Commission Opinion on Hungary's application for Membership of the European Union
Date: 1997-07-15
Institutions: European Commission
Subjects: EU relations, Hungary, accession to the European Union, economic situation, political situation

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 Opinion
The Contents of the Opinion

b)   Relations Between the European Union and Hungary

Historical and Geopolitical Context
Hungary’s Position Concerning the European Union
Contractual Relations
The Pre-Accession Strategy
Trade Relations
General Evaluation

B.  CRITERIA FOR MEMBERSHIP

1.   Political Criteria

1.1  Democracy and the Rule of Law

Parliament and Legislative Powers: Structure
Functioning of Parliament
The Executive: Structure
Functioning of the Executive
The Judiciary: Structure
Functioning of the Judiciary

1.2  Human Rights and the Protection of Minorities

Civil and Political Rights
Economic, Social and Cultural Rights
Minority Rights and the Protection of Minorities

1.3  General Evaluation

2.   Economic Criteria

2.1  The Economic Situation

Background
Liberalisation
Stabilisation of the Economy
Structural Change
Financial Sector
Economic and Social Development

2.2  The Economy in the Perspective of Membership

Introduction
The Existence of a Functioning Market Economy
The Capacity to Cope with Competitive Pressure and Market Forces
Prospects 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 Youth
Research and Technological Development
Telecommunications
Audio-visual

3.3  Economic and Fiscal Affairs

Economic and Monetary Union
Taxation
Statistics

3.4  Sectoral Policies

Industry
Agriculture
Fisheries
Energy
Transport
Small 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
Development
Customs
Common 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 Capacity
4.3  General Evaluation

C.  SUMMARY AND CONCLUSION

Annexes

Composition of Parliament
Single Market:  White Paper Measures
Statistical 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  information,  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  into  three  parts,  the  Habsburgs
conquered and reunited Hungary in the late seventeenth century.  In 1867 the creation of
the  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  Communist
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.  There
were 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  prepared 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 and
yet 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  the
gradual  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  Council
examines the overall status of relations and provides the opportunity to review 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 the
Minister 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  Consultative  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  and
agricultural 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  been  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 a
steady 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 1995
and 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, though
it  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 the
list 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 of
crisis” (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 extensive
powers, 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 into 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 the
Republic  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 and
minority 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 has
also 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 from 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 must
also 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 Economic
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 entailed 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 successfully  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  initially
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  registered  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

GDP per head

as % of EU-15 average

Share of agriculture in:

gross value added
employment

million

PPS-ECU (1995)
per cent (1995)

per cent (1995)
per cent (1995)

Gross foreign debt/GDP

per cent

Exports of goods & services/GDP

per cent

Stock of foreign direct investment1

billion ECU
ECU per head

     10.2

   6300
   37

    7.2
    8

  62

  34

    10.6
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  private
monopolies. 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  sector,  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  inflation  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 relating 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  recent  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  out
completely 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  line  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  liberalized.  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  expected  to  remain  so  in  the  short-to-medium-
term as Hungary still needs to contain public and external deficits and  reduce its foreign
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 threatened 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 wide-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 to
reverse 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
        December-on-December

per cent
per cent

Unemployment rate, end-year

per cent
ILO definition

18.8
21.2

10.2

28.2
28.3

9.3

23.6
19.8

9.2

General  government  budget per  cent  of  GDP -8.4

-6.0

-3.8

balance

Current account balance

per cent of GDP

-9.4

Debt/export ratio

per cent

267

-5.7

186

-3.9

144

Foreign 

direct 

investment per cent of GDP

2.8

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  meet  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 imports.

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 favourable 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  machinery  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  disability
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 evasion 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 incentives 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 partly
recapitalised  with  public  funds,  and  policy  now  aims  at  recapitalisation  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, the
banking 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 accepted standards for minimum capital adequacy. Notwithstanding
that some 40 banks are operating in Hungary, the banking 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  lending.  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  finance  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 are
adequate 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 country
of 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  unemployment  rate  is  close  to  twice  the  national  average.  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 obstacles 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 associated
countries  in  central  and  eastern  Europe  need  to  satisfy  for  accession.  The  economic
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 better 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,  Hungary
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 will be unable  to maintain its  commitment to the
economic obligations of membership.

At the level of the public authorities, Membership 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  by
macroeconomic  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 functioning.

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  identified
more easily and executed more smoothly.

