Regular report from the Commission on Hungary's progress towards accession
Date: 1998-12-17
Institutions: European Commission
Subjects: EU relations, Hungary, accession to the European Union, economic situation, report

COMMISSION  OF THE EUROPEAN  COMMUNITIES 

* * * ** 

* ** 

Brussels,  17.12.1998 
COM(1998) 700 final 

REGULAR REPORT 

FROM THE COMMISSION 

ON 

HUNGARY'S 

PROGRESS TOWARDS ACCESSION 

Table of contents 

A. 

Introduction 

a) 

b) 

Preface 
The Context of the Progress Report 
Relations between the European Union and Hungary 
The enhanced Pre-Accession Strategy 
Recent developments in bilateral relations 

B.  Criteria for Membership 

1. 
1.1 

1.2 

1.3 

2. 
2.1 
2.2 

2.3 

2.4 

3. 
3.1 

3.2 

Political criteria 
Democracy  and the Rule of Law 
Parliament 
The Executive 
The judicial  system 
Anti-Corruption  measures 
Human Rights and the Protection of Minorities 
Civil and Political Rights 
Economic, Social and Cultural Rights 
Minority Rights and the Protection of Minorities 
General evaluation 

Economic criteria 
Introduction 
Economic developments since the Commission published its Opinion 
Macroeconomic  developments 
Structural  reforms 
Assessment in terms of the Copenhagen  criteria 
The existence of a functioning  market economy 
The  capacity  to  cope  with  competitive  pressure  and  market  forces  within  the 
Union 
General  evaluation 

Ability to assume the obligations of Membership 
Internal Market without  frontiers 
General  framework 
The Four Freedoms 
Competition 
Innovation 
Information  Society 
Education, Training and Youth 
Research and Technological Development 
Telecommunications 
Audio-visual 

3.3 

3.4 

3.5 

3.6 

3.7 
3.8 

3.9 

Economic and Fiscal  Affairs 
Economic and Monetary Union 
Taxation 
Statistics 
Sectoral  Policies 
Industry 
Agriculture 
Fisheries 
Energy 
Transport 
Small and Medium-Sized  Enterprises 
Economic and Social Cohesion 
Employment  and Social  Affairs 
Regional Policy and Cohesion 
Quality of Life and Environment 
Environment 
Consumer Protection 
Justice and Home Affairs 
External Policies 
Trade and International Economic Relations 
Development 
Customs 
Common Foreign and Security Policy 
Financial  Questions 
Financial Control 

3.10  General Evaluation 

4.  Administrative capacity to apply the Acquis 

C.  Conclusion 

D.  Accession  Partnership  and National  Programme  for  the 
the  Acquis:  Global  Assessment  of 

Adoption  of 
Implementation 
1. 
2. 

Accession Partnership 
National programme for the adoption of the Acquis 

Annex 
Statistical Data 

A. 

Introduction 

a) 

Preface 

In Agenda  2000 the Commission  said it would report regularly to the European  Council 
on  progress  made  by  each  of  the  candidate  countries  of  Central  and  Eastern  Europe  in 
preparations  for  membership  and that  it would  submit  its first  report  at the end  of  1998. 
The  European Council in Luxembourg decided that 

"From  the  end  of  1998,  the  Commission  will  make  regular  reports  to  the  Council, 
together  with  any  necessary  recommendations  for  opening  bilateral  intergovernmental 
conferences,  reviewing  the  progress  of  each  Central  and  East  European  applicant  State 
towards accession in the light of the Copenhagen criteria, in particular the rate at which it 
is  adopting  the  Union  acquis.  Prior  to  those  reports,  implementation  of  the  accession 
partnerships  and  progress  in  adopting  the  acquis  will  be  examined  with  each  applicant 
State  in the Europe  Agreement  bodies.  The  Commission's  reports  will  serve  as  a basis 
for taking, in the Council context, the necessary decisions on the conduct of the accession 
negotiations  or their extension  to other applicants.  In that context, the Commission  will 
continue  to  follow  the  method  adopted  by  Agenda 2000  in  evaluating  applicant  States' 
ability to meet the economic criteria and fulfil  the obligations deriving from  accession. 

A  dynamic  approach  should  be maintained  in  assessing  the progress  made  by  applicant 
States in the regular reports which the Commission will submit to the Council." 

The European  Council in Cardiff  supported those conclusions, stating that "The  Union's 
priority  is  to  maintain  the  enlargement  process  for  the  countries  covered  in  the 
Luxembourg  European  Council conclusions, within which they can actively pursue  their 
candidatures  and  make  progress  towards  taking  on  the  obligations  of  membership, 
including  the Copenhagen  criteria.  Each of these  candidate  countries  will be judged  on 
the  basis  of  the  same  criteria  and  will  proceed  in  its  candidature  at  its  own  rate, 
depending  on its degree  of preparedness.  Much will  depend  on the  efforts  made by  the 
candidate  countries  themselves  to  meet  the criteria.  All  will  benefit  from  strengthened 
relations with the EU including through political  dialogue  and tailored  strategies  to  help 
them prepared for  accession." 

In  accordance  with  the  guidance  provided  by  these  Council  Conclusions,  the  progress 
report on Hungary follows the same structure as the Opinion.  It 

-  describes  the relations  between  Hungary  and the Union,  particularly  in the  framework 
of the Association Agreement; 

- analyses the situation in respect of the political  conditions  set 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 (functioning  market economy, capacity to cope with 
competitive pressures and market forces within the Union) 

-  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 

It  also  covers judicial  and  administrative  capacity  as requested  by the Madrid  European 
Council  which  underlined  the  necessity  for  the  candidate  countries  to  adapt  their 
administrative  structures  so  as  to  guarantee  the  harmonious 
implementation  of 
Community policies after membership. 

This  approach  ensures  equal  treatment  for  all  the  candidate  countries.  The  report  takes 
into  consideration  progress  since  the  Opinion. 
It  looks  at  whether  intended  reforms 
referred  to in the Opinion have been carried out  and  examines  new initiatives,  including 
those directly related to addressing Accession Partnership priorities. The report contains a 
separate  section  which  examines  the  extent  to  which  Hungary  has  addressed  the  short 
term priorities set out in the Accession Partnerships. 

While the assessment  of progress  in meeting the political  and  acquis  criteria  focuses  on 
that which  has been  accomplished  since the Opinion,  the economic  assessment  is  based 
on  a  longer  term  evaluation  of  Hungary's  economic  performance.  The  assessment  of 
progress  made  in adopting  the acquis has been made  on the basis  of adopted  legislation 
rather  than  legislation  which  is  in  various  stages  of  either  preparation  or  Parliamentary 
approval.  Only  in  this  manner  was  it  possible  to  objectively  measure  and  compare 
concrete progress in preparation for accession. 

The  report  draws  on  numerous  sources  of  information.  The  candidate  countries  were 
invited  to  provide  information  on  progress  made  in  preparations  for  membership  since 
the  publication  of  the  Opinion.  Their  presentations  at  the  meetings  held  under  the 
auspices  of  the  Europe  Agreement,  their  National  Programmes  for  the  Adoption  of  the 
Acquis  and  the  information  provided  in the context  of the  analytical  examination  of  the 
acquis  provided  were  additional  sources  of  information.  Council  deliberations  on  the 
Opinion  and  the reports  and resolutions  of the European Parliament  on the  Commission 
Opinions1  and in particular the report  on the application  of Hungary  for  accession  to  the 
EU  prepared  by  Mr.  Von  Habsburg  were  taken  into  account  in  the  preparation  of  the 
reports. 
The  Commission  also  used  assessments  made  by  the  Member  States, 
particularly with respect  to the political  criteria for membership  and the work  of various 
international  organisations,  and in particular  the contributions  of the  Council  of Europe, 
the OSCE  and the IFIs as well  as that  of non-governmental  organisations  in  preparation 
of the regular reports. 

1 European Parliament Doc. 224.339  'Report on the Communication from the Commission Agenda 2000' 
(Rapporteurs:  A. Oostlander and E. Baron Crespo; Co-rapporteurs:  M. Aelvoet, J. Dormer, O. Von 
Habsburg, E. Caccavale, F. Kristoffersen,  M. Hoff, C. Carnero Gonzales, P. Bernard-Raymond,  R. 
Speciale, J. Wiersma, J.W. Bertens) 

b) 

Relations Between the European Union and Hungary 

The Enhanced Pre-Accession Strategy 

On  30  March  1998  the  accession  process  was  formally  launched  by  a  meeting  of  the 
Ministers  for  Foreign  Affairs  of the fifteen  EU Member  States, the ten  Central  and  East 
European  applicant  states  and  Cyprus.  In  advance  of  this  meeting  country  specific 
Accession  Partnerships  were  adopted  to  support  the  applicant  countries  in  their 
preparations  for membership. These documents set out the priorities for  further  work and 
the supporting financial  assistance available from  the EU. In March Hungary presented a 
first  version  of  its National  Programme  for  the  Adoption  of  the Acquis  (NPAA)  which 
describes  in  more  detail  the  actions  needed  to  reach  the  objectives  set  out  in  the 
Accession  Partnership.  Following  the  opening  of  the  Intergovernmental  Conference, 
Hungary presented the main elements of its integration  strategy at the opening  session of 
the  EU-Hungary  accession  negotiations  in  Brussels  on  31  March.  An  analytical 
examination  of  the  acquis  ("screening")  started  on  3  April.  Pre-accession  aid  will  be 
increased  substantially.  Alongside  the Phare  programme,  it will,  as from  the year  2000, 
comprise  aid  for  agriculture  and  a  structural  instrument  which  will  give  priority  to 
measures  similar to those of the Cohesion Fund in environment  and transport. The Phare 
programme will concentrate on institution building and investment in other areas. 

