken toreverse the deterioration in the country's finances. The fall in inflation resumed, however,
in 1996. By the beginning of 1997, twelve-month inflation had fallen below 20%. This
declining trend is expected to continue in the future and could lead to single figures in the
coming years. A more rapid reduction of inflation appears difficult, however. More
restrictive monetary policy and the ensuing increase in interest rates could slow down the
economic recovery and lead to counter-acting speculative capital inflows; more active use
of exchange rate policy to slow inflation could harm the competitiveness of Hungarian
enterprises.
Main economic trends 1994 1995 1996
Real GDP growth rate per cent 2.9 1.5 1.0
Consumer price inflation
annual average per cent 18.8 28.2 23.6
        December-on-December per cent 21.2 28.3 19.8
Unemployment rate, end-year per cent 10.2 9.3 9.2
ILO definition
General government budget per cent of GDP-8.4 -6.0 -3.8
balance
Current account balance per cent of GDP-9.4 -5.7 -3.9
Debt/export ratio per cent 267 186 144
Foreign direct investment per cent of GDP2.8 10.5 4.4
Source: Commission services, national sources, EBRD
External
Hungary entered the transition with a heavy foreign debt burden, and this continues to be
the case. Despite this, and in contrast with some other countries in the region, it has
always been able to m eet fully its debt service obligations. A sharp deterioration in the
current account balance occurred in early 1995 on top of large deficits which had already
been recorded in 1993 and 1994. Decisive action by the authorities has substantially
remedied the situation. In order to reassure international lenders, the central bank
maintains a large stock of foreign reserves. At the end of 1996, these amounted to nearly
7 billion ECU, equivalent to more than 7 months of im ports.
Hungary's emergence from recession in 1993 was accompanied by the emergence of
substantial trade and current account deficits, the latter amounting to over 9% of GDP in
1994. Corrective measures taken in 1995 succeeded in reducing this gap and by 1996 the
current account deficit had fallen below 4% of GDP. Aided by large flows of foreign
investment linked to an acceleration of privatisation in late 1995, Hungary has succeeded
in reducing the level of its outstanding foreign debt from over  24.6 billion ECU in mid-
1995 to almost 20.7 billion ECU  by late 1996.  As a result, Hungary has been capable of
borrowing on the international capital market at gradually more favour able interest rates.
Nevertheless, cutting the current account deficit to levels where it can be financed by
inflows of foreign direct investment ( FDI), so that the level of foreign debt continues to be
manageable, remains a policy priority for Hungary.
Structural Change
Foreign Trade
The growth in Hungary's trade with the EU has been one of the more remarkable
developments of recent years. The dollar value of trade with the EU has approximately
tripled since 1989. Combined with a decline in trade with former CMEA countries, this
resulted in over 60% of Hungary's foreign trade taking place with the EU in 1996.
These changes in the direction of trade have been accompanied by shifts in the product
composition of Hungary's exchanges with the EU. Exports of machinery, spare parts and
semi-finished products have increased their share, while agricultural produce now is less
important in Hungary's exports to the EU. Hungary's imports of ma chinery and capital
goods from the EU have shown above average growth. Imports of consumer goods now
represent a smaller share of total imports from the EU than was the case in the initial years
of transition; as much of this fall was concentrated in 1995, it may be due to the impact of
the import surcharge and related measures taken in Spring 1995, but the effect of an
overall quota on consumer goods imports enforced by Hungary should also be taken into
account.
Labour Market
Although there has been a slight decline in the total active population since 1979, this
trend has increased significantly since 1990. Employment has fallen by some 1.3 million.
The agricultural and industrial sectors were particularly affected. Public employment
dropped, and there has been large-scale restructuring in the coal and steel industry. These
reductions have been only partially compensated by the increase in private employment.
The reduced demand for labour has been to a large extent absorbed by a reduction in the
active population, facilitated by generous provisions for early retirement and dis ability
pensions.
Public Finances
Hungary has a complex system of public finances which makes it difficult to determine
precisely the level of general government spending. It is estimated that the expenditure of
the “consolidated government” (which does not include all local authority spending) was
above 55% of GDP in 1995.
Over one-third of non-interest expenditure goes to finance a relatively generous system of
social security. Low statutory retirement ages, disability pensions, and early retirement
schemes result in an effective average retirement age of under 55 for both men and
women. As a result, and notwithstanding some reduction in contribution rates from 1997,social security charges are very high in relation to gross earnings. But high rates of
taxation, and burdensome procedures, increase the rewards to eva sion at the same time as
the tax administration has to try to keep track of the rapid expansion of private enterprise.
This combination of circumstances entails two major consequences for Hungary’s public
finances. One is the emergence of a sizeable informal economy. A second consequence is
that within the formal economy, social security contribution arrears have become a
significant problem. The net result of high levels of government expenditure and
difficulties in tax collection has been the emergence of large budget deficits in recent
years, averaging around 7% of 
GDP from 1992 to 1995.
However, notable progress is being made in reforming the public finances. A centralized
treasury has been in operation since the beginning of 1996, and the operations of the
extra-budgetary funds are gradually being incorporated into the central budget. As part of
a general reappraisal of the functions of state institutions in a market economy, a
comprehensive reform of the public finances is underway. Within this reform,
improvements in the operation of the social security system are a key area. Plans for the
reform of the pension system are now at an advanced stage; in parallel with this, the
statutory retirement age is to be raised in stages for both men and women.
As a result, the budget deficit has already shown a considerable improvement, falling to an
estimated 3.3% of GDP in 1996. This overall improvement, however, concealed a further
expansion of the deficit in the social security system. The implementation of the planned
reforms in the health and pension systems therefore remains a necessary condition for the
long term sustainability of Hungary’s public finances.
Enterprise Sector: Privatisation and Enterprise Restructuring
Privatisation and restructuring have gone further in Hungary than in most other transition
economies; indeed, in sectors such as telecommunications and energy supply, the scale of
private involvement is greater than that in many EU member states. The scope for public
investment in these sectors is severely constrained by the state of the public finances.
Increasing private involvement in these key sectors should help to accelerate their
modernization and improve the quality of the services they provide to the rest of the
economy.
Privatisation has been a significant channel for FDI in the Hungarian economy. FDI has also
taken the form of investment in “greenfield” sites. FDI benefits Hungary in a number of
ways. It has enabled the country to finance large current account deficits, without foreign
debt rising to even higher levels. It provides capital needed to finance investment in
modernising the economy's industrial structure. It provides ince ntives for local industries
to invest in quality improvements, either so as to compete with the “newcomer”, or as
suppliers of inputs. Finally, FDI can also generate substantial employment, both directly
and indirectly.
Apart from privatisation, the private sector in Hungary has also grown at a spectacular
pace through the creation of new enterprises. In comparison with a “typical” market
economy, it is likely that the Hungarian enterprise sector will be characterized by a
relatively large proportion of very small enterprises in the years to come.
Financial Sector
Initial reforms of the banking sector in 1987 and 1991 did not tackle the problems caused
by the common state ownership of enterprises and banks. The state-owned banking sector
supported loss-making state-owned companies and accumulated bad loans to a point
where they impeded the development of the productive sector. The banks have been partlyrecapitalised with public funds, and policy now aims at re capitalisation through
privatisation. The first success in this area was recorded in 1995. As a consequence of
continued privatisation and the spread of partly foreign-owned (joint venture) banks, thebanking sector is now mainly in private ownership.
The decline in the profitability of the banking sector came to a halt at the end of 1993.
Bank profitability in 1995 was positive, though modest by international standards. The
improvement can be attributed to better credit assessment and lending practices. All banks
satisfy internationally acce pted standards for minimum capital adequacy. Notwithstanding
that some 40 banks are operating in Hungary, the bank ing sector remains relatively highly
concentrated. This contributes to large spreads between deposit and lending rates and
weak competition within the sector.
High interest rates, and wide spreads between deposit and lending rates also result from
the policy of the independent central bank, the National Bank of Hungary (
NBH). The NBH
kept monetary policy tight in order to offset the impact of fiscal policy, which up until
1995 had tended to be relatively lax. High levels of reserve requirements paying low
interest rates have arisen in part from the fact that the NBH's assets included a large non-
performing loan to the budget. The transfer, from early 1997, of this debt to the  state
budget should improve the central bank’s financial situation and make possible the
reduction of the charges it imposes on commercial banks. The final result could be lower
interest rates and cost of capital for corporate investment.
A weakness in the Hungarian financial system is the relatively low level of long-term
finance available for enterprise l ending. In 1995, short-term loans (less than one year)
accounted for three-fifths of all loans to the business sector. This inevitably tends to
reduce the time horizon over which enterprises can plan investment projects, although the
relative shortage of long-term credits has been partially offset by enterprise borrowing
from abroad and increased self-financing. Some of the factors which reduce the amount of
long-term lending by domestic banks - uncertainty related to high inflation and interest
rates, for example - are gradually being removed as economic stabilization strengthens.
However, the availability of long-term loans depends to some extent on the amount of
long-term saving which is undertaken. The planned reform of the pension system, which is
expected to include a shift towards funded pensions should contribute to filling this gap in
Hungary's financial system.
The Budapest Stock Exchange ( BSE) began operation in 1990, with one quoted share. By
early 1996, 41 companies were listed. Share capitalisation on the stock market tripled
since the end of 1994 and the value of average monthly trading in shares increased by
300% over the early months of 1995. The securities market has to an increasing degree,
been providing companies with an alternative source of fi nance to bank loans.
Government bond issues dominate the bond market while the corporate bond market is
not developed.
Economic and Social Development
SocialIndicators
Hungary’s population is estimated at about 10.2 million. The population has been falling
slightly for some years now, under the impact of a declining birth rate (less than 11 per
thousand population, similar to the rate in the EU) and reduced life expectancy. Average
life expectancy is low - 65 years in 1991 - and has even declined in recent years. Infant
mortality is high compared with the EU. The age structure of the population is also
broadly similar to that in the Union, with approximately one-fifth of the population aged
under 15, and one-fifth aged 60 or more.
In the longer term, the development of the Hungarian economy will require further
improvements in the availability of both human and physical capital. Although Hungary
has a long tradition of high education standards, the education system is currently facing a
period of budgetary constraints which slows down the pace of required reforms.  At
primary and pre-primary level, participation rates are very high, at secondary level they areadequate whereas at higher education level they are below the EU average.
Regional Distribution of Income and Employment
Regional data on GDP per capita suggest considerable disparities. Income levels range
from 206% of the national average in Budapest down to 67% in the north-eastern countryof Nograd. Most of the counties with above average levels of per capita 
GDP are located
in the western and central parts of the country.
The services sector accounts for 77% of GDP in Budapest; industry’s share of GDP peaks
at 40% in the central parts of the country, while the contribution of agriculture peaks at
16% and is typically highest in the east.
There are substantial differences in unemployment rates across counties. Unemployment is
lowest in the western parts and in Budapest, and highest in the east of the country.
Indeed, with a ratio of just 5 unemployed persons to each notified vacancy, it is possible
that some sectors may be experiencing difficulties in recruiting qualified personnel. In
other districts the une mployment rate is close to twice the national aver age. The
unemployment rate for the Roma population is significantly higher than the national
average.
Wide differences in unemployment rates in a relatively small country suggest obsta cles to
the mobility of both capital and labour. In the absence of appropriate policies, there is a
risk that regional disparities in economic development may be exacerbated, as more skilled
and mobile workers migrate to the capital.
2.2 The Economy in the Perspective of Membership
Introduction
The European Council in Copenhagen in 1993 defined the conditions that the asso ciated
countries in central and eastern Europe need to satisfy for accession. The eco nomic
criteria are:
• the existence of a functioning market economy;
• the capacity to cope with competitive pressure and market forces within the Union.
These criteria are linked. Firstly, a functioning market economy will be be tter able to cope
with competitive pressure . Secondly, in the context of membership of the Union, the
functioning market is the internal market. Without integration into the internal market, EU
membership would lose its economic meaning, both for Hungary and for its partners.
The adoption of the acquis, and in particular the internal market acquis, is therefore
essential for a candidate country, which must commit itself permanently to the economic
obligations of membership . This irreversible commitment is needed to provide the
certainty that every part of the enlarged EU market will continue to operate by
common rules.
The capacity to take on the acquis has several dimensions. On the one hand, Hun gary
needs to be capable of taking on the economic obligations of membership, in such a way
that the single market functions smoothly and fairly. On the other hand, Hungary’s
capacity to benefit fully from the competitive pressures of the internal market requires that
the underlying economic environment be favourable, and that the Hungarian economy
have flexibility and a sufficient level of human and physical capital, especially
infrastructure. In their absence, competitive pressures are likely to be considered too
intense by some sections of society, and there will be a call for protective measures,
which, if implemented, would undermine the single market.
The capacity and determination of a candidate country to adopt and implement the  acquis
will be crucial, since the costs and benefits of doing so may be unevenly spread across
time, industries and social groups. The existence of a broad based consensus about the
nature of the changes to economic policy which membership of the Union requires, and a
sustained record of implementation of economic reforms in the face of interest group
pressure reduce the risk that a country w ill be unable to maintain its commitment to the
economic obligations of membership.
At the level of the public authorities, M embership of the Union requires the administrative
and legal capacity to transpose and implement the wide range of technical legislation
needed to remove obstacles to freedom of movement within the Union and so ensure the
working of the single market. These aspects are examined in later chapters. At the level of
individual firms, the impact on their competitiveness of adopting the acquis depends on
their capacity to adapt to the new economic environment.
The Existence of a Functioning Market Economy
The existence of a market economy requires that equilibrium between supply and demand
is established by the free interplay of market forces. A market economy is functioning
when the legal system, including the regulation of property rights, is in place and can be
enforced. The performance of a market economy is facilitated and improved bymacroeconomic stability and a degree of consensus about the essentials of economic
policy. A well-developed financial sector and an absence of significant barriers to market
entry and exit help to improve the efficiency with which an economy works. Good
progress in implementation of the Europe Agreement should help to ensure that the
transition to membership of the Union is relatively smooth.
Hungary can be regarded as a functioning market economy. The early abandonment of
central planning means that economic agents have relatively long experience of operating
within the basic institutional framework of a market economy. In most, if not in all areas,
market mechanisms are in place. Almost all transactions take place at market prices. The
remaining price controls relate to services such as post, railway transport, telephones, and
household gas and electricity supply, typically provided by “natural monopolies”. This is
similar to the situation prevailing in most member states.
Property rights appear to be well-defined and enforceable. The legal system provides a
stable statutory framework in which economic actors can operate. The huge number of
small and medium-sized enterprises which have been created in the 1990s is an indication
that there are not significant administrative hurdles to the start-up of new activities.
The financial system, an essential feature of a modern market economy, contains some
weaknesses in Hungary. These include relatively wide spreads between lending and
deposit rates and a degree of concentration which weakens competition in the sector.
Enterprises face some difficulty in obtaining long-term loans. However, these problems
point to the importance of strengthening the institutional framework rather than to the
absence of a key part of the market economy infrastructure: they reduce the efficiency
with which the economy functions, but they do not prevent it function ing.
Progress has also been made in establishing macroeconomic stability, a crucial condition
to allow economic agents to plan their activity and, thus, facilitate investment. While
inflation and interest rates in Hungary are certainly higher than would be desirable, their
development is following a relatively stable, predictable, downwards path. Moreover, the
effective implementation of the “crawling peg” exchange rate has removed a potential
source of uncertainty for economic actors.
The considerable public and political support in favour of market reforms has lessened the
risk of any major policy reversal and further contributed to the reduction of uncertainty.
This result is partly due to the government’s consensual approach to policy formulation.
However, the authorities have shown themselves capable of departing from this approach
when needed, as in the case of the stabilisation package introduced in 1995. Their
continued commitment to macroeconomic adjustment in the face of considerable social
costs and public protest has further strengthened the credibility of the Hungarian reform
process.
The Capacity to Cope with Competitive Pressure and Market Forces
It is difficult, some years ahead of prospective membership, and before Hungary has
adopted and implemented the larger part of Community law, to form a definitive
judgement of the country’s ability to fulfil this criterion. Nevertheless, it is possible to
identify a number of features of Hungary’s development which provide some indication of
its probable capacity to cope with competitive pressure and market forces within the
Union.
This requires a stable macroeconomic framework within which individual economic agents
can make decisions in a climate of a reasonable degree of predictability. There must be a
sufficient amount of human and physical capital including infrastructure to provide the
background so that individual firms have the ability to adapt to face increased competitive
pressures in the single market. Firms need to invest to improve their efficiency, so that
they can both compete at home and take advantage of economies of scale which flow
from access to the single market. This capacity to adapt will be greater, the more firms
have access to investment finance, the better the quality of their workforce, and the more
successful they are at innovation.
Moreover, an economy will be better able to take on the obligations of membership the
higher the degree of economic integration with the Union which it achieves ahead of
accession. The more integrated a country already is with the Union, the less the further
restructuring implied by membership. The level of economic integration is related to both
the range and volume of goods traded with member states. Direct benefits from access to
the single market may also be greater in sectors where there are a sizeable proportion of
small firms, since these are relatively more affected by impediments to trade.
The authorities are making great efforts to improve competitive conditions in the
Hungarian economy. The current Hungarian government has devoted considerable
resources to developing a comprehensive medium-term macro- and microeconomic
framework within which the necessary measures for EU membership can be identi fied
more easily and executed more smoothly.
Reductions in social insurance charges and in the overall level of taxation, in l ine with
reductions in public expenditure, aim to improve the competitiveness of the economy.
Similarly, improved competitiveness in the financial system is to be expected as the central
bank lowers its charges to commercial banks. Lower marginal rates of taxation should
also reduce incentives for informal economic activities. The growth of the black economy
in previous years may point to a need to strengthen public administration in some areas.
Most of the transport network suffers from a considerable backlog in investment, due to
the difficult position of the public finances. Telecommunications, however, have made
significant progress in recent years, as privatisation and market liberalisation succeeded in
attracting sizeable foreign investment.
In industry, double-digit rates of productivity growth which have been maintained for
several years now in conjunction with moderate wage rises are a sign of continued
improvements in competitiveness. Moreover, the capacity to cope with competitive
pressure in the future clearly depends on the strength of the current restructuring process.
From this point of view, the substantial growth in the number of new small and medium-
sized enterprises constitutes a positive development. Many, or most, of these are still
developing, and many can be expected to fail. Nevertheless, the existence of such a large
proportion of new firms is a sign that restructuring of the industrial sector in Hungary is
well under way. Access to the single market is likely to be particularly beneficial for these
smaller companies.
Another indication of Hungary’s developing integration with the Union is offered by the
proportion of Hungary's total trade that now takes place with the EU, and its rate of
growth in recent years. This hints at the existence of a core of Hungarian enterprises
which are already quite competitive in EU markets, and which are able to pro duce goods
which are compatible with the demands of the single market.
In addition, foreign direct investment has been playing a large role in the Hungarian
restructuring process, at times even contributing to the development of new industries,
such as car manufacture. This is particularly important since FDI flows typically constitute
an efficient way to transfer technology to the enterprise affected as well as to the rest of
the economy through demonstration and spillover effects. FDI can also be expected to help
Hungarian industry adapt to the requirements of the acquis. The early privatisation to
foreign purchasers of key service industries such as telecommunications which Hungary
achieved may be of especial significance in allowing Hungarian companies to compete
more effectively.
All these considerations, therefore, point to the fact that Hungary's ability to take on the
obligations of membership and cope with competitive pressure in the single market is
increasing. Obviously, a number of industries are protected from foreign competition by
measures which could not be maintained within the single market. However, progress
made to date suggests that accession to the Union in the relatively near future would
imply more an acceleration of existing patterns of restructuring, rather than posing an
entirely new set of challenges to the economy.
Indeed, in the perspective of future membership of the Union, the capacity of Hungary's
enterprises to adapt to changing circumstances appears as important as the level of
competitiveness they have managed to achieve so far. In this regard, many of the policies
aiming at the establishment of a functioning market economy also help to strengthen
enterprises’ capacity to adjust to competitive pressure in the single mar ket.
In particular, the progress in reducing inflation and in bringing the budget deficit under
control has contributed to a considerable reduction in interest rates, thus lowering the
financial costs of investment and restructuring. Structural policies increasing the
competitiveness of the domestic financial sector will also contribute to a further reduction
in the cost of capital while the increased liberalisation of capital movements and the
strengthening of macroeconomic stability w ill improve the terms of access to the
international capital markets. Sustained macroeconomic and political stability will
consolidate Hungary’s already proven attractiveness as a destination for FDI.
The ability of individual enterprises to respond to competitive pressures in the single
market depends upon their technological capabilities. From this point of view, Hun gary’s
long tradition of good educational standards is to its advantage. Similarly, the country has
a strong record in the area of R&D, although spending  has more than halved since 1989.
R&D activity should now be expected to increase: the already substantial private share of
research expenditure should be boosted by improvements in profitability as the economic
recovery gains momentum, and by continuing substantial inflows of FDI. Moreover,
Hungary’s participation in EU R&D programmes will strengthen this trend, and increase
the competitiveness of the Hungarian econ omy.
Prospects and Priorities
Macroeconomic stability remains somewhat fragile in Hungary. Although inflation is
slowing, and the budget and current account deficits are declining, these trends are not
irreversible. The improvement in the country's finances which got underway in 1995 was
crucially dependent on the confidence of the international community, in particular in the
government's commitment to its announced stabilization policies. Continued confidence isessential if the positive economic trends which emerged in 1995 and continued in 1996 areto be sustained. Foreign debt service w ill constitute a substantial outflow of funds from
Hungary for many years to come. Foreign investment helps finance these payments. 
FDI
also contributes to continuing improvements in productivity and competitiveness.
Macroeconomic stability - meaning lower inflation and unemployment, and higher
economic growth - needs to be underpinned by structural reforms, if it is to be sustainable.A number of these reforms have been identified in the preceding sections. Reform of the
public sector is rightly regarded as a priority by the Hungarian authorities. This includes
restructuring the activities of the state so that they better meet the needs of a market
economy. This will entail development and strengthening of the legal and regulatory
mechanisms needed to enable enterprises to operate effi ciently.
Restoring health to the public finances is also essential. Borrowing by government to meet
current expenditures drains savings which could be used for investment to enhance the
competitiveness of Hungary's economy. Government borrowing reduces the funds
available for investments by developing private enterprises. Public finance reform also
implies a fairer distribution of taxation, in part by broadening the tax base. This should
help improve enterprise competitiveness by reducing non-wage la bour costs.
Improvements in transport and communications infrastructure will assist Hungary's
integration with the 
EU, and also help companies to operate more efficiently within the
country. The main problem facing the authorities in this area seems to be the cost of the
investment which is needed.
Understandably, some of the features of more mature market economies are somewhat
underdeveloped in Hungary. Consolidating the institutional and legal framework of a
market economy is an important part of creating an environment in which the large
number of small enterprises which have been established in recent years, and private
enterprise in general, can flourish. Specifically, there is a need to strengthen the regulatory
mechanisms which enable a market economy to function effectively.
Equally there is the need for an effective competition policy, including the appropriate
regulation of monopoly producers. Having successfully privatised such firms, Hungary
now needs to ensure that they operate in an appropriate regulatory/competitive
environment.
The large numbers of new, small and medium-sized private enterprises which have been
created in Hungary will likely have a particular need for business support serv ices.
Financing their expansion may raise special problems, given that banks may be in general
somewhat inexperienced in this area of lending. It may be necessary to develop the
institutional and legal infrastructure necessary to promote collateralised lending.
If enterprises are to compete effectively they need a well-trained labour force. The large
scale restructuring of the Hungarian economy implies considerable changes in the nature
of employment, and in the type of skills which will be dem anded by employers. The
immediate challenge for the education system is to adapt to better meet these needs in
areas such as new technologies, for example. Active labour market policies also have an
important contribution to make to this process. Improving geographical mobility of
workers means improving the operation of the housing market, possibly requiring the
development of new financial institutions. Regional development policies may be needed
to tackle the emergence of localised unemployment “black spots”. Overall, a
comprehensive range of policies will be needed to ensure that inadequacies in the
functioning of the labour market do not hamper Hungary's ability to withstand
competition in the Single Market.
2.3 General Evaluation
Hungary can be regarded as a functioning market economy. Liberalisation and
privatisation have progressed considerably, and there has been strong growth of new
private firms. However, in order to guarantee longer-term stability, the reform of pensions
and social security needs to advance rapidly. The prop osed method of pension reform
would have the added benefit of deepening capital markets.
Hungary should be well able to cope with competitive pressure and market forces within
the Union in the medium term, provided the macroeconomic conditions for strong
investment growth re main in place. Hungarian enterprises are already quite competitive in
EU markets. Restructuring of industry and banks is well underway. Hungary’s record of
consistent commitment to steady market reforms and its ability to take difficult decisions
when they are necessary is an important positive factor. It has had a consistently high level
of foreign direct investment. However, the key task now is to avoid unsustainable
budgetary or external deficits, which would hinder investment and restructuring and halt
the recent acceleration of growth.
3. Ability to Assume the Obligations of Membership
The European Council in Copenhagen included among the criteria for accession “the
ability to take on the obligations of membership, including adherence to the aims of
political, economic and monetary union”.
In applying for membership on the basis of the Treaty, Hungary has accepted without
reserve the basic aims of the Union, including its policies and instruments. This ch apter
examines Hungary’s capacity to assume the obligations of membership - that is, the legal
and institutional framework, known as the acquis, by means of which the Union puts into
effect its objectives.
With the development of the Union, the acquis has become progressively more onerous,
and presents a greater challenge for future accessions than was the case in the past. The
ability of Hungary to implement the acquis will be central to its capacity to function
successfully within the Union.
The following sections examine, for each main field of the Union’s activity, the current
and prospective situation of Hungary. The starting-point of the description and analysis is
a brief summary of the acquis, with a mention of the provisions of the Europe Agreement
and the White Paper, where they are relevant. Finally, for each field of activity there is a
brief assessment of Hungary’s ability to assume the obligations of membership on a
medium-term horizon.
3.1    Internal Market Without Frontiers
Article 7a of the Treaty defines the Union’s internal market as an area without internal
frontiers in which the free movement of goods, persons, services and capital is ensured.
This internal market, central to the integration process, is based on an open-market
economy in which competition and economic and social cohesion must play a full part.
Effective implementation of the liberties enshrined in the Treaty requires not only
compliance with such important principles as, for example, non-discrimination or mutual
recognition of national regulations - as clarified by Court of Justice rulings - but also
concomitant, effective application of a series of common specific provisions.  These are
designed, in particular, to provide safety, public health, environmental and consumer
protection, public confidence in the services sector, appropriately qualified persons to
practise certain specialist occupations and, where necessary, introduction or coordinationof regulatory and monitoring mechanisms;  all systematic checks and inspections necessaryto ensure correct application of the rules are carried out on the market, not at frontier
crossings.
It is important to incorporate Community legislation i nto national legislation effectively,
but even more important to implement it properly in the field, via the appropriate
administrative and judicial structures set up in the Member States and respected by
companies.  This is an essential precondition for creating the mutual trust indispensable
for smooth operation of the internal market.