Reductions  in  social  insurance  charges  and  in  the  overall  level  of  taxation,  in  line  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 produce 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 market.

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  will  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, Hungary’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 economy.

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 is
essential if the positive economic trends which emerged in 1995 and continued in 1996 are
to be sustained. Foreign debt  service will  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 efficiently.

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 labour 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  services.
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  demanded  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 
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.

the  emergence  of 

tackle 

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  proposed  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 remain 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  chapter
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 coordination
of regulatory and monitoring mechanisms;  all systematic checks and inspections necessary
to  ensure  correct  application  of  the  rules  are  carried  out  on  the  market,  not  at  frontier
crossings.

It is important to  incorporate Community  legislation  into  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,  in
particular,  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.  Companies  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  amendments  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.  Regarding
copyright  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  prepared  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 established
in 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 of
the  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 pharmaceutical  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 under
the  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  pharmaceutical  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  will  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  significant,  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 Articles 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 for
short-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  cooperation
between 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  transport.  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 directive
not  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  the
securities  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 permitted
from 1998.

Provided  harmonisation  proceeds  as  planned,  no  major  difficulties  are  foreseen  in
achieving full approximation in relation to free movement of services. With the completion
of  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  families).  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  the
transitional  period,  the  Association  Council  will  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,  whilst  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 considers
it  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 to
be 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 and
plant-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 (in
particular as regards VAT and excise duties, veterinary and plant-health checks,  and  the
collection 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  article
92/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  have  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 contribute 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,  the
development  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.  Hungary
is  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 is
the 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 market
entrants 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.

tariffs 

A tariffs reform programme is under preparation with the objective of  introducing  cost-
oriented 
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.

in  1998.  In  order 

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 transmission (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-visual acquis by the time
of  accession  to  the  EU  and  is  working  toward  a  more  complete  transposition  in  the
meantime.

As  a  result  of  the  progress  made,  Hungary  will  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  common
concern  and  they  will  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 participation
of 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 the
transmission 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  will  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 expected 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  1
January 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.  Only 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 mechanism, 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 wine  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  alcohol,  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 in
the right direction.

Descriptive Summary

Industrial  output  of  Hungary  in  1995  stood  at  around  9.2  bn  Ecu,  equivalent  to  about
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 
employment

in 

total

Chemical Industry and Pharmaceuticals

Mechanical and electrical engineering

Foodstuff and Tobacco

Textiles and Clothing Products

Wood, Paper, Printing Industry and Furniture

Mining, excavation, metallurgy and non-metallic
mineral products

Vehicles

Pressure  Vessels,  medical 
equipment, meteorological equipment

apparatus 

or

Telecommunication and Electronics

Total

5

4

4

2

2

2

1

1

1

23

2

3

4

3

2

2

1

0.5

0.5

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  electrical  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.   With  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  need  to  face  continued
restructuring.    Among  those  sectors  which  in  all  likeliness  could  be  competitive  by  the
turn  of  the  century  are  the  food  industry  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 protection 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 value
in Hungary.  Minimum access quotas 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 market
integration 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 further
development 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 fruit
and  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 is
envisaged 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 exports, 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,  etc.),  nuclear  energy,  as  well  as  energy  efficiency  and  environmental
rules.    Development of Trans-European Energy Networks and  support for  energy  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 to
the  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.  The
independence 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 the
previously 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 will 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  the
Ministry 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 measures
to 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  social  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, and
another 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  social  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 social  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 national
sources,  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-ordination
is  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 
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

to  manage 

integrated 

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 some
key  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  Pollution
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-compliance
areas  (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 will 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  protection  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 guarantees
data 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  meet  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 Hungary
will  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,  in
general, 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  member  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. 
the  International  Development
Association.

  Hungary  also  participates 

in 

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  investigation
means 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 adaptation
of 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 of
the situation of the Hungarian minorities abroad 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  member  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 traditional
external control institution which audits the operation of the ministries 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 
corresponding to the structural funds of the EU.

to  establish  a  financial  management  system

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  will  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 will 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 examines
the 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  ministries  (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  the
central 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  Europe",  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.

  Because  EU  environmental  policy, 

Environment: 
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.

involves 

the 

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 legislation
can 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 ministries 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, 
the
establishment  of  an  efficient  customs  organisation  with  a  sufficient  number  of  qualified
and motivated staff showing a high degree of integrity.

including  computerisation  and 

investigation  resources,  and 

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 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 remain 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 goods, 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 will 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 will  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 will 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 the
medium 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 identified
in the Opinions. The Commission will present a report no later than the end of 1998 on
the progress Hungary has achieved.