Recent developments in bilateral relations 

Hungary has continued to implement  the Europe Agreement  correctly and contributed  to 
the smooth functioning  of the various joint institutions. 

The  Association  Council  will  meet  in  November  1998.  An  Association  Committee 
meeting was held in January  1998. The system of subcommittees continues to function  as 
a forum  for technical discussions. 

Since  the  issuing  of  the  Opinion  the  Joint  Parliamentary  Committee  comprising 
representatives  of the Hungarian and European Parliament met three times, in  September 
1997,  February  and  September  1998.  A  meeting  of  the  Joint  Consultative  Committee 
comprising  economic  and  social  representatives  from  the  EU's  Economic  and  Social 
Committee as well as relevant Hungarian bodies was held in December 1997. 

Hungary's trade with the EU has continued to increase its share of total trade.  During the 
first  five  months  of  1998  Hungarian  exports  to  the  EU  accounted  for  71% of  total 
exports.  Imports  from  the  EU  amounted  to  73.6%  up  from  62.4%  for  the  whole  of 
1997. 

Under  the  Europe  Agreement  an  adaptation  protocol,  covering  in  particular  non 
processed  agricultural  and  processed  agricultural  products,  has  been  signed  to  take  into 
account  the  results  of  the  Uruguay  Round  and  the  accession  of  Austria,  Finland  and 
Sweden to the EU. 

Several trade issues (e.g. the lifting  of the prior import surveillance on ceramic tiles, the 
phasing  out  of  the  import  surcharge)  were  resolved.  Recent  trade  problems  in  the 
agriculture  sector  include  concessions  on  cut  flowers  granted  to  Israel  which  are  more 
favourable  than  those  granted  to  the  EU,  tax  discrimination  on  spirits  and  the  non-
application of the principle of mutual recognition for an energy drink. 

Current discussions seek to accelerate the approximation process, and to progress in areas 
like copyright protection  and state aid. In the area of industrial  standards  and  conformity 
assessment,  negotiations  have  started  on  the  conclusion  of  a  Protocol  on  European 
Conformity  Assessment  (PECA), designed to speed up the process of aligning Hungarian 
horizontal and technical legislation in this area to the acquis. 

The  Europe  Agreement  was  challenged  by  a  submission  to  the  Constitutional  Court 
questioning  the  constitutionality  of the  Art.  62  (2)  on  competition  rules.  The  Court  did 
not  question  the  constitutionality  of  the  Europe  Agreement  but  underlined  the  need  to 
modify  the  Hungarian  law  transposing  the  Implementing  Rules  on  competition  adopted 
by the Association Council. 

The  1998  Phare programme  consists  of  a national  allocation  (77  MECU), based  on  the 
Accession  Partnership  priorities,  to  support  in  particular  Justice  and  Home  Affairs, 
agriculture, environment,  and regional policy,  as well  as the participation  in  Community 
programmes  and  Tempus.  An  additional  10  MECU  have  been  allocated  for  a  cross-
border co-operation programme. 

Hungary also participates in and benefits from Phare funded  multi-country  and horizontal 
programmes  such  as  customs,  environment,  small  and  medium  sized  enterprises, 
statistics, public administration reform  and TAIEX. 

The  Commission  continues  to  have  a  critical  view  on  the  Hungarian  performance 
regarding  the  implementation  of  the  Phare  programme  due  to  the  low  absorption  and 
management  capacity. 

B.  Criteria for  membership 

1. 

Political Criteria 

Introduction 

In  its  1997  Opinion  on  Hungary's  application  for  EU  membership,  the  Commission 
concluded that: 

"Hungary  presents 
guaranteeing the rule of law, human rights and respect for and protection of minorities." 

the  characteristics  of  a  democracy  with  stable 

institutions 

Furthermore,  in the Accession Partnership with Hungary  "  further  efforts  to improve  the 
situation of the Roma" were mentioned as a medium-term priority. 

Recent developments 

Following  the  May  1998  general  elections  the  Socialist-Free  Democrat  coalition 
government  was  replaced  by  a  coalition  government  led  by  the  Federation  of  Young 
Democrats.  The  coalition  partners  of  FIDESz  are  the  Smallholder's  Party  and  the 
Democratic  Forum.  This  change  of  government  has  not  resulted  in  any  major  shift  in 
government policy over the past years as regards the European Union. 

1.1.  Democracy and the Rule of Law 

The Parliament 

The  Hungarian  Parliament  continues  to  operate  well.  Its  powers  are  respected  and  the 
opposition plays a full part in its activities. 

As confirmed by the OSCE the general elections took place under free and fair conditions. 

The elections were held under the slightly modified  election system adopted by the House 
in October  1997. The main changes concerned the timing of elections, the rules for entering 
Parliament and the organisation of election campaigns. 

It is regrettable that the draft  law regarding the Parliamentary representation  of minorities 
which was pending at the time of the Opinion has still not  been approved. 

The Executive 

The  institutions  of  the  State  continue  to  operate  smoothly.  Important  steps  have  been 
taken to modernise public administration: 

•  A new  Act  on the  legal  status  and  liability  of members  of the  Government  and  state 
secretaries  will  help  to  increase  transparency  in  the  operation  of  the  Hungarian 
administration.  The Act  very  clearly  defines  and  regulates  the  legal  responsibility  of 
the executive. 

•  A  new  law  on  the  ethics  of  public  service  defines  the  incompatibility  of  private 
business with public service and thus helps to combat corruption more  efficiently. 

Salaries of civil servants are still low compared with earnings in the private sector and the 
Government continued to improve the situation by increasing salaries over the last twelve 
months. 

The Judiciary 

Addressing  a  specific  weakness  identified  in  the  Opinion  Parliament  elected  two  new 
judges  to  the  Constitutional  Court  which  now  has  its  full  contingent  of  11 judges.  It  has 
thus met its constitutional obligation to ensure the smooth functioning  of other democratic 
institutions. 

The Hungarian authorities have undertaken efforts to address weaknesses in the judiciary. A 
comprehensive judicial programme aims at speeding up court procedures and consolidating 
the judicial branch so as to combat more efficiently  corruption and organised crime. 

This  new  legislation  consolidates  the  separation  of  the judiciary  from  the  executive.  The 
creation of a National Judicial Council  consisting of 15 members will shift  control over the 
courts to the judiciary  although the executive will still be represented through the Minister 
of  Justice. In  addition  a  fourth  level  of  courts,  a  system  of  high  courts  of justice  will  be 
inserted between the regional courts and the Supreme Court, and will hear appeals in cases 
against decisions of the local or regional courts. Three of the new high courts are scheduled 
to come into operation in January  1999 and a further two in 2003.  The new legislation also 
defines  the  rights  and  duties  of judges,  lays  down  the  principles  of  the  remuneration  of 
judges on a new basis and increases the training period from two to three years. It decreases 
the number of cases the Supreme Court is required to hear in some cases moving them  from 
local to county courts. 

Since  1997 the number of judges has considerably increased and there are currently 2449, 
including  the  110  Judges  at  the  Supreme  Court.  This  number  is  expected  to  increase 
gradually in the short and medium term due to the judicial reform process. 

It remains to be seen if the reform will speed up judicial procedures or improve the standard 
of rulings. In particular  the reform  does  not  affect  the  internal  organisation  of the  courts. 
Judges do not have adequate administrative or support staff or technical facilities. 

Anti-Corruption  measures 

Hungary  continues  to  be  confronted  with  corruption  problems.  Stricter  rules  were 
introduced  for  economic  crimes  through  modification  of  the  penal  code.  Additional 
measures have been taken regarding the prevention of corruption, such as adoption of laws 
on the  conduct  of  senior  officials  and practitioners  in the  liberal  professions,  and  on  the 
tender of public contracts. 

In  1997-1998  Hungary  signed  the following  international  agreements  on the  fight  against 
corruption: 

• 

the recommendation  of the Council of the OECD to Member Governments on Bribery 
in  International  Business  Transactions  in  December  1997  (OECD  anti-Bribery  Pact) 
and 

• 

the Convention on Laundering, Search, Seizure and Confiscation  of the Proceeds from 

Crime in November  1997 (Strasbourg Convention). 

Additional efforts  are needed to combat corruption in the police forces, the customs service, 
local  administration  and  national  regulatory  agencies. Furthermore,  co-operation  between 
the different  anti-corruption entities should be increased. 