This chapter must be read in conjunction with, inter alia, the chapters on social policy, the
environment, consumer protection and sectoral policies.
The Four Freedoms
A step-by-step approach is being taken to absorption of the acquis by the candidate
countries:
- The Association Agreement between the Community, its Member States and Hungary
entered into force on February 1994.  With regard to the four freedoms and
approximation of legislation, the Agreement provides, in particular, for immediate or
gradual application of a number of obligations, some of them reciprocal, covering, inparticular, freedom of establishment, national treatment, free trade, intellectual property
and public procurement.
- The Commission’s 1995 White Paper (COM (95) 163 final), guidelines intended to
help the candidate countries prepare for integration into the internal market gives a closer
definition of the legislation concerned.  It identifies the “key measures” with a direct effect
on the free movement of goods, services, capital and persons and outlines the conditions
necessary in order to operate the legislation, including the legal and organisational
structures.  Twenty-three areas of Community activity are examined, dividing the
measures into two stages, in order of priority, to provide a work programme for the pre-
accession phase. The Technical Assistance and Information Exchange Office (TAIEX)
was set up with the objective of providing complementary and focused technical
assistance in the areas of legislation covered in the White Paper. A legislative database has
recently been established by the Office.
- The candidate countries will have to implement all the acquis .  The “Action plan for
the single market” submitted to the Amsterdam European Council gives details of the
priority measures necessary to make the single market work better between the Fifteen in
preparation for introduction of the single currency.  This will inevitably entail changes to
the acquis.
General Framework
Whatever their field of activity, undertakings must be able to operate on the basis of
common rules.  These are important since they shape the general framework within which
economies operate and, hence, the general conditions of competition.  They include the
rules on competition (on undertakings and State aid) and tax measures discussed
elsewhere in this Opinion, the opening-up of public works, supply and service contracts,
harmonisation of the rules on intellectual property (including the European patent),
harmonisation of the rules on company law and accountancy, protection of personal data,
transfer of proceedings and recognition of judgments Article 220 EC Conventions).
Descriptive Summary
Public procurement is regulated by a 1995 law and its implementing regulations, whereas
concessions are regulated by 1991 legislation.  An independent agency, the Public
Procurement Council, placed under the supervision of Parliament, is in charge of
managing various aspects of public procurement policy.
Hungary has already adapted its legislation concerning intellectual and industrial property.
The protection of patents is based on the Munich convention. Protection of copyrights
appears to meet most of EU requirements.  Hungary is a member of TRIPs (Trade
Related Aspects of Intellectual Property Rights).
Company law is largely regulated by the Company Act of 1988. A number of different
types of entity are recognised under Hungarian law, including companies limited by shares
and limited liability companies. As at 30 April 1996 there were over 94,000 companies
registered. Com panies may issue shares and there are provisions for the protection of
shareholders in that event. Minimum capital requirements are laid down by law and there
are provisions equivalent to the protection of authorised capital. Creditors also enjoy a
certain level of protection. A Register of Companies is maintained at the Court of
Registration, which contains the basic information about each company. There is in
addition a computer database making public company data widely available.
With regard to accounting, the Accounting Act (1991) provides the basic framework for
the annual accounts of companies. A National Accounting Committee has been created to
develop principles of accounting and propose changes to existing decrees as well as new
decrees. Rules for consolidated accounts are included in the Accounting Act. The
authorisation of auditors is based on provisions in the Accounting Act, a Government
Decree and a Decree from the Ministry of Finance. No authority directly supervises the
auditors at present. The conditions of operation are checked by an expert panel appointed
by the Minister of Finance.
Article 59 of the Hungarian Constitution provides for the protection of the private life of
all citizens.  Based on this article is the law of 27 October 1992 which establishes the
institutional framework for the protection of data, including an independent supervisory
authority. This law has been complemented by some sectoral provisions, such as the law
on the health care sector adopted in May 1997. The Hungarian Parliament has authorised
in May 1997 the ratification of Council of Europe convention No 108 for the protection
of personal data. It is planned to deposit the instrument of ratification later in 1997.
Current and Prospective Assessment
The Hungarian legislation on public procurement is largely compatible with the EC
directives in this field.  It contains all the fundamental principles of the EC public
procurement rules.  All six Directives in this sector referred to in the White Paper are
incorporated into Hungarian law, although in all cases only partially.  In particular, the
Hungarian legislation does not fully meet all the requirements of EC Directives regarding
the utilities sectors (namely energy, telecommunications, water, and transport).
Although it is too soon to judge adequately the effectiveness of the public procurement
procedures in practice, the legal remedies are rapid, effective, applied by the courts, and
are in line with most of the requirements of the relevant directives. The Public
Procurement Council, an independent agency, seems to meet the infrastructure
requirement for a correct implementation of the public procurement legislation. In March
1997 it submitted to Parliament the first report on the activities carried out during the
period November 1995 to end December 1996. At present, Hungarian firms (or EU firms
with subsidiaries located inside Hungary), obtain preferential treatment as regards the
award of public procurement contracts.
Firms located in the EU will get equal access only after the expiry of the transition period
set out in the Europe Agreement. Further am endments to the 1991 Act on public
procurement are envisaged to be completed in 1997. Complete harmonisation in the field
of public procurement is expected to be achieved no later than the date of accession.
Significant progress in the protection of intellectual and industrial property has already
been achieved. In the view of the Hungarian authorities, the protection of patents is in full
accordance with the European Patent Convention, to which Hungary has applied for
membership. In the area of pharmaceuticals, further efforts are nevertheless required. A
policy paper on copyright and neighbouring rights, due out shortly, will propose further
measures which will bring Hungarian legislation in this area into full conformity with EU
legislation.  A EU-compatible law on trade marks was adopted in March 1997.  Regardingcopyright on radio and television broadcasting, the existing law has to be significantly
adapted to make it compatible with EU legislation and the necessary administrative
structures need to be strengthened to ensure that the legislation is adequately enforced.
Piracy is still a problem in Hungary.
A comprehensive review of the Company Act is scheduled for 1997 which will include
any measures still required to achieve full compatibility with the First, Second, Third and
Twelfth Directives. It is understood that preparatory work has begun on legislation
corresponding to the Eleventh Directive (at present, foreign companies are not able to
establish branches in Hungary) and this is due to be in force in the first half of 1998.
Hungary recognises that some differences remain between Hungarian law and the
Accounting Directives. It intends to remove these through amendments, but no timetable
has yet been given. A law on auditing is being prepa red at the moment and it will
implement the substance of the 8th Directive. The creation of a Chamber of Auditors is
under way. Certain transitional problems are in evidence relating to the implementation in
practice of the new rules, including a shortage of qualified accountants and auditors, but
these can be solved in the medium term. Although a National Accounting Committee has
been created and appears to be giving sufficient reassurance, no independent standard-
setting body has been set up.
The imminent accession of Hungary to Council of Europe Convention no. 108 indicates
that Hungarian legislation on data protection is in line with European standards as laid
down in that Convention. Moreover, an independent authority competent to supervise the
implementation of the legislation has already been established.  Although Hungary’s
legislation is fairly close to the EC framework Directive, it is not yet fully in line with it.
No new legislation is yet announced in this respect.
Hungary has recently been invited by the States parties to the Lugano Convention on
jurisdiction and enforcement of judgements in civil law and commercial matters to adhere
to that Convention.  Such development gives a good indication of confidence in
Hungary’s judicial systems.
Conclusion
Hungary has already taken on the most important directives of the sectors indicated
above.  Implementation of the provisions of the Europe Agreement and the White Paper’s
recommendations covering the sectors reviewed has generally been good.
Further work is required, notably in the area of intellectual property and public
procurement.  Regarding intellectual and industrial property, the legislation which has
already been adopted requires enforcement.  Efforts of a lesser degree are required in the
fields of company law, accounting and data protection, to bring the Hungarian legislation
fully into line with the EC legislation. In these three fields, assuming the present
harmonisation plan proceeds and is complemented for accounting and data protection,
there should no be major difficulties.
Free Movement of Goods
Free movement of goods can be achieved only by removing measures which restrict trade
– not only customs duties and quantitative restrictions but all measures with equivalent,
i.e. protectionist, effect, irrespective of whether or not they are specifically aimed at
domestic or imported products. Where technical standards are not harmonised, the free
movement of goods must be ensured by applying the principle of mutual recognition of
national rules and accepting the rule that national specifications should be no more
stringent than is required to achieve their legitimate objectives. This rule was establishedin the Cassis de Dijon  judgment.
For the purpose of harmonisation, the European Community has developed the “New
Approach” which introduces an approach carefully balanced between government and
private autonomous bodies and in which European Community legislation and European
standards play a distinct complementary role. Thus, instead of imposing technical
solutions, European Community legislation is limited to establishing the essential
requirements which products must meet. Products manufactured in accordance with
European standards are presumed to meet such essential requirements, but European
standards are not the only way to prove such conformity. The “New Approach” works in
conjunction with the “Global Approach” on product certification which governs the
apposition of the “CE Mark” on the product. For other products such as pharmaceuticals,
chemicals, motor vehicles, and food products, European Community directives follow the
traditional regulatory pattern of providing fully detailed rules.
The free movement of goods also dictates that a number of Community harmonisation
measures be transposed into national law. Implementation of health and safety
harmonisation rules is particularly important and requires the establishment of appropriate
mechanisms and organisations, both for businesses and the authorities.
Two of the “horizontal” directives essential to smooth running of the single market are the
Directive on general product safety and the Directive on liability for defective products.
The regulations concerning general product safety are covered in the section on consumer
protection.
The rules on agricultural products (compliance with veterinary and plant-health standards)
are explained in detail in the section on agriculture.
Descriptive Summary
In compliance with the provisions of the Europe Agreement, levels of tariff protection in
Hungary are low.  A legal framework has already been established for the removal of the
few discriminatory measures still in place, based to a large extent on the implementation ofthe Europe Agreement.  All prices have been liberalised, with the exception of public
utilities (postal services, railways, telecommunications), and household gas and electricity
prices.
With regard to technical barriers to trade, the process of alignment is proceeding rapidly
in the foodstuffs sector.  As regards New Approach directives, some delays seem to be
occurring.  In the pharmaceu tical sector, only legislation relating to veterinary medicinal
products is currently fully approximated.
In the field of product conformity and standardisation, efforts are being made to enhance
both metrology and the conformity assessment infrastructure.  The activities of the
Hungarian Standards Institution (1995 legislation) include certification of quality
assurance systems and products.  Although the application of national standards is
voluntary, the law provides for individual legislation to make national standards
mandatory.
Current and Prospective Assessment
Hungary has speeded up the resolution of a number of remaining obstacles to trade over
the last two years, and has a good track record for meeting the deadlines established underthe Europe Agreement. It has made considerable progress towards establishing the
conditions for the free movement of goods.  It has already liberalised its price, trade and
foreign exchange regimes, and put in place basic legal and commercial rules ensuring legal
security and transparency for private economic operators. Nonetheless, further efforts are
required for the full adoption and implementation of the acquis.
There remain a number of restrictive measures relating to foreign trade, including a global
quota on the value of imports of consumer goods, the regimes of export and import
licensing in a number of sensitive sectors (for example, clothing, footwear, cars, medicines
and telecommunications equipment). A new set of pan-European rules of origin which
favour trade and free circulation entered into force on 1 July 1997.  The list of EU
products under mandatory certification when imported into Hungary has been reduced
and should soon be aligned with EU standards.
Concerning the free movement and safety of industrial products, full compliance with the
White Paper recommendations is expected by 1998.  A number of technical directives has
already been introduced into the Hungarian legal system.  The alignment process is
making progress for New Approach directives and is virtually completed in the foodstuffs
sector.  In the automotive sector, Hungary has announced plans to transpose the
framework directive as well as the separate technical directives for the European type-
approval system into national law by the end of 1997. On pharm aceutical and chemical
products legislative alignment is progressing at a slower pace than previously announced.
With regard to the necessary structures to apply the acquis, Hungary has witnessed the
massive foreign investment in some sectors as a stimulation for adjusting the necessary
regulatory framework and structures.  An appropriate legal framework has been created
providing for a standardisation activity geared towards voluntary and internationally
oriented standards, the establishment of a national accreditation system, including
extensive use of EN 45000 standards and international guidelines, and certification and
inspection activities basically in line with EU principles.
The national Hungarian Standards Institution is an institution of public interest which also
operates in the field of product certification.  It is an affiliate member of the European
Committee for Standardization (CEN) and the European Committee for the Coordination
of Electrical Standards (CENELEC).
An Act on civil liability for defective products came into force on 1 January 1994, which
is in complete agreement with EC legislation on nearly all important points.
In the areas subject to national rules and not covered by Community harmonisation, there
is too little information available to assess whether Community legal principles on the free
movement of goods are properly applied in Hungary. This situation is explained in
particular by the fact that the reporting procedures which form part of the internal-market
machinery are not yet operational and so cannot be used in the pre-accession period. The
most important instruments in this connection are: Directive 83/189, requiring
governments to report draft national technical standards and regulations; Decision
3052/95 on measures derogating from the principle of the free movement of goods;
procedures by which complaints can be submitted to the Commission; and Article 177 of
the Treaty, enabling Member States to ask for preliminary rulings from the Court of
Justice. An assessment of whether Hungary complies with the principle of mutual
recognition would require more information on its national rules, and on administrative
practices, which can have an effect on product sales.
Conclusion
Significant progress has been made.  Hungary is progressively taking on the acquis
communautaire related to the free movement of goods, and has already taken on the most
important directives.  Implementation of the provisions of the Europe Agreement and the
White Paper’s recommendations  has generally been good.
Further work is required in the areas of standards and certification.  Provided current
efforts are maintained, free circulation of goods should be made possible in the medium
term.
During this period, special attention will have to be paid to type-approval of motor
vehicles, tractors and motorbikes, the procedures for authorising market placement and
the rules on labelling.  The Hungarian authorities w ill also have to ensure that national
legislation in areas not covered by Community harmonisation is not likely to act as a
barrier to trade, notably by verifying that the measures in force are proportionate to the
objectives they pursue.
Free Movement of Capital
As far as the obligations of Hungary are concerned, the Europe Agreement establishes the
principle of the free movement of capital between Hungary and the EU. As far as the
obligations of Hungary are concerned, this applies from the entry into force of the EA as
regards direct investments made by companies already established in Hungary;  as regards
branches and agencies of Community companies (as well as the self-employed)gradually
during the transitional period.
The White Paper highlights the link between the free movement of capital and the free
movement of financial services. It suggests a sequence of capital liberalisation starting
from long-term capital movements and those linked to commercial transactions to short
term capital.
Descriptive Summary
Hungary’s ability to attract Foreign Direct Investment (FDI) has been impressive:
Hungary has the largest inflow of FDI in the region, attracting 40% of the total FDI in
Central and Eastern Europe.  The total amount of FDI reached approximately  13.3 bn
USD for the period 1990-1996.  This has helped to reduce the foreign debt whilst
contributing positively to the restructuring, privatisation and modernisation of Hungarian
industry. Capital inflows, in addition to FDI, have been sign ificant, as the long term
government securities market is open to foreign investors, and the HUF yields are
sufficiently attractive to induce portfolio investment flows.  Also, substantial private
sector borrowing has contributed to the net inflow of capital. These developments have
been in part due to Hungary’s liberalised policies concerning the free movement of capital.Hungary joined the OECD in May 1996.
Current and Prospective Assessment
Hungary has accepted the requirements of Article VIII of the IMF Arti cles of Agreement,
providing for currency convertibility for current transactions from 1 January 1996.
Significant progress towards the liberalisation of capital movements was made with the
entry into force of a new Foreign Exchange Act on 1 January 1996.  The new law partially
liberalised long-term capital movements but maintained the obligation for authorisation forshort-term capital transactions.  The most important changes were the removal of
restrictions on outward direct investment, personal capital movements and granting of
trade credits.
Further relaxation of restrictions on portfolio investment by residents abroad were
introduced from 1 July 1996.  Also from 1 January 1997 the acquisition by residents of
shares and bonds of OECD based enterprises with investment grade rating was liberalised.
The underlying principle for further capital liberalisation remains the same as that followed
so far: first transactions with longer maturities, then transactions with shorter maturities.
Based on the above principles, the further opening of the capital account is planned as
follows :
- After January 1, 1998,  the establishment of branches of foreign companies in all sectors
will be allowed.
- Within 1 to 2 years, medium and long-term capital transactions will be liberalised.Full liberalisation of  capital transactions (White Paper, stage II) can be expected by the
end of the decade.
Conclusion
The Hungarian government’s efforts to liberalise its capital markets have met with
considerable success in several areas. The provisions of the Europe Agreement as well as
the recommendations of the White Paper have largely been implemented
Further efforts are still required, though, especially in liberalising outward capital
movements and removing investment restrictions on institutional investors (e.g. insurance
companies.)
Free Movement of Services
The basis of the free movement of services is the prohibition of discrimination, in
particular on grounds of nationality, and rules on the alignment of divergent national
legislation. These rules often concern both the right of establishment, which comes under
the heading of the free movement of persons, and the freedom to provide services. Their
implementation implies the establishment of administrative structures (banking control
boards, audio-visual control authorities, regulatory bodies) and greater cooperationbetween Member States in the area of enforcement (mutual recognition arrangements).
A substantial amount of the legislation applicable to the free movement of services relates
to financial services.  It also concerns the problems relating to the opening-up of national
markets in the sectors traditionally dominated by monopolies, e.g. telecommunications
and, to a certain extent, energy and t ransport. These subjects will be dealt with in the
sections of the Opinion specifically referring to them.
Descriptive Summary
There is a certain concentration in the market because the five biggest banks represent
(end 1996) just under 60% of total assets.
A new Banking and Financial Market Law, which entered into force at the beginning of
1997, anticipates a structure for credit institutions based on EU requirements.
The current legal framework for the banking sector provides for minimum capital
requirements, solvency ratios, deposit guarantee rules, provisions against money
laundering, and other provisions.  These are consistent with the acquis.  The EC First
Banking Directive, the Own Funds Directive, the Money Laundering Directive, the Large
Exposure Directive, and most other elements of the core acquis have all been largely
approximated. At present, only credit institutions which are established in Hungary and
registered according to national law can operate in Hungary, even if they are owned or
controlled by foreign interests.
The Budapest Stock Exchange was re-opened in 1990. A future market was opened in
April 1995. Credit institutions and insurance undertakings are only allowed to carry out
"cash activities".
upervision of banks and capital market institutions functions in a similar way to that in the
EU; it is carried out by one body, the Hungarian Banking and Capital Market Supervisory
Authority. This Authority is charged with co-operating with the foreign correspondent
authorities for supervisory purposes.  It is bound to secrecy, on a reciprocal basis, with
regard to the supervisory information received from foreign authorities.  Although the
Hungarian financial market is not yet as developed as those in the EU, progress has been
impressive.
Of the 19 insurance companies presently operating in Hungary (including the two former
state monopolists), 15 have foreign capital participation, including the largest insurance
company. The Hungarian insurance market is open to foreign participation and ownership.Under the present regulations, neither EU or non-EU undertakings with their head offices
outside of Hungary may open a branch in Hungary.
Insurance companies may not pursue as in the EU any other business activities outside of
the sphere of insurance, and must submit a confidential internal report to the State
Insurance Supervisory Authority which evaluates the activities of the company. The
minimum guarantee fund is one-third of the solvency margin, as in the EU.  However, the
requirements for the minimum guarantee fund are even stricter than those of the EU.
Current and Prospective Assessment
Since the bank’s consolidation scheme has been completed, State-owned banks do not
enjoy any preferential treatment. The bank privatisation programme is due to be
completed by the end of 1997, when the government share of bank equity will be limited
to 15%.
Considerable progress has been made in adopting the acquis related to financial services
(banks) particularly with the new Banking Law adopted in 1996.  The only major directivenot yet sufficiently approximated is the Capital Adequacy Directive, since Hungarian
capital adequacy regulations are still based on credit risk alone (it is planned to extend the
current regulations to cover market risk within one or two years).  The new banking law
is largely compatible with the acquis, but its practical implementation and functioning
needs monitoring.
Free establishment of foreign banks’ branches is envisaged as from 1 January 1998, on the
basis of the OECD agreement.
Regarding the financial market, the legislative framework is now largely in compliance
with EU criteria concerning official stock exchange listing, public offers of transferable
securities, insider dealing, disposal of major holdings, and investment services in thesecurities field.  The directive on investment funds (so-called “UCITS”) has only been
partially implemented by a 1991 law.  Investment fund management may be carried out
only by companies licensed by the Supervisory Authority, as in the EU.  The capital
adequacy directive is also applicable to investment firms.
The Hungarian authorities have largely succeeded in their legislation on life and non-life
insurance into line with the EC Directives of the first and second generation. In some
areas, the Insurance Act of 1995 exceeds the requirements of the first generation of EU
directives (for example, in the fields of approval of policy conditions and insurance
premia), while not meeting the third generation of objectives, such as the total abolition of
prior approval of premia.  The Hungarian government has indicated that they wish
gradually to implement changes to achieve full approximation to EU regulations and
directives, primarily in the interests of their customers.
Conclusion
Important progress has been achieved.  The acquis in this sector (23 key White Paper
measures) has already been largely transposed.  Full free establishment in the areas of
banking and insurance have still to be adequately introduced in the sectors’ legislative
frameworks and duly implemented. Under the present regulations, neither EU or non-EU
undertakings with their head offices outside of Hungary may open a branch in Hungary.
However, in 1997 Hungary intends to establish the general legal background to rectify this
situation.  The establishment of branches by foreign companies is expected to be permittedfrom 1998.
Provided harmonisation proceeds as planned, no major difficulties are foreseen in
achieving full approximation in relation to free movement of services. With the completionof the privatisation process in the banking and in the insurance sectors scheduled for
1997/98 and given the relatively large role of foreign (mainly European) investors in these
two sectors, it is likely that the Hungarian financial services sector will be able to operate
competitively in a wider single market after accession.
Free Movement of Persons
The free movement of persons encompasses two concepts with different logical
implications in the Treaty. On the one hand, Article 7a in Part One of the Treaty on
‘Principles’ mentions the concept in connection with the establishment of the internal
market and implies that persons are not to be subject to controls when crossing the
internal frontiers between the Member States. On the other hand, Article 8a in Part Two
of the Treaty on ‘Citizenship of the Union’ gives every citizen of the Union the individual
right to move and reside freely within the territory of the Member States, subject to
certain conditions. The abolition of frontier checks must apply to all persons, whatever
their nationality, if Article 7a is not to be meaningless. While the rights deriving from
Article 8a apply in all Member States, those stemming from Article 7a have not yet been
fully applied throughout the Union.
(a) Free Movement of Union Citizens, Freedom of Establishment and Mutual
Recognition of Diplomas and Qualifications
The Europe Agreement provides for the non-discriminatory treatment of workers that are
legally employed (as well as their famili es). It covers the possibility of cumulating or
transferring social security rights, and encourages Member States to conclude bilateral
agreements with Hungary on access to labour markets. During the second phase of thetransitional period, the Association Council w ill examine further ways of improving the
movement of workers.
The White Paper considers the legislative requirements in order to achieve a harmonious
development of the labour market, w hilst simultaneously preventing distortions of
competition.
The free movement of workers is one of the fundamental freedoms enshrined in the
Treaty; freedom to practise certain professions (e.g. in the legal and health fields) may,
however, be subject to certain conditions, such as qualifications. Depending on the case,
these may be dealt with through coordination or by applying the principle of mutual
recognition. Freedom of establishment is also guaranteed under the Treaty and covers the
economic activity of self-employed natural persons and companies.
The free choice of place of residence may thus be subject to minimum conditions as to
resources and health insurance where the person does not exercise a profession in the
country concerned.
 Descriptive Summary
Under Hungarian law, access to employment for foreign nationals with relevant permits
cannot be prohibited on grounds of nationality alone.  In certain circumstances, however,
preference criteria for nationals may be imposed by statutory or collective instruments.
Since the beginning of the 1990s, Hungarian legislation has imposed restrictions on the
annual quota of possible immigration permits in order to boost employment of Hungarian
nationals.
Foreign nationals may only have access to employment if they have a work permit, which
is subject to certain conditions.  The current regulation also requires visas for the families
of foreign workers.
Provided a migrant worker has the appropriate residence permit, he/she is eligible for
social security. Members of the family of the foreign worker have access to education
although, at least for higher education, the registration fees are higher for foreigners than
for nationals.  Members of the a worker’s family do not acquire a right to work.
A substantial part of the acquis concerning the mutual recognition of diplomas and
qualifications (55 directives)  has already been taken on board and full approximation is
expected in the medium term.  Negotiations on the mutual recognition of diplomas are
due to start soon, and in particular Hungary has expressed an interest in including in the
discussions the medium-level professional qualifications issued by vocational training
centres.
Current and Prospective Assessment
Hungarian legislation already recognises the principle of non-discrimination between
nationals and foreigners legally residing in the country.  Therefore, the application of the
principle of equal treatment to those EU workers already legally residing in Hungary
should not be a problem.
Training, where co-ordinated by directives for seven professions, is broadly in line with
the acquis, although some adaptation is still necessary.  Professional structures (such as
professional chambers or associations) are in place for many professions, but these will
probably need to be reinforced in the future. Integration with EU professional
associations is developing well (for example engineering diplomas already meet the
minimum European standards).
Conclusion
The necessary structures in this area seem to be in place, but it is hard to assess their real
effect and enforcement.  Hungary is aware of the outstanding issues that need to be
resolved with regard to the free movement of persons.  From a technical point of view,
adaptations of regulations will be necessary in the medium term.
(b) Abolition of Checks on Persons at Internal Frontiers
The free movement of persons within the meaning of Article 7a of the EC Treaty, i.e. the
abolition of checks on all persons, whatever their nationality, at the internal frontiers has
not yet been fully implemented in the Union. Doing away with checks on persons is
conditional on the introduction of a large number of accompanying measures, some of
which have yet to be approved and implemented by the Member States (see separate
section on Justice and Home Affairs). However, that objective has been achieved by a
limited number of Member States in accordance with the Schengen Convention (seven
Member States already apply it and another six are working towards implementation).
The draft Treaty aims to make that objective easier to achieve within the Union by
including a new chapter on Freedom, Security and Justice and incorporating the Schengen
Agreement into the .Treaty.
Hungary has stated its intention to become party to the Schengen Agreement. It has called
for institutional and technical cooperation notably in the field of border control, to the
upgrading and modernisation of which significant financial resources are being devoted.
General Evaluation
1. Hungary’s progress in the implementation of legislation relating to the White Paper is
summarised in the annex. According to the table, Hungary considers that by 30 June 1997
it will have adopted national implementing legislation for 579 of the 899 directives and
regulations in the White Paper. That figure covers provisions for which Hungary considersit will have adopted implementing legislation or which it will have checked for
compatibility with Community rules and does not prejudge actual compatibility as such,
on which the Commission is not able at this stage to state an opinion.
2. For most of the areas linked with the internal market and in particular public
procurement, intellectual property, company law and accountancy rules, product liability
and financial services, the Community legislative base is almost in place. Legislation has
been adopted in full or in part to implement most of the measures according to the
Hungarian authorities’ assessment, though the Commission cannot at this stage express a
position on its total compatibility with Community law. Legislative efforts are still
necessary to achieve full conformity with the acquis.