ANNEX

COMPOSITION OF PARLIAMENT

Political party

Abbreviation

Hungarian Socialist Party
Union of Free Democrats
Independent Smallholders’ Party
Christian Democratic Party
Union of Young Democrats
Hungarian Democratic Forum

MSZP
SZDSZ
FKGP
KDNP
FIDESZ-MPP

MDF

    19

Hungarian People’s Democratic Party
Independent candidates

MDNP
  -

Seats

208
  67
   25
   23
    21

     15
       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 in
accordance 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

1.Free Movement of Capital

2.FM and Safety of Industrial Products

3.Competition

1.2 

4.Social policy and action

5.Agriculture

6.Transport

7.Audiovisual

8.Environment

1.2.1 

1.2.2 

1.2.3 

1.2.4 

9.Telecommunication

10.Direct Taxation

1.2.5 

1.2.6 

11.Free movement of goods

1.2.7 

12.Public Procurement

1.2.8 

13.Financial services

1.2.9 

14.Protection of personal data

15.Company Law

16.Accountancy

17.Civil law

1.2.10 

1.2.11 

1.2.12 

1.2.13 

18.Mutual rec. of prof. Qual.

1.2.14 

19.Intellectual property

20.Energy

21.Customs law

1.2.15 

1.2.16 

1.2.17 

22.Indirect Taxation

1.2.18 

23.Consumer Protection

1.2.19 

Total

Hungary
Number of White Paper measures
Hungary
Number of White Paper measures
Hungary
Number of White Paper measures
Hungary
Number of White Paper measures
Hungary
Number of White Paper measures
Hungary
Number of White Paper measures
Hungary
Number of White Paper measures
Hungary
Number of White Paper measures
Hungary
Number of White Paper measures
Hungary
Number of White Paper measures
Hungary
Number of White Paper measures
Hungary
Number of White Paper measures
Hungary
Number of White Paper measures
Hungary
Number of White Paper measures
Hungary
Number of White Paper measures
Hungary
Number of White Paper measures
Hungary
Number of White Paper measures
Hungary
Number of White Paper measures
Hungary
Number of White Paper measures
Hungary
Number of White Paper measures
Hungary
Number of White Paper measures
Hungary
Number of White Paper measures
Hungary
Number of White Paper measures
Hungary
Number of White Paper measures

Directives

Stage I

Stage
II/III

Stage I

Regulations
Sta
II/

3
3
22
56
3
3
11
12
83
93
11
19
1
1
23
31
8
9
0
2
0
0
5
5
12
13
0
0
2
2
2
3
1
1
2
2
5
5
6
10
0
2
8
15
5
8
213
295

1
1
50
104
0
0
7
15
42
46
4
15
0
0
0
7
5
7
0
2
0
0
1
1
8
8
2
2
2
3
2
2
1
1
13
16
2
3
0
2
0
1
25
54
2
3
167
293

0
0
1
4
1
1
0
0
44
62
4
8
0
0
2
7
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
3
14
14
0
0
0
0
66
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 may
occaasionally 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

Total Area

Population ( end of the period)