1.2.  Human Rights and the Protection of Minorities 

Hungary has already acceded to most of the major institutional human rights instruments. 
In  1997  Hungary  signed  the  European  convention  on  Nationality  and  the  European 
Agreement  relating  to  persons  participating  in  proceedings  of  the  European  Court  of 
Human  Rights.  In  1998  the  Council  of  Europe  Convention  for  the  Protection  of 
Minorities took  effect. 

The  Social  Charter  of  the  Council  of Europe  has  not been  ratified.  In  January  1998, the 
government  submitted  12  out  of  the  19  articles  of  that  Charter  to  the  Parliament  for 
ratification.  The  new  government  supports  the  early  ratification  of  the  totality  of  the 
Charter and should therefore submit the whole text to the Parliament. 

Civil and Political Rights 

Basic  civil  and  political  rights  continue  to  be  respected  in  Hungary  and  important 
progress has been made. In particular: 

•  Freedom  of the press  continues to be respected.  The  Hungarian media law, adopted in 
1996,  has  broken  the  monopoly  of  state  TV  and  facilitated  competition  between 
commercial TV channels. In June  1997 the electronic media market was liberalised  by 
ORTT  allowing  commercial TV channels to participate  in tenders. The appearance  of 
two  new  commercial  channels  provides  fresh  competition  to  a market  dominated  by 
the  state-owned  television  and  improves  services  in  compliance  with  a  functioning 
market economy. Competitive pressure is also present in the commercial radio market 
since the decision in November  1997 to open up this segment of the market for private 
ownership.  Nevertheless,  the  number  of private  radio  stations  remains  small  and  the 
public sector continues to have an important share. 

•  A new law  regulates the functioning  of  NGOs in Hungary. It provides the legal basis 
for  a  functioning  non-governmental  sector.  It  is  widely  hoped  that  the  law  will 
contribute  to  strengthening  civil  society  in  Hungary  by  filling  one  of  the  largest 
legislative gaps in the new democracy.  The EU's initiative for democracy  and human 
rights actively supports NGOs working in this field in Hungary. 

•  On  1  March  1998,  new  comprehensive  legislation  on  asylum  entered  into  force. 
Hungary now  extends refugee  status to non-European  refugees  if they were persecuted 
in  their  homeland  for  religious,  ethnic  or  political  reasons  and  it  has  lifted  the 
geographical reservation introduced in 1989 when joining the Geneva Convention. Thus 
it  fulfils 
its  international  obligations  to  the  Geneva  Convention  and  meets  the 
expectations  raised  in  the  Opinion.  Minor  implementation  problems  exist  because  of 

10 

insufficient  financial  resources  for  the  training  of  new  staff,  including  judges.  The 
Kistarcsa community shelter (a temporary first point of refuge  for those seeking asylum) 
has closed due to its appalling conditions. 

Police  behaviour  and  the  prison  situation  continue  to  give  rise  to  concern.  It  is 
reported  that  the  police  abuse  their  power,  mistreat  persons  (there  are  increasing 
reports  of  abuse  of  minors,  foreigners  and  Roma).  While  conditions  within  police 
detention  centres have  significantly  improved, the situation in many  of the prisons  is 
still of concern. 

Economic,  Social  and  Cultural  Rights 

In general economic, social and cultural rights continue to be respected in Hungary. A law 
on  the  rights  and  equal  chances  of  handicapped  people  in  health  care,  education, 
employment, transport and residence was passed in March 1998 which will come into  force 
from  1 January  1999. The law, which was one of the last legislative measures  adopted by 
the outgoing Parliament,  should put  an end to discrimination  against  disabled persons  and 
create the conditions for them to become equal members of society. 

Minority Rights  and the Protection of Minorities 

Continued attention needs to be paid to the respect of the human rights of the Roma by the 
Hungarian authorities. The Roma are not always granted equal treatment before the law. 

The government adopted a comprehensive Roma action programme in July  1997, the first 
since  the  change  of  regime,  in  response  to  the  fact  that  the  situation  of  the  Roma  has 
deteriorated over the last few years. It aims to provide medium-term solutions to improving 
the  situation  of  Roma,  in  particular  in  the  fields  of  education,  employment,  agricultural 
activities, social and health  affairs  and housing. The proposals  are positive  as they  form  a 
good basis for continued dialogue between the Roma, the government and society but there 
appear to be only limited funds available from the central budget. 

Education is considered  a main priority in improving the situation of the Roma and other 
minorities.  The  Ombudsman  for  National  and  Ethnic  Minorities  raised  some  critical 
points  concerning  the  education  of  the  minorities.  The  Ombudsman  examined  352 
petitions last year, the majority  of which affected  the Roma. The petitioners  claimed that 
individual  minority  rights  had  been  violated  in  166  cases  and  collective  rights  in  74 
cases. Another  report by the Ombudsman  assessing the  situation  of minority  education  in 
Hungary states that in contrast to other minorities Roma children suffer from discrimination 
through  segregated  classes  and  schools.  Although  the  law  on  public  education  prohibits 
segregation, no legal sanctions can be imposed against those violating the legal provisions. 
The Ministry has not accepted the Ombudsman's report. 

11 

1.3.  General evaluation 

Developments in Hungary confirm  the conclusion of the Opinion that Hungary fulfils  the 
political  Copenhagen  criteria.  Hungary's  institutions  continue  to  function  smoothly. 
Elections  have  taken  place  in  free  and  fair  conditions  and  allowed  a  smooth  transfer  of 
power in 1998. 

Continuing  attention  needs  to  be  paid  to  combating  corruption  more  effectively  and  to 
improving the situation of the Roma. 

2.  Economic Criteria 

2.1. 

Introduction 

In  its  1997  Opinion  on  Hungary's  application  for  EU  membership,  the  Commission 
concluded : 

"Hungary  can be regarded  as a functioning  market  economy",  "it  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". 

the  economic  developments 

In  examining 
the 
Commission's  approach  was  guided  by  the  conclusions  of  the  European  Council  in 
Copenhagen in June 1993 which stated that membership of the Union requires : 

in  Hungary  since 

the  Opinion, 

• 

• 

the existence of a functioning  market economy; 

the capacity to cope with competitive pressure and market forces within the Union. 

In  the  analysis  below  the  commission  has  followed  the  methodology  applied  in  the 
Opinion. 

2.2.  Economic  developments  since  the  Commission  published  its 

Opinion 

Since  mid-1997,  Hungary's  economic  prospects  have  continued  to  improve.  The 
economy  has  performed  better  than  envisaged  in  the  reference  macroeconomic 
framework  outlined in the first "Joint Assessment of Hungary's Medium-Term  Economic 
Policy Priorities" prepared by the Hungarian Ministry  of Finance  and the  Commission's 
Directorate  General  for  Economic  and Financial  Affairs  in June  1997. Last  year,  growth 
accelerated,  inflation  fell  and  real  personal  incomes  rose  while  the  external  balances 
improved.  These trends continued  into the first half of  1998 and mark a clear break  with 
the past,  largely due to the substantial modernisation  of some productive  sectors brought 
about  by  past  foreign  direct  investment.  The  sustained  strengthening  of  the  external 
accounts allowed Hungary to complete successfully  its precautionary  stand-by  agreement 
with  the  International  Monetary  Fund  without  drawing  any  funds.  During  the  period 

12 

under review,  the Hungarian  authorities  continued  to  operate  a  crawling peg  exchange 
rate regime. 

Macroeconomic  developments 

At the time of the publication of the Opinion, economic growth had already begun to pick 
up  following  the  slowdown  caused  by the  adjustment  measures  of  1995.  This  trend  has 
continued:  GDP  growth  equalled  4.4%  in  1997 and was  close  to  5% in  the  first  half  of 
1998. 

Private and public consumption growth has resumed after  a three-year decline. However, 
the  speed  of  the  recovery  in  household  consumption  is  unclear  since  weaknesses  in 
national  account  data  hamper  accurate  measurements  of  the  different  components  of 
domestic demand. According to the figures provided by the Central  Statistics  Office,  the 
annual growth in household  consumption  equalled  0.9% in  1997 and rose to 2.9% in the 
first half of 1998. 

So  far,  however,  investment  and  exports  have  largely  led  the  recovery.  Capital 
expenditures  on  fixed  assets rose by  8.8%  over  1997 and  accelerated  further  during  the 
first half  of  1998. Exports  have  been  booming,  growing  at  an  annual  rate  of  26.4%  in 
1997  and  only  slightly  less  in  the  first  half  of  1998.  However,  the  strengthening  of 
domestic  demand  and  the  high  import  content  of  the  most  dynamic  exports  caused 
imports  to  grow  at  a  similar  rate,  thus  limiting  the  net  contribution  of  exports  to  GDP 
growth. 

Booming  exports,  however,  have  played  a  leading  role  in  the  industrial  recovery 
underpinning the current upswing in growth. Thus, during  1997, industrial output rose by 
11% as sales to export markets increased by more than 30%, counterbalancing a 1.5%  fall 
in  domestic  revenues.  During  the  first  seven  months  of  1998,  industrial  growth 
accelerated  even  further  as  exports  remained  buoyant  and  sales  growth  in  the  domestic 
market resumed. 