3. Despite the efforts made, the real progress made in taking over texts adopted very
recently must be accompanied by specific implementing measures and by the establishment
of an efficient administrative structure.  Hungary has certain infrastructure which works
satisfactorily (e.g. in public procurement, the appeal procedures provided for in the
directives are applicable and appeals are made to the courts), but major efforts have still tobe made in a number of areas, in particular on standardisation, including on the technical
structures needed for implementing the “new approach”.
As things currently stand, the Commission cannot yet express an opinion on the capacity
of companies, particularly small and medium-sized businesses, to implement the acquis .
4. Leaving aside certain specific aspects relating to agriculture, checks at the internal
frontiers of the Union can only be abolished once sufficient legislative harmonisation has
been achieved. This calls for mutual confidence, based in particular on sound
administration (e.g. the importance of safety checks on some products at the place of
departure). As far as goods are concerned, the completion of the internal market on
1 January 1993 was only achieved by doing away with all the formalities and checks
performed by the Member States at the internal borders of the Union. In particular these
checks covered technical points (particularly product safety), veterinary, animal-health andplant-health matters, economic and commercial matters (e.g. prevention of counterfeiting
of goods), security (weapons, etc.) and environmental aspects (waste, etc.). In most cases,the abolition of checks was only made possible by the adoption and application of
Community measures harmonising the rules on movement and placement on the market
(particularly as regards product safety) and, where applicable, by shifting the place where
controls and formalities are conducted to within the Member States or on their markets (inparticular as regards VAT and excise duties, veterinary and plant-health checks, and thecollection of statistics). A section of Hungary’s present borders will become the Union’s
external frontier and this means border checks will need to be stepped up (see separate
section on customs).
In view of the overall assessment that can be made of progress achieved to date and the
rate at which work is advancing in the various areas concerned, it is difficult at present to
put a time-scale on Hungary’s ability to take over and implement all the instruments
required to abolish internal border checks and to transfer those checks to the Union’s
external frontier.
5. Hungary has already adopted significant elements of the acquis relating to the single
market. However, the Commission is not yet able to take a position on every measure
whose transposition has been reported by Hungary.  In many areas, enforcement needs to
be strengthened. Provided that current efforts continue, it can be expected that in the
medium term Hungary will have adopted and implemented the legislation and made the
necessary progress on the mechanisms of enforcement, in order to be able to participate
fully in the single market.
Competition
European Community competition policy derives from Art. 3 (g) of the Treaty providing
that the Community shall have a system ensuring that competition in the internal market
is not distorted .  The main areas of application are anti-trust and state aid.
The Europe Agreement provides for a competition regime to be applied in trade relations
between the Community and Poland based on the criteria of articles 85 and 86 of the EC
Treaty (agreements between undertakings) abuses of dominant position) and in article92/state aid) and for implementing rules in these fields to be adopted within three years of
the entry into force of the Agreement.  Furthermore it provides  that Hungary will make
its legislation compatible with that of the Community in the field of competition.
The White Paper refers to the progressive application of the above provisions and those of
the Merger Regulation (4064/89) and of Art. 37 and 90 (Monopolies and Special Rights).
Descriptive Summary
The New competition law “on the Prohibition of Unfair and Restrictive Market Practices”
was adopted in June 1996 by Parliament and entered into force on 1 January 1997.  It
represents a significant step towards achieving the necessary approximation of legislation
in the field of anti-trust .
Block exemptions on vertical restraints similar to those applicable in the Community are
under preparation and are expected to be adopted in 1997.
In order to enforce competition laws, the Office of Economic Competition (OEC)  was
established in 1991.  The procedural rules, in particular due process and third party rights,to a large degree satisfy the requirements as concerns approximation of legislation.
In order to be in line with the current and foreseeable situation in the EU as regards
sectors subject to monopolies or dominant positions such as telecommunications,
transport, postal services and energy, necessary measures have already been taken; others
are under preparation.
In the field of state aid the monitoring authority on state aid has been established within
the Ministry of Finance.  Rules for its functioning has not yet been clearly established, in
particular the powers of the monitoring authority to collect all information necessary to
assess the compatibility of state aid granted by all aid granting authorities.
A first aid inventory has been drawn up which represents a step towards creating the
transparency required in the granting of state aid.  However, it is not complete as it
includes solely aid financed by the State budget, not aid financed by other public
authorities, and as it does not provide sufficient information on the objective of the aid
granted.
Export aid is granted in Hungary which is incompatible with the Europe Agreement.
Current and Prospective Assessment
With the new Competition Law which entered into force on 1 January 1997 and the
foreseen adoption of block exemptions equivalent to those applicable in the Community,
Hungary has gone a long way towards satisfying the requirements as regards
approximation of legislation in the field of anti-trust .  Further refinements may be needed
in the field of procedures and merger control and as regards special and exclusive rights .
The staff of the Hungarian competition office seems sufficiently skilled to ensure a
credible enforcement of the competition law.
The procedural rules for the monitoring of state aid need to be improved to achieve
compliance, and the aid inventory developed in order to ensure the necessary
transparency.
It should be added, moreover, that certain aid measures seem to be contingent upon
export performance which is clearly not compatible with the Europe Agreement.
Moreover, state aid seems to be granted through indirect forms of state aid, such as tax
reliefs, debt write-offs and tax arrears.  These measures constitute operating aid which are
only allowed under very strict conditions.  Due to the lack of transparency it is as yet
unclear whether the conditions for granting operating aid are complied with.
In addition to the adoption of legislation sufficiently approximate to that of the EU,
credible enforcement  of competition law requires the establishment of well functioning
anti-trust and state aid monitoring authorities.  It requires moreover that the judicial
system, the public administration and the relevant economic operators h ave a sufficient
understanding of competition law and policy.
Conclusion
With the adoption of the new Competition Act the progress in approximation of
legislation is significant in the field of  anti-trust  and the skills of and the efforts made so
far by the Hungarian anti-trust authority represent a significant step forward for a credible
competition law enforcement.
In the field of state aid, however, more needs to be done to achieve the degree of
transparency required.  The role and powers of the monitoring authority need to be clearly
defined to ensure the compatibility with the Community rules of the aid granted. A
considerable effort will be necessary to fulfil the requirements in the field of state aid over
the medium term.  Close cooperation with the Commission will be necessary in this field.
3.2    Innovation
Information Society
Present Situation
The economic and social effects made possible by the combination of information
technology and telecommunications are great.  In Hungary these possibilities were
neglected before 1989 although general education was a  priority.  The result is that the
size of the information technology market has recently spurted beyond normal expectation
deduced from GDP per capita.  The number of host computers on the Internet (2.9 per
1000 inhabitants) as a relative measure of development towards the information society
(IS), suggests that Hungary has passed the EU average of two years ago.  If Internet
connections follow the same pattern of growth, the telecommunications infrastructure,
which is at present about six years behind the EU average, may remain a brake on IS
developments.
Conclusion
Because of the positive approach to telecommunications liberalisation combined with the
high level of the national education system.  Hungary can be expected to realise the
potentialities of the Information Society earlier than the average CEEC.
Education, Training and Youth
Articles 126 and 127 of the EC Treaty provide that the Community shall co ntribute to the
development of quality education and implement a vocational training policy aimed at
promoting the European dimension in education and at enhancing industrial adaptation
and the responsiveness of the labour market through vocational training policies.
The Europe Agreement provides for co-operation in raising the level of education and
professional qualifications.  The White Paper includes no measures in this field.
Descriptive Summary
Hungary’s spending on education amounts to 6.6 % of GDP. and accounts for 8.9 % of
the state budget’s expenses.
The Hungarian educational system is structured in a similar way to most western
European countries.  It includes, at present, 9,500 schools and 89 higher education
institutions, of which 30 are universities and 59 colleges.  There are 2 million pupils,
186,000 teachers and 180,000 students in Hungary. Hungary has a long tradition of
excellent education facilities.  The Hungarian educational system already met very high
standards before the transformation.  According to 1993 data, only  2.3% of the labour
force has completed less than full primary education, 25.8% has achieved the general
school certificate, 27.2% has a skilled workers’ qualification, 29.9% has obtained a
baccalaureate and 14.8% has a higher education diploma.  More recently, Hungary has
been developing vocational training with a view to increase labour market mobility and
thus assist economic transition and address unemployment.
The economic downturn since 1990 and the resulting drop in government revenue (itself
an explanation for the important wage differences between the public and the private
sector, which creates an incentive for the best teachers to leave the public sector) resulted
in a potential threat to  these standards.
The Tempus programme has contributed to the achievement of the goals of higher
education reform and created the basis for cooperation with the EU higher education
institutions.
About 15% of the total population of Hungary is aged between 15 and 25.  Hungarian
youth organisations have been involved in European youth activities since 1990.  From
1995, youth co-operation was included in the Youth for Europe programme.
Current and Prospective Assessment
Hungary enjoys a solid background in education and training.  The institutional reforms
and the development or review of curricula should support education in those professional
areas which contribute directly to accession.  The development of European Studies, the
introduction of new courses and study programmes in the regulated professions, thedevelopment of multi- and interdisciplinary professional profiles, the application of
modern technology, and the establishment of quality assurance systems are challenges
facing Hungary’s higher education system.
There has been progress in recent years in the development of new curricula and
establishing new programmes at graduate and doctoral level, especially in the fields of
technology development and transfer, Business, Management and SME development, and
Agriculture.  This will help to consolidate and develop the growing market economy.
However, lack of resources and low pay compared to the private sector remain a problem.
As from the second half of 1997, Hungary will participate in Community Programmes and
this will contribute further to the preparation for integration.
Conclusion
In the perspective of accession, no major problems should be expected in these fields.
Research and Technological Development
Research and Technological Development activities at Community level, as provided for
by the Treaty and in the Framework Programme, aim at improving the competitiveness of
European industry, the quality of life, as well as supporting sustainable development,
environmental protection, and other common policies.
The Europe Agreement and its additional Protocol provide for co-operation in these
areas, notably through participation in the Framework Programme.  The White Paper
includes no direct measures in this field.
Descriptive Summary
The National Committee for Technological Development is the main Hungarian Science
and Technology institution responsible for implementing science and technology policy,
managing strategic government programmes and planning, co-ordinating and financing all
state funded activities in this sector.
Competitive mechanisms for research funding have been introduced. Hungary’s spending
in this field represents about 0.78 % of GDP; this was 1.07% in 1991.
Current priority subjects are Information Technologies, Materials Technologies and Agro-
Food.
Regular cooperation with the European Union started in 1992 with the 3rd Research and
Technology Development Framework Programme.  So far, cooperation was mainly
concentrated on COPERNICUS  (Specific Programme for Cooperation with CECs and
NIS) and remains rather low for participation in the 4th Framework Programme.  Hungaryis a member of COST (European cooperation in the field of scientific and technical
research) and EUREKA (European Research Coordination Agency).
The statistics on research and technological development are compatible with OECD
standards; Hungary is now a member of that organisation.
Current and Prospective Assessment
Important changes and improvements have already taken place.  A big effort has been
made in the improvement of the internal structure, liberalisation, and financial support in
this sector.  Human resources and potential remain strong despite the cutbacks.
Despite the fall in investment in and technical services of recent years, Hungary remains
one of the strong performers among CEECs.  The Hungarian scientific output ranks the
country among the top 20 countries world-wide.
Nevertheless, it is necessary to improve the level of innovation in the economy generally
and in industry and to enforce the links of research institutes with industry and small and
medium enterprises.
Hungary is prepared to play an active role in the European research and technological
development and allocate funds to this activity. It has declared its interest in full
association with the 5th Framework Programme.
Conclusion
In the perspective of accession, no major problems are expected in this field. Accession
would be of mutual benefit.
Telecommunications
The objectives of EC telecommunications policy are the elimination of obstacles to the
effective operation of the Single Market in telecommunications equipment, services and
networks, the opening of foreign markets to EU companies and the achievement of
universally available modern services for EU residents and businesses.  These are achieved
through harmonisation of the standards and conditions for service offerings the
liberalisation of the markets for terminals, services and networks and the adoption of
necessary regulatory instruments. The Directives and policies needed to achieve this have
now been established,  but the liberalisation of public voice telephony and operation of
related infrastructure will be deferred for a year or two after 1998 in certain member
states.
The Europe Agreement provides for co-operation aimed at enhancing standards and
practices towards EC levels in telecommunication and postal policies, standardisation,
regulatory approaches and the modernisation of infrastructure.  The White Paper focuses
on the approximation of regulation, networks and services, followed by  further steps
ensuring gradual sector liberalisation.
Descriptive Summary
At the beginning of the 1990s Hungary had a poorly developed telecommunications
network, despite the fact that economic liberalisation had already begun.  The 11%
penetration rate in 1991 was very low and process has been made since than, notably by a
rapid liberalisation of the telecommunications  market.
The legislation and regulatory instruments comprise the Telecommunications Law of
1992; the Frequency Management Law of 1993; the decree of 1993 on Licensing and on
the general conditions for services of telecommunications operators; the Law of 1995 on
type approval of telecommunications equipment; the decree of 1997 on licensing of those
services for which the market has already been liberalised (eg, data transmission, multi-
media).  Although a significant regional disparity persists, the increase in the penetration
rate for telephony in the fixed and mobile networks has been most impressive, (28% for
fixed telephony in May 1997).  Mobile communications are provided by three operators,
all of which are joint ventures between Hungarian and Western investors.  Hungary is
currently attracting considerable investment in this sector, partly due to the fact that it has
privatised the majority of the capital of the public network operator MATAV.  MATAV isthe only CEEC public operator which is majority- owned by the private sector.  The state
retains only 23% of the capital.
Current and Prospective Assessment
Degree of Liberalisation
According to the commitments at the WTO negotiations in 1997, the Government will
liberalise the market for the fixed network and voice telephony by 1 January 2002. The
market for mobile communications has been opened to competition by licensing two GSM
networks in addition to the analogue mobile services. Additional mobile phone services
are expected to be introduced in 1998 and 2000. Alternative infrastructures are expected
to be opened in June 1997 through a license for provision of data transmission and value
added services using the network of the Hungarian railways.
Approximation to EC Law
The recent legislation regarding networks and services covers most of the acquis. This
legislation and regulatory instruments comprise the Telecommunications Law of 1992, the
Frequency Management Law of 1993, the Decree of 1993 on Licensing and on the
general conditions for Services of Telecommunications operators, the Law of 1995 on
type approval of telecommunications equipment, the Decree of 1997 on licensing of those
services for which the market has already been liberalised (eg, data transmission, multi-
media). Regulatory measures on interconnection and equal opportunities for new marketentrants have favoured the  rapid start-up of many operators of various services.
The administrative capacity required for the implementation of the acquis appears to be
sufficient. However, the National Communications Authority is under the direct
supervision of the Ministry of Transport. Therefore, the regulatory function is not
independent of the ownership function exercised by the state in relation to MATAV.
A tariffs reform programme is under preparation with the objective of introducing cost-
oriented tariffs in 1998. In order to finance universal service obligations, a
“Communications Fund” will be created in 1997. Policy measures will have to be taken to
secure truly universal service availability in the new competitive environment and to
reduce large disparities in the penetration rate.
Infrastructure
The penetration rate for the telephone service has increased from 11 lines per 100
inhabitants in 1991 to 26 in 1996 (the average in Ireland, Portugal and Greece is about
43.9 lines per 100 inhabitants). The number of subscribers of mobile telephony was
465,000 in 1996. About 60% of the fixed network and about 85% of the mobile networks
was digitised in 1996 (the average in Ireland, Portugal and Greece is about 62.4). All the
telecommunications districts of the countries are connected by a fibre optic cable network
which is 2500 kilometres long. On the basis of this modernisation of the network,
advanced services like ISDN started to be introduced in 1995 and about 2000 ISDN lines
are now available. Since 1996 technologies like SDH and ATM have gradually been
introduced in Budapest and in the backbone network. As for cable TV, more than 40% of
the households are connected.
Foreign investment has been high in the sector. 67% of the stock of the national network
operator, MATAV, has been taken over by a consortium between Deutsche Telekom and
Ameritech. The provider of paging services, Operator Hungaria, is a joint venture of TDF
Radio-Services, France (49%) and TeleHungaria (51%). The two other paging operators,
Easy Call Hungary and Eurohivo Kft Magyar Paging, are joint ventures between Matrix
Telecommunications and Telecom Finland as well as Microsystem Telecom Corporation
and Gerard AC Sales and Leasing (US). The mobile telephony operator, Pannon GSM, is
a joint venture of several Western European countries (74%) and a Hungarian consortium
(26%); the second GSM operator WesTel 900 GSM and the analogue mobile telephony
operator are joint ventures of MATAV (51%/43.6%) and US  and other companies
(49%/56.4%).
Competitiveness of the Sector
Hungary has been successful with regard to its strategy of rapid expansion of its
telecommunications network. In 1995 there were 10.2 employees per 1000 lines (the
average in Ireland, Portugal and Greece is about 6.2). The waiting list for a telephone line
is expected to disappear by mid 1997. The price of a standard line for business
communications (416 ecu) is the highest in the region and revenue per line (about 270 ecu
in 1995) is also among the highest in the region. This should ensure that MATAV can be
run as a business profitable enough to allow for further investment.
Conclusion
Hungary should have little difficulty in adopting the EC model of telecommunications
liberalisation in the medium term because it has already implemented most of the acquis
communautaire.  If foreign investment continues at its current pace and if a tariff
rebalancing scheme is introduced in 1998, the sector should be able to face full
competition.
Audio-visual
The audio-visual acquis aims, in the context of the Internal Market, for the provision and
free movement of audio-visual services within the EU as well as the promotion of the
European programme industry.  The Television Without Frontiers Directive, which is
applicable to all broadcasters regardless of the modes of t ransmission (terrestrial, satellite,
cable) or their private or public nature, contains this acquis, setting down basic rules
concerning transfrontier broadcasting.  The main points are: to ensure the free movement
of television broadcasts throughout member states; to promote the production and
distribution of European audio-visual works (by laying down a minimum proportion of
broadcasting time for European works and those by independent producers); to set basic
standards in the field of television advertising; to provide for the protection of minors and
to allow for the right of reply.
The Europe Agreement provides for co-operation in the promotion and modernisation of
the audio-visual industry, and the harmonisation of  regulatory aspects of audio-visual
policy.
The Television Without Frontiers Directives is a Stage I measure in the White Paper.
Descriptive Summary
The legal framework for the audio-visual sector is determined by the 1996 Act on Radio
and Television Services.  This Act dismantled the State's information monopoly and
established the National Radio and Television Board which is responsible for evaluating
frequency tenders, supervising the media, providing programme monitoring, and
controlling services.
The main public service television broadcaster is Hungarian Television, which operates as
a private company but is 100% State-owned.  It has about 72% of the market share, with
the rest divided between domestic and foreign channels.  The process of awarding licences
to two private channels is well advanced.
The state monopoly over film production was lifted in the late 1980s.  Government
subsidies for film production, provided indirectly, amount to approximately 1 billion HUF
(5 MECU) per year.  The distribution sector is largely controlled by two US enterprises.
Current and Prospective Assessment
The audio-visual sector in Hungary is attempting to reestablish itself after major upheavals
in recent years, and is characterised by rapid growth and constant change.  Its ability
properly to adhere to the acquis presupposes an upgrading of the capacity of the
programme-making industry to meet the important challenges of an adapted regulatory
framework.
Hungarian audio-visual legislation is in large measure compatible with EU requirements.
The Hungarian government has said that it can take on the audio-v isual acquis by the time
of accession to the EU and is working toward a more comp lete transposition in the
meantime.
As a result of the progress made, Hungary w ill shortly be invited to participate in
Community audio-visual policy (and, in particular, the MEDIA II programme).
Conclusion
In view of the continuing progress toward legislative alignment, and provided that this is
accompanied by the necessary structural adaptations of the industry, Hungary should be
able to meet EC requirements in the audio-visual sector in the next few years.
3.3 Economic and Fiscal Affairs
Economic and Monetary Union
By the time of Hungary’s accession, the third stage of EMU will have commenced.  This
will mark important changes for all Member states, including those that do not participate
in the Euro area. All Member states, including the new ones, will participate fully in the
economic and monetary union.  Their economic policies will be a matter of commonconcern and they w ill be involved in the coordination of economic policies (national
convergence programmes, broad economic guidelines, multilateral surveillance, excessive
deficit procedure).  They will be required to respect the stability and growth pact, to
renounce any direct central bank financing of the public sector deficit and privileged
access of public authorities to financial institutions, and to have completed the
liberalisation of capital movements.
Accession means closer monetary and exchange rate co-operation with the European
Union.  This will require strengthening structural reforms in the area of monetary and
exchange rate policies.  Member states not participating in the Euro area will be able to
conduct an autonomous monetary policy and participate in the European System of
Central Banks (ESCB) on a restricted basis.  Their central banks have to be independent
and have price stability as their primary objective.  Monetary policy has to be conducted
with market-based instruments and has to be ”efficient” in transmitting its impulses to the
real economy.  Therefore, reforms need to be pursued to tackle factors that hinder the
efficiency of monetary policy, such as the lack of competition in the banking sector, the
lack of development of financial markets and the problem of “bad loans” in the banking
sector.  Finally all Member states shall treat their exchange rate policy as a matter of
common interest and be in a position to stabilise their exchange rates in a mechanism yet
to be decided.
As membership of the European Union implies acceptance of the goal of EMU, the
convergence criteria will have to be fulfilled by Hungary, although not necessarily on
accession. While the fulfilment of the convergence criteria is not a precondition for EU
membership, they remain key points of reference for stability oriented macroeconomic
policies, and must in time be fulfilled by new member states on a permanent basis.  Hence
the successful conclusion of systematic transformation and market oriented structural
reforms is essential.  Hungary’s economic situation and progress has already been
analysed in preceding chapters of this Opinion.
Current and Prospective Assessment
The Hungarian Central Bank is formally independent from the government. In practice,
however, the appointments of new governors have coincided with changes in the
government. The objective of price stability is not clearly stated in the CB Law, but it can
be claimed that since the launch of the stabilization package (March 1995) the objective of
the central bank is to curb inflation. Finally, a recent amendment to the CB Law has
almost eliminated any differences between this Law and the Treaty provision concerning
the prohibition of budget deficit financing  by the central bank.
The monetary policy strategy implemented since March 1995 within the framework of a
consistent stabilization programme, has undoubtedly been effective in reducing inflation.
In addition, the process of transition towards a market based monetary policy appears to
be quite advanced:  the Hungarian central bank uses indirect instruments only to control
the money supply. Bank privatisation has proceeded at a fast pace, with huge participationof foreign investors; “bad loans” have been reduced to non-critical levels; the bankruptcy
law is implemented quite efficiently and banks do certainly not face a soft budget
constraint. Finally, the market of government papers is one of the most developed in the
region. However, it is important that the privatisation of commercial banks continues and
that competition in the banking sector is increased in order to enhance the efficiency of thetransmission mechanism and to increase the CB’s ability to control monetary aggregates.
Since March 1995, the exchange rate has been playing the fundamental role of nominal
anchor in the stabilization programme. The exchange rate regime chosen at that time
(crawling band), has proved to be successful in reducing inflation and curb speculative
capital inflows. The authorities will consider reducing over time the actual rate of crawl in
order to peg inflation expectations at a lower level. In addition, the sound and stabilising
policy mix implemented since March 1995, has helped the exchange rate to move along
the pre-announced path without any particular tension.
Conclusion
It is premature to judge whether Hungary w ill be in a position, by the time of its
accession, to participate in the Euro area; that will depend on the success of its structural
transformation permitting to attain and to adhere permanently to the convergence criteria,
which are not however a condition of accession.
Hungary’s participation in the third stage of EMU as a non-participant in the Euro area
should pose no problems in the medium term, provided that central bank legislation is
made fully compatible with EC rules and that the stability orientation of current monetary
and exchange rate policies is maintained.
Taxation
The acquis in the area of direct taxation mainly concerns some aspects of corporation
taxes and capital duty.  The four freedoms of the EC Treaty have a wider impact on
national tax systems.
The indirect taxation acquis consists primarily of harmonised legislation in the field of
Value Added Tax and excise duties.  This includes the application of  a non-cumulative
general tax on consumption (VAT)  which is levied on all stages of production and
distribution of  goods and services.  This implies an equal tax treatment of domestic and
non-domestic (import) transactions.  The VAT acquis also contains transitional
arrangements for the taxation of transactions within the European Union between taxable
persons.  In the field of excise duties the acquis contains harmonised tax structures and
minimum rates of duty together with common rules on the holding and movement of
harmonised excisable goods (including the use of fiscal warehouses).  As a result of the
introduction of the Single Market, all fiscal controls at the Community’s internal frontiers
were abolished in January 1993.
The mutual assistance between Member State tax authorities is an important feature of
administrative cooperation in the Internal Market; the respective Directive covers both
direct and indirect taxation.
The Europe Agreement contains provisions on approximation of legislation in the area of
indirect taxation.
The White Paper contains as Stage I measures those which make up the main
requirements of the indirect taxation acquis (essentially, those measures applied in the
Community up to 1993), and as Stage II measures those which are in addition necessary
to implement the full indirect taxation acquis.
Descriptive Summary
Direct Taxation
The two company taxation Directives and the Arbitration Convention provide for a
mechanism which applies on the basis of reciprocity.  Respective provisions can therefore
by definition not be expected to exist before accession.
Indirect Taxation
The overall contribution of VAT and excise duty revenue to the Hungarian state budget
was about 21% and 10% respectively in 1995.  This is exp ected to continue on an upward
trend.
Value Added Tax
The current Hungarian VAT system was introduced on 1 January 1988 replacing the
previous Single-Stage Consumption Tax.  A revised VAT Act entered into force on 1January 1995.  Hungary applies a dual VAT rate system: a standard VAT rate of 25% and
a reduced VAT rate of 12%.  The reduced rate applies to certain specified products and
services.  All other goods and services are taxed at the standard VAT rate.  In addition
Hungary applies a zero-rate to the supply of pharmaceutical products.
Certain activities are exempt from VAT without the right to claim the input credit on such
supplies.  These exemptions relate mainly to activities in the public interest, financial and
insurance services, property and lotteries and similar games.  Refund of excessive VAT is
in principle only possible in certain specific cases such as when the taxable person has
made investments of significant  value, or if the taxable person has submitted a declaration
declaring the termination of his position as a taxable person.  In other situations the
excessive VAT is set off against the tax to be paid in the subsequent VAT declaration.
Refunds to taxable persons not established in Hungary are granted, on a reciprocity basis.
The Hungarian VAT Act provides for several special schemes in the field of commercial
accommodation, the agricultural sector, second-hand goods and for retail traders.
Excise
The current excise duty legislation in Hungary entered into force from 6 January 1992.
Excise duties are levied on a wide range of products including products other than those
subject to common excise duties within the Community (mineral oils, alcohol and
alcoholic beverages and manufactured tobacco).  Generally the duty is ad valorem in
nature, with an additional specific duty for spirits, beers and cigarette’s.  O nly mineral oils
are charged on a purely specific basis.