   - total

   - Females

   - Males

Population density

Urban Population

Deaths rate

Births rate

Income and GDP per capita

   -Average monthly wage and salary per employee

   -GDP per capita

Structure of production: share of branch GVA

   -agriculture

   -industry

   -construction

   -services

1990

1992

1993

1994

1995

1000 hectares

9303

9303

9303

10310

in 1000

10277

5354.3

4922.7

per 1 km2

10246

5338.2

4907.8

10212

5330.7

4881.3

111

111

110

110

in % of total population

43.1

63.2

63.8

62.6

per 1000 of population

14.2

11.7

14.4

11.3

14.4

11.3

European Currency Unit

in % of Total Gross Value Added

14.2

11

239

3343

6.2

23.3

4.4

54.0

167

1688

12.5

27.6

6.0

39.9

share of branch GVA in 1990

share of branch GVA in 1995

14.0

12.5

0.0

6.2

39.9

27.6

6.0

   -agriculture

   -industry

   -construction

   -services

  - Others

54.0

   -agriculture

   -industry

   -constructio

   -services

  - Others

23.3

4.4

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

Gross Domestic Product

Gross Domestic Product

Final consumption expenditure

   -of households and NPISH

   -of general government

Gross fixed capital formation

Exports of goods and services

Imports of goods and services

Final consumption expenditure

   -of households and NPISH

   -of general government

Gross fixed capital formation

Exports of goods and services

Imports of goods and services

in Purchasing Power Standard per capita

5543.6

5953.9

6311.4

% change over the previous year

-3.1

0.6

1.4

-1.1

-2.6

2.1

0.2

-0.6

5.4

3.4

9.8

2.0

-10.1

20.2

in % of Gross Domestic Product

80.5

54.8

25.7

20.9

32.8

33.7

84.2

57.7

26.5

19.9

31.4

31.7

88.2

59.7

28.6

18.9

26.4

34.6

2.9

-2.3

0.2

-7.4

12.5

13.7

8.8

84.3

58.0

26.2

20.1

28.9

35.4

1.5

-6.6

-7.1

-5.7

-4.3

13.4

-0.7

78.1

54.0

24.0

19.1

34.4

36.6

GDP (% Change over the previous year)

1991

1992

1993

1994

1995

3.0

2.0

1.0

0.0

-1.0

-2.0

-3.0

-4.0

MAIN ECONOMIC INDICATORS

1990

1991

1992

1993
percentage change over the previous year

1994

1995

1996

Inflation rate

28.9

35

23

22.5

18.8

28.2

23.6

Industrial production volume indices

Gross agricultural production volume indices

Unemployment rate (ILO methodology)

   - Total

   - less then 25 years

   - 25 years and more

Gross Foreign debt

Balance of payments

   -Exports of goods

   -Imports of goods

   -Trade balance

   -Services, net

   -Income, net

   -Current account balance

   -Capital and fin. acc.(excl. reserves)

   -Reserve assets

previous year = 100

104

90.3

109.6

103.2

104.6

102.6

102.3

in % labour force

11.3

in Billions of USD

10.2

17.6

8.7

9.3

16.6

8.2

9.2

15.7

8.0

21.37

23.31

20.51

22.88

27.20

in millions of USD

9151

-8617

534

484

-1427

379

-946

558

9688

-9330

358

534

-1356

403

2379

-2700

10097

8119

7648

12864

14184

-10108

-12140

-11364

-15297

-16836

-11

765

-1260

352

409

-763

-4021

216

-1190

-4262

6112

-2574

-3716

159

-1406

-4054

3205

640

-2433

642

-1804

-2535

5851

-4614

-2652

1498

-1456

-1689

-1610

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 all
industrial corporations. The indices by branches refer to corporations with more than 20 employees up to the end of 1994 and with more
than 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-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.
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

Imports and exports (current prices)

   - Imports

   - Exports

   - Balance of trade

External trade volume indices

   - Imports

   - Exports

Structure of Import by SITC (current prices)

   - (0+1) food and live animals, beverage and tobacco

   -  2 crude materials, inedible

   -  3 mineral fuels and lubricants

   -  4 animal and vegetable oils etc.

   -  5 chemicals and related products

   -  6 manufactured goods classified chiefly by material

   -  7 machinery and transport equipment

   -  8 miscellaneous manufactured articles

   -  9 goods not elsewhere classified

Structure of export by SITC (current prices)

   - (0+1) food and live animals, beverage and tobacco

   -  2 crude materials, inedible

   -  3 mineral fuels and lubricants

   -  4 animal and vegetable oils etc.

   -  5 chemicals and related products

   -  6 manufactured goods classified chiefly by material

   -  7 machinery and transport equipment

   -  8 miscellaneous manufactured articles

   -  9 goods not elsewhere classified

External trade price indices

   - Imports

   - Exports

1992

1993

1994

1995

1996

in millions of USD

12645

8918

-3727

14554

10701

-3853

previous year = 100

15466

12867

-2599

16209

13145

-3064

120.9

86.9

114.5

116.6

96.1

108.4

105.5

104.6

in % of total Import

5.5

4

15

0.1

12.9

20.4

29.9

12.2

0

21.8

5.5

3.4

1.2

10.8

16

20.8

20.4

0.1

5.6

3.1

13.3

0.2

11.9

18.2

36.6

11.1

0

6.3

3.7

11.8

0.3

12.7

19.8

34.1

11.3

in % of total Export

19.1

5.7

4.1

1

12.1

16.1

24.1

17.8

0.1

18.5

5.2

4

0.9

11.2

16.6

25.6

17.9

5.3

4.1

11.7

0.3

14.2

23

30.8

10.6

20.3

4.8

3.2

0.7

11.8

17.4

25.6

16.2

5

3.7

13.6

0.3

13.9

22.2

30.5

10.8

18.4

4.5

4.1

0.8

11.1

17.7

25.5

17.8

previous year = 100

109.9

109.4

111.9

115.5

118.1

132.2

133.9

120.8

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

Structure of imports by main countries (current prices)