In  addition,  the  sharp  increase  in  exports  has  helped  preserve  the  sustainability  of 
Hungary's  external  balances  in  spite  of  the  acceleration  in  growth,  the  resumption  of 
domestic  consumption  and the timely  abolition  of the import  surcharge by mid-1997.  In 
ECU  terms,  the  1997  trade  deficit  in  goods  and  services  more  than  halved  relative  to 
1996. The current account deficit  fell  from  3.8% of GDP to an estimated  2.2%. This  gap 
was  fully  financed  by  foreign  direct  investment  flows  that  continued  unabated, 
confirming  Hungary's  attractiveness  to  foreign  investors  and  supporting  a  further 
improvement  in  its  debt  service  indicators.  Similar  developments  took  place  during  the 
first  half  of  1998  when  the  improvement  in  the  trade  balance  was  sustained  but  the 
current account deficit worsened slightly because of rising net income payments. 

Disinflation  has continued.  The year-on-year  inflation  rate fell  to  13.5% by August  1998 
from  18%o a year earlier. During  1997, however, the decline in inflation  slowed  somewhat 
because  of  a  structural  adjustment  in  the  relative  price  of  energy  products,  adverse 
seasonal  trends  in  food  prices  and  higher-than-planned  nominal  wage  growth.  During 
1998, disinflation  regained momentum thanks to smaller increases in administered prices 
and consumption  taxes as well as positive trends in the prices for  food  and imported  raw 
materials. 

13 

H u n g a r y:  M a in  e c o n o m ic  t r e n ds 

1994 

1995 

1996 

1997 

1998  latest 

R e al  G DP  g r o w th  rate 

per  cent 

2.9 

1.5 

1.3 

4.4 

4.8 

Jan-Jun 

Inflation  rate 

a n n u al  a v e r a ge 
Decern  b e r - o n - D e c e m b er 

per  cent 
per  cent 

U n e m p l o y m e nt  r a t e,  e n d - y e ar 

ILO  definition 
r e g i s t e r ed 

per  cent 
per  cent 

G e n e r al  g o v e r n m e nt  b u d g et  b a l a n ce  per  cent  of  GDP 

C u r r e nt  a c c o u nt  b a l a n ce 

Foreign  d e bt 

d e b t / e x p o rt  ratio1 
g r o ss  f o r e i gn  d e bt 

per  cent  of  GDP 
billion  ECU 

per  cent 
billion  ECU 

18.8 
21.2 

10.2 
10.4 

-8.4 

-9.4 
-3.3 

24.0 

28.2 
28.3 

9.5 
10.4 

-6.8 

-5.5 
-1.9 

191 
24.2 

23.6 
19.8 

9.2 
10.5 

-3.1 

-3.7 
-1.3 

156 
21.7 

18.3 
18.4 

8.1 
10.4 

-4.8 

-2.2 
-0.9 

114 
20.9 

15.2 
12.5 

Jan-Sep 
Sep-on-Sep 

8.9 

Sep 

-1.0 

Jan-Jul 

Foreign  direct  i n v e s t m e nt  inflow 

net  inflow  a c c o r d i ng  to  E B RD 
b a l a n ce  of  p a y m e n ts  data 

per  cent  of  GDP 
million  ECU 

2.8 
963 

10.5 
3404 

4.4 
1408 

4.6 
1597 

868 

Jan-Jul 

Source:  Commission 
'  Gross  hard  currency 

services, 

national 

sources, 

EBRD 

debt  as  a  precentage 

of  exports  of  goods  and 

services 

Wage  growth,  however,  has  remained  above  the  guidelines  fixed  by  the  Interest 
Reconciliation  Council  (IRC),  a  tri-partite  body  comprised  of  unions,  employers  and 
government representatives. During the first seven months of  1998, gross average wages 
grew  by  roughly  20%  over  the  same  period  in  1997,  i.e.  some  five  percentage  points 
higher  than  the  average  guideline  set  by  the  IRC.  Strong  wage  growth  is  explained  by 
several  factors.  These  include  a catch-up  of real wages  following  sharp  cuts in  workers' 
purchasing power in  1995 and  1996; growth of public sector wages over and beyond  that 
in  the  private  sector;  falling  unemployment;  and  entrenched  inflationary  expectations 
strengthened by the authorities' recurrent failure to meet inflation targets. 

The target deficit  for the general government budget in both  1997 and  1998 was 4.9% of 
GDP.  The  1997 deficit  amounted to an estimated 4.6% of GDP.  As in  1996, the accounts 
of  the  central  budget,  local  governments  and  separate  state  funds  all  performed  better 
than  envisaged,  largely  due  to  faster  than  expected  economic  growth.  This  more  than 
offset  a  large  overshooting  of  the  social  security  funds  that  required  the  drafting  of  a 
supplementary  budget.  During  the  current  year,  the  evolution  of  fiscal  revenues  and 
expenditures  is  following  a similar pattern. Higher-than-budgeted  receipts by the  central 
government  are  offsetting  a  large  overshooting  in  the  accounts  of  the  social  security 
funds.  However, while the overspending by the Health Security Fund reflects  the absence 
of  any  comprehensive  reform,  a radical  pension  reform  is being  implemented  as  of  the 
beginning  of  1998. As the number of employees  switching to the new pension  system  is 
higher  than  expected,  contributions  to  the  Pension  Fund  are  falling  by  more  than 
budgeted and the Fund's accounts are temporarily moving into the red. 

Monetary  policy  has  continued  to  operate  within  the  framework  imposed  by  Hungary's 
crawling  peg  exchange  rate  regime.  The  National  Bank  of  Hungary  (NBH)  routinely 
modifies  official  interest  rates  and  cuts  the  pace  at  which  the  forint  is  devalued  in  an 
attempt to reduce inflationary  expectations and moderate the growth of domestic demand. 

14 

The timing of these decisions, however, is affected  by concerns about the fragility  of the 
external balance, on the one hand, and the pace of the recovery, on the other. 

Average market lending and deposit rates have continued to decline gradually in nominal 
terms  and  the  spread  between  the  two  has  fallen.  Adjusted  for  actual  (as  opposed  to 
expected)  inflation,  deposit  rates  have  averaged  close  to  zero  while  lending  rates  have 
hovered  around  3%. In  the  past,  weaknesses  in  banks'  balance-sheets  and  competition 
from  new  non-bank  financial  operators  led  to  a  fall  in  the  stock  of  domestic  credit 
extended by banks both in real terms and as a percentage of GDP. During  1997, however, 
this  aggregate  trend  slowed  down while real  credit  to  enterprises  rose at  an  accelerating 
pace  for  the  second  year  in a row. On the other hand, net  credit  to  the  government  and 
credits to household and SMEs continued to fall  sharply. 

The impact of the Russian  crisis must be seen against the background  of Hungary's  high 
level of integration with the world economy. As a result of past trade reorientation,  some 
70% of Hungarian  exports now go to the EU and roughly 4% to Russia. On an aggregate 
level,  therefore,  real  and  direct  effects  from  the  crisis  are  likely  to  be  limited.  The 
exposure  of  the  banking  sectors  also  appears  to  be  rather  small.  Due  to  its  positive 
economic performance,  however, Hungary had been  attracting  a relatively  large share of 
the  funds  allocated  by  international  investors  to  emerging  markets. 
It  has  been 
particularly  affected  by  investors'  flight  from  emerging  market  assets.  The  stock 
exchange index has recorded sharp falls. For the first  time since the establishment  of the 
current  exchange  rate  regime  in  1995,  the  NBH  intervened  to  stop  the  forint  from 
depreciating  faster  than  the  monthly  rate  of  crawl  and  eventually  was  forced  to  raise 
interest rates. 

Structural 

reforms 

At  the  time  of  the  publication  of  the  Commission's  Opinion,  structural  reforms  were 
already  relatively  well  advanced.  The  process  of  privatisation,  in  particular,  had  gone 
quite  far.  During  1997, mass  privatisation  was  completed  and  sales  for  cash  continued. 
Revenues  from  privatisation  amounted  to  some  350  billion  forint,  more  than  half  in 
foreign  currency. As previously, they were mostly used to finance the reduction of public 
foreign  debt.  According  to the amendments  to  the Privatisation  Act  introduced  in  1997, 
the State Property Agency  (APV) will retain a permanent  stake in  116 companies. Among 
them  are  26  agricultural  companies,  which  use  some  14%  of  all  agricultural  land  and 
generate  more  than  a quarter  of total  agricultural  sale revenues. It remains  to be  seen  if 
the new ruling coalition will modify remaining privatisation plans. 