Mutual Assistance
The tax administration has not yet had to develop its capacity for mutual assistance with
the tax authorities of Member States, since mutual assistance is a feature which would
only become applicable on accession.
Current and Prospective Assessment
Value Added Tax
The current VAT system in Hungary has been based on the main principles of the VAT
legislation of the Community.  It is a solid starting point for future alignment with the
Community VAT acquis.
The definitions of goods and services are not identical with those contained in Community
legislation.  The Hungarian reduced VAT rate is applied to supplies other than those
permitted under the Community legislation.
Hungary’s membership of the European Union would require additional adjustments to
bring the VAT legislation into line with the requirements of the Community acquis.   This
is in particular the case as regards the system of taxation necessary in a Community with
no internal frontier controls.
The Hungarian national strategy plan for implementing the recommendations of the White
Paper regarding VAT is planned, in the short term (during 1997), to give priority to the
introduction of arrangements for taxing certain services on the basis of the so-called
reverse charge mecha nism, whereby the  service will be either taxed at the hands of the
recipient, or he or somebody else may be held jointly and severally liable for the payment
of the tax.  A flat rate scheme for farmers is also intended to be introduced.  A new
scheme for second-hand goods is planned to be based on the margin principle.  An
extension of the current special scheme for small undertakings is envisaged.  The aim is,
by 1998, to bring the Hungarian VAT system into line with that of the Community.
Excise
There are significant discrepancies between the Hungarian excise regime and EC
requirements.
Firstly, there exists no excise suspension system where goods can move between
authorised tax warehouses without payment of duty.
Secondly, ad valorem taxation of spirits tends to exaggerate price differentials between
products and is open to challenge as being discriminatory against the  more  expensive
imports in favour of local producers.  Also, the system of taxation of w ine and tobacco
(on an ad valorem basis) and taxation of beer (based on two elements) are not compatible
with Community law.
In the event of accession, excise duties on products not belonging to the above-mentioned
categories could continue to apply provided, however, that they would not give rise to
border-crossing formalities in trade between member states and that they complied with
the principles of non-discrimination between national products and products originating in
other member states.
In order to ensure a correct application of the Community excise legislation it is important
that Hungary adopts soon excise tax structures compatible with EC law at the minimum
taxation level applicable in the EC; EC compatible arrangements for the effective
operation of the excise regime (tax warehouses, registered traders, etc;); and
strengthening of control procedures (using tax stamps or other fiscal markings) to combat
fraud.
The Hungarian strategy plan for implementing the provisions of the White Paper does not
provide a clear timetable for future adjustments to Hungarian excise legislation.  A short
term objective consists of establishing tax warehouses for the production phase, requiring
a financial guarantee, introducing an accompanying document, defining the chargability of
the tax, replacing duty on products other than al cohol, tobacco and mineral oils with a
“national consumption tax”, switching from ad valorem rates of duty to specific rates
applied to the three categories of exciseable products except cigarettes, and implementing
tax stamps.  However the adaptation of taxes rates to the EU minimum levels as well as
the adoption of regulations needed for the free movement of goods have been postponed.
Mutual Assistance
There would also be a need, on accession, to implement the appropriate arrangements for
administrative cooperation and mutual assistance between Member States.  These
requirements are essential for the functioning of the Internal Market.
Conclusion
The acquis in respect of direct taxation should present no significant difficulties.
As regards indirect taxation, provided that sustained progress continues in these areas,
Hungary should be able to comply with the acquis concerning VAT and excise duties
within the next few years.
It should be possible to start participating in mutual assistance as the tax administration
develops its expertise in this respect.
Statistics
The main principles of the Community acquis relate to the impartiality, reliability,
transparency, confidentiality (of individual information) and dissemination of official
statistics.  In addition, there exists an important body of principles and practices
concerning the use of European and international classifications, systems of national
accounts, business registers, and various categories of statistics.
The Europe Agreement provides for co-operation to develop effective and reliable
statistics, in harmony with international standards and classifications.
The White Paper includes no provisions in this field.
Descriptive Summary
The Central Statistical Office (KSH), the central body charged with producing and
disseminating official statistics in Hungary, works closely with the National Statistical
Council (NSC), particularly in the preparation of the annual survey programme.
The legal basis for Hungarian official statistics consists of the 1993 Law on Statistics
Current and Prospective Assessment
Hungarian legislation is, with a few exceptions, compatible with the current standards
applied within the European Union.
Some issues of impartiality and confidentiality need clarification.  There are still some
deficiencies in sectors such as external trade or business statistics, and a systematic link
between business surveys and the national accounts has not yet been established.
Conclusion
Provided that continuing progress is made, Hungary should be able to comply with EU
requirements for official statistics within the next few years.
3.4 Sectoral Policies
Industry
EU industrial policy seeks to enhance competitiveness, thus achieving rising living
standards and high rates of employment.  It aims at speeding up adjustment to structural
change, encouraging an environment favourable to initiative, to the development of
undertakings throughout the Community, and to industrial co-operation, and fostering
better exploitation of the industrial potential of policies of innovation, research and
technological development.  EC industrial policy is horizontal by nature.  Sectoral
communications aim at transposing horizontal concepts into specific sectors.  EC
industrial policy results from an articulation of instruments from a number of Community
policies; it includes both instruments related to the operation of markets (product
specification and market access, trade policy, state aids and competitions policy) and
measures related to industry’s capacity to adapt to change (stable macro-economic
environment, technology, training etc.).
In order to cope with competitive pressure and market forces within the Union, the
industry of applicant countries needs to have achieved a certain level of competitiveness
by the time of accession.  The applicant countries need to be seen as pursuing policies
aimed at open and competitive markets along the lines set out in Article 130 (“Industry”)
of the Treaty.  Co-operation between the EC and the candidate countries in the fields of
industrial co-operation, investment, industrial standardisation and conformity assessment
as provided for in the Europe Agreement  is also an important indicator of development inthe right direction.
Descriptive Summary
Industrial output of Hungary in 1995 stood at around 9.2 bn Ecu, equivalent to a bout
three-quarters the industrial production of Ireland.  Its share in GDP is  23% (down from
28% in 1990), and industry accounts for 830,000 jobs or  23% of total employment.  The
total number of enterprises in industry is estimated at around  100,000  most of which are
SMEs.
The transition process entailed a marked decline in industrial production in the first five
years and industrial production reached its bottom in 1992, at the level of 77% of the
1980 output.  Since then, production has grown steadily at an average annual rate of 4%.
Hungarian Industry, main production sectors in 1995
%Share
in  total GDP% Share in total
employment
Chemical Industry and Pharmaceuticals 5 2
Mechanical and electrical engineering 4 3
Foodstuff and Tobacco 4 4
Textiles and Clothing Products 2 3
Wood, Paper, Printing Industry and Furniture 2 2
Mining, excavation, metallurgy and non-metallic
mineral products2 2
Vehicles 1 1
Pressure Vessels, medical apparatus or
equipment, meteorological equipment1 0.5
Telecommunication and Electronics 1 0.5
Total 23 18
The chemical industry is one of Hungary’s most dominant sectors. In the detergent, soap
and colours sub-sectors there is considerable foreign involvement. In those sectors where
the chemical industry managed to retain the  particular strengths it had before the
transition (especially in pharmaceutical intermediates, plastics and agro-chemicals),accession should not pose problems. Given the high raw-material-intensity of the chemical
industry in general and Hungary’s very low endowment with natural resources, some of
the other sub-sectors, however, might  experience further adjustment strains.
The pharmaceutical industry is the most successful and technologically advanced in
Central and Eastern Europe. Many firms are producing at quality levels approaching those
of the EU. It will however take years of investment and restructuring until companies will
be able to launch own internationally-competitive products. Following a period of intense
restructuring and successful privatisation, the export market has begun to recover. Nearly
all pharmaceutical producers have acquired a strategic Western investor. While most
exports go to other CEECs, recently production of generic medicines has been re-
orientated towards the EU.
Mechanical/electrical engineering: Some products in this sector are capable of
competing with some EU Member States. High FDI from the EU and US is an indicator
for a further competitive upgrading. The whole engineering industry is already closely
integrated with the German and, to a certain extent, Austrian industry, a process which is
likely to be further accelerated. Despite the collapse of CMEA markets, Russia remains
the main trading partner of Hungary in this sector. The e lectrical engineering sector,
especially electrical and medical equipment, has managed to increase exports and should
be able to integrate itself successfully in the European industrial tissue, whereas prospects
of mechanical engineering (notably machine tools and lifting equipment) are more
uncertain. The rather good competitive edge of mechanical and electrical industry
contributed to stimulate both upgrading of technical infrastructure and a drive for prompt
legislative alignment meeting EU requirements.
The automotive industry is one of the fastest growing sectors. Assemblies of passenger
cars were established in 1993. This was almost exclusively driven by FDI, attracted by
relatively low labour costs, flexible labour legislation, and favourable demand forecasts.
Major Western car producers have set up production facilities, including a Japanese
producer aiming at exporting considerable quantities into the EU. Car production in
Hungary is still small compared to that of applicant countries. Hungary developed a hub
of engine production for many Western manufacturers. From a structural point of view,
the integration of the Hungarian car and components sector into the European and global
economy is already advanced and technologically sophisticated. Commercial vehicle
construction, however, the traditional sector and still the main employer within the
Hungarian automotive industry, is in a serious crisis. This sector, suffering from strong
declines in production, is still awaiting privatisation and major restructuring before it can
be considered ready to face accession.
Foodstuffs: Roughly half of Hungary’s significant foreign trade in this sector takes place
with the EU, while a considerable influx of modern production technology has occurred
by means of FDI. More structural change is still to take place since concentration in
production remains higher in some sub-sectors and capacity utilisation is very low.
The textile industry is suffering from the breakdown of former CMEA markets, low
productivity and destitute production facilities. In spite of a considerable decline in
textiles, there is at the same time a substantial surplus in clothes, mainly due to the strong
outward processing trade (OPT) between EU and Hungary. In 1992 more than 75 % of
all EU textile imports from Eastern Europe were due to OPT, making it the most
important element of EU-CEECs textile trade. Relocation of production to Hungary has
continued at a fast pace to make use of low labour costs but activities with a higher value
added (innovation, design, marketing) remained in the EU. By the end of 1993 Hungary
had the highest number of joint-ventures among the East European countries in this
sector, with Italy, Germany, France and Greece being the most active. There is some
likelihood that current low  productivity will improve over the preaccession period, by
increasing competitiveness and industrial restructuring, building on FDI, and improved
market access.
The steel industry, which is fairly moderate in size and still benefits from import
restrictions, is waiting for further steps in modernisation. Although a first international
joint venture was set up, the industry  has a need for additional cooperation projects. The
slow pace of privatisation and restructuring is a cause for concern as it seriously affects
the structurally depressed North East of Hungary . Hungary’s request to extend certain
state aids demonstrates the intention to support actively modernisation in this sector.
The wood and paper industry offers good growth-prospects and should experience no
difficulties.
Since the beginning of transition the fairly modern Hungarian cement industry has been
aggressively trying to enter EU markets. Hungary is fast approaching EU standards in this
sector and there is strong cooperation with EU companies.  As soon as construction
demand picks up, so will domestic demand for cement, thus easing competitive pressures
on EU firms.
Many types of glass and ceramic products (tableware, tiles) are competitive with EU
products both in price and quality. These subsectors and the ones with foreign
participation have good perspectives.
Hungary has a very strong supply base for a complete range of railway equipment . Its
access to low-cost input factors and determination to offset the losses of further CMEA
markets makes it a strong competitor for EU suppliers, mostly in the low-value-added
segments.
After privatisation performance slower than originally envisaged Hungary made a new
start in Summer 1995 and hopes to have sold more than 70% of state-owned productive
assets by the end of 1997.  This would result in one of the lowest shares of state
ownership in the candidate countries.  In some sectors such as construction, privatisation
is already on a very high level (82%).
Almost half of FDI is in the manufacturing industry, the breakdown by sectors including:
food and tobacco (28%), mechanical and electrical engineering (26%), chemicals and
petroleum refining (20%) non-metallic mineral products (2%) and wood and paper
products (7%).  Strong FDI performance has created wide spread links with foreign
companies to the benefit of Hungarian competitiveness; furthermore it also has a
considerable impact on performance of Hungarian industry as a whole as foreign affiliates
record significantly higher growth in productivity, sales, and exports than purely domestic
companies and thereby stimulate other industries upstream and downstream.
Current and Prospective Assessment
Hungary started to reform early and has now put in place most of the elements of a
market economy (including a capital market). These are now working satisfactorily. This
largely explains, together with the way privatisation was organised, why Hungary has the
highest FDI level of all applicant countries. The industrial structure is relatively diversified
with less reliance on large enterprises in energy intensive sectors.
The prospects for a rapid economic development are hampered by an only moderate level
of investment  (equivalent to 19% of  GDP, about the EU average) and by the need to
keep interest rates high in order to encourage savings as the large foreign debt already
accumulated does not allow the country to call on additional foreign capital. A lot of
adjustment is still necessary outside the sectors that are already heavily engaged in trade
(usually the ones dominated by foreign capital).
The current stagnation in industrial output, mainly due to the government’s austerity
programme is expected to end in 1997.  W ith domestic demand recovering and the EU
economy picking up, the  increase in industrial output growth has already started.  The
strong productivity growth during the last years can be expected to continue though
perhaps on a lower level, and subject (at least in part) to the development of FDI.  The
strong correlation of FDI with privatisation observed in the past would justify the
expectation that after the end of privatisation annual FDI flows may stabilise on a
considerably lower level than today.
Hungary’s current industrial policy tries to adapt its structural heritage by shifting away
from the more traditional sectors of industry, to those with better growth prospects and
potential in the EU and other Western markets.  Most of the structural adjustment
problems of the past (tax/subsidy-type distortions in the domestic price structure,
monopoly positions, weaknesses and inefficiencies in financial markets) have already been
overcome to a large extent.  In general, the more traditional sectors of the Hungarian
industry which in the past have grown excessively (mining and metallurgy), and those
sectors with high energy, environment and material costs will n eed to face continued
restructuring.  Among those sectors which in all likeliness could be competitive by the
turn of the century are the food ind ustry and food processing machinery, motor car
manufacturing, construction and construction materials as well as pharmaceuticals and
specialised chemicals. The biggest need for further restructuring and modernisation exists
in commercial vehicles, certain subsectors in  food processing, to a certain extent in
textiles and clothing, and steel.
Conclusion on Industrial Competitiveness
Given the extent of restructuring and modernisation efforts undertaken so far there are
good reasons to expect that most sectors of Hungarian industry in the mid term can be
competitive operators in the Single Market.  This applies in particular to those sectors
benefiting from foreign investment.
An evaluation of the acquis specific to the free circulation of industrial goods is to be
found in the separate section on the internal market.
Agriculture
The Common Agricultural Policy aims to maintain and develop a modern agricultural
system ensuring a fair standard of living for the agricultural community and the supply of
food at a reasonable price for consumers, and ensuring the free movement of goods within
the EC.  Special attention is given to the environment and rural development.  Common
market organisations exist to administer the CAP.  These are complemented by
regulations on veterinary health, plant health and animal nutrition and by regulations
concerning food hygiene.  Legislation also exists in the area of structural policy, originally
developed primarily to modernise and enlarge agriculture, but more recently with an
increasing emphasis on the environment, and the regional differentiation of the policy.
Since reforms in 1992,  increasing contributions to farm support have come from direct
aid payments increasingly compensating for reduced market support prices.
The Europe Agreement provides the basis for agricultural trade between Hungary and the
Community and aims to promote co-operation on the modernisation, restructuring and
privatisation of Hungary’s agriculture sector as well as the agro-industrial sector and
phyto-sanitary standards. The White Paper covers the fields of veterinary, plant health and
animal nutrition controls, as well as marketing requirements for individual commodities.
The purpose  of such legislation is to protect consumers,public health and  the health of
animals and plants.
Descriptive Summary
Agricultural Situation
The value of the agricultural production in 1995 was approximately 1.97% of that of the
Union.
Agriculture and forestry contribute 7.2% to the GDP (1995) and employment in this
sector amounts to 8% of total employment.  The regional distribution of employment in
agriculture and forestry varies between a share of 2.3% to 17.1% of total regional
employment.
Since 1990 the recession in agriculture has been even more pronounced than in other
sectors in the economy (-34% over the period 1990-93), leading to a sharp reduction in
agricultural employment and social problems in rural areas; the main reasons being the
restructuring of land ownership and the collapse of traditional export markets.  After that
sharp decline, crop production has been recovering since 1993.
Hungary has 6.2 million ha of agricultural land (4.3% of EC agricultural area) and 1.8
million ha of forest.  Arable land accounts for  4.8 million ha, permanent grassland for
1.15 million ha and permanent crops for 260,000 ha.  Following the instability of the
transitional period, land-use patterns now seem to have stabilised.
The main characteristic of the Hungarian farm structure in the past has been the
predominance of large-scale farms, coexisting with a large number of small individual
farms and household plots.  The situation is evolving towards a more balanced situation
between large corporate farms and co-operatives on the one hand, and individual farms on
the other hand.  About 7,000 corporate farms and co-operatives, and a further 50-60,000
full time farming units account for about 70% of the agricultural output.  Besides, there
are about 1.1 million small and auxiliary farms.
At the moment most of the farm land is privately owned, while a minor part has remained
in state ownership (state farms involved in seed production, breeding etc.).  Farm labour
productivity is generally higher than in other CEECs but still well below productivity in
the EU.
The main crop is cereals (11 million tons in 1995) and around 15% of production is
exported.  The second largest crop is oilseeds, mainly sunflower seed (1995: 780,000t),
occupying 10% of arable land.  Hungary is normally self sufficient in sugar (4.6 million
tons in 1995) with exports in years of high production.  Hungary produces a large variety
of fruit and vegetables and exports relatively significant quantities of fresh and processed
products.  Hungary has a relatively significant production of wine and is traditionally a net
exporter, exporting about 25% of production.
Hungary was a traditional exporter of dairy products, in particular cheese.  However,
reduced supply, has led to a balance in imports and exports (1995 production: 1.9 Mio t).
Production also dropped significantly in the meat sector, (in 1995 beef meat: 39,000t; pig
meat: 580,000t; poultry: 364,000t) but declining consumption, in particular of pigmeat,
and increased imports have made continued exports possible although at lower levels,
especially in the poultry and pigmeat sectors.
The agro-food business has undergone radical change with the emergence of a large
number of newly established private enterprises.  Prior to transition, state-owned food
processing enterprises accounted for 75% of the food industry output.  The privatisation
of the food industry has progressed considerably and is nearly complete.  Foreign
investments have played a major role in the privatisation process and by the end of 1995
foreign investors owned about 53% of the former state industry, while the state still had a
share of 12% and other domestic investors 35%.
Hungary is a net exporter of agricultural and forestry products.  In 1995, agriculture and
forestry accounted for  21 % of total exports and 6.7% of total imports, and the trade
surplus for this sector amounted to 1.6 billion ECU.  Main export products are meat,
cereals, fresh and processed fruit and vegetables, and beverages; the most important
import product is animal feed, the other products are rather dispersed with a certain
concentration on tropical products.
The positive balance is not only due to primary agricultural products but also due to
processed products.
The EC is by far the most important trading partner in agricultural products, accounting
for more than half of both imports and exports. Hungary has a positive balance of 500
MECUS (1995) with the EU.   40 % of exports went to the other CEECs and the Newly
Independent States.
Agricultural Policy
The PSE (producer subsidy equivalent) for Hungary, calculated by the OECD was 16 %
in 1995, compared to 49 % in the EU.
Hungarian agricultural policy is traditionally export oriented.  During the initial period
following transition Hungary's agricultural support was low (PSE 8%), and import tariffs
were relatively low (average protection 22%).  Imports were regulated mainly by
quantitative restrictions.
Since 1993, agricultural policies have gradually changed towards increased prot ection of
domestic markets and the introduction of market stabilization in key sectors.  With the
introduction of new agricultural policies the overall support level has increased
substantially although it is still well below the support level in the EC.
Hungary has introduced two categories of agricultural market policies: (i) Direct market
regulations have been introduced for wheat, maize, slaughter pigs, slaughter cattle and
cows' milk.  The market regulations include a system of guaranteed prices within
maximum guaranteed quantities.  A particular feature of the system is that it directly
supports the farm gate price, rather than the wholesale price as is the case in the EU.  (ii)
Another group of products (sugarbeet, chicken, sunflower seed, sugar and isoglucose) is
supported by indirect market regulations.  External trade measures (import regulations,
export subsidies) are the main instruments to stabilize these markets.
Hungarian support prices are generally significantly lower than EC support prices (30-
50% in 1995/96). Although still lower, wholesale prices in Hungary are relatively close to
EC prices for several products.  This is especially true for pigmeat, oil seeds and poultry
meat.
The main price differences are for cereals, milk and beef, where Hungarian prices are
substantially lower than corresponding EU prices.
The total budgetary expenditure on agriculture is about ECU 500 million (1995).  About
half of the budget is spent on export subsidies, while reorganisation and agricultural
development account for close to 20% of the budget.  Spending on domestic market
support measures was less than 10%, mainly due to the fact that market prices have
generally been higher than intervention prices and consequently intervention purchases
have been very limited.
Hungary applies a general system of investment subsidies with the objective of improving
the efficiency of agricultural production and promoting structural adjustments.  These
measures include direct subsidies for the use of certified seed, interest subsidies on credits
for buying inputs for agricultural production, and support to investments in improvement
of production capital.
Rural development policies are receiving increased attention and a number of measures
are in place.  However, funding of these measures has so far been restricted because of
limited resources.
Hungary made its commitment to the Uruguay Round Agreement in national currency.
The main part of the domestic support is the Aggregate Measurement of Support (AMS)
which will be limited to HUF 33,808 million (272 MECU) in the year 2000.  The
Aggregate Measurement of Support (AMS) represents about 10% of the production valuein Hungary.  Minimum access quo tas have been established on a wide range of products
with an average tariff rate of 22%.  Hungary’s export subsidy commitment is limited to
HUF 14,318 million (115 MECU) in the year 2000, the most important products
benefiting from export support being poultry (HUF 3,514 million), pork (HUF 3,031
million) and wheat (HUF 1,315 million).
Under the Europe Agreement, in 1997, adaptation of the current EU agricultural
concessions to the results of the Uruguay Round and EU enlargement will involve, among
other exercises, a 5% yearly increase of tariff quotas and a move to 80% reductions on in-
quota duty rates.  These improvements should further improve Hungarian access to the
EU market. In the veterinary and phytosanitary field Hungary has negotiated with the
European Commission an agreement of equivalency which is nearing completion.
Hungary is also a member of CEFTA.  Agricultural market liberalisation within CEFTA
will be implemented progressively with the intention of achieving in 1999 complete marketintegration between the contracting parties.
Hungary is harmonising its legislation in accordance with the White Paper.The main State body responsible for administration in agriculture is the Ministry of
Agriculture whose activities cover agriculture, food industry, forestry, hunting and
fisheries.  Agricultural trade, however, falls under the responsibility of the Ministry of
Trade.  Within the Ministry of Agriculture, the Office for Agricultural Market
Organisations co-ordinates and supervises all work relating to market organisation.  19
County Offices of Agriculture provide the Ministry with primary information and
statistical data about the regions, control tasks (land use, subsidies) and liaison with
regional agriculture-related organisations.
Current and Prospective Assessment
The agricultural conditions, the farm structure, the relatively advanced restructuring of the
food industry, and its capacity to attract foreign investment suggests that Hungarian
agriculture is already increasing its competitiveness.  However in the medium term
livestock numbers are expected to remain lower than they were prior to transition.  While
the most dynamic restructuring has taken place in the agro processing sector, some furtherdevelopment is needed in first stage processing and marketing of farm produce.
Hungary is making progress in adapting its policies to the CAP, and legislation
harmonising market policies with the CAP is under consideration in certain sectors (eg
sugar).  However, major differences still remain between Hungarian and EC policies.
The market support measures in the pigmeat sector, in particular the public intervention
measures, would need to be adapted to EC policies.  Market price quotation systems
would also be required for market management purposes.  Marketing standards in the fruitand vegetable sectors are to a large extent harmonised with EC standards except for
products destined for the processing industry.  Producer organisations exist in this sector
but their structure and function need to be adapted to the EC criteria.
However, certain main policy instruments currently established in the EC for production
management, marketing and certain intervention measures are not applied in Hungary.
This includes key instruments such as dairy quotas, key features of the arable crop scheme
(base area, set-aside, compensatory payments, and premia in the livestock sector), as well
as certain rural and structural development programmes.
Management and control of these measures require relatively sophisticated administrative
systems, including an appropriate land register and cattle identification and registration
systems.  As a general observation it appears that the administrative capacity would need
to be further developed in these areas if these measures were to be applied in Hungary.
It is difficult to foresee at this stage how agricultural support prices in Hungary will
develop in the period before accession; this will depend on a number of factors including
the domestic economy, the situation on export markets, and the development of price
support levels in the Union.
Although progress has been made in adapting rural and structural policies, some policies
and input subsidies appears to be inconsistent with EC policies.
Important problems still exist in the field of export subsidies: in 1995 Hungary exceeded
its commitment under the GATT Agreement, which was limited to 21 billion HUF (ECU
169 million).  The Government should reconsider its subsidy system, and analyse the
possible role of structural and rural policies.
Hungary is correctly applying the provisions of the Europe Agreement concerning trade
with the Union in agricultural products.
Hungary is making progress in laying down the legislation foreseen in the White Paper.
Preparation of legislation to further harmonize Hungarian legislation with EU legislation isenvisaged to be completed within the next few years.
In the veterinary field Hungary has adopted new primary legislation which should provide
the basis for implementation of secondary implementation rules and regulations currently
under preparation.  The completion of the adaptation of legislation is envisaged in 1997.
Further adaptation is however expected to be necessary on compliance with internal
market control measures (safeguard, the licence system, veterinary checks, additional
guarantees, regionalisation) introduction of HACCP (Hazard Analysis Critical Control
Point) and self-control systems, veterinary drugs and animal welfare legislation.
Hungary has an elaborate infrastructure for veterinary control and inspection, both at the
borders and internally.  However, the increased fragmentation of the livestock units may
make inspection and overall disease control more difficult.  Furthermore, with the possible
restructuring of the services there may be a risk of weakening the direct command and
communication lines.  The facilities at border inspection posts are still inadequate for
Community veterinary control.  Complete facilities for the inspection of live animals and
animal products at the border inspection posts are not yet available and most border
checks are limited to controls on certificates and other documents with the majority of
physical checks being undertaken at destination.  The Hungarian system does not
completely comply with EU import rules from third countries.
As regards internal measures there is a need for the Hungarian authorities to ensure
Hungary’s animal health status in respect of certain EU requirements.  The system of
registration of holdings and identification of animals will need to be adjusted to the EU
systems.
There is a need to upgrade certain food processing establishments for the national market,
to upgrade testing and diagnostic facilities, to develop acceptable veterinary audit and
certification procedures and to maintain an adequately structured, resourced, staffed and
trained veterinary sector.