in % of total imports

1992

1993

1994

1995

1996

1st partner

2nd partner

3rd partner

4th partner

5th partner

others

Structure of exports by main countries (current prices)

1st partner

2nd partner

3rd partner

4th partner

5th partner

others

DE

RU

AT

IT

CZ

DE

RU

AT

IT

YU

23.6 DE

22.2 DE

23.4 DE

23.4 DE

16.9 RU

21.6 AT

12 RU

11.8 RU

14.4 AT

11.6 RU

12 AT

10.7 AT

6.3

IT

4.3 US

6

IT

3.9 GB

7

IT

4 FR

7.9

IT

3.9 FR

34.5

34.7

41.6

42.3

23.6

12.5

9.5

8.1

4.2

42.1

in % of total exports

27.7 DE

26.6 DE

28.2 DE

28.6 DE

29

13.1 RU

15.3 AT

10.9 AT

10.1 AT

10.6

10.7 AT

10.1

IT

9.5

IT

3.5 US

8 RU

4.2 GB

8.5

IT

7.5 RU

4.3 FR

8.5

IT

6.4 RU

4 FR

35.5

35.8

40.6

42.4

8

5.9

3.7

42.8

Structure of export by main partners
in 1996

Structure of import by main partners
in 1996

42.1%

DE
23.6%

RU
12.5%

FR
4.2%

IT
8.1%

AT
9.5%

42.8%

FR
3.7%

RU
5.9%

IT
8.0%

AT

CZ

DE

FR

GB

Austria

Czech Republic

Germany

France

United Kingdom

DE
29.0%

AT
10.6%

IT

RU

US

YU

Italy

Russian Federation

United States

Yugoslavia

SOCIAL INDICATORS

Population on 1 January

1991

1992

1993
thousand

1994

1995

10354.8

10337.2

10310.2

10277.0

10246

Proportion of population by age 1 January 1995

in % of total population

y0_14
y15_24
y25_44
y45_64
y65_max

Live births
Deaths
Infant deaths

   - Less than 1 year
   - Still birth

Marriages
Divorces

Crude marriage rate

Crude divorce rate

Natural growth
Net migration
Total population growth
Total fertility rate
Infant mortality rate
Late foetal mortality rate
Life expectancy
   - Males
   - Females

Life expectancy
   - Males
   - Females

total number

127207
144813

121724
148781

117033
150244

115598
146889

1989
575
61198
24433

5.92

2.36

-1.7
0
-1.7
1.86
15.64
4.5

1714
509
57005
21607

1458
425
54099
22350

per 1000 of population

5.52

2.09

-2.62
0
-2.62
1.77
14.08
4.16

65
73.8

5.26

2.17

-3.23
0
-3.23
1.69
12.46
3.62

at birth

64.6
73.7

at 65 years

1335
408
54114
23417

5.26

2.3

-3.05
0
-3.05
1.64
11.55
3.52

64.8
74.2

12
15.6

18.3
15.8
28.1
23.8
14.0

5.2

2.4

10.7

64.8
74.2

12.1
15.8

Net Migration:  No comprehensive migration survey carried out: estimated figures.

LABOUR MARKET

Economic Activity Rate (ILO methodology)

Average employment

Unemployment rate by age (ILO methodology)

   - total
   - less then 25 years
   - 25 years and more

Registered unemployment (end of period)

Average paid employment indices by NACE classes

   - Agriculture, hunting, forestry and fishing
   - Mining and quarrying
   - Manufacturing
   - Production and distribution of electricity, gas and water
   - Construction
   - Transport, storage and communication

Monthly nominal wages and salaries indices by NACE classes

   - Agriculture, hunting, forestry and fishing
   - Mining and quarrying
   - Manufacturing
   - Production and distribution of electricity, gas and water
   - Construction
   - Transport, storage and communication