In the banking  sector,  the process  of privatisation  was completed,  except  for  the  sale  of 
remaining  minority  interests.  Controlling  stakes  in both  K&H  and Mezobank  were  sold 
to  foreign  investors, bringing  the  share of  foreign  ownership  in  total  registered  banking 
capital  to  about  60%  by  the  end  of  1997.  The  State  will  limit  its  participation  in  the 
largest commercial bank (OTP) to a single golden share. During  1998, however, the trend 
towards  decreasing  public  shareholding  was  reversed  as  a  result  of  the  developments 
affecting  Postabanka.  In  March  1997,  a  run  on  the  deposits  of  what  was  Hungary's 
second  largest retail bank took place. The authorities  intervened promptly  to  support  the 
bank  and  investors'  confidence  in the relatively  healthy  Hungarian  banking  system  was 
not  shaken.  As  time  passed,  however,  the  problematic  nature  of  Postabanka  accounts 

15 

became increasingly clear along with underlying failures  in regulatory  supervision.  The 
inability  to  find  a  strategic  investor  coupled  with  various  re-capitalisation  operations  to 
support  the  bank  and  acquire  the  majority  stake  needed  to  remove  management 
eventually  led  to  its  nationalisation.  Following  the  election  of  a  new  Board  in  August 
1998,  massive  accumulated  losses  have  been  disclosed  and  the  authorities  are  in  the 
process of formulating  a strategy for the effective  restructuring of the bank. 

Hungary:  Main  indicators  of  economic  structure 
(all  data  for  1997  unless  otherwise 

indicated) 

Population 

GDP  per  head 

as  %  of  EU-15  average 

Share  of  agriculture  in: 

gross  value  added 
employment 

Investment-to-GDP  ratio 

Gross  foreign  debt/GDP 

Exports  of  goods  &  services/GDP 

Stock  of  foreign  direct  investment1 

million 

PPS-ECU 
per  cent 

per  cent 
per  cent 

(1995) 

per  cent 

per  cent 

per  cent 

10.1 

8900 
47 

6.7 
7.9 

22 

53 

46 

billion  ECU 
ECU  per  head 

13.9 
1381 

Source:  Commission 
1  FDI  stock  converted  at  end-1997  exchange 

services,  national  sources,  EBRD 

rate  of 

1ECU=$1.10421 

Apart from  bank privatisation, a number of measures implemented  during  1997 and  1998 
will  help  the  development  of Hungarian  financial  markets.  These  include  the  entry  into 
force  of  regulations  for  mortgage  lending  and  home  savings  institutions  that  began 
operation  in  1997.  Moreover,  since  the  beginning  of  1998,  branches  of  foreign  credit 
institutions  are allowed  to  operate  in the Hungarian  banking  sector,  subject  to  a  licence 
from  the State Financial and Capital Markets Commission. This government  agency was 
created  in  1997  by  merging  the  two  supervisory  institutions  that  were  previously 
responsible for the banking  sector and the security and exchange markets. Finally,  a new 
pension system was introduced in January  1998. It is based on three pillars: a scaled-back 
version  of  the  existing  pay-as-you-go  scheme,  a  fully-funded  mandatory  privately-
operated  tier  and  a third  voluntary  fully  funded  tier.  In  the  long  term,  this  regime  will 
lead  to  a  sharp  increase  in  the  share  of  national  savings  intermediated  by  the  local 
financial  sector, thus strongly supporting its development. 

Pension  reform  also  marked  a  first  important  step  towards  the  overhaul  of  the  social 
security  system.  Further  measures  were  taken  by  the  new  administration  with 
abolishment  of  the  two  quasi-independent  commissions  overseeing  the  health  and 
pension systems. 

16 

In the area of trade policy, Hungary  eliminated  all trade-related  charges,  except  tariffs, 
and  continued  to reduce the proportion  of goods  affected  by non-tariff  border  measures. 
Among  these,  the  global  quota  on  consumer  goods  remains  restrictive  according  to  the 
WTO.  The  authorities,  however,  plan  to  phase  them  out  by  2001.  Moreover,  several 
items  were  removed  from  the  list  of products  subject  to  quantitative  restrictions  at  the 
beginning of 1998. 

2.3.  Assessment  in terms of the Copenhagen  criteria 

The existence of a functioning  market economy 

The existence of a functioning  market  economy requires that prices, as well  as trade  are 
liberalised  and  that  an  enforceable  legal  system,  including  property  rights,  is  in  place. 
Macroeconomic  stability and consensus about economic policy enhance the  performance 
of  a  market  economy.  A  well-developed  financial  sector  and  the  absence  of  any 
significant barriers to market entry and exit improve the efficiency  of the economy. 

Since  the  publication  of  the  Opinion,  the  market  economy  has  been  strengthened  by 
further  sales  of  financial  and  non-financial  enterprises  and  by  increasing  the  role  of 
private agents in the pension system. Thanks to extensive liberalisation  and privatisation, 
a  wide  spectrum  of  economic  sectors  is  now  exposed  to  market  forces  in  a  largely 
irreversible way, enhancing the credibility of the Hungarian reform process. 

The  depth  and  breadth  of  the  privatisation  process  carried  out  so  far  has  been 
considerable.  However,  the  State  is planning  to keep  a permanent  stake  in  a  fairly  high 
number  of  enterprises  operating  in  a  wide  range  of  sectors.  In  some  cases,  public 
participation will be reduced to a single golden share, but this entails a rather large range 
of powers that need to be exercised properly. Moreover, the nationalisation  of Postabanka 
has reversed the trend towards reduced state ownership in the banking sector, presumably 
only temporarily. 

Hungary has largely put into place the institutional machinery required to harness market 
forces whenever appropriate. The functioning  of the economy needs to be supported by a 
proper  enforcement  of the  1996  Competition  Act  and by  the  conduct  of  a coherent  and 
credible  regulatory  policy.  Experience  has  shown that  the regulatory  environment  needs 
to  be  improved  further  to  foster  the  efficiency  gains  accruing  from  private  ownership 
while sharing them with consumers. From this point of view, regulated enterprises are not 
being granted  sufficient  freedom  in fixing prices for different  kind of users and products. 
This  leads to  an unbalanced  tariff  structure that  sends  distorted  signals  to  users. Finally, 
the  implementation  of  regulatory  policy  has,  at  times,  lacked  consistency  generating 
unnecessary  uncertainty.  Sometimes,  for  instance,  the  authorities  have  disregarded  the 
price recommendations  of the energy industry regulator, giving rise to concerns that price 
setting  might  be  driven  by  inappropriate  considerations  (such  as  electoral  issues  or  a 
desire to influence  the short-term evolution of the inflation rate). 

The capacity of the financial sector to channel savings towards productive investment has 
strengthened.  More  than  90%  of  total  loans  in  1997  were  qualified  as  problem-free. 

17 

Lending  to  the  enterprises  is picking  up  in  real  terms  and  access  to  credit  is  arguably 
being  extended  to  a wider  spectrum  of  enterprises.  Banks  are beginning  to  focus  on  the 
credit  market  for  smaller  enterprises  and  on  retailing,  while  intermediation  spreads  are 
falling.  Increasing  competition  between banks  and  other  emerging  sources  of  finance  is 
likely  to  lead to further  consolidation.  This market-driven  process needs to be  supported 
by  a  high  quality  of  supervision.  While  this  is  already  relatively  advanced,  the 
Postabanka  affair  has  revealed  worrying  failings,  suggesting  there  is  still  considerable 
scope  for  improving  both  regulatory  laws  and  their  implementation.  The  formal 
independence of the supervisory institution has not always been synonymous  of  effective 
capacity to enforce the regulatory framework  in a timely and impartial manner. 

Financial  intermediation  outside  the  traditional  banking  channels  is  expanding  fast  but 
non-bank  corporate  borrowing  instruments  still play  only  a marginal  role. An  important 
boost  to  the  medium-term  development  of  the  financial  system  will  be  provided  by  the 
new  pension  system  as  long  as  reform  implementation  is  accompanied  by  careful 
supervision and on-going refinement  of the new  framework. 

With  the  implementation  of  the  policy  package  of  1995,  the  previous  government  had 
proved its commitment to macroeconomic adjustment  and structural reform. This allowed 
it  to  set  out  medium  term  goals  for  macroeconomic  policies  in  a  credible  manner.  It  is 
likely that the new administration will manage to do the same since consensus  about the 
essentials of economic policy remains broadly based. Against this background, a revision 
of the "Joint Assessment of Hungary's Medium-Term Economic Policy Priorities" and its 
reference macroeconomic  framework  is planned for late 1998. 

Hungary  remains  a  functioning  market  economy.  Sustained  macroeconomic  stability, 
further  privatisation,  and  pension  reform  have  strengthened  the  workings  of  market 
mechanisms.  However,  there  is  still  a  need  to  consolidate  the  institutional  and  legal 
framework  of  a  market  economy,  especially  with  regard  to  regulated  monopolies  and 
financial  markets.  Some  events,  most  notably  the  case  of  Postabanka,  indicate  that 
regulations  are not  always enforced  in a prompt  and impartial  fashion.  Strengthening  the 
regulatory  mechanisms  which  enable  a  market  economy  to  function  effectively  is  a 
necessary  condition  to  keep  reaping  the  full  benefits  of  all  the  reforms  already 
implemented. 

The  Capacity 
within  the  Union 

to  Cope  with  Competitive  Pressure  and  Market 

Forces 

Hungary's  ability  to  fulfil  this  criterion  depends  on  the  existence  of  a market  economy 
and  a stable macroeconomic  framework,  allowing  economic  agents to make  decisions  in 
a  climate  of  predictability.  It  also  requires  a  sufficient  amount  of  human  and  physical 
capital,  including  infrastructure.  State  enterprises  need  to  be  restructured  and  all 
enterprises  need  to  invest  to  improve  their  efficiency.  Furthermore,  the  more  access 
enterprises  have to outside  finance  and the more successful  they are  at restructuring  and 
innovating, the greater will be their capacity to adapt. Overall, an economy will be better 
able  to  take  on  the  obligations  of  membership  the  higher  the  degree  of  economic 
integration  it achieves with the Union prior to accession. Evidence of this is provided by 
both the volume and the range of products traded by Hungary with EU Member States. 