Harmonisation of the legislation in the field of animal nutrition, plant protection products,
pesticide residues, organic farming, seeds and propagation material, plant health is
underway (Law on animal nutrition already into force) and should be in place by the end
of 1998.  It will be necessary to verify if the existing institutions are able to implement the
new legislation.
Conclusion
Further alignment to the acquis is still necessary, although significant progress has been
made in adopting the measures mentioned in the White Paper.
Particular efforts are needed in relation to :- implementation and enforcement of veterinary and phytosanitary requirements and
upgrading of establishments to meet EC standards; this is particularly important with
regard to the inspection and control arrangements for protecting the EU external
borders;
- strengthening of the administrative structures to ensure the necessary capacity to
implement and enforce the policy instruments of the CAP ;
- further restructuring of the agro-food sector to improve its competitive capacity.If such progress is accomplished, accession in the medium term should not be
accompanied by significant problems in applying the common agricultural policy in an
appropriate manner.
Fisheries
The Common Fisheries Policy includes common market organisations, structural policy,
agreements with third countries, and management and conservation of fish resources and
scientific research in support of these activities.
The Europe Agreement includes provisions concerning trade in fisheries products with the
Community..
The White Paper includes no measures in this field.
Descriptive Summary
Hungary has only inland water fisheries.  The fishing sector does not play an important
role in the national economy.  The total catch in 1995 was 22,866 tons, mostly carp.  The
volume and range of domestic fish processing is small owing to a lack of capital.  The
employment of this sector is only 250 people.
As a trading partner of the Community, Hungary represents 0.1% of total EC imports
(independently of origin) of fisheries products and 4% of EC imports of fisheries products
from the candidate countries alone (in terms of value).  As regards EC expo rts, Hungary
receives 1.05% of our total exports of fisheries products and 12.6% of our exports of
these products to the candidate countries (in terms of value).
Current and Prospective Assessment
Hungary’s production and foreign trade data, when compared to the corresponding EU
figures, are quite low and therefore should not have a significant impact upon the
Community as a whole.
It will be necessary for Hungary to ensure compliance with the EU’s health, hygiene and
environmental standards.
Conclusion
This sector should not represent a problem for accession.
Energy
Main EU energy policy objectives, as reflected in the Commission White Paper “An
energy policy for the EU” include enhancement of competitiveness, security of energy
supplies and protection of the environment.  Key elements of the energy acquis comprise
of Treaty provisions and secondary legislation particularly concerning competition and
state aids, internal energy market (including directives on electricity , price transparency,
gas and electricity transit, hydrocarbons licensing, emergency response including security
stock obligations, et c.), nuclear energy, as well as energy efficiency and environmental
rules.  Development of Trans-European Energy Networks and support for en ergy R&D
are other important elements of energy policy.  Ongoing developments include
liberalisation of the gas sector, energy efficiency acquis and the Auto-oil programme.
In the field of nuclear energy, the Community acquis has evolved substantially from the
original EAEC Treaty to a framework of legal and political instruments, including
international agreements.  At present, it addresses issues of health and safety, including
radiation protection, safety of nuclear installations, management of radioactive waste,
investment including EURATOM financial instruments, promotion of research, nuclear
common market, supplies, safeguards, and international relations.
The Europe Agreement provides for co-operation to develop the progressive integration
of the energy markets in Europe and includes provisions on assistance within the related
policy areas.  The White Paper preparing CEECs for the internal energy market underlines
the need for full application of key internal market directives in combination with EU
competition law.   As to the nuclear sector, the White Paper refers to nuclear supply,
safeguards and shipments of nuclear waste.
Descriptive Summary
Hungary imports more than 50% of its energy resources and heavily depends on Russia
for oil, gas and uranium.  Domestic resources are declining (oil and gas) or are of low
quality or extracted uneconomically (solid fuels).  Solid fuels production declined in the
period 1983-1994 from 25 Mio to 14 Mio tons per annum and employment declined from
50,000 to 21,000.
Uranium production ends in 1997 but its social-regional consequences will be addressed
with state intervention until 2005.
Hungary’s energy sector is, due to its heritage of e.g. low prices or supply orientation,
two to three times less efficient than the EU average.
The country is increasingly linking its networks up with the European Union and the test
synchronous connection since 1995 with the Western European UCPTE electricity system
as well as the gas connection with Austria should be noted.
The Paks nuclear power station of Russian design produces 40% of the country’s
electricity and the four reactors of the VVER 440-213 type will be close to  objectives
generally accepted in the EU once the already planned upgrading programmes (300
MECU) will be implemented of which two-thirds relates to safety upgrades.  Two
research reactors, using Russian fabricated fuel are also in operation.
Current and Prospective Assessment
Hungary’s energy policy objectives are in line with those of the EU and include security of
energy supplies, including diversification; introduction of more market principles;
environmental protection and increased efficiency.
The competition framework in the energy sector is progressively approximating with the
directives of the internal energy market in combination with the application of EC
competition law.  Here the Competition Law, the 1993 Mining Act and the 1994
Electricity and Gas Acts should be noted.  The latter Acts include the establishment of a
regulator in the sector.
Energy prices have been increased and also prices for households are now near to
covering costs.
Privatisation, a crucial income source is extensive and covers both production and
distribution.  The State will however retain golden shares in the strategic hydrocarbons
and electricity companies.
Hungary has taken important steps for rapid compliance with EU emergency preparedness
acquis including the obligation to hold 90 days of oil stocks. The 1993 “Law on Security
Stockpiling of Imported Crude Oil and Petroleum Products” foresees to reach,  the ninety
days of emergency stocks by 1999 (calculated on the basis of imports and not on the basis
of consumption according to Community rules).  Current stocks in the hands of the
stockpiling association are estimated at 50-60  days, although total oil stocks in the
country exceed the  90 day target.
Restructuring of the solid fuels and uranium mines continue and its social and regional
consequences will have to be addressed further, whereas the state interventions should be
assessed against EC and ECSC state aid rules.
Hungary has started the development of EC conform efficiency legislation (e.g. labelling
appliances, minimum efficiency norms) as well as environmental norms (e.g. fuel quality
standards) but more remains to be done.
Hungary uses domestic uranium for its nuclear power plants, but additional supplies,
enrichment services and fuel fabrication are all procured from Russia.  Hungary’s
accession would increase the EU’s dependence on Russian uranium and enrichment.  The
common nuclear materials policy of diversification of sources of supply would however
apply to contracts concluded after accession.
According to agreements between Hungary and Russia, spent fuel is to be shipped back to
Russia.  Nevertheless, an interim dry storage facility (50 years operation) is under
construction at Paks.  Selection of a site for final disposal of High Level Waste and spent
fuel is ongoing, with the objective target to have the installation operational by 2040.  The
construction of a storage facility for low level waste and intermediate level waste, to be
ready for 2002, is proceeding.  The inclusion of the final disposal and decommissioning
costs in the electricity price is foreseen for the near future.
Upon accession, Hungary would need to comply with the provisions of the Euratom
Treaty, in particular those related to supply of nuclear material, the nuclear common
market, safeguards, health and safety and international agreements.  It is already party tothe relevant international regimes in these fields and has legislation in force or in
preparation which implement these regimes in its national legal order, and has a full-scope
safeguards agreement in force with the IAEA.  No major difficulties are therefore
expected in applying the relevant Community legislation in the above areas.  Special
attention has to be given to the timely implementation of  nuclear safety programmes.  Theindependence of the safety authority should be  supported.
Conclusion
Provided that current efforts are maintained, Hungary should be in a position to comply
with most of the EU energy legislation in the next few years.  However, matters such as
the adjustment of monopolies including import and export, access to networks, energy
pricing, state interventions in the solid fuels and uranium sectors, and the development of
energy efficiency and fuel quality standards need to be closely followed.
No major difficulties are foreseen for compliance with Euratom provisions.  Nuclear
safety standards should be tackled appropriately  in order to bring the nuclear power plant
to the level required; and longer term solutions for nuclear waste need attention.
Transport
Community transport policy consist of policies and initiatives in three fundamental areas:
• Improving quality by developing integrated and competitive transport systems based on
advanced technologies which also contribute to environmental and safety objectives.
• Improving the functioning of the single market in order to promote efficiency, choice
and user-friendly provision of transport services while safeguarding social standards;
• Broadening the external dimension by improving transport links with third countries
and fostering the access of EU operators to other transport markets(The Common
Transport Policy Action programme, 1995-2000)
The Europe Agreement provides for the approximation of legislation with Community law
and co-operation aiming to restructure and modernise transport, the improvement of
access to the transport market, the facilitation of transit and the achievement of operating
standards comparable to those in the Community.  The White Paper focuses on measures
for the accomplishment of Internal Market conditions in the transport sector, including
such aspects as competition, legislative harmonisation and standards.
Descriptive Summary
The Hungarian transport network is fairly dense and centred on the capital, Budapest.  It
occupies a strategic position in Central Europe, between Northern Europe and the
Balkans and further, the Middle East.  Three Trans-European corridors, identified at the
Pan-European Transport Conference in Crete, cross the Hungarian territory.  Hungary’s
international trade reorientation towards the West, together with the embargo on Serbia
(which has led to very substantial traffic diversion through Hungary), exposed the need to
invest in rapid and significant improvements to its rail and road network, most of which
suffers from a considerable backlog in maintenance; Hungary will also need to develop thepreviously limited border crossing infrastructures.
The general improvement and the structural changes in the Hungarian economy has led to
a change in the modal split in the transport sector, with an increase in the share of road
transport compared to other modes, both for passengers and freight, (with bus transport
showing relative stability), whereas car ownership increased in rapidly proportions.
Railways in particular have lost market share, especially for passenger traffic. Air traffic is
growing steadily with the strengthening of East-West relations.
The Danube runs through Hungary and was a major communications route before 1989,
but lost a great deal of its traffic to the roads.  The opening of the Rhine-Danube link, and
ultimately the joining-up of this link with the Black Sea, could mean that river transport
will assume a greater role than at present.
Current and Prospective Assessment
In the area of the Internal Market, Hungary has made relatively good progress in
assimilating the acquis.  Hungary’s international transport sector already broadly applies
rules similar to the Union’s, especially in air transport, shipping, inland waterways,
combined transport and road passenger transport.  The changes needed to bring
Hungarian law on civil aviation into line w ill have to be made by the end of 1998.  In the
rail sector, care should be taken to ensure that access rights to the railway network
actually correspond in scope to the Community acquis, and that the acquis is effectively
applied; the public service aspects and standardisation of accounts will have to be
monitored over the coming years.  The road haulage sector complies with most of the
provisions of the acquis relating to international traffic but the operation of its domestic
arm poses greater potential risks.
This aspect will require close attention and is of particular importance in the context of a
future Union without internal borders when road haulage cabotage will be totally
unrestricted.  If it is to be in a position to enter the Union’s internal transport market,
Hungary will have to step up its efforts in order to align the conditions governing its
national road haulage sector on those of the Union, in particular as regards compliance
with technical, social and safety rules.  Passenger cars must also be subject to technical
roadworthiness tests in line with Community standards.
The development of an integrated and competitive transport system is an objective of
which the Hungarian authorities are aware;  achieving an acceptable level of safety and
optimal use of the transport system are probably going to be the two main difficulties.
Hungary’s progress on safety is relatively satisfactory.  In contrast the objective of
coherence of the transport system appears harder to attain.  Hungary is likely to face a
steady rise in the share of road transport and will have to focus its efforts on the use of
railways and inland waterways; this might encourage the Hungarian authorities to change
their policy, which at present is largely geared to roads.
In order to improve links with the Member States and its neighbours, Hungary plans to
invest about ECU 3.7 billion of its own budget over the period 1995-99 in transport
infrastructure used by international traffic, primarily trans-European corridors.  This sum
amounts to around 2.2% of GNP, a respectable effort.
Conclusion
Hungary has made significant progress in the adoption of the Community acquis in the
transport sector. Provided that it improves the operation of its domestic road haulage
market (in particular as regards market access, social rules and safety), makes progress
with technical checks on passenger cars, and clarifies the arrangements on financial
transparency and access rights in the rail sector - all measures which should not be
impossible to achieve,  the transport sector is unlikely to pose major problems as regards
adoptions of the internal market acquis.
It will be necessary, however, to make sure that the resources needed to lay the
foundations for the future trans-European network, extended to include the new member
countries, are actually made available.  It would also be advisable for Hungary’s
administrative structures, and in particular bodies supervising areas such as safety, to be
rapidly reinforced.
Small and Medium Enterprises
EU enterprise policy aims at encouraging a favourable environment for the development
of SMEs throughout the EU, at improving their competitiveness and encouraging their
Europeanisation and internationalisation.  It is characterised by a high degree of
subsidiarity.  The complementary role of the Community is defined and implemented
through a Multiannual Programme for SMEs in the EU.  This programme provides the
legal and budgetary basis for the Community’s specific SME policy actions.  The acquis
has so far been limited to recommendations on specific areas, although legislation in other
sectors also affects SMEs (e.g. competition, environment, company law).
The Europe Agreement provides for co-operation to develop and strengthen SMEs, in
particular in the private sector, inter alia through provision of information and assistance
on legal, administrative and tax conditions.  The White Paper contains no specific
measures.
Descriptive Summary
Since the start of the economic restructuring process, the share of SMEs in production
employment, export and investment has grown dramatically.  This is not only the result of
the creation of many new micro-businesses, but also of the disappearance of many large,
state-owned industrial and mining companies.  The distribution of gross value added
between enterprises of different size categories, based on 1994 figures, shows that large
companies stand for 64.3%, medium-sized companies 20%, and small companies 15.7%.
(Hungarian definitions classify enterprises with up to 300 employees as SMEs).  In 1994,
businesses with fewer than 300 employees provided 33% of the jobs in industry.  SMEs
with less than 50 employees in industry had a domestic market share of around 26%,
companies with 51-300 employees around 18% in 1995.  The SME’s share in industrial
exports was approximately 10% for small companies and 20% for medium sized
companies in the same year.
The Hungarian Government has had a policy for SME development since 1989.  There are
plans to change the tax system in order to alleviate the tax burden for small companies,
and to introduce new preferential credit arrangements (from a fund managed by theMinistry for Industry and Trade) which supports SME development
Current and Prospective Assessment
Stabilisation of the share of SMEs in production and employment is under way.  Given its
structure and comparative advantages, the Hungarian economy will remain characterised
by a large percentage of SMEs.
A 1994 Government Resolution on the medium-term development concept for SMEs
recognises the need to adopt a uniform definition of SMEs; expand credit and guarantee
systems and establish capital market institutions; guarantee that SMEs are not
disadvantaged in competition in respect of development and review of legal regulations
pertaining to public purchasing and foreign trade (quotas); and the importance of
supporting the development of an SME infrastructure in the field of business information
and educational systems and through the strengthening of chambers and professional
associations.  Some progress has been made in these efforts to pursue an active SME
policy.
The on-going efforts to strengthen the SMEs during the pre-accession period will therefore
need to be continued.
Conclusion
There are no specific problems foreseen in Hungary’s integration in this sector.
3.5  Economic and Social Cohesion
Employment and Social Affairs
Community social policy has been developed through a variety of instruments such as
legal provisions, the European Social Fund and actions focused on specific issues,
including public health, poverty and the disabled.  The legal acquis covers health and
safety at work, labour law and working conditions, equal opportunities for men and
women, social security co-ordination for migrant workers, and tobacco products.  Social
legislation in the Union has been characterised by laying down minimum standards   In
addition, the social dialogue at European level is enshrined in the Treaty (Article 118b),
and the Protocol on social policy refers to consultation of the social partners and measuresto facilitate the social dialogue.
The Europe Agreement provides for the approximation of legislation with Community law
and  co-operation on improving standards of health and safety at work, labour market
policies and the modernisation of the s ocial security system. It also provides for
Community workers legally employed in Hungary to be treated without discrimination on
grounds of nationality as regards their working conditions. The White Paper provides for
measures for approximation in all the areas of the acquis.
Descriptive Summary
Since the Interest Conciliation Council was set up by the Hungarian Government in 1992,
the tripartite social dialogue has been working relatively well.  This could change because
of the Government’s limited room for manoeuvre following its policy of economic
austerity.  On the side of employers, there are a number of organisations of similar
importance.  One of them is a member of the International Organisation of Employers, andanother has joined the European Centre of Companies with Public Participation.  None of
them have joined the Union of Industrial and Employers’ Confederation of Europe
(UNICE).  On the employee side, there are several organisations, and three have joined
the European trade Union Confederation (ETUC).  To ensure the future efficiency of the
social dialogue, many of the existing organisations would need to merge to increase their
representativeness.
Hungary’s unemployment rate currently stands at about 9.2% according to ILO
methodology. The high level of long-term unemployed is likely to remain a major
problem.  The regional disparities are considerable.
A network of regional and local employment offices has been established to implement
labour market policies.  Hungary has introduced a policy to make the labour market
flexible.  If this process is continued, Hungary should be able to adjust to the demands of
integration into EU labour market and employment systems.
Hungary spends about
 22% of its GDP on so cial security and welfare.  Social spending,
including the pension scheme and health care which are the  most important items,
constitutes half of government expenditure..  In terms of financing, contributions are more
important than taxes, and the employer’s share is relatively high. Continued efforts are
required to ensure that measures of social protection are developed.
The Hungarian health system needs to be improved.
Current and Prospective Assessment
In 1993, Hungary adopted a new Safety and Health Act laying down the principles and
organisational aspects for the protection of safety and health at work.  The law takes
account of the provisions of the EC framework directive and some individual directives.
Hungary has inspection services which are in accordance with ILO Convention N° 81.
For a series of specific areas, work needs to be continued to approximate the standards of
the acquis.
Hungary has already reached a significant degree of protection in the field of labour law.
But there are various adjustments which need to be made, particularly on the safeguarding
of employee’s rights in the event of transfer of undertakings and in cases of collective
redundancies.  New legislation to ensure full compliance in these areas is under
preparation.  Although there is a system of works councils in force, the social dialogue on
company level needs to be developed.
In the area of equal treatment of men and women, the main provisions of EU legislation
are covered by Hungarian legislation.
Concerning the right to the free movement of workers, there would appear to be no
obstacles to prevent Hungary from being able to implement the provisions of the acquis in
this area. The introduction of the right to free movement will however require changes in
the national law, particularly as regards access to employment and a treatment free from
discrimination on grounds of nationality.
In the field of so cial security for migrant workers accession does not, in principle, pose
major problems, although certain technical adaptations will be necessary.  More important
is the administrative capacity to apply the detailed co-ordination rules in co-operation with
other countries.  Although many of the administrative structures required to carry out
these tasks are already in place in Hungary, further preparation and training will be
necessary before accession.
The EC Directives respectively on the warning labelling of cigarette packages and the
maximum tar content have not yet been transposed into Hungarian legislation (although it
is claimed that the national regulation of tobacco products complies with the above
mentioned directives).
Conclusion
Provided Hungary pursues work in terms of adoption and application of the EC acquis,
Hungary is likely to be able to take on the  acquis in the social area in the medium term.
Regional Policy and Cohesion
In accordance with Title XIV of the Treaty, the Community supports the strengthening of
cohesion, mainly through the Structural Funds.  Hungary will have to implement these
instruments effectively whilst respecting the principles, objectives and procedures which
will be in place at the time of its accession.
The Europe Agreement provides for co-operation on regional development and spatial
planning, notably through the exchange of information between local, regional and
national authorities and the exchange of civil servants and experts. The White Paper
contains no specific provisions.
Descriptive Summary
In 1995, Hungary was at some  37 % of the EU average GDP per capita.  Economic
development is distributed rather unequally although, compared with other CEECs,
Hungary presents a relatively homogeneous unemployment pattern.  According to nationalsources, regional GDP per capita ranges from twice the national average in Budapest,
which together with western regions belongs to the most prosperous parts of the country,
to one third of the national average in the eastern parts of the country.
Average unemployment is somewhat above 10%.  Unemployment is lowest in the western
parts and Budapest (7.2%) and highest in the eastern parts of Hungary (north-east:
16.4%).
The Act on Regional Development and Physical Planning, adopted in 1996, constitutes
the legal basis for a specific Hungarian regional development policy.  The principles,
objectives and institutional structure envisaged in the act present clear similarities with the
EU structural policy.
The Ministry of Environment and Regional Development is responsible for both regional
policy and spatial planning.  Inter-ministerial co-ordination is ensured  by the National
Council for Regional Development.  Moreover, a National Development Agency is
involved in the implementation of Hungary’s regional policy. A Government decree
envisages the establishment of a regional development fund.
Hungary’s financial instruments at the disposal of regional policy are clearly limited.
However, the share of total development related expenditure which constitutes potential
counterpart funds to the EC structural policy cannot yet be determined. Therefore,
Hungary’s co-financement capacity cannot presently be evaluated with sufficient
reliability.
At the regional level, 20 counties represent the highest regional administrative system.
They are responsible for implementing the regional policy, but at the same time the new
law provides for the establishment of larger regional administrative and planning units,
with Regional Development Councils set up on the initiative of the counties.
Approximately 100 associations of local government have been created which are
responsible for settlement development and planning.  Their representative bodies adopt
development programmes.  Seven Nuts II regions covering the whole territory are
currently under consideration.
Current and Prospective Assessment
The Hungarian government is well aware of the need of an active regional policy
involving all government levels. Moreover, Hungary is the first country among Central
and European countries which adopted a legal framework closely in line with EC
Structural Policy.  Many sections of the new law have been drafted in the perspective of
taking over the acquis.
Problems still exist in implementing the newly adopted regional development policy.
Institutions still have to be created and existing ones need support and experience.  In
addition to the National Council for Regional Development, inter-ministerial co-ordinationis strongly required, which needs an appropriate administrative framework and efficient
procedures, including the budgetary area.
Lack of co-ordination between the Ministries which have deconcentrated settlements and
the elected County Development Councils, which are the major actors for regional
development needs to be corrected. Furthermore, regional co-operation between counties
should be strengthened.
Conclusion
Through the Act on Regional Development, Hungary is introducing the legal basis for a
comprehensive regional policy. Although some of the Act’s provisions are still to be
implemented, Hungary’s administrative capacity to manage integrated regional
development programmes seems satisfactory. Thus, subject to the remaining reforms,
Hungary should be ready to apply the Community rules and to channel effectively the
funds from the EC structural policies
3.6  Quality of Life and Environment
Environment
The  Community’s environmental policy, derived from the Treaty, aims towards
sustainability based on the integration of environmental protection into EU sectoral
policies, preventive action, the polluter pays principle, fighting environmental damage at
the source, and shared responsibility.  The acquis comprises approximately 200 legal acts
covering a wide range of matters, including water and air pollution, management of waste
and chemicals, biotechnology, radiation protection, and nature protection.  Member states
are required to ensure that an environmental impact assessment is carried out before
development consent is granted for certain public and private projects.
The Europe Agreement stipulates that Hungarian development policies shall be guided by
the principle of sustainable development and should fully incorporate environmental
considerations.  It also identifies environment as a priority for bilateral co-operation, as
well as an area for approximation legislation to that of the Community.
The White Paper covers only a small part of the environmental acquis, namely product-
related legislation, which is directly related to the free circulation of goods.
Descriptive Summary
Whilst Hungary’s environmental problems are less severe than in many other countries in
the region, and the differences throughout the country are less pronounced, the country
still faces a major challenge to bring its standards up to those of the European Union in
the areas of water, waste and air quality.
Water quality, closely linked to agricultural activities and exacerbated by the lack of
waste-treatment plants in many settlements, is the main problem and requires major
investment.  Waste management has been considerably neglected in the past and there are
problems in hazardous and municipal waste.  Overall trends in emissions of the main air
pollutants show significant decreases since the late 1980s due to changes in fuel use and
industrial restructuring.  However urban traffic is now the fastest growing source of air
pollution.  Lastly, some of the country’s natural assets, such as the Balaton lake and the
Sajo valley, have been damaged by intensive agricultural activity or are endangered by
over-exploitation for recreation and tourism.
Hungary’s investment levels in environment are just below the average for EU countries in
terms of share of GDP.  In recent years more than half of environmental investment has
been allocated to the water sector.
The country has started a large-scale reform of its environmental policy, aiming primarily
at approximation with EU standards.  A new overall environmental act has been in place
since 1995, while a new medium-term national programme covering sectoral and regional
actions is about to be approved by parliament.  Supporting framework regulations in somekey areas (waste, water, nature) have been recently adopted or drafted.  On the other
hand, much of the subsidiary legislation, especially in water and waste policies, is old.
The monitoring system for most sectors is sufficient.  The use of economic instruments
has so far been limited. In view of the limited availability of public funds for environmental
improvements, the potential of market based instruments as a source of finance needs
more attention.
Current and Prospective Assessment
As a result of recent legislation, formal compliance to the EU environmental acquis is well
advanced and on the basis of current plans additional progress can be expected over the
next three to five years, especially in waste management, water and chemicals.  Also, a
number of general policy measures such as environmental impact assessment, access to
information and integrated pollution and prevention control are either already in place or
will shortly be enacted.  The bulk of remaining legislative work concerns subsidiary laws -
e.g. in water and waste- which are still based on the old system rather than the framework
legislation.  Particular attention should be given to the quick transposition of framework
directives dealing with air, waste and water as well as to the Integrated P ollution
Prevention and Control  (IPPC) directive, as well as the establishment of financing
strategies for legislation in the water, air and waste sectors requiring major investments.
With respect to White Paper directives, legislation is in force on in the process of adoption
for nearly all environmental sectors, but waste and noise emission legislation is still in
preparation.
Important problems remain however, in substantive compliance.  More efforts are
required in implementing and enforcing environmental policies, especially in relation to
supervision and enforcement structures and in raising permit and fine cost levels.  In the
water sector for example, major investments are required to connect the remaining large
proportion of the population to the water system.  Substantive compliance is also low in
product-related White Paper directives and in waste management, due largely to
inadequate enforcement in industry. Improved enforcement in currently low-complianceareas (for example, small manufacturing plants and agriculture) will be critical in
implementing legislation. The country’s environmental accession strategy should include
implementation timetables for meeting the EU environmental acquis starting amongst
others with implementation of the framework and IPPC directives mentioned above.
Conclusion
Given current trends and plans, full transposition of the environmental acquis can be
achieved in Hungary in the medium term. However effective compliance with a number of
pieces of legislation requiring a sustained high level of investment and considerable
administrative effort (e.g. urban waste water treatment, drinking water, aspects of waste
management and air pollution legislation) could be achieved only in the long to very long
term. Substantive compliance w ill depend on implementing changes in the structure of the
enforcement system and its instruments, and at the same time applying the proposed
national environmental accession strategy. It will also depend on an increase in public and
private investment.
Consumer Protection
The Community acquis covers protection of the economic interests of consumers
(including control of misleading advertisements, indication of prices, consumer credit,
unfair contract terms, distance selling, package travel, sales away from business premises
and timeshare property) as well as the general safety of goods and the specific sectors of
cosmetics, textile names and toys.