Monthly wages and salaries indices
   - nominal
   - real

1993

1994

1995

1996

in percent of population age +15

59.2

57.1
in thousand

56.1

55.6

2836

2899

2744

2552

in % of labour force

11.3

9.3
16.6
8.2
in % of economically active population

10.2
17.6
8.7

12.6

10.9

10.9

9.2
15.7
8

10.7

1993

1994

1995

1996

Previous year = 100

73.7
65.7

125.5
130
124.7
124.7
120.6
120

121.9
96.1

82.7
63.8
93.1
104.9
90.6
96.6

127.8
118.6
123
123.5
121.9
125.8

124.7
107.0

90.7
82.4
94.7
96.8
82.7
97.4

121.2
118.5
121.3
120.8
116.7
117.4

116.8
87.8

95.3
92
94.8
94.4
76.6
94.5

117.4
118.4
121.6
123.1
118
124.3

120.4
94.6

Economic activity rate (ILO Methodology) Percentage of labor force in the total population aged 15+.This rate is derivated of 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-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 LFSS (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 (LFSS).
Registered unemployment data are based on the monthly administrative unemployment register. Since May 1995 the coverage scope of registered unemployed has
changed 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 additional 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, employees
on 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 all
budgetary, subsidised organisations and persons with secondary job are included. Armed forces, apprentices, employees on child-care and additional child-care
leaves are excluded.

PUBLIC FINANCE

Government budget

in Billions of national currency

1990

1991

1992

1993

1994

1995

1996

     -Consolidated central government revenue

     -Grants

     -Consolidated central government expenditure

     -Consolidated general government expenditure

     -Consolidated central government deficit/surplus

     -General government deficit/surplus

Government budget

     -Consolidated central government expenditure

     -Consolidated general government expenditure

     -Consolidated central government deficit/surplus

     -General government deficit/surplus

1088.8

16.7

52.1

0.8

-203.7

-205.2

-253.3

-265.4

-284.8

-367.4

-275.8

-336.1

-166

-250.7

in % of Gross Domestic Product

-6.9

-7.0

-7.1

-7.5

-6.5

-8.4

-5.0

-6.1

-2.5

-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

Monetary aggregates

   - Monetary aggregate M1

   - Quasi money

1990

1991

1992

1993

1994

1995

1996

Billions (10^9) of US Dollars

8.06

9.40

8.80

9.16

7.39

9.49

7.37

9.90

Total reserves ( gold excluded, end of period)

Millions (10^6) of US Dollars

Average short term interest rates

   - lending rate

   - deposit rate

Official discount rate (end of period)

USD exchange rates

Average of period

End of period

ECU exchange rates

Average of period

End of period

6771

6810

12052

9795

% per annum

25.4

15.7

27.4

20.3

1 USD = ...HUF

32.6

26.1

28

23

63.206

61.449

80.488

83.773

74.735

75.62

78.988

83.97

91.933

100.7

105.16

110.69

125.68

139.47

152.65

164.93

1 ECU = ...HUF

92.608

102.535

107.653

125.090

164.392

207.909

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 institutions, 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 definition
excludes claims on residents denominated in foreign currency. According to the definition; official foreign reserves are calculated at market exchange rates and
prices 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 national
authorities. Some factors contributing to possible differences are the valuation of the reserve position in the Fund, 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 of
the reporting banks and the weighting schemes vary.

INFLATION 
changes)
Percentage change of the CPIs with the current month compared with the corresponding month of the previous year (t/t-12)

(12  months

Jan

Feb

Mar

Apr

May

Jun

Jul

Aug

Sep

Oct

Nov

Dec

1993

1994

1995

1996

25.9

17.0

22.1

28.9

24.7

16.6

23.8

28.3

23.4

16.8

27.5

25.6

22.8

17.3

29.2

24.4

21.3

18.3

30.8

23.9

20.9

19.2

31.0

23.6

21.3

20.0

30.5

23.0

22.3

19.5

29.2

22.9

23.0

18.9

28.8

22.2

22.0

19.5

29.0

21.0

21.0

21.0

28.7

20.1

21.1

21.2

28.3

19.8

Inflation (%  change of CPI)

35.0
30.0
25.0
20.0
15.0
10.0
5.0
0.0

3
9
-
n
a
J

r
a

M

y
a
M

l
u
J

p
e
S

v
o
N

4
9
-
n
a
J

r
a

M

y
a
M

l
u
J

p
e
S

v
o
N

5
9
-
n
a
J

r
a

M

y
a
M

l
u
J

p
e
S

v
o
N

6
9
-
n
a
J

r
a

M

y
a
M

l
u
J

p
e
S

v
o
N

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  the
calculation of CPIs).