18 

At  the time  of the publication  of the Opinion,  fast  productivity  growth, rapid  increases 
in trade integration with the EU and large  FDI flows  had already characterised  Hungarian 
economic developments for several years. This suggested that restructuring had reached a 
relatively  advanced  stage  and  that  a  core  of  Hungarian  enterprises  was  already  quite 
competitive in the EU markets. 

Events  occurring  since  then  have  confirmed  this  assessment.  Export  growth  accelerated 
strongly during  1997. The share of goods going to the EU markets has increased  further, 
especially  in  technology  sectors  such  as  machine  manufacturing.  Moreover,  intra-
industry  trade  with  the  EU  is  rising,  suggesting  an  increasing  integration  of  the 
Hungarian  economy  with  that  of  the  EU.  Sustained  increases  in  productivity  and 
moderate  rises  in  unit  labour  cost  are  making  Hungarian  products  more  competitive. 
During  1997, productivity  in  the  manufacturing  sector  as  a whole  increased  by  14.4%, 
unit  labour  costs  by  6.3%. In  machine  manufacturing,  productivity  increased  by  nearly 
50% with unit labour cost falling by almost  15%. 

A large part of these developments  are due to the supply improvements brought  about by 
past investment of a few multinational enterprises engaged in machine manufacturing  and 
producing for export markets. The share of this industrial sector in total exports rose  from 
37% in  1996 to 45% in  1997. More generally,  FDI flows have played a leading role in the 
restructuring  of  the  economy  and  Hungary's  integration  into  the  global  production 
system. In  1997, companies with  foreign  stakes above  10% were responsible  for  72% of 
all exports and 71% of all imports. 

Restructuring  and  competitiveness  gains  are  taking  place  across  a broad  section  of  the 
economy,  but  not  at the very rapid  pace  of the  leading  sectors. In  some  sectors,  such  as 
food  processing,  steel  and  textiles, restructuring  has  lagged  behind.  Yet,  recent  rises  in 
the  domestic  sales  of  local  firms  producing  investment  and  intermediate  goods  suggest 
that  export-oriented  foreign  ventures  may  have  begun  to  buy  key  inputs  locally,  rather 
than  abroad.  In  this way,  the benefits  of FDI  spread  to  other  sectors  and  the  amount  of 
locally  increases.  In  order  to  facilitate  more  widespread 
value  added  produced 
restructuring, 
the 
functioning  of the labour market, improving infrastructures,  promoting  SMEs, supporting 
R&D activities and fostering regional development. 

the  authorities  are  implementing  policies  aimed  at  enhancing 

Hungary's  non-wage 
labour  costs  remain  high,  negatively  affecting  enterprise 
competitiveness  and  employment.  Further  fiscal  consolidation,  and  in  particular  the 
reform  of the public  sector and of the health care system, is needed to lay the basis  for  a 
reduction of these costs. 

Macroeconomic  stability  has  been  crucial  in  maintaining  high  investment  growth.  It 
needs to be strengthened  further, taking advantage of the current upswing which gives the 
authorities  an  opportunity  to  pursue  fiscal  consolidation  and  disinflation  against  the 
background  of  solid  growth.  Hungary  needs  foreign  revenues  to  remunerate  its  rising 
stock  of  foreign  capital  and  remains  dependent  on  foreign  investments  to  finance  its 
transition  process.  Accordingly,  fiscal  policy  need  to  increase  further  the  availability  of 
domestic  savings  to  finance  private  investment  and  counter-balance  the  effect  of  rising 
household spending on the current account balance. 

Hungary  should be well able to cope with competitive pressure and market  forces  within 
the Union  in the medium  term, provided  the conditions  supporting  trade  integration  and 

19 

ongoing  enterprise  restructuring  are  preserved.  Efforts  to  foster  restructuring  in  the 
sectors  where  it has  lagged  behind  need  to be  strengthened.  The macroeconomic  policy 
stance must remain sustainable  and respond to changing internal  and external conditions. 
Fiscal  consolidation  needs  to  be  pursued  while  the  continued  overshooting  of  the 
accounts of the health system points to an urgent need for  reform. 

2.4.  General evaluation 

Hungary  can  be  regarded  as  a  functioning  market  economy.  It  should  be  well  able  to 
cope with competitive pressure and market forces  within the Union in the medium  term, 
provided  that  it  maintains  the  conditions  for  trade  integration  and  ongoing  enterprise 
restructuring. 

Since the Opinion,  further  progress has been achieved  on privatisation,  restructuring  and 
pension  reform.  The  regulatory  framework  has  been  strengthened,  macroeconomic 
stability has been maintained and economic growth has accelerated. 

Priority should now be given to the improved to the implementation  and enforcement  of 
the legal framework,  especially with regard to regulated enterprises and to the  financial 
sector. The sharp acceleration in growth poses a potential, if not immediate, risk for the 
soundness of Hungary's external accounts. At the same time, it offers  an opportunity  for 
tackling inflation  and consolidating the fiscal  accounts in a more forceful  manner. The 
continued overshooting of the accounts of the health sector demonstrates an urgent need 
for  reform. 

3.  Ability to Assume the Obligations of Membership 

This  section  aims to up-date the Commission's  Opinion  of  1997 as concerns  Hungary's 
ability  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. 

In  the  1997  Commission's  Opinion  on  Hungary's  application  for  EU-membership,  the 
Commission concluded that 

"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 
agriculture". 

The presentation below  of the different  subject  matters  follows  the same structure  as the 
1997 Opinion, but the general descriptions of each sector have been omitted. Instead,  the 
report  focuses  on  the  progress  made  since  July  1997.  Under  each  heading  legislative 
decisions-arid progress in implementing and enforcing  legislation is reported. 

20 

3.1. 

Internal Market  Without  Frontiers 

As  explained  in the  Opinion,  the Union's  internal  market  is defined  in Article  7a of  the 
Treaty  as  an  area  without  internal  frontiers  in  which  the  free  movements  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  and  enforcement  of  these  four  freedoms  requires  not  only 
compliance with such important principles as, for example, non-discrimination  or mutual 
recognition  of  national  legislations  but  also  the  effective  application  of  common  rules, 
such  as  those  designed  for  safety,  environmental  or  consumer  protection,  and  effective 
means of redress. The same principles apply to certain common rules, for  example in the 
areas  of  public  procurement,  intellectual  property  and  data  protection,  which  are 
important in shaping the general framework within which the economies operate. 

General Framework 

Hungary  has  already  adopted  the  basic  principles  of  the  acquis  related  to  public 
procurement  rules  and  the  current  legislation  is being  applied  in  a transparent  manner. 
There  was  an  increase  in the number  of tenders  advertised  as well  as  a decrease  in  the 
total  value  of  contracts  awarded  through  negotiated  procedure.  However,  further 
alignment with the acquis is needed, notably with regard to regulations within the utilities 
sector and with regard to local preference clauses. 

Legislation  on  company  law  and  accounting  has been  further  brought  into  line with  the 
acquis  through  new  laws  on  Companies  and  on  the  Company  Registration.  However, 
some adjustments  are still needed concerning the scope of the nullity provision, the rules 
applied to groups of companies and publicity requirements in case of mergers. 

A  law  on  Branches  and  Commercial  Agencies  set  up  by  Foreign  Companies  aligns 
Hungarian  legislation  with  the  relevant  provisions  of  the  Europe  Agreement  and  with 
Hungary's  Treaty  of  accession  to  the  OECD.  This  law  made  the  establishment  of 
branches of foreign companies possible from 1  January 1998. 

A  new  law  on  auditing  activities  and  the  Chamber  of  Hungarian  Auditors  harmonises 
Hungarian  legislation  with  the  8th  EC  Accounting  Directive,  with  regard  both  to 
professional  requirements  and chamber membership. The newly  established  Chamber  of 
Auditors  is  developing  training  and  retraining  programmes  to  address  the  current 
shortage of qualified  auditors. However, further  efforts  are needed. 

Further  progress has been  achieved  in the  area of industrial  property.  Hungary's  law  on 
the  Protection  of  Trademarks  and  Geographical  Indications  largely  complies  with  the 
acquis.  Hungary  became  party  to  the  Protocol  relating  to  the  Madrid  Agreement 
concerning International Registration of Trademarks in October  1997. 

21 

No  developments  have  taken  place  in  the  area  of  copyright.  Efforts  are  still  required 
notably  with  regard  to  rental  and  lending  rights,  terms  of  protection  (retro-active 
protection  for  sound  recordings  fallen  into  public  domain  before  1974)  and  cable  and 
satellite. 

The accession  of Hungary  in October  1997 to the Council  of Europe Convention  n°  108 
confirms  that  a satisfactory  level on data protection  has been  reached.  Still  some  further 
alignments with Community norms are necessary. 