The Europe Agreement provides for the approximation of the legislation with Community
law and co-operation with a view  to achieving full compatibility between the systems of
consumer protection in Hungary and the Community.  Stage I measures of the White
Paper focus on improving product safety, including cosmetics, textiles and toys, and on
the protection of the economic interests of consumers, notably measures on misleading
advertising, consumer credit, unfair contract terms and indication of prices.  Stage II
measures relate to package travel, sales away from business premises and time-share
property. New EU legislation which has been adopted recently (distance selling) or will be
adopted soon (comparative advertising, price indication) will also need to be taken into
account.
Descriptive Summary
Hungarian consumer p rotection does not include a general Consumer Protection Act;
consumer protection legislation in Hungary is covered by legislation in different sectors.
Responsibility is shared between different authorities and ministries, which makes co-
ordination difficult.
In 1996, Parliament asked the Hungarian Government to prepare and submit a Consumer
Protection Act within a year.  In response, the Government adopted a resolution in June
1996 on the concepts of the  modernisation of consumer legislation.  The Ministry of
Industry and Trade, in co-operation with other ministries, was then charged with the
preparation of a draft law, which is likely to be put to parliament in the second half of
1997, and which should comply with EU standards.  Once the law is agreed, it is likely to
help to unify consumer law in Hungary.
Hungary was one of the first countries in Central Europe to develop a consumer
movement.  The National Association for Consumer Protection acts both as a federation
of local consumer unions and as a national pressure group.  But there is no
institutionalised form of representation for consumer organisations.
Current and Prospective Assessment
Substantial work is required at the legislative level in order to “modernise” consumer
legislation in accordance with EC consumer directives, including the need to clarify many
consumer policy concepts and definitions.  For many areas of consumer policy, there is
some legislation but it does not provide the protection required by EC requirements.
When a Consumer Protection Act is agreed, it will provide the framework for the
progressive alignment of the Hungarian legislation to the EC consumer direction.
For many key measures referred to in White Paper, draft laws or amendments are under
preparation. But at the present, the level of implementations of EC law is low.  In
particular, adjustments to existing legislation are required in areas such as indication of
prices, misleading advertising, sales away from business premises, distance selling, unfair
contract terms, consumer credit, general product safety cosmetics and safety of toys.
There are no legislative measures for timeshare property and textile names.
The development of a strong and independent consumer movement, sustained by public
authorities, will need to accompany the introduction of the acquis.
Conclusion
The Hungarian Government is seeking to introduce into national law the requirements of
EC directives in the consumer sector. Although these efforts will have to be pursued,
Hungary is likely to be in a position to take on the full consumer protection acquis in the
medium term. Work should concentrate on completing, updating and unifying legislation
as well as establishing the structures necessary to ensure the effective implementation of
the acquis.
3.7 Justice and Home Affairs
The Present Provisions
The Justice and Home Affairs (JHA) acquis principally derives from the framework for
co-operation set out in Title VI (Article K) of the Treaty on European Union (TEU), "the
third pillar", although certain "first pillar" (EC Treaty) provisions and legislative measures
are also closely linked
The EU JHA framework primarily covers: asylum; control of external borders and
immigration; customs co-operation and police co-operation against serious crime,
including drug trafficking; and judicial co-operation on criminal and civil matters.  The
TEU stipulates key principles upon which such co-operation is based, notably the
European Convention on Human Rights and the 1951 Geneva Convention on the Status
of Refugees.  It is also based implicitly on a range of international conventions concerning
its fields of interest, notably those of the Council of Europe, the United Nations and the
Hague Conference.  The legislative content of third pillar acquis is different from the first
pillar; it consists of conventions, joint actions, joint positions and resolutions, (including
the agreed elements of draft instruments which are in negotiation).  A number of EU
conventions (including the 1990 Dublin Convention, and conventions relating to
extradition, fraud and EUROPOL) have been agreed by the Council and are now in the
process of ratification by national Parliaments; several other conventions, including one on
external frontiers are in various stages of negotiation in the Council.  The JHA acquis
involves a high degree of practical co-operation, as well as legislation and its effective
implementation.
The New Treaty
For many of the above matters, the entry into force of the Treaty resulting from the
Amsterdam Inter-Governmental Conference will mark the end of the current cooperation
framework.
Reiterating the objective of developing the Union into an “area of  freedom, security and
justice”, the new Treaty brings these matters, including the free movement of persons,
asylum and immigration, into the Community’s sphere of competence.
On the free movement of persons in particular, the new Treaty provides for the
incorporation of the Schengen acquis into the framework of the European Union and
binds any candidate for EU membership to accept that acquis in full.
With regard to matters remaining within the cooperation framework, i.e. policing and
criminal justice, the new Treaty provides for the reinforcement of the cooperation system.
The Europe Agreement and the White Paper
The Europe Agreement includes provision for co-operation in the fight against drug abuse
and money laundering.
The White Paper does not deal directly with third pillar subjects, but reference is made to
first pillar matters such as money laundering and freedom of movement of persons which
are closely related to Justice and Home Affairs considerations.  Reference is also made to
the Brussels and Rome conventions.
Descriptive Summary
General Preconditions for JHA Cooperation
Hungary joined the Council of Europe in 1990 and has ratified the most important
instruments concerning human rights.  The Constitution provides for an independent
judiciary according to the rule of law.
Institutional reform of JHA institutions is well under way, with the current priority being
to build on the civilisation and democratisation measures that have already taken place to
develop the effectiveness of the bodies in their specific tasks.  The Constitution guaranteesdata protection: a new data protection law approaching EU requirements is now in place
and Hungary has signed the 1990 data protection convention.  (See also  separate section
on Single Market).
Asylum
Hungary signed the Geneva Convention and Protocol in 1989 but expressed a
geographical reserve effectively excluding non-European refugees from protection.  A
new asylum law is in preparation which will remove the geographical restriction and allow
Hungary to withdraw the reserve, as well as modernising the administration system.
There are currently some 6,000 refugees in the country, with the trend of refugee arrivals
being downwards.  There are also some 6,000 temporary refugees from former
Yugoslavia; Hungary is planning their return in cooperation with international bodies but
(as elsewhere) no returns have begun as yet.
Immigration/Border Control
Some 40 million border crossings were made in 1995; of these some 103,000 were illegal.
Migrants are coming from Romania, former Yugoslavia and the NIS, aiming to transit
Hungary to the west (although Hungary is also becoming a target country).  Hungary has
visa-free agreements with EU countries and the NIS (for the latter invitation letters are
required); Hungary is considering its position on the visa-free agreements with the NIS in
the light of the requirement to harmonise with the EU list of third countries for which
visas are required.  Hungary is also modernising its consular visa issuing procedures,
which already stipulate that visas must be issued abroad.  A comprehensive review of
aliens legislation is under way in the light of EU requirements.  Currently some 2,000
immigration permits a year are issued to ethnic Hungarians.  Those unable to justify their
status within the country can be subject to measures ranging from restrictions on
movement to detention and deportation - these measures can be challenged before a court
of law.  Readmission agreements are in place with Austria and neighbouring countries;
such agreements are in preparation with France, Germany, Belgium, NL and Greece and
with Russia, Turkey, India, Pakistan, China and Vietnam.  Border management is
currently being modernised at the Austrian border and the Government plans (in part with
PHARE assistance if made available) to upgrade information systems at the borders,
introduce passport readable machines and to upgrade all remaining border points.  The
Government has submitted to parliament a draft law on border management and the
organisation of the border guard.
Police Cooperation
Organised crime exists in Hungary in the field of drug trafficking, trafficking in humans
and prostitution, money laundering, counterfeiting of money and documents, smuggling of
goods and stolen cars, and blackmail; violence and extortion are used.  Local criminals are
active, as are crime syndicates from a number of countries to the east.  The police service
has been radically restructured to tackle organised crime more effectively, with specialist
units (on organised crime generally and on drugs) being established.  Hungary has not yet
signed the money laundering convention but a new law and administrative procedures are
in place which generally m eet the requirements of the convention and a Money
Laundering Task Force is active.  (See also   separate section on Single Market).  Nuclear
smuggling was a problem in 1993-94 but is now under better control.  Hungary sees no
domestic threat from terrorism, but is vigilant against international terrorist threats.  It has
ratified the key international terrorist conventions and has adopted domestic legal and
administrative measures against terrorism.
Drugs
Hungary is a transit country for drug trafficking, on the Northern Balkan route (significant
quantities of heroin have been seized in recent years).  Domestic demand is increasing.
Hungary has ratified the main international drugs conventions (except money laundering -
see above) and is working within the Phare Multi Country Drugs programme and others
to develop its anti-drugs capabilities.  Domestic legal measures to tackle drugs
investigations are in place and there is a special drugs unit in the police.
udicial Cooperation
The Ministry of Justice has begun to prepare the judiciary for EU accession.  The
Government is currently accelerating reforms to the judicial system, including setting up
an intermediate tier of appeal courts at regional level, and is strengthening the system of
training of judges.  Hungary has ratified the main criminal conventions  (except money
laundering - see above).  Hungary is party to a number of Hague conventions and is
developing its capacities on the civil side as well.
Current and Prospective Assessment
There are some important gaps still to be filled in Hungary's legislation but for the most
part the legislation is either in place or in preparation and is being implemented.  An
important priority for the near future will be developing more effective border
management systems, especially on the future external borders.  The visa systems with
regard to the NIS and other non-associated neighbours remain unsatisfactory and Hungarywill need to ensure that the facilitation of crossing by ethnic Hungarians from
neighbouring countries does not detract in any significant way from the need to carry out
effective border controls at the future external border.
The main institutional problems lie in the field of resource constraints, inexperience and
the impact of organised crime on the state, including some corruption.  The Government
is nevertheless taking active steps to prepare the institutions, including the judiciary for
participation in the JHA process.  Hungary already has in place a small number of experts
with knowledge and experience of the requirements of JHA cooperation with EU member
states and we can expect this core of expertise to be developed and expanded as
preparations for membership continue.
A key gap in Hungary's preparation to date has been the failure to lift the geographical
reserve on the Geneva Convention.  Assuming the current draft law in preparation within
Government is approved by the Parliament, work will still need to be done to develop a
working implementation system for the new asylum legislation; moreover there is a need
to ensure that sufficient provision is made for support to refugees of non-Hungarian
origin.
Conclusion
Hungary is well on track to meet the justice and home affairs acquis (present and future)
within the next few years, assuming progress continues at the current rate and effective
training and institutional development programmes are implemented in the key JHA
institutions.
3.8  External Policies
Trade and International Economic Relations
The acquis in this field is made up principally of the Community's multilateral and bilateral
commercial policy commitments, and its autonomous commercial defence instruments.
The Europe Agreement includes provisions in several areas requiring parties to act in
accordance with  WTO/ GATT principles, or other relevant international obligations.
The White Paper includes no provisions in this field
Descriptive Summary
Hungary has developed an open, trading economy and is a member of the World Trade
Organisation (WTO).  Upon accession Hungary would have to comply with the
obligations of the plurilateral WTO agreements to which the Community is a party.
At present, Hungary maintains a balance of payments quota on consumer goods, including
on textiles and clothing products.  This restriction will have to be phased out prior to
accession.  The import surcharge was eliminated on 1 July 1997.  On accession, the
Community textiles policy would be extended to Hungary; any Community restrictions
still maintained at the date of accession would require adjustment by an appropriate
amount to take account of Hungarian accession.
Current and Prospective Assessment
On accession Hungary would have to apply the Community's Common Customs Tariff,
and the external trade provisions of the Common Agricultural Policy.  The post Uruguay
Round weighted average level of most favoured nation duties for industrial products will
be 6.9% for Hungary and 3.6% for the Community.  The progressive implementation of
free trade between Hungary and the Community by the time of accession will, however,
reduce the impact on the domestic industry of applying the lower Community Common
Customs Tariff.
In its relations with international organisations Hungary should ensure that its actions and
commitments respect the Europe Agreement and ensure a harmonious adoption of its
future obligations as a member of the Community.
On accession Hungary would become party to the Community's various preferential
agreements.  Preferential agreements between Hungary and third countries would, ingeneral, have to be terminated on accession.
In the area of trade in services and establishment, there are some inconsistencies between
the multilateral commitments made by Hungary, and those of the Community.  It should
be possible to resolve these wherever necessary.
On accession Hungary would have to repeal national legislation in the field of commercial
defence instruments, and EC legislation would become applicable there.
Experience from previous accessions has shown that the automatic extension of existing
anti-dumping measures to new member states often prompts third countries to raise
questions regarding the compatibility of this approach with relevant WTO provisions.  It
has also shown that accession creates a potential for circumventing measures adopted by
the Community under the commercial defence instruments.  This happens when, prior to
accession, substantial quantities of the products subject to measures are exported to the
territory of the future member state and, on accession, are automatically released for free
circulation in the enlarged customs territory.  These two problems would have to be
addressed during Hungary's pre-accession phase.
Hungary is a member of all four existing regimes for the non-proliferation of weapons of
mass-destruction.  Hungary is, in practice, implementing the Community control list of
dual-use items.  Arms export is also controlled.  The export control legislation in Hungary
is comparable to that of me mber states, and the obligations imposed on exporting
companies are demanding.  Hungary appears to have no problems applying EC legislation
in this field.
Conclusion
Hungary is well placed to be able to meet Community requirements in this field within the
next few years.
Development
The acquis in the development sector is made up principally of the Lomé Convention,
which runs until early 2000.
Neither the Europe Agreement nor the White Paper include provisions in this field.
Descriptive Summary
Hungary has no preferential trade agreements with ACP countries.  However, under its
GSP scheme Hungary grants a degree of preferential treatment in the form of reduced
duties to a number of ACP countries, and grants duty free access to those ACP countries
considered as Least Developed Countries.
Hungary has no budget for development aid, although there is a "Foreign Aid Fund"
managed by the Minister of Foreign Affairs (HUF 20 million (about 200,000 ECU)in
1996).  Under this fund, Hungary provides development aid under OECD norms, and
humanitarian aid.  Hungary also participates in the International Development
Association.
Current and Prospective Assessment
On accession, Hungary should apply its preferential trade regime to the ACP States and
participate, together with the other member states, in financing the European
Development Fund (EDF), which provides financial aid under the Lomé Convention.
Applying the Lomé trade regime should not generally be a source of difficulties for
Hungary.
Normally, new member states accede to the Lomé Convention by means of a protocol
annexed to the Convention, which comes into force on the date of their accession to the
EU.
Conclusion
Hungary is well placed to be able to meet EU requirements in this field in the next few
years.
Customs
The acquis in this sector is the Community Customs Code and its implementing
provisions; the EU's Combined Nomenclature; the Common Customs Tariff including
trade preferences, tariff quotas and tariff suspensions; and other customs-related
legislation outside the scope of the customs code.
The Europe Agreement covers the establishment of a free trade area with the Community
and the progressive removal of customs duties on a wide range of products, according to
clear timetables starting from the date of entry into force of the agreement.
The White Paper includes in Stage I, measures to consolidate and streamline the free trade
established under the Europe Agreement, including legislation compatible with the
Customs Code, Combined Nomenclature, etc.  Stage II concerns the adoption of the full
Community legislation, with a view to joining the customs union upon accession.
Descriptive Summary
On accession the Hungarian customs authorities would be required to assume all the
responsibilities necessary for the protection and control of their part of the EU's external
border.  Besides the provisions on indirect taxation, they would be responsible for the
implementation and enforcement at the external border of the Community's common
commercial policy, the common agricultural policy, the common fisheries policy etc.
Hungary's capacity to fully apply the acquis presupposes the possibility to adopt and
implement the Community legislation; and the existence of an adequate level of
infrastructure and equipment, in particular in terms of computerisation and investigationmeans and the establishment of an efficient customs organisation with a sufficient number
of qualified and motivated staff showing a high degree of integrity.
With the support of the technical assistance provided by customs programmes, Hungary
has adapted the Hungarian customs legislation to make it compatible with the
Community's customs code since 1996.  In addition, work is in progress for the adaptationof its implementing provisions as well as the customs-related legislation outside the scope
of the customs code, and consequently legislation still differs in certain areas.
Hungary aligned its national goods nomenclature to the Community's Combined
Nomenclature as from 1 January 1996.  The Hungarian administration does not have an
Integrated Tariff yet.  This will make the comparison of the Hungarian tariff rates with the
Common Customs Tariff rates difficult.  The introduction of a Binding Tariff Information
system is foreseen in a new Code.
Hungary adopted on 1 July 1997 the new system of cumulation of origin between
European countries .
Hungary has become a contracting party to the EC/EFTA Common Transit Convention
and to the Convention on Simplification of Formalities on 1 July 1996.
Current and Prospective Assessment
Hungary would need to adapt its national procedures to the Community legislation
regarding suspensive arrangements and customs procedures with economic impact.  At
the moment of accession, some technical transitional arrangements would be needed,
notably for operations beginning before the date of accession but which are concluded
after that date.
At present 106 so-called "industrial" free zones and 105 "warehousing" free-zones are
operational in the Hungarian territory.  The exact scope of the activities performed in
these numerous free zones will require close examination in relation to Community
legislation.
It will be important that the Hungarian customs authorities can participate appropriately in
the various computerised systems necessary for the management, in the customs
union/internal market, of the customs and indirect tax provisions, as well as the
computerised systems for mutual administrative assistance in customs, agricultural and
indirect tax matters.
On accession Hungary would need to dismantle customs controls at the borders with EU
member states and with other acceding countries: in practical terms this should not pose
significant difficulties.  However, a strong emphasis would need to be given to controlling
the external EU frontier, and the resources needed for the reinforcement of the border
posts along Hungary's frontiers with non-EU member states should be taken into account
in its strategic planning.
Conclusion
Hungary is making a major effort to align its organisation and staff to the duties that have
to be carried out by a modern customs organisation.
If it reinforces it efforts, particularly in relation to project management in the
computerisation area, Hungary should be ready to fulfill the responsibilities of an EU
customs administration within the next few years.
Common Foreign and Security Policy
Since 1989 Hungary has re-oriented its foreign and security policy towards European and
Euro-Atlantic integration.  Improvement of relations with neighbouring countries and ofthe situation of the Hungarian minorities a broad have also been considered as key foreign
policy priorities of equal importance by successive Hungarian governments.  Hungary has
been an active participant in the dialogue arrangements provided for under the Union’s
Common Foreign and Security Policy and whenever invited has supported EU actions
within that framework.  Hungary is a member of the UN, OSCE, Council of Europe; it is
an associate partner of WEU, a participant in NACC and the PfP, and has been invited to
open negotiations for membership of NATO; it has provided base facilities and sent troops
to participate in IFOR/SFOR operations.  It also participates in a number of regional
organisations including CEFTA and the CEI.
Hungary strives to contribute to regional security by maintaining and expanding good
relations with its seven neighbouring states, with which it has no  territorial disputes.
Basic treaties, recognising existing borders and aiming at protecting the rights of
Hungarian minorities (in total numbering three million) have been concluded with Austria,
Slovenia, Croatia, Romania, Slovakia and the Ukraine.  There remain differences of
interpretation between Hungary and Slovakia concerning implementation of their bilateral
treaty.  Hungary has not recognised Slovakia as the successor state of Czechoslovakia,
partly due to the dispute over the construction of the Gabcikovo dam; this dispute has
been referred to the International Court of Justice, and both Hungary and Slovakia have
agreed to abide by the Court’s adjudication.  No treaty with the Federal Republic of
Yugoslavia has yet been agreed, notably as a result of the situation of the Hungarians
living in the Voivodina.
Hungary has a sizeable diplomatic service which would permit it as a mem ber of the
Union to play a full role.  It maintains 100 representations abroad and employs 639
diplomatic staff.
Hungary supports non-proliferation of nuclear, biological and chemical weapons and is a
signatory to all relevant international arms control agreements.  It exercises strict control
concerning the dual use of technology being a member of all the major existing export
control regimes.  Hungary’s armed forces are under democratic control.  The defence
industrial base has declined sharply in recent years and is in a process of re-organisation.
In its memorandum accompanying its application for membership of the Union, Hungary
confirmed that it was ready and able to participate fully and actively in the Common
Foreign and Security Policy.
The assessment of Hungarian foreign and security policy to date leads to the expectation
that as a member it could effectively fulfil its obligations in this field.
3.9 Financial Questions
Financial Control
The implementation of Community policies, especially for agriculture and the Structural
Funds, requires efficient management and control systems for public expenditure, with
provisions to fight fraud.  Approximation of legislation is moreover needed to allow the
system of “own resources” to be introduced, with satisfactory provision for accounting.
The Europe Agreement provides for cooperation in audit and financial control, including
technical assistance from the Community as appropriate.  The White Paper includes no
measures in this field.
Descriptive Summary
The current financial control system in Hungary has been strongly influenced by practices
in the EU member states:  both branches of control have finally been set up in accordance
with the Community model. An internal audit office at the Government level, the
Government Control Office (GCO), reporting directly to the Prime Minister,  has the
mandate to follow the execution of the State budget and to ensure that the principles of
sound management are properly respected. The State Audit Office (SAO) is the traditionalexternal control institution which audits the operation of the min istries and authorities of
national competence for effectiveness and aspects of rationality, regularity and legality.
The SAO reports independently to the Parliament.  Its reports are public and can be
discussed by the competent committees of the National Assembly.
In addition every organisation managing or consuming public funds(including foreign aid)
has to have its own Internal Control Organisation (independent of the SAO and GCO)
reporting directly to the Minister or director of the given institution.  Its task is to inspect
the financial management of the Ministry and the institutions under their control, and its
audits and controls cover aspects of regularity and sound financial management.
Generally, the SAO conducts a posteriori  audits; a priori audits are the responsibility of
the Treasury.  It is expected that efficiency audits will be attributed greater importance in
the future.
Special controlling organisations include the Tax and Financial Control Office (Act on
Taxation), the Customs and Finance Guard (Customs Act).  All of whom operate under
the supervision of  the Ministry of Finance.
With regard to fraud, the Hungarian financial, civil and criminal legal systems provide
protection for the financial interests not only of the Republic of Hungary but also of  the
EU.  A Coordination Committee for Economic Protection, operating under the Prime
Minister's Office, co-ordinates nationally the anti-fraud operations of such bodies as the
Tax and Finance Control Offices, Customs and the Finance Guard.
With regard to import duties the Hungarian Customs and Finance Guard are responsible
for their establishment and accounting but they also participate, by consultation, in the
development of legislation.
Regional development policy is integrated into the national economic policy and as such is
part of the national budget.  There are five special State funds. Most of their  control
organisations have been established recently and according to Western European systems.
In the case of an audit (the SAO is the external auditor) compliance with legal regulations,
accounting discipline, efficiency and performance relative to the objectives are checked.
As far as export subsidies and agricultural market support is concerned, the Tax and
Finance Control Office has been appointed as disbursing agency since 1 January 1996.  Its
competence relates to the establishment of eligibility, disbursement and audit of
expenditure.  The Office is assisted for the audit of payments and the contributions to
agriculture the Hungarian State Treasury, the 19 Country Agricultural Offices of the
Ministry of Agriculture, the National Institute for Agricultural Quality Control and the
Forest Inspectorates.
Current and Prospective Assessment
The structure of the Hungarian Customs and Finance guard (one central office, ten
regional offices and 112 local customs offices) seems comparable to the customs
organisations that are operated by certain EU member states.  The control organisation
for the five special funds which finance key tasks of the State have necessary skills and
practice and are able to meet the financial control requirements of the EU.
The Hungarian government plans to establish a financial management system
corresponding to the structural funds of the EU.
Accounting procedures for import duties and sugar duties will have to correspond to the
“own resources” of the EU.
The control of agricultural payments which is now being implemented has to correspond
to EU requirements.
The fight against the black market would be greatly accelerated and made more efficient
by full computerisation and the establishment of a remote data transfer system.
Conclusion
In the medium term Hungary should be able to fulfil its obligations in relation to the
financial control structures without any major problems, provided that measures currently
envisaged are put in place.
Budgetary Implications
The communication entitled “Agenda2000” sets out the overall financial framework which
should accommodate the budget impact of any future enlargements in the medium term.
This is to ensure that any enlargement is compatible with proposed Community policy
guidelines within reasonable budget limits.
As things stand, it would be difficult, not to say premature, to attempt precise country-by-
country evaluations of the budgetary implications of each of the applicants joining the
Union. Exactly what the impact would be may vary considerably depending on a whole
series of factors:
- the date on which the applicant country joins;- developments in Community policies between now and then, in particular the
decisions to be taken on further reform of the common agricultural policy and new
guidelines for structural measures;
- the progress made by the applicant countries in terms of growth, increasing their
competitiveness and productivity and their ability to absorb the acquis;
- the transitional measures that will come out of the negotiations.Only a few orders of magnitude for certain budget categories and an overall estimate can
be given purely as a guide.
Expenditure
If the common agricultural policy were to be reformed along the lines suggested by the
Commission, once the reforms were fully up and running and in terms of just market
intervention measures, Hungary’s accession would give rise to only marginal additional
expenditure of some 2% to 3% in relation to likely expenditure on the present fifteen
Member States.
After a phasing-in period, the allocations for Hungary under the heading of structural
measures would be about 4% of its GNP.
Application of the other internal Community policies in the new member countries would
be likely to involve additional expenditure probably in excess of their relative proportion
of Union GNP, since for certain policies the additional implementing costs also depend on
the target population, the geographical area covered or the number of Member States
involved in the coordination and harmonisation measures. The GNP of Hungary is
currently less than 0.6% of total Union GNP.
By contrast, Hungary’s accession should not involve significant additional expenditure as
far as Union external action is concerned.
It should not be forgotten that when an applicant country joins, the Community budget
will no longer have to bear the costs of grants the country was eligible for under the
various pre-accession programmes, such as PHARE.
In light of the above, the estimated costs in the three areas mentioned arising from
Hungary’s accession should fall within the range of, annually, ECU 2.5 to 3.1 billion in
2005-06 (at constant 1997 prices).
Revenue
Assuming full application of the own resources system, the new members’ contributions
to the Community budget should, in terms of total GNP and VAT resources (taking
account of the capping rules applying to VAT),  be close to the proportion of the Union’s
GNP they account for, which in Hungary’s case is about 0.6%. Hungary’s portion of
traditional own resources w ill depend on the structure of its trade flows at the time of
accession.
To ensure that the own resources are established, monitored and made available in line
with Community regulations, Hungary w ill have to overhaul its current customs system.
In addition, for the purposes of accurately calculating the GNP resource considerable
improvements will have to be made to the national accounts to ensure that they are
reliable, homogeneous and complete. Improving the statistics will also be essential for
drawing up the VAT own resources base, which will mean bringing Hungary’s VAT
system fully into line with the Community directives.
4  Administrative Capacity to Apply the Acquis
The European Council in Madrid in December 1995 concluded that the harmonious
integration into the EU of the central and eastern European applicant states would, in
particular, require the adjustment of their administrative structures.  This chapter examinesthe current state of the public administration in Hungary, including relevant aspects of the
judicial system, and assesses the current and prospective ability to carry out the functions
required of it in a modern, democratic state, with a particular  focus on the need to
administer matters related to the acquis.
4.1  Administrative Structures
A description of Hungarian constitutional structures, their powers and responsibilities,
including those of regional and local government, is given in Chapter 1.