INDUSTRY

Structure of GDP by economic activities (NACE, current prices)

   - Mining and quarrying
   - Manufacturing
   - Production and distribution of electricity, gas and water

Industrial production volume indices by NACE classes

   - Total
   - Mining and quarrying
   - Manufacturing
   - Production and distribution of electricity, gas and water

1993

1994

1995

1996

in % of Gross Domestic Product

0.6
21.9
3.7

104
99
103.3
97.8

0.5
21.6
3.2

previous year = 100

109.6
82.7
109.3
101.7

0.5
23
3.4

104.6
86.7
105
101.8

102.3
102.4
102
104.8

Industrial production volume indices by NACE classes

   - Total
   - Mining and quarrying
   - Manufacturing
   - Production and distribution of electricity, gas and water

1993Q1 1993Q2 1993Q3 1993Q4 1994Q1 1994Q2 1994Q3 1994Q4
corresponding period of the previous year = 100

105
93
103
98

108
106
106
99

103
108
103
99

109
102
108
100

106.2
80.6
105.4
97.8

111
85.5
110.3
100.4

110.4
73.5
110.9
102.1

1995Q1 1995Q2 1995Q3 1995Q4 1996Q1 1996Q2 1996Q3 1996Q4
corresponding period of the previous year = 100

109.2
70.7
110.6
102.2

106.9
96.1
107.7
100.1

103.7
87.1
103.6
105.9

100.1
94.1
100.1
100.3

101.7
99.1
98.7
113

100.5
108.7
102
98.5

102.3
105.3
103.1
104.4

104.3
96.4
103.7
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  sales
includes the data of all industrial corporations. The indices by branches refer to corporations with more than 20 employees up to the end of
1994 and with more than 10 employees since 1995.

INFRASTRUCTURE

Railway network

Railway transport

   - freight transport

   - passengers transport

1991

1992

1993

1994

1995

 in Km per 1000 Km2

86.8

86

83.4

83

83

 in million ton or passengers -km

7708

8432

7707

8508

8409

8441

 in 1000 of population

Number of telephone subscribers

194.5

199

145.6
 inhabitants

173

208

Number of inhabitants per passenger car

5.1

5

4.7

4.7

4.5

AGRICULTURE

Land area by land-use categories

   - total
   - agricultural land
   - forest
   - arable land
   - permanent meadows and pastures

Agricultural land by legal status

   - state enterprise
   - Cooperatives
   - others

Share of GDP

   - Agriculture, hunting, forestry and fishing (Nace A+B)

1992

1993

1994

1995

1996

9303

in 1000 Hectares

9303
6136
1712
4742
1164

9303
6129
1764
4747
1157

9303
6122
1767
4749
1148

in % of agricultural land

20.2
53.3
26.5

19
37.7
43.3

9303
6179
1763
4806
1148

17.6
30.5
51.9

1992

1993

1994

1995

1996

in % of Gross Domestic Product

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

   - Cereals
   - of which: wheat
   - Potatoes
   - Sugar beet
   - Fodder beet

Main crops by yield

   - Cereals
   - of which: wheat
   - Potatoes
   - Sugar beet
   - Fodder beet

in 1000 Hectares

2657
986
56
95

2830
1059
57
105

in 100 kg/Hectares

31.7
30.6
188.8
229.7

40.7
46.0
166.0
321.0

2664
1108
57
124

41.3
41.6
192.8
338.6

2604
846
52
108

37.9
40.8
233.0
271.1

Sales or procurement of animal for slaughter

in 1000 tons of live weight

1992

1993

1994

1995

1996

   -  pigs
   -  cattle
   - poultry

Livestock breeding intensity (end of period)

   -  cattle
   -  of which: cows
   -  sheep

   -  pigs
   -  of which: sows

Share of GDP : is calculated at basic prices.

490.2
186.6
243.3

420.3
116.7
223.3

348.6
90.3
218

375.4
87.2
293.1

Heads per 1000 Ha of agricultural land

163
73
204

149
68
155

150
68
158

Heads per 1000 Ha of arable land

816
65

920
55

1070
71

521.5
83.1
292.2

147
67
1410

1120

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.