The  Four  Freedoms 

Free Movement of Goods 

The  general  principles  of  the  New  and  Global  Approach  are  already  adopted.  The 
adoption  of  European  Harmonised  Standards  is  quite  advanced  in  the  sectors  where 
Hungary  has  transposed  New  Approach  Directives.  Nevertheless  Hungary  must 
accelerate  the  transposition  of  the  remaining  standards  in  order  to  reach  the  80% 
transposition  rate  which  is  a  precondition  for  a  full  membership  of  the  European 
Standards Bodies (CEN, CENELEC). 

Further  progress  has  also  been  made  regarding  the  designation  of  the  conformity 
assessment bodies in the fields covered by the New Approach Directives. 

A  number  of  measures  leading  to  alignment  with  the  acquis  in  the  area  of  the  free 
movement and safety of industrial products were adopted. 
Progress  can  be  noted  in  the  fields  covered  by  the  low  voltage,  toys,  machinery, 
appliances  burning  gaseous  fuels,  non-automatic  weighing  instruments,  construction 
products and pre-packaging directives. 

The Hungarian  legislation  in the  field  of motor vehicles  has been  amended  in  line  with 
the acquis on type approval. 
Further progress has also been achieved in the field of chemicals, textiles and  footwear. 
A  new  law  on  pharmaceutical  products  for  medicinal  use  is  due  to  enter  into  force  in 
1999. This legislation  supplements the law on civil liability  for  defective  pharmaceutical 
products but further  amendments as regards its scope will still be necessary to ensure  full 
compliance with the acquis. 

Free Movement of Capital 

As  already  pointed  out  in  the  Opinion  significant  process  had  already  been  achieved  in 
the liberalisation of capital movements. 

Since  mid-1997  Hungary  has  proceeded  further  along  this  track.  The  law  on  Foreign 
Exchange  was  amended  in  January  1998.  Remaining  restrictions  of  medium  and  long 
term  capital market transactions  were lifted  (except  outward  financial  credits  and  certain 
operations on collective  investment  undertakings). Also in the field of short-term  capital 
transactions, some progress has been made. From  15 May  1998 the ceilings on  exporting 
foreign  and  Hungarian  currency  without  a  permit  have  been  raised  and  authorised 
resident  foreign  exchange  banks  have  received  the  full  right  to  operate  on  non-resident 

22 

accounts. Establishment of branches of foreign enterprises was also permitted in January 
1998. 

There  still remain, however,  restrictions  on short-term  capital market  and money  market 
transactions.  For  instance,  issuing  and  trade  in  foreign  securities  on  domestic  money 
market is restricted as are those of domestic instruments on foreign  money markets. Most 
residents  are not allowed to hold deposit accounts abroad. In addition, restrictions  on the 
acquisition of real estate by non-residents remain, albeit limited to arable land, as well as 
purchases of real estate abroad by residents. 

The  remaining  restrictions  on  capital  market  operations  and  on  the  acquisition  of  real 
estate abroad by residents still have to abolished.  Hungary plans to remove all remaining 
restrictions by the year 2000. 

Free Movement of Services 

In  the  banking  sector,  an  amendment  to  the  law  on  Credit  Institutions  and  Financial 
Undertakings  provides  foreign  financial  institutions  with  the  possibility  to  operate  as 
branches, as well as to create the conditions for universal banking.  Efforts  to  implement 
the real time gross settlements system should be continued. 

The  provisions  of  the  Capital  Adequacy  Directive,  which  was  the  only  major  missing 
piece  of  Community  banking  acquis,  have  been  incorporated  into  the  Banking  Law 
which  will  enter  into  force  on  1 January  1999.  Despite  this  progress,  some  technical 
amendments  will  be  necessary  in  the  banking  sector  to  achieve  full  approximation. 
Concerning money  laundering there is still a need for  further  alignment with the  acquis. 
The continuing existence of anonymous banking accounts remains a matter of concern. 

The  supervisory  body  is  the  Hungarian  Banking  and  Capital  Market  Supervisory 
Authority,  which  will  need  to  be  further  strengthened  before  accession,  since  its  duties 
will considerably increase after the full  adoption of the acquis. 

As  regards  securities,  branches  of  foreign  companies  may  be  established  since  January 
1998.  The  amended  law  on  the  Introduction  of  Securities,  Provision  of  Investment 
Services and on Securities Exchange now ensures proper conditions for the  establishment 
of  branches  of  foreign  credit  institutions  and  investment  firms.  The  provisions  of  the 
Capital Adequacy Directive will apply to investment firms  as of  1  January  1999. Some of 
the provisions of the Investment  Services Directive allowing credit institutions to provide 
a full range of investment services will be in place by then. 

The life and non-life  insurance directives are already largely implemented. As of  January 
1998 foreign insurers were allowed to establish branches on a national treatment basis. 

Characteristic Features of Reporting and Book-keeping  Obligations of Insurers have been 
adopted  in  1997.  However,  insurance  accounting  is  an  area  which  is  not  yet  fully 
harmonised. 

23 

Free Movement of Persons 

(a)  Free Movement  of  persons, freedom  of establishment and mutual recognition of 

diplomas and qualifications 

With regard to mutual recognition  of professional  qualifications  and diplomas,  Hungary 
is  largely  in  line  with  the  acquis,  although  some  further  adjustments  are  needed. 
Professional  structures  (such  as  professional  chambers  or  associations)  are  in  place  for 
most professions,  but need to be reinforced.  The formal  and effective  implementation  of 
the acquis in general and in particular in the field  of architecture is quite good. A law on 
architects  allowed  further  approximation  on  the  General  System  Directives.  In  March 
1998,  the  Hungarian  Equivalence  and  Information  Centre,  which  is  in  charge  of 
recognition of diplomas, became an independent central agency. 

By adopting new law on Branches and Commercial Representation of Foreign-Registered 
Enterprises  Hungary has fulfilled  its international obligations including those of the EA. 

(b)  Abolition  of checks on persons  at internal frontiers 

No particular developments can be reported. 

Competition 

As  already  indicated  in the  Opinion Hungary  satisfies  to  a large extent  the  requirements 
in the field  of anti-trust.  In the meantime national regulations  on block  exemptions  have 
been  adopted,  covering  insurance,  exclusive  distribution  and  exclusive  purchase  (April 
1997)  as  well  as  franchising  and  motor  vehicle  distribution  and  servicing  agreements 
(January  1998). These  exemptions incorporate the main principles of the relevant  acquis 
into Hungarian law. 

As  regards  state  aid  the Minister  of Finance  was  given  responsibility  for  ensuring  state 
aid compatibility with the acquis after the amendment of the Act on Public Finance at the 
end of  1997. Currently,  state  aid  control  is done by the  State  Aid  Monitoring  Authority 
within the  framework  of an interministerial co-ordination procedure.  These reforms  do 
not  however  allow  the  monitoring  authority  full  access  to  the  relevant  information  to 
assess all proposed state aid and furthermore  not all funds  and schemes were brought  into 
line  with  the  state  aid  regime.  Moreover  insufficient  attention  was  made  to  institution 
building.  This points to the need for further  reform. 

A centralised monitoring and data processing system for aid awards has been  set up. The 
Annual  Report  on  State  Aid  granted  in  Hungary  in  1995-1996  was  submitted  to  the 
Commission  in May  1998  as required  under  Article  62/4  (b)  of the  Europe  Agreement. 
The  report  broadly  follows  the  methodology  and  the  presentation  of  the  Commission's 
survey on State aid in the Union. 

Hungary abolished export related tax concessions in January  1998 which were considered 
by the Commission as export aids 

24 

In  June  1998  the  Constitutional  Court  ruled  that  three  provisions  of  the  Hungarian 
legislation  promulgating  the  decision  of  the  Association  Council  on  the  Implementing 
Rules  regarding  the  competition  provisions  of  the  Europe  Agreement  applicable  to 
undertakings  are  unconstitutional.  However,  the  legal  effect  of  the  ruling  is  suspended 
until 31 December  1999. 

Conclusion 

Steps  have  been  made  towards  meeting  the  short-term  priorities  of  the  Accession 
Partnership,  notably  with  regard 
law  and 
approximation in the area of  certification. 

the  further  alignment  of  company 

However,  further  progress  especially  in  the  area  of  standardisation,  copyright,  public 
procurement  and  company  law  is  needed  to  meet  both  the  provisions  of  the  Europe 
Agreement and the short-term priorities of the Accession Partnership. 

There  is  also  a  need  for  further  developing  institutional  capacity  to  ensure  smooth 
implementation  of legislation in the field  of free  movement  of goods, in particular  in the 
field  of standardisation. 

In  the  area  of  free  movement  of  services  further  progress  should  be  achieved  in 
liberalising the service sector and strengthening the supervisory authorities. 

Alignment  with  anti-trust  legislation  has  further  progressed.  The  consequences  of  the 
recent  ruling  of  the  Constitutional  Court  need  to  be  examined  urgently  to  ensure  the 
application of the related provisions of the Europe Agreement. 