At the central level there are 12 m inistries (of equal status) in addition to the Prime
Minister's Office, two ministers without portfolio (Privatisation, and National Security),
and six national agencies; the EU Integration State Secretariat in the Ministry of Foreign
Affairs acts as the central coordinating body for accession-related matters.
The legal basis for the civil service is provided by the 1992 Act on the legal status of Civil
Servants, and partly by both the 1973 law on Responsibility and Legal Status of
Government Members and State Secretaries and the 1990 Act on Temporary Regulation
of the legal status of State Secretaries (though these latter two Acts are scheduled to be
significantly amended in the near future).
The public administration is in general politically independent. There are rules for the
political independence of recruitment and promotion.  It is, however, usual practice for
Ministers to make appointments to senior positions in the civil service, such as State
Secretary, and often also at lower levels in the administration.
Of the 98,200 civil servants in the Hungarian public administration, about 60,000 are
employed in the central and territorial state administration, and about 40,000 are
employed directly by local self-government institutions. Public administration at thecentral government level has been subject to across the board staff cuts to help reduce the
budget deficit, including a 16% staff reduction in central public administration. (In spite of
this, the total number of civil servants has remained relatively stable over the past few
years). Currently, pay levels for comparable jobs are about three times higher in the
private sector than in the public sector.
In 1994 the position of Government Commissioner for the Modernisation of Public
Administration was created to co-ordinate reform of the public administration.  The
Commissioner has the rank of Deputy State Secretary and is attached to the Prime
Minister's office.  A Government decree of September 1996 instructs the Commissioner,
in conjunction with other relevant Ministries, to prepare a Public Administration Reform
(PAR) action plan. The action plan for 1997-98 lists 57 individual activities, and
concentrates on deregulation, training of civil servants, and further development of the
local government system.
In late 1995 the Hungarian Government adopted the modernisation programme entitled
"Hungary in a new Eur ope", setting out the country's medium-term strategy.  The
document develops the framework of Hungary's preparation for EU membership.
Regionalisation, regional development and regional policy are highlighted as key elements
in the creation of a de-centralised, more efficient administrative structure, and the future
framework for industrial development.  (See also the section of the Introduction
concerning relations between the European Union and Hungary).
4.2  Administrative and Judicial Capacity
Hungary was administered under central planning during the communist period. The
communist system rejected the primacy of the rule of law and subjugated the law and the
administration to the implementation of Party policy. Against this background, both the
administration and the rule of law itself increasingly came to be seen by the public as
instruments of political control.
The situation in Hungary has improved greatly since 1989.  The administrative framework
currently in place is now comparable to that found in EU countries.  The tasks of the
administrative units, and the control bodies, are reasonably well defined.  Over the last
five to six years, organisations have been set up in accordance with the requirements of a
market economy and have been given the necessary responsibilities and powers.
There are, however, certain issues on which the division of control, scope, tasks, and
competence have not been put in order.  For example, both in the case of agriculture and
consumer protection there is a need to establish central control bodies. The management
and supervision of local self-government requires significant improvement, while their
remit and institutional structure need to be better defined.
The civil service is not understaffed overall.  However, the across-the-board staff cuts,
and low pay compared to the private sector, have affected morale and motivation in some
areas, especially in the central administration. There has recently been a problem of "brain
drain" of experienced staff to the private sector, and a decline in recruitment.  It will be
important for the future effectiveness of the public administration that these problems are
resolved.
Following the high public expectations in the early 1990s, public confidence in the
administration as a whole has gradually waned.  It is sometimes regarded as being
excessively legalistic and non-transparent.  Problems of corruption have gained a higher
profile over the past few years, although hard evidence to back up specific allegations is
generally lacking.
The importance of administrative reform is widely accepted, and the planned reforms are
generally well designed.  The PAR action plan puts an end to across-the-board staff cuts,
and recognizes the particular importance, and specific training needs, of senior civil
servants. The implementation of public administration reform, however, is being hindered
by the very problems which the reforms are intended to address: a lack of management
skills, a shortage of qualified or experienced personnel in some areas, as well as
insufficient or ineffective departmental coordination and co-operation.  Implementation
has been slow.  Induction training of new staff, and improved functional training
(especially in management skills), will be required to raise the overall quality of the civil
service.  The civil service has been taking steps to improve the level of professional
awareness of EU issues.
As regards the coordination of EU related matters, the EU Integration State Secretariat
functions well.  Any further reform should build on the useful progress already made.
Key Areas for the Implementation of the Acquis
The uniform application of EC law:  The effective application of the acquis presupposes
that the judicial authorities of member states are able to apply the provisions of the Treaty
dealing with ensuring the unity and application of the acquis, and are able to ensure the
proper functioning of the Single Market and Community policies in general.  A high
quality and well trained and resourced judiciary is necessary for the application by the
courts of EC law, including cases of direct effect, and cases of referral to the European
Court of Justice under the terms of Article 177 EC.
Provided that reforms recently adopted in Hungary proceed as intended, including the
training of judges, the judicial system should be able effectively to implement the acquis.
In certain cases, such as public procurement, Hungarian judges have already applied the
principles of Community law.
Single market:  The ability of Hungary to ensure the correct application of Community
requirements in the Single Market, particularly concerning the free movement of goods
and services presupposes the existence of highly developed and effective  regulatory,
standardisation, certification and supervisory authorities, able to act fully in accordance
with EC rules.  An analysis of these points is made in Chapter 3.1 (under "The Four
Freedoms").
Concerning the administrative capacity in respect of free movement of goods, the situation
in Hungary is generally satisfactory.  In the various regulatory bodies staffing levels
appear to be adequate. Where there are problems these are more due to a lack of
communication at times between the different institutions.  Concerning the free movement
of services the situation is also generally satisfactory.  Following the 1996 Banking Law
an administrative structure based on EC requirements has been created.  Although staffing
levels appear to be largely adequate, (the Hungarian Banking and Capital Market
Supervisory Authority has 235 staff) there is a need for these to be correctly deployed to
perform an adequate number of on-site examinations on banks.  The quality of these
examinations should be improved by better training of staff. The State Insurance
Supervising Authority has 36 staff.
In order to meet EC requirements in this area Hungary needs to consolidate the progress
already made in its relevant administrative structures.
Competition:  As explained in Chapter 3.1 (under "Competition") enforcement of
competition law requires the establishment of anti-trust and state aid monitoring
authorities, and that the judicial system, the public administration and the relevant
economic operators have a sufficient understanding of competition law and policy.
In Hungary the central authority is the Office of Economic Competition which has 106
staff; this is adequate.  The level of expertise is sufficient.  Nonetheless, the ability
effectively to implement EC requirements in this field will require further training in EU
competition law.
Telecommunications:  In order to formulate and implement the many liberalisation
regulations contained in the acquis in this field it is necessary to have a regulatory and
policy making body that is effectively separated from any operating company.
In Hungary the regulatory authorities are the Ministry of Transport, Telecommunications
and Water Management, and the National Communications Authority (NCA) which deals
with the application of regulations and control functions (such as type approvals,
frequency and monitoring).  The National Communication Authority has 398 staff at the
central level, and 276 at the regional level in 7 regional offices.  However there remains a
need for improvements and reinforcing of the regulatory capacity and enforcement
capacities in this area.  Also, the NCA is not independent of the ownership function
exercised by the State in relation  the main telecommunications company.
Indirect taxation:  The effective administration of the indirect taxation acquis presupposes
structures capable of implementing the EC legislation concerning the harmonisation of
Valued Added Tax and excise duties in an environment in which  fiscal controls at internal
EU frontiers have been abolished; and the excise system is based on the tax warehouses,
duty being payable at the local rate in the member state at the time the goods are
consumed.  This requires a highly developed and well trained and resourced service, with
a high degree of integrity.
In Hungary the relevant authority is the Ministry of Finance with a total of 8,000 staff.
Due to a large turnover of staff, resulting partly from trained staff being recruited by the
private sector, it is difficult to estimate the capacity of existing staff. In order to ensure the
effective administration of the acquis in this area it will be necessary to consolidate and
improve the overall professional standards of the staff, including training measures and
improvements in pay.
Agriculture:  The administrative requirements in the agricultural area primarily concern
veterinary and phytosanitary control, to protect public health and ensure the free
movement of agricultural goods; and the ability to administer the mechanisms and
requirements of the CAP, including high standards of financial control and official
statistics.  These points are dealt with in Chapter 3.4 (under "Agriculture"); general
standards in the statistical field are examined in Chapter 3.3 (under "Statistics").
Concerning the administrative capacity in respect of veterinary and phytosanitary controls,
Hungary has an elaborate infrastructure.  As regards staffing, there are 20 Animal Health
and Food Control Stations, employing 2,880 staff, and a National Institute for
Agricultural Quality Control employing 710 staff.  Facilities at border inspection posts still
require improvement to meet EU standards.  Concerning the administration of general
CAP requirements, improvements in administrative structures will be required.
In order to meet EC requirements in this area some important adjustments are still
required, although progress has already been made.
Transport:  The application of the EU Internal Market and competition requirements to
the transport sector, the development of relevant infrastructure products, and other
aspects of the transport acquis will present administrative challenges to new member
states.
The responsible government authority in Hungary is the Ministry of Transport,
Telecommunications and Water Management with a total of 342 staff. There is a shortage
of qualified staff, and sometimes a lack of communication between administrative units.
This raises particular concerns with regard to the enforcement of safety controls.
Employment and social policy:  A central administrative requirement in respect of the
acquis in this area is adequate inspection capacity, particularly concerning health and
safety at work.
The Hungarian labour inspectorate is well staffed, with 61 staff centrally, and 5,170 at
regional offices (although only a proportion of these staff are involved directly in labour
inspection functions).  With suitable training and experience the labour inspectorate could
be expected successfully to administer the relevant acquis in this area.
Regional policy and cohesion:   The main administrative requirements in this area are the
existence of appropriate and effective administrative bodies , and in particular a high
degree of competence and integrity in the administration of Community funds.
In Hungary regional policy is administered by the Ministry of the Environment and
Regional Development (381 staff) and regional and local bodies. These arrangements are
not yet fully adequate. The situation concerning financial control is generally satisfactory
(see the section, below, on "Financial control"). The effective administration of the acquis
in this area will require improvements in coordination, definition of roles between the
various bodies, and further development of administrative expertise.
Environment:  Because EU environmental policy, involves the integration of
environmental protection into EU sectoral policies the administrative requirement is
potentially very wide, affecting many bodies not normally associated  with environmental
protection.  However, the main responsibility lies with environment ministries and various
subsidiary bodies.
As noted above (under “Regional policy and cohesion”), the relevant ministry has 381
staff.  Monitoring is carried out by sectoral authorities, enforcement by the National
Inspectorate of Environmental Protection and 12 regional inspectorates. These
arrangements are not yet adequate since better coordination is required with other
institutions involved, both at the national and regional level. The effective administration
of the acquis in this area will require greater financial and human resources, backed by a
reinforced commitment from the Government. A planned rationalisation of the system has
been on hold for some time.
Consumer protection:  In this area, the effective administration of the acquis requires the
allocation of overall responsibility to a specific State body through which the formulation,
implementation and enforcement of consumer policy and consumer protection legislationcan be undertaken.
In Hungary the government Department for Technical Development and Environmental
Protection shares general responsibility for consumer affairs with the semi-independent
Bureau for Consumer Affairs. As regards non-governmental consumer bodies an already
strong and independent consumer movement has developed. There remains confusion
about the exact scope and objectives of consumer policy. This in part explains difficulties
in the effective enforcement of consumer laws; however, other factors which need to be
addressed include a lack of expert staff, organisational deficits, and a lack of sensitivity to
consumer questions among the judiciary.
Justice and home affairs:  Oversight of justice and home affairs questions falls to the
justice and interior ministries.  The administrative structures need to be able to deal
effectively with asylum and migration questions, border management, police cooperation
and judicial cooperation.  There is an overriding need for sufficient and properly trained
staff with a high degree of integrity.
In Hungary the justice and interior mini stries are adequately staffed (Ministry of Interior,
549 staff; Ministry of Justice, 335 staff). The capacity to handle asylum and migration
questions is not yet assured though a new asylum law is being prepared which will bring
the administrative system up to EU standards. Border management is being modernised,
though some borders are weak and lack resources to function effectively. The police have
created specialist units to combat organised crime, and are improving cooperation with
neighbouring states. Reforms to the judiciary are being accelerated. The effective
administration of the acquis in this area will require increased investment in human
resources (in particular specialist and language training), and steps to combat corruption.
Customs:  Applying the acquis in this area requires  an adequate level of infrastructure
and equipment, including computerisation and investigation resources, and the
establishment of an efficient customs organisation with a sufficient number of qualified
and motivated staff showing a high degree of integrity.
In Hungary the customs service employs 6,000 staff. Due to a high turnover of staff, it is
difficult to estimate their efficiency, and therefore the adequacy of staffing levels. The
effective administration of the acquis in this area will require the retention of experienced
and qualified staff, and improvements to the existing monitoring system. The public
perception of corruption needs to be addressed.
Financial control:  The protection of the Community’s financial interests requires the
development of anti-fraud services, training of specialised staff (investigators, magistrates)
and the reinforcement of systems of specific cooperation. The implementation of
Community policies, especially for agriculture and the Structural Funds, requires efficient
management and control systems for public expenditure, with provisions to fight fraud.
Administratively it is essential to have a clear separation between external and internal
control.   Police and judicial authorities need to be able effectively to handle complex
transnational financial crime (including fraud, corruption and money laundering) which
could affect the Community’s financial interests.
In Hungary the main external control body is the State Audit Office. The number of staff
employed is not currently available to the Commission. The organisation and functioning
of the financial control systems in Hungary is broadly in line with the EU's requirements.
4.3  General Evaluation
If Hungary continues its comprehensive reform efforts in this area it could be envisaged
that the necessary administrative structures would be in place, in the medium term,
effectively to administer the acquis.
Provided that progress continues as planned, the Hungarian judicial system should be in a
position effectively to apply Community law in the medium term.
C. SUMMARY AND CONCLUSION
Hungary submitted its application for membership of the European Union on 31 March
1994.  Its request is part of the historic process of ending the division of Europe and
consolidating the establishment of democracy across the continent.
In accordance with the provisions of Article O of the Treaty, the Commission has, at the
request of the Council, prepared an Opinion on Hungary’s request for membership.
Hungary’s preparation for membership is going forward notably on the basis of the
Europe Agreement  which entered into force on 1 February 1994.    Implementation of
the White Paper of May 1995 on the Internal Market, another essential element of the
pre-accession strategy, is going ahead on the basis of a Plan agreed by the government in
December 1995 and revised in 1997.   The government has put in place the necessary
mechanisms to coordinate its policies for European integration.
In preparing its Opinion, the Commission has applied the criteria established at the
Copenhagen European Council of June 1993.  The Conclusions of this Council stated
that those candidate countries of Central and Eastern Europe who wish to do so shall
become members of the Union if they meet the following conditions:
− stability of institutions guaranteeing democracy, the rule of law, human rights and
respect for and protection of minorities;
− the existence of a functioning market economy, as well as the ability to cope with
competitive pressures and market forces within the Union;
− the ability to take on the obligations of membership, including adherence to the aims of
political, economic and monetary union.
A judgement on these three groups of criteria - political, economic, and the ability to take
on the acquis - depends also on the capacity of a country’s administrative and legal
systems to put into effect the principles of democracy and the market economy and to
apply and enforce the acquis in practice.
The method followed in preparing these Opinions has been to analyse the situation in
each candidate country, looking forward to the medium term prospects, and taking into
account progress accomplished and reforms already under way.  For the political criteria,
the Commission has analysed the current situation, going beyond a formal account of the
institutions to examine how democracy and the rule of law operate in practice.
1. Political Criteria
Hungary’s political institutions function properly.  They respect the limits on their
competences and cooperate with each other.  Elections are free and fair and led to
alternation of power in 1990 and 1994.  The opposition plays a normal part in the
operation of the institutions.
There are no major problems over respect for fundamental rights.  The rights of minorities
are guaranteed and protected.  Certain improvements are still needed in the operation of
the judicial system and in protection for the Roma, but the measures recently taken by the
government constitute progress.  The fight against corruption needs further reinforcement.
Hungary presents the characteristics of a democracy with stable institutions guaranteeing
the rule of law, human rights and respect for and protection of minorities.
2.  Economic Criteria
After a fall in GDP of nearly 20% between 1989 and 1993, Hungary has seen renewed
growth since 1994 (1.5% in 1995, 1% in 1996).  This has been accompanied by progress
towards stabilisation of public finances, external accounts and inflation (19.8% in 1996).
Hungary has 10.2 million inhabitants and its GDP per capita is equivalent to 37% of the
EU average.  8% of the working population are employed in the agricultural sector which
contributes 7% of gross value added.  Trade with the EU has grown considerably since
1989 and now represents 60% of Hungary’s external trade.
On the basis of its analysis the Commission’s judgement as to Hungary’s ability to meet
the economic criteria  established at Copenhagen is as follows:
Hungary can be regarded as a functioning market economy .  Liberalisation and
privatisation have progressed considerably, and there has been strong growth of new
private firms.  In order to guarantee longer term stability, the reform of pensions and
social security needs to advance rapidly.  The proposed method of pension reform wouldhave the added benefit of deepening capital markets.
Hungary should be well able to cope with competitive pressure and market forces
within the Union  in the medium term, provided the macroeconomic conditions for strong
investment growth rem ain in place.  Hungarian enterprises are already competitive in EU
markets.  Restructuring of industry and banks is well underway.  Hungary’s record of
consistent commitment to steady market reforms and its ability to take difficult decisions
when they are necessary is an important positive factor.  It has had a consistently high
level of foreign direct investment.  However, the key task is now to avoid unsustainable
budgetary or external deficits, which hinder investment and restructuring, and halt the
recent acceleration of growth.
3. Capacity to take on the obligations of membership
Hungary’s ability to take on the acquis has been evaluated according to a number of
indicators:
− the obligations set out in the Europe Agreement, particularly those relating to the right
of establishment, national treatment, free circulation of go ods, intellectual property and
public procurement;
− implementation of the measures set out in the White Paper as essential for establishing
the single market;
− progressive transposition of the other parts of the acquis.
Hungary has met the bulk of its obligations under the Europe Agreement, and the
timetable set out in the Agreement has been met.  The Agreement has functioned very
well and it has been possible to resolve any bilateral difficulties which have arisen, in
particular in the field of trade.  Hungary has achieved a good rate of transposition of the
rules and directives set out in the White Paper.
For the whole field related to the single market , and in particular competition, public
procurement, intellectual property, company and accounting law, taxation, product
liability, financial services, the legislative foundation is almost completely in place.
Despite the efforts undertaken, the progress made in transposing legislation still needs to
be accompanied by concrete measures of implementation, as well as establishment of an
effective administrative underpinning.  Hungary has some instruments which operate
correctly (for instance in the field of public procurement, appeal procedures set out in the
directives are applied and court cases have been started) but substantial efforts are still
needed in a number of sectors, notably standardisation.
As for the other parts of the acquis, Hungary should not have difficulty in applying it in
the medium term, provided it continues its current preparation for accession in the
following fields: education, training and youth; research and technological development;
telecommunications; audio-visual; small and medium enterprises; international trade
relations, and development.
By contrast substantial efforts will be needed for Hungary to be able to apply the acquis in
consumer protection and customs controls.
Given the extent of restructuring and modernisation efforts undertaken so far, there are
good reasons to expect that most sectors of Hungarian industry in the medium term can
be competitive operators in the single market.
For the environment, very important efforts w ill be needed, including massive investment
and strengthening of administrative capacity for enforcement of legislation.  Full
compliance with the acquis could only be expected in the long to very long term and
would necessitate increased levels of public expenditure.
Hungary has already made considerable progress on taking on the transport  acquis.  If it
continues its efforts on road transport and technical controls this sector should not pose
significant difficulties.  Hungary will need to provide the investment necessary to extend
the European transport network in order to ensure effective operation of the single
market.
Hungary should also be able in the medium term to apply the acquis on employment and
social affairs  but efforts are still needed to improve the health system and apply EU
health and safety at work standards.  Hungary already has an effective labour inspectorate.
For regional policy  Hungary has adopted a regional development policy which,  if
implemented, should permit it in the medium term to apply Community rules and make
effective use of structural funds.  Hungary w ill also need the necessary financial control
instruments.
In the agriculture sector if progress is made in the veterinary and phytosanitary fields,
and if the structures needed in the agrifood sector and for applying the CAP are
reinforced, membership in the medium term should not pose significant problems for
Hungary in applying the CAP in an appropriate manner.
For energy efforts are still needed in respect of monopoly operations, price fixing, access
to networks and state intervention in the solid fuel and uranium sectors.  Hungary has a
nuclear power station at Paks which produces nearly 40% of the country’s electricity.  It
needs to modernise this in the medium term in order to bring it up into internationally
accepted safety standards.  It will also need to find a solution for nuclear waste.
On the basis of the analysis of its capacity to apply the acquis, Hungary could be in a
position in the medium term to take and implement the measures necessary for removal of
controls at its borders and establishment of these at the Union’s external border.
Hungary should be in a position to participate at the appropriate time in the third stage of
economic and monetary union , which implies coordination of economic policy and
complete liberalisation of capital movements.  But it is premature to judge whether
Hungary will be in a position, by the time of its accession, to participate in the Euro area.
That will depend on how far the success of its structural transformation enables it to
achieve and sustain permanently the convergence criteria.  These are, however, not a
condition for membership.
Hungary should be able to meet the justice and home affairs  acquis in the next few
years, even though particular attention w ill need to be paid to frontier controls, treatment
of asylum seekers, visa policy and the fight against organised crime.  Hungary has
indicated a wish to join the Schengen Agreements.
Hungary should be able to fulfil its obligations in respect of the common foreign and
security policy .
In addition, Hungary has reinforced its relations with its neighbours since 1989, and has
signed Friendship and Good Neighbourliness Agreements with them recognising existing
frontiers and resolving almost all the potential disputes with them.  It has played an
important role in regional stability.
4.  Administrative and Legal Capacity
If Hungary pursues the administrative reforms which have already been started, the
necessary structures could be in place in the medium term to apply the acquis effectively.
The capacity of the judicial system to ensure uniform application of Community law is of
great importance, particularly for the implementation of the single market.  If Hungary
pursues its efforts, the judicial system should be capable of applying Community law in themedium term.
CONCLUSION
In the light of these considerations, the Commission concludes that :
- Hungary  presents the characteristics of a democracy , with stable institutions
guaranteeing the rule of law, human rights and respect for and protection of minorities;
- Hungary can be regarded as a functioning market economy and it should be able
to cope with competitive pressure and market forces within the Union in the medium
term;
- if Hungary continues its efforts on transposition of the acquis relating particularly
to the single market, and intensifies its work on its implementation,  Hungary should
become capable in the medium term of applying it fully. In addition,  particular efforts
will be needed to meet the acquis in sectors such as environment, customs control and
energy. More generally, further administrative reform will be indispensable if Hungary is
to have the structures to apply and enforce the acquis effectively.
In the light of these considerations, the Commission recommends that negotiations for
accession should be opened with Hungary.
The reinforced pre-accession strategy will help Hungary to prepare itself better to meet
the obligations of membership, and to take action to improve the shortcomings identifiedin the Opinions. The Commission will present a report no later than the end of 1998 onthe progress Hungary has achieved.
ANNEX
COMPOSITION OF PARLIAMENT
Political party Abbreviation Seats
Hungarian Socialist Party MSZP 208
Union of Free Democrats SZDSZ   67Independent Smallholders’ Party FKGP    25Christian Democratic Party KDNP    23Union of Young Democrats FIDESZ-MPP     21Hungarian Democratic Forum MDF     19
Hungarian People’s Democratic Party MDNP      15
Independent candidates   -        8
Market:  White Paper Measures
This table is based on information provided by the Hungarian authorities and confirmed by them as correct as at the end of June 1997.  It does not indicate the
Commission’s agreement with their analysis.  The table includes directives and regulations cited in the White Paper which total 899.  These have been listed inaccordance with the categorization used in the White Paper and in relation to the policy areas covered.  The table shows the number of measures for which the
Hungarian authorities have notified the existence of adopted legislation having some degree of compatibility with the
corresponding White Paper measures.
1.1.1.1.1.1.1 White Paper chapters Directives Regulation s
Stage I Stage
II/IIIStage I St a
II/
1.Free Movement of Capital Hungary 310
Number of White Paper measures 310
2.FM and Safety of Industrial Products Hungary 22 50 1
Number of White Paper measures 56 104 4
3.Competition Hungary 301
1.2 Number of White Paper measures 3 0 1
4.Social policy and action Hungary 11 7 0
Number of White Paper measures 12 15 0
5.Agriculture Hungary 83 42 44
1.2.1 Number of White Paper measures 93 46 62
6.Transport Hungary 11 4 4
1.2.2 Number of White Paper measures 19 15 8
7.Audiovisual Hungary 100
1.2.3 Number of White Paper measures 1 0 0
8.Environment Hungary 23 0 2
1.2.4 Number of White Paper measures 31 7 7
9.Telecommunication Hungary 850
1.2.5 Number of White Paper measures 9 7 0
10.Direct Taxation Hungary 000
1.2.6 Number of White Paper measures 2 2 0
11.Free movement of goods Hungary 000
1.2.7 Number of White Paper measures 0 0 0
12.Public Procurement Hungary 510
1.2.8 Number of White Paper measures 5 1 0
13.Financial services Hungary 12 8 0
1.2.9 Number of White Paper measures 13 8 0
14.Protection of personal data Hungary 020
1.2.10 Number of White Paper measures 0 2 0
15.Company Law Hungary 220
1.2.11 Number of White Paper measures 2 3 0
16.Accountancy Hungary 220
1.2.12 Number of White Paper measures 3 2 0
17.Civil law Hungary 110
1.2.13 Number of White Paper measures 1 1 0
18.Mutual rec. of prof. Qual. Hungary 21 3 0
1.2.14 Number of White Paper measures 2 16 0
19.Intellectual property Hungary 520
1.2.15 Number of White Paper measures 5 3 0
20.Energy Hungary 600
1.2.16 Number of White Paper measures 10 2 3
21.Customs law Hungary 00 1 4
1.2.17 Number of White Paper measures 2 1 14
22.Indirect Taxation Hungary 82 5 0
1.2.18 Number of White Paper measures 15 54 0
23.Consumer Protection Hungary 520
1.2.19 Number of White Paper measures 8 3 0
Total Hungary 213 167 66
Number of White Paper measures 295 293 99
Statistical  Data
If not explicitly stated otherwise, data contained in this annex are collected from „ Hungarian Central
Statistical Office  (KÖZPONTI STATISZTIKAI HIVATAL)“ with whom Eurostat and Member States’
statistical offices are co-operating since several years in the framework of the Phare programme. Regular
data collection and dissemination are part of this co-operation process with the aim to enable the
application of EU laws and practices in statistics. The data presented below have been compiled as far as
possible using EU definitions and standards which in some cases differ from national practices.  This mayoccaasionally give rise to differences between the data presented here and thosoe shown elsewhere in the
opinion, which are generally based on the individual applicant countries’ updated replies to the
questionnaire sent to them in April 1996.  The exact compatibility with EU standards on statistics and
thus the comparability with EU figures can still not be guaranteed, particularly those statistics that have
not been supplied through Eurostat, but have been delivered directly by the countries concerned..
Wherever available, methodological notes are given describing content and particularities of statistical
data presented in this annex. Data correspond to the information available as of May 1997.
BASIC DATA
1990 1992 1993 1994 1995
1000 hectares
Total Area 9303 9303 9303
Population ( end of the period) in 1000
   - total 10310 10277 10246 10212
   - Females 5354.3 5338.2 5330.7
   - Males 4922.7 4907.8 4881.3
per 1 km2
Population density 111 111 110 110
in % of total population
Urban Population 43.1 63.2 63.8 62.6
per 1000 of population
Deaths rate 14.2 14.4 14.4 14.2
Births rate 11.7 11.3 11.3 11
Income and GDP per capita European Currency Unit
   -Average monthly wage and salary per employee 167 239
   -GDP per capita 1688 3343
Structure of production: share of branch GVA in % of Total Gross Value Added
   -agriculture 12.5 6.2
   -industry 27.6 23.3
   -construction 6.0 4.4
   -services 39.9 54.0
share of branch GVA in 1995
23.3
4.454.00.06.2
   -agriculture
   -industry
   -constructi o
   -services
  - Othersshare of branch GVA in 1990
27.6
6.039.914.0
12.5
   -agriculture
   -industry
   -construction
   -services
  - Others
NATIONAL ACCOUNTS
1991 1992 1993 1994 1995
in Millions of National Currency
Gross Domestic Product (Current Prices) 2498319 2942668 3548262 4364811 5493800
in Billions of ECU
Gross Domestic Product (Current Prices) 26.98 28.7 32.96 34.89 33.42
in Purchasing Power Standard per capita
Gross Domestic Product 5543.6 5953.9 6311.4
% change over the previous year
Gross Domestic Product -3.1 -0.6 2.9 1.5
Final consumption expenditure 0.6 5.4 -2.3 -6.6
   -of households and NPISH 1.4 3.4 0.2 -7.1
   -of general government -1.1 9.8 -7.4 -5.7
Gross fixed capital formation -2.6 2.0 12.5 -4.3
Exports of goods and services 2.1 -10.1 13.7 13.4
Imports of goods and services 0.2 20.2 8.8 -0.7
in % of Gross Domestic Product
Final consumption expenditure 80.5 84.2 88.2 84.3 78.1
   -of households and NPISH 54.8 57.7 59.7 58.0 54.0
   -of general government 25.7 26.5 28.6 26.2 24.0
Gross fixed capital formation 20.9 19.9 18.9 20.1 19.1
Exports of goods and services 32.8 31.4 26.4 28.9 34.4
Imports of goods and services 33.7 31.7 34.6 35.4 36.6
GDP (%Change over the previous year)
-4.0-3.0-2.0-1.00.01.02.03.0
1991 1992 1993 1994 1995
MAIN ECONOMIC INDICATORS
1990 1991 1992 1993 1994 1995 1996
percentage change over the previous year
Inflation rate 28.9 35 23 22.5 18.8 28.2 23.6
previous year = 100
Industrial production volume indices 104 109.6 104.6 102.3
Gross agricultural production volume indices 90.3 103.2 102.6
Unemployment rate (ILO methodology) in % labour force
   - Total 11.3 10.2 9.3 9.2
   - less then 25 years 17.6 16.6 15.7
   - 25 years and more 8.7 8.2 8.0
in Billions of USD
Gross Foreign debt 21.37 23.31 20.51 22.88 27.20
Balance of payments in millions of USD
   -Exports of goods 9151 9688 10097 8119 7648 12864 14184
   -Imports of goods -8617 -9330 -10108 -12140 -11364 -15297 -16836
   -Trade balance 534 358 -11 -4021 -3716 -2433 -2652
   -Services, net 484 534 765 216 159 642 1498
   -Income, net -1427 -1356 -1260 -1190 -1406 -1804 -1456
   -Current account balance 379 403 352 -4262 -4054 -2535 -1689
   -Capital and fin. acc.(excl. reserves) -946 2379 409 6112 3205 5851 -1610
   -Reserve assets 558 -2700 -763 -2574 640 -4614 1437
Inflation rate:  Percentage change of yearly average over the previous year - all items index (data are based on national CPIs which are
not strictly comparable).
Industrial production volume indices: Industrial production covers mining and quarrying, manufacturing and electricity, gas and water supply
(according to the NACE Classification Sections C,D,E). Index of total industrial production and industrial sales includes the data of allindustrial corporations. The indices by branches refer to corporations with more than 20 employees up to the end of 1994 and with morethan 10 employees since 1995.
Gross agricultural production volume indices:  Indices based on evaluation of all individual products of gross agricultural production.
Constant prices refer to 1991.
Unemployment rate (by ILO methodology): Percentage of the unemployed in labour force. This rate is derived from LFSS (Labor Force
Survey), observing the following ILO definitions and recommendations where:Labor force  employed and unemployed persons in the sense of the ILO definitions stated below.
The employed   all persons aged 15+, who during the reference period worked at least one hour for wage or salary or other remuneration as
employees, entrepreneurs, members of cooperatives or contributing family workers. Members of armed forces and women on child-careleave are included.The unemployed all persons aged 15+, who concurrently meet all three conditions of the ILO definition for being classified as the
unemployed: (i) have no work, (ii) are actively seeking a job and (iii) are ready to take up a job within a fortnight.In Hungary, LFSS monitors only persons aged 15-74.
Gross foreign debt:   Debt is extracted form the OECD’s External Debt Statistics.
Balance of payments:   Data is derived from IMF database, their comparability with respective EU statistics can not be guaranteed, but
balance of payments is compiled mainly in accordance to IMF standards. Balance in trade of goods in accordance with balance of
payments principles. Exports and imports are both in f.o.b. values.  Net income includes direct, portfolio and other investment
income, compensation of employees.  Current account balance by definition of IMF 5th Manual, capital transfers are excluded.
Reserve assets : it means changes in reserve assets during the year; (+) signifies an increase, (-) a decrease in reserve assets.
FOREIGN TRADE
1992 1993 1994 1995 1996
Imports and exports (current prices) in millions of USD
   - Imports 12645 14554 15466 16209
   - Exports 8918 10701 12867 13145
   - Balance of trade -3727 -3853 -2599 -3064
External trade volume indices previous year = 100
   - Imports 120.9 114.5 96.1 105.5
   - Exports 86.9 116.6 108.4 104.6
Structure of Import by SITC (current prices) in % of total Import
   - (0+1) food and live animals, beverage and tobacco 5.5 5.6 6.3 5.3 5
   -  2 crude materials, inedible 4 3.1 3.7 4.1 3.7
   -  3 mineral fuels and lubricants 15 13.3 11.8 11.7 13.6
   -  4 animal and vegetable oils etc. 0.1 0.2 0.3 0.3 0.3
   -  5 chemicals and related products 12.9 11.9 12.7 14.2 13.9
   -  6 manufactured goods classified chiefly by material 20.4 18.2 19.8 23 22.2
   -  7 machinery and transport equipment 29.9 36.6 34.1 30.8 30.5
   -  8 miscellaneous manufactured articles 12.2 11.1 11.3 10.6 10.8
   -  9 goods not elsewhere classified 0 0
Structure of export by SITC (current prices) in % of total Export
   - (0+1) food and live animals, beverage and tobacco 21.8 19.1 18.5 20.3 18.4
   -  2 crude materials, inedible 5.5 5.7 5.2 4.8 4.5
   -  3 mineral fuels and lubricants 3.4 4.1 4 3.2 4.1
   -  4 animal and vegetable oils etc. 1.2 1 0.9 0.7 0.8
   -  5 chemicals and related products 10.8 12.1 11.2 11.8 11.1
   -  6 manufactured goods classified chiefly by material 16 16.1 16.6 17.4 17.7
   -  7 machinery and transport equipment 20.8 24.1 25.6 25.6 25.5
   -  8 miscellaneous manufactured articles 20.4 17.8 17.9 16.2 17.8
   -  9 goods not elsewhere classified 0.1 0.1
External trade price indices previous year = 100
   - Imports 109.9 109.4 115.5 132.2 120.8
   - Exports 111.9 118.1 133.9 118
Imports and exports (current prices), External trade volume indices and Structure of external trade by SITC (current prices):
Trade data exclude direct re-exports, trade in services and trade with customs free zones as well as licenses, know-how and patents. The data
are based upon the special trade system and are regularly updated.
Trade Classifications : The recording of merchandise trade occurs by two types of classification in parallel: apart from the Hungarian
External Trade Classification (KTJ) also on the basis of the Harmonized Commodity Description and Coding System (HS) nomenclature.
Imports are recorded on CIF basis and are captured in the same way as exports. Exports are recorded on FOB basis and are captured with
the date on which the commodities cross the customs border.  The customs statistics is utilized for monitoring of foreign trade data.
Eurostat has converted National Currencies to the US dollar by applying the International Monetary Fund annual average exchange rates.
External trade price indices:  Unit value index - calculation is used for measuring price changes in external trade, with the exception of
heterogeneous commodity groups, where the sample method is applied for the price observation.
FOREIGN
TRADE
1992 1993 1994 1995 1996
Structure of imports by main countries (current prices) in % of total imports
1st partner DE23.6DE22.2DE23.4DE23.4DE23.6
2nd partner RU16.9RU21.6AT12RU11.8RU12.5
3rd partner AT14.4AT11.6RU12AT10.7AT9.5
4th partner IT6.3IT 6IT 7IT7.9IT8.1
5th partner CZ4.3US3.9GB 4FR3.9FR4.2
others 34.5 34.7 41.6 42.3 42.1
Structure of exports by main countries (current prices) in % of total exports
1st partner DE27.7DE26.6DE28.2DE28.6DE29
2nd partner RU13.1RU15.3AT10.9AT10.1AT10.6
3rd partner AT10.7AT10.1IT8.5IT8.5IT 8
4th partner IT9.5IT 8RU7.5RU6.4RU5.9
5th partner YU3.5US4.2GB4.3FR 4FR3.7
others 35.5 35.8 40.6 42.4 42.8
Structure of export by main partners
in 1996
DE
29.0%
AT
10.6%
IT
8.0%RU
5.9%FR
3.7%42.8%Structure of import by main partners
in 1996
DE
23.6%
RU
12.5%
AT
9.5%IT
8.1%FR
4.2%42.1%
AT Austria IT Italy
CZ Czech Republic RU Russian FederationDE Germany US United StatesFR France YU YugoslaviaGB United Kingdom
SOCIAL INDICATORS
1991 1992 1993 1994 1995
Population on 1 January thousand
10354.8 10337.2 10310.2 10277.0 10246
Proportion of population by age 1 January 1995 in % of total population
y0_14 18.3
y15_24 15.8
y25_44 28.1
y45_64 23.8
y65_max 14.0
total number
Live births 127207 121724 117033 115598
Deaths 144813 148781 150244 146889
Infant deaths
   - Less than 1 year 1989 1714 1458 1335
   - Still birth 575 509 425 408
Marriages 61198 57005 54099 54114
Divorces 24433 21607 22350 23417
per 1000 of population
Crude marriage rate 5.92 5.52 5.26 5.26 5.2
Crude divorce rate 2.36 2.09 2.17 2.3 2.4
Natural growth -1.7 -2.62 -3.23 -3.05
Net migration 0000
Total population growth -1.7 -2.62 -3.23 -3.05
Total fertility rate 1.86 1.77 1.69 1.64
Infant mortality rate 15.64 14.08 12.46 11.55 10.7
Late foetal mortality rate 4.5 4.16 3.62 3.52
Life expectancy at birth
   - Males 65 64.6 64.8 64.8
   - Females 73.8 73.7 74.2 74.2
Life expectancy at 65 years
   - Males 12 12.1
   - Females 15.6 15.8
Net Migration:  No comprehensive migration survey carried out: estimated figures.
LABOUR MARKET
1993 1994 1995 1996
Economic Activity Rate (ILO methodology) in percent of population age +15
59.2 57.1 56.1 55.6
Average employment in thousand
2836 2899 2744 2552
Unemployment rate by age (ILO methodology) in % of labour force
   - total 11.3 10.2 9.3 9.2
   - less then 25 years 17.6 16.6 15.7
   - 25 years and more 8.7 8.2 8
Registered unemployment (end of period) in % of economically active population
12.6 10.9 10.9 10.7
1993 1994 1995 1996
Average paid employment indices by NACE classes Previous year = 100
   - Agriculture, hunting, forestry and fishing 73.7 82.7 90.7 95.3
   - Mining and quarrying 65.7 63.8 82.4 92
   - Manufacturing 93.1 94.7 94.8
   - Production and distribution of electricity, gas and water 104.9 96.8 94.4
   - Construction 90.6 82.7 76.6
   - Transport, storage and communication 96.6 97.4 94.5
Monthly nominal wages and salaries indices by NACE classes
   - Agriculture, hunting, forestry and fishing 125.5 127.8 121.2 117.4
   - Mining and quarrying 130 118.6 118.5 118.4
   - Manufacturing 124.7 123 121.3 121.6
   - Production and distribution of electricity, gas and water 124.7 123.5 120.8 123.1
   - Construction 120.6 121.9 116.7 118
   - Transport, storage and communication 120 125.8 117.4 124.3
Monthly wages and salaries indices
   - nominal 121.9 124.7 116.8 120.4
   - real 96.1 107.0 87.8 94.6
Economic activity rate (ILO Methodology)  Percentage of labor force in the total population aged 15+.This rate is derivated of L FSS (Labor Force Survey) observing the
following ILO definitions and recommendations, where:
Labor force:   employed and unemployed persons in the sense of the ILO definitions stated below.
The employed:   all persons aged 15+, who during the reference period worked at least one hour for wage or salary or other remuneration as employees,
entrepreneurs, members of cooperatives or contributing family workers. Members of armed forces and women on child-care leave are included.
The unemployed:  all persons aged 15+, who concurrently meet all three conditions of the ILO definition for being classified as the unemployed: (i) have no work,
(ii) are actively seeking a job and (iii) are ready to take up a job within a fortnight.
Unemployment rate (by ILO methodology)  Percentage of the unemployed in labour force. This rate is derived from L FSS (Labor Force Survey), observing the ILO
definitions and recommendations (see ILO definitions above)
Registered unemployment (end of period:  percentage of unemployed registered in civil economically active population, based on Labour force sample survey (L FSS).
Registered unemployment data are based on the monthly administrative unemployment register. Since May 1995 the coverage scope of registered unemployed haschanged because of excluding of job-seekers, who are temporarily unable to undertake work.
Average employment: Since 1994, the absolute figures for entrepreneurial sphere cover already the economic units with 10 or more employees.  The data cover also all
budgetary, subsidised organisations and persons with secondary job are included. Armed forces, apprentices, employees on child-care and add itional child-care
leaves are excluded.
Average paid employment indices by NACE classes:  The data for entrepreneurial sphere cover in 1994 corporations with 20 or more employees, since 1995 with 10
or more employees. The data cover also all budgetary, subsidised organisations and persons with secondary job are included. Armed forces, apprentices, employeeson child-care and additional child-care leaves are excluded.
Monthly wages and salaries indices: Monthly real wages and salaries indices are derived from net nominal wages and salaries indices divided by consumer price
indices. The data for entrepreneurial sphere cover in 1994 corporations with 20 or more employees, since 1995 with 10 or more employees.  The data cover also allbudgetary, subsidised organisations and persons with secondary job are included. Armed forces, apprentices, employees on child-care and add itional child-care
leaves are excluded.
PUBLIC FINANCE
1990 1991 1992 1993 1994 1995 1996
Government budget in Billions of national currency
     -Consolidated central government revenue
     -Grants
     -Consolidated central government expenditure 1088.8
     -Consolidated general government expenditure
     -Consolidated central government deficit/surplus 16.7 -203.7 -253.3 -284.8 -275.8 -166
     -General government deficit/surplus -205.2 -265.4 -367.4 -336.1 -250.7
Government budget in % of Gross Domestic Product
     -Consolidated central government expenditure 52.1
     -Consolidated general government expenditure
     -Consolidated central government deficit/surplus 0.8 -6.9 -7.1 -6.5 -5.0 -2.5
     -General government deficit/surplus -7.0 -7.5 -8.4 -6.1 -3.8
Government budget:  Data relate to central and general government as published in the IMF’s Government Finance Statistics Yearbook (1996) (GFSY);
included also is the country’s presentation in the GFSY.
Because the GFSY does not present statistics for general government, but for individual levels of government separately, the consolidated series
presented here were obtained from central and local government data and adjusted in consolidation for the identified intergovernmental transfers.
 Even though the statistics cover the central and local government published in GFSY, the coverage may  not be exhaustive if some central or
local government units are not included in that coverage.  A measure of the exhaustiveness of the coverage can be obtained by comparing in the
GFSY the note on the coverage of data for individual countries with the list of central and local government units provided.
It should be noted that the deficit/surplus used here is equal to revenue and grants minus expenditure, and does not take lending minus
repayments into account (see further below).
The netting of inter-government transfers carried-out in the attached tables is limited to the current and capital transfers consisting of the
identified grants and current and capital subsidies between the levels of government.  Other types of transactions occurring between government
levels, such as the payments of taxes and employers’ social security contributions, and the reciprocal purchases of goods and services are not
normally classified as inter-governmental transfers have not been eliminated in the consolidation process.  Finally, whether the absence of data for
current and capital transfers should be attributed to the absence of transfer or to lack of data is unclear; in all cases absence of information on
transfers have been deemed to represent zero-transfers.
a. Government expenditure consists of general government cash expenditures on current and capital goods and services, interest
payments and current and capital transfers but excludes non-cash transactions.
b. Deficit/surplus equals cash revenue and cash grants minus cash expenditure.  This measure of the deficit/surplus differs from
that used in GFS  which equals cash revenue and cash grants, minus cash expenditure, minus net lending.  This exclusion of net lending (consisting,
in the GFS methodology, of operations in financial assets and liabilities carried out for specific policy purposes, rather than for liquidity purposes)
brings the measure of the deficit/surplus presented here closer to the national accounts concept of net borrowing/net lending.  Also, as a result of this
exclusion, receipts from privatisation (classified as repayments in the GFS methodology) do not enter in the determination of the deficit/surplus
presented in the attached tables (and therefore do not reduce the deficit).
Consolidated central government deficit/surplus and General government deficit/surplus data for years 1992-1996 were compiled by the Ministry of Finance on
a basis that approximates the national accounts.
FINANCIAL SECTOR
1990 1991 1992 1993 1994 1995 1996
Monetary aggregates Billions (10^9) of US Dollars
   - Monetary aggregate M1 8.06 8.80 7.39 7.37
   - Quasi money 9.40 9.16 9.49 9.90
Total reserves ( gold excluded, end of period) Millions (10^6) of US Dollars
6771 6810 12052 9795
Average short term interest rates % per annum
   - lending rate 25.4 27.4 32.6
   - deposit rate 15.7 20.3 26.1
Official discount rate (end of period) 28 23
USD exchange rates 1 USD = ...HUF
Average of period 63.206 74.735 78.988 91.933 105.16 125.68 152.65
End of period 61.449 75.62 83.97 100.7 110.69 139.47 164.93
ECU exchange rates 1 ECU = ...HUF
Average of period 80.488 92.608 102.535 107.653 125.090 164.392 207.909
End of period 83.773 101.401 101.679 112.348 136.153 183.297 206.656
Monetary Aggregates: Money (M1):   Includes demand deposits and currency outside banks.   The amount of some forint sight deposits of the household
sector (that can be separated only from the beginning of 1993) has been reclassified as part of M1 instead of Quasi-money.
Quasi money (QM) :  Include time, savings and foreign currency deposits.   In 1995 stocks of broad money (M2): the sum of currency outside banks, sight,
demand, savings and time deposits of domestic money holders other than central government, extra-budgetary funds and of financial ins titutions, in domestic and
foreign currencies.Eurostat has converted National Currencies to the US dollar by applying the International Monetary Fund annual end of period exchange rates.
Total reserves (gold excluded, end of period):  The statistics on official foreign reserves are extracted from the IMF’s monthly International Financial Statistics (IFS).
Total reserves (gold excluded) are defined as the sum of central bank holdings of foreign currencies and other (gross) claims on non-residents; this definitionexcludes claims on residents denominated in foreign currency. According to the definition; official foreign reserves are calculated at market exchange rates andprices in force at the end of the period under consideration. Total reserves (gold excluded) published in IFS may differ from the figures published by the nationalauthorities. Some factors contributing to possible differences are the valuation of the reserve position in the F und, and a different treatment of claims in non-
convertible currencies.
USD exchange rates : International Monetary Fund exchange rates as present in the publication: “Statistiques Financieres Internationales”.
Average short term interest rates:   Data are extracted from the IMF’s monthly International Financial Statistics (IFS). Average short-term lending and deposit rates
relate to period averages.  Lending rates  generally consist of the average interest rate charged on loans granted by reporting banks. Deposit rates  relate to average
demand and time deposit rates or average time deposit rates. These rates may not be strictly comparable across countries to the extent the representative value ofthe reporting banks and the weighting schemes vary.
INFLATION (12 months
changes)
Percentage change of the CPIs with the current month compared with the corresponding month of the previous year (t/t-12)
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
1993 25.9 24.7 23.4 22.8 21.3 20.9 21.3 22.3 23.0 22.0 21.0 21.1
1994 17.0 16.6 16.8 17.3 18.3 19.2 20.0 19.5 18.9 19.5 21.0 21.2
1995 22.1 23.8 27.5 29.2 30.8 31.0 30.5 29.2 28.8 29.0 28.7 28.3
1996 28.9 28.3 25.6 24.4 23.9 23.6 23.0 22.9 22.2 21.0 20.1 19.8
Inflation (% change of CPI)
0.05.010.015.020.025.030.035.0
Jan-93
Mar
May
Jul
Sep
Nov
Jan-94
Mar
May
Jul
Sep
Nov
Jan-95
Mar
May
Jul
Sep
Nov
Jan-96
Mar
May
Jul
Sep
Nov
Inflation (12 months changes):  Inflation rates (12 months changes) are percentage changes of the CPIs with the current month
compared with the corresponding month of the previous year.  Inflation rates are based on national which are not strictly
comparable between candidate countries or with those based on EU HICPs (different methods, concepts, practices in thecalculation of CPIs).
INDUSTRY
1993 1994 1995 1996
Structure of GDP by economic activities (NACE, current prices) in % of Gross Domestic Product
   - Mining and quarrying 0.6 0.5 0.5
   - Manufacturing 21.9 21.6 23
   - Production and distribution of electricity, gas and water 3.7 3.2 3.4
Industrial production volume indices by NACE classes previous year = 100
   - Total 104 109.6 104.6 102.3
   - Mining and quarrying 99 82.7 86.7 102.4
   - Manufacturing 103.3 109.3 105 102
   - Production and distribution of electricity, gas and water 97.8 101.7 101.8 104.8
1993Q1 1993Q2 1993Q3 1993Q4 1994Q1 1994Q2 1994Q3 1994Q4
Industrial production volume indices by NACE classes corresponding period of the previous year = 100
   - Total 105 108 103 109 106.2 111 110.4
   - Mining and quarrying 93 106 108 102 80.6 85.5 73.5
   - Manufacturing 103 106 103 108 105.4 110.3 110.9
   - Production and distribution of electricity, gas and water 98 99 99 100 97.8 100.4 102.1
1995Q1 1995Q2 1995Q3 1995Q4 1996Q1 1996Q2 1996Q3 1996Q4
corresponding period of the previous year = 100
109.2 106.9 103.7 100.1 101.7 100.5 102.3 104.3
70.7 96.1 87.1 94.1 99.1 108.7 105.3 96.4
110.6 107.7 103.6 100.1 98.7 102 103.1 103.7
102.2 100.1 105.9 100.3 113 98.5 104.4 102.6
Structure of GDP by economic activities (NACE, current prices):  is calculated at basic prices.
Industrial production volume indices by NACE classes:  Industrial production covers mining and quarrying, manufacturing and electricity,
gas and water supply (according to the NACE Classification Sections C,D,E).  Index of total industrial production and industrial salesincludes the data of all industrial corporations. The indices by branches refer to corporations with more than 20 employees up to the end of1994 and with more than 10 employees since 1995.
INFRASTRUCTURE
1991 1992 1993 1994 1995
 in Km per 1000 Km2
Railway network 86.8 86 83.4 83 83
Railway transport  in million ton or passengers -km
   - freight transport 7708 7707 8409
   - passengers transport 8432 8508 8441
 in 1000 of population
Number of telephone subscribers 194.5 199 145.6 173 208
 inhabitants
Number of inhabitants per passenger car 5.1 5 4.7 4.7 4.5
AGRICULTURE
1992 1993 1994 1995 1996
Land area by land-use categories in 1000 Hectares
   - total 9303 9303 9303 9303 9303
   - agricultural land 6136 6129 6122 6179
   - forest 1712 1764 1767 1763
   - arable land 4742 4747 4749 4806
   - permanent meadows and pastures 1164 1157 1148 1148
Agricultural land by legal status in % of agricultural land
   - state enterprise 20.2 1917.6
   - Cooperatives 53.3 37.7 30.5
   - others 26.5 43.3 51.9
1992 1993 1994 1995 1996
Share of GDP in % of Gross Domestic Product
   - Agriculture, hunting, forestry and fishing (Nace A+B) 6.6 6.7 7.2
Previous year = 100
Gross agricultural production volume indices 90.3 103.2 102.6 104.9
Main crops by area in 1000 Hectares
   - Cereals 2604 2657 2830 2664
   - of which: wheat 846 986 1059 1108
   - Potatoes 52 56 57 57
   - Sugar beet 108 95 105 124
   - Fodder beet
Main crops by yield in 100 kg/Hectares
   - Cereals 37.9 31.7 40.7 41.3
   - of which: wheat 40.8 30.6 46.0 41.6
   - Potatoes 233.0 188.8 166.0 192.8
   - Sugar beet 271.1 229.7 321.0 338.6
   - Fodder beet
1992 1993 1994 1995 1996
Sales or procurement of animal for slaughter in 1000 tons of live weight
   -  pigs 490.2 420.3 348.6 375.4 521.5
   -  cattle 186.6 116.7 90.3 87.2 83.1
   - poultry 243.3 223.3 218293.1 292.2
Livestock breeding intensity (end of period) Heads per 1000 Ha of agricultural land
   -  cattle 163 149 150 147
   -  of which: cows 73 68 68 67
   -  sheep 204 155 158 1410
Heads per 1000 Ha of arable land
   -  pigs 816 920 1070 1120
   -  of which: sows 65 55 71
Share of GDP :  is calculated at basic prices.
Gross agricultural production volume indices :  Indices based on evaluation of all individual products of gross agricultural production.
Constant prices refer to 1991.
Sales or procurement of animals for slaughter :  The data refer to the procurement of principal product of agriculture.