In the field  of state aids, efforts  to create full transparency in the granting of aid should be 
pursued  resulting  in  the  establishment  of  a  comprehensive  and  updated  State  aid 
inventory.  The  legal  framework  for  the granting  of  State  aid  needs  further  alignment  to 
Community law. Finally, the State Aid Monitoring Authority should be given the powers 
necessary  to  control  existing  and  future  aid  measures  on  a  systematic  basis.  Operating 
rules  for  funds  and  aid  schemes  compatible with  the  acquis  should  be  adopted  together 
with the relevant institution building steps. 

3.2. 

Innovation 

Information  Society 

Hungary  participates  in  the  joint  High-Level  Committee  on  Information  Society  and 
actively supports the development of the information  society. 

The telecommunications infrastructure  should be upgraded in order to take full  advantage 
of  the  possibilities  offered  by  the  information  society.  An  "Intelligent  cities/regions" 
programme  launched  in  1997 aims to upgrade information  infrastructure  in bigger  cities 
and regions. 

25 

Education,  Training and Youth 

Hungarian participation in Community programmes such as Socrates, Leonardo da Vinci, 
Youth for Europe began in September 1997. 

Vocational training in Hungary has been gradually oriented towards the EU practices and 
objectives. The successful  participation of Hungary in the Leonardo da Vinci  programme 
proves  that  the  essential  elements  for  a sound  management  of vocational  training  are  in 
place.  No  major  legislative  developments  have  occurred  since  July  1997.  At  the 
institutional level, vocational training has been placed under the umbrella of the Ministry 
of  Education,  in  an  attempt  to  a  better  coordinate  educational  policies  and  to  more 
rationally use available material and human resources. 

There  have  been  a  number  of  initiatives  to  strengthen  the  European  dimension  in 
education.  Twelve  European  Study  Centres  were  set  up  in  early  1998  in  Hungary's 
Higher  Education  Establishments  to  develop  European  studies.  As  regards  mutual 
recognition of professional  qualifications  and diplomas Hungary is generally in line with 
the acquis. 

Research  and  Technological 

Development 

Hungary  asked  to  start  the  negotiations  for  full  association  with  the  5th  Framework 
Programme  in November  1997.  Three  rounds  of  exploratory  talks  aiming  at  preparing 
the negotiations have already taken place. 

Research  is mentioned  as  a priority  in the National  Programme  for  the Adoption  of  the 
Acquis.  Tax deductions  can be obtained  for Research and Development  activities  and to 
support  innovations.  Since  16 March  1998, a new  law on Risk  Capital  Investment,  Risk 
Capital  Companies  and Risk  Capital Funds  encourages  risk  capital  investments  for  high 
tech  firms. 
In  order  to  make  R&D  more  effective,  a  number  of  scientific  research 
institutes are being restructured and merged. 

Telecommunications 

fair  competition 

liberalisation  cannot  be  effective  unless 

Significant progress has been made in the approximation of telecommunications regulation. 
However, 
the 
telecommunications  markets  is well  monitored.  Hungary joined  the WTO  agreement  on 
telecommunication  services  in  October  1997  thereby  facilitating  access  to  its  telecom 
market but has maintained  a monopoly in telephone services until 31 December 2001  (for 
international long-distance calls) and a year longer for local calls.  The government's target 
of achieving cost-based rates by the end of year 2000 seems realistic. Both the Ministry of 
Transport,  Communication  and  Water  Management  and  the  National  Communications 
Authority  are  ensuring  control  functions,  but their roles need  to be clarified  and  there  are 
doubts about the independence and efficiency  of the Communications Authorities. 

in 

Hungary has made substantial progress in liberalising the telecommunications  sector. The 
harmonisation  measures  still  to be  adopted  include  the  development  of  an  authorisation 
introduction  of  non-discriminatory,  proportional,  and 
and 

licensing  regime, 

the 

26 

transparent  interconnection  terms, and in particular  cost-oriented  interconnection  tariffs 
supported by transparent cost-accounting systems. 

In  the  postal  sector,  new  rules  have  been  introduced  on  the  maximum  rates  for  postal 
services, but  further  progress  is  still  needed  on  the  gradual  liberalisation  of  the  market 
and the guarantee of the universal postal service in accordance with the EU directives. 

Audio-visual 

Progress  has  been  made  in  Hungary  with  respect  to  the  adoption  of  the  Television 
without Frontiers Directive, in particular through the adoption, in October  1998, of a law 
implementing  the  Council  of  Europe  Convention  on  Transfrontier  Television.  Efforts, 
however,  will  be  necessary  in  order  for  Hungary  to  ensure  actual  implementation  and 
enforcement  of the provisions of the convention, notably as regards satellite broadcasting. 

An  outstanding  issue  relates  to the  alignment  of  existing  telecommunication  licences  to 
the provisions of the Convention. 

Conclusion 

Hungary has paid continued attention to information  society, education and training and 
research and technological development. In the area of telecommunications  liberalisation 
has to progress together with the monitoring of fair competition. Hungary has requested a 
transition period until 31.12.2002 for the full liberalisation of public networks voice 
telephony. Hungary needs to enhance efforts  to align with the audio-visual  acquis. 

3.3.  Economic  and Fiscal  Affairs 

Economic  and Monetary  Union 

Hungary has made little additional progress in its preparations  for joining Economic  and 
Monetary Union. 

Since  mid  1977,  the  National  Bank  of  Hungary  has  maintained  the  crawling  peg 
exchange rate regime as one of its main instruments for reducing inflation.  The NBH has 
continued to reduce the rate of crawl while leaving unchanged the width of the band. The 
forint  came under pressure in August in the aftermath  of global financial  turmoil  forcing 
the NBH to intervene for the first  time since the introduction of the crawling peg in 1995 
and also to raise interest rates. 

As  far  as  central  bank  legislation  is  concerned,  the  Hungarian  authorities  will  have  to 
introduce  the  remaining  legal  provisions  concerning  the  independence  of  the  NBH. 
Contrary to what has happened  following  previous general elections, the Governor of the 
NBH as not replaced following  the May  1998 elections. 

27 

Taxation 

Since  1997 Hungary has continued the approximation of its VAT legislation to that of the 
acquis. The latest amendments to the Hungarian VAT legislation are the introduction of a 
rate  for  second  hand  goods  and  objects  of  arts  and  a reversed  charge  mechanism.  From 
January  1998, tropical  fruits  (including  oranges)  became  subject  to  the  reduced  rate  of 
12% instead of the standard rate of 25% thus eliminating differentiation  between  fruits. 

The  law  on  Excise  duties  which  entered  into  force  in  January  1998  addresses  the 
problems of the domestic excise system and of a tax warehouse system, the procedure  for 
tax  suspension  together  with  the  accompanying  administrative  documentation  and,  the 
excise payment certificate. The law is broadly in line with the Community system even if 
some  minor  incompatibilities  still  exist.  These  measures  together  with  the  adoption  of 
Community provisions on cigarettes and tobacco and structures and rates  on alcohol and 
mineral oils address weaknesses  identified  in the Opinion. The major  remaining  problem 
relates to differential  duty levels on domestic and imported spirits. 

As  regards  direct  taxation  and  corporation  tax  in  particular,  a  new  law  on  foreign 
companies  setting  up  branches  and  commercial  agencies,  partially  transposed  the 
Community provisions on taxation of parent companies and subsidiaries. 

Efforts  are  needed  in  the  area  of  indirect  taxation  on  raising  capital  and  also  on  the 
provision  of mutual  assistance  in the  field  of  direct  taxation.  Several  outstanding  issues 
such as the effect  of the law on Foreign Investments  on the freedom  to provide  services 
need to be addressed. 

The overall efficiency  of tax collection in 1997 improved resulting in increased revenue. 

Conclusion 

Over  the  last  year,  Hungary  has  further  progressed  in  taxation.  While  the  Hungarian 
authorities have put  in place the rudimentary  elements  of an excise  tax  structure  aligned 
with  the  acquis,  further  efforts  are  still required  in particular  as regards  VAT  (scope  of 
the application  of the reduced  VAT rate, special  scheme  for  farmers,  preparation  for  the 
Community's  transitional  VAT  regime).  Administrative  capacity  as  well  arrangements 
for administrative co-operation and mutual assistance need also to be further  improved. 

Statistics 

Hungarian  legislation  is, with  a  few  exceptions,  compatible  with  the  current  standards 
applied  within  the European  Union.  Substantial  progress  has been  made  in the  relations 
between  the  Hungarian  Statistical  Office  and  other  ministries  or  institutions  providing 
statistics  or  administrative  data,  but  the  co-ordinating  role  of  the  Hungarian  Statistical 
Office  still  needs  to  be  strengthened.  The  professional  independence  of  the  statistical 
units of the agencies belonging to the Statistical  Office  need to be defined  in more  detail 
as provisions on data transmission abroad and  confidentiality. 

28 

There are also weaknesses in regional and geographic statistics, some business  statistics 
such  as  tourism  and  the coverage  and methods  used  in  external  trade  statistics.  Macro-
economic  statistics  are good.  However  improvements  needs to be made  in  Government 
finance  and  especially  debt  and deficit  statistics. A major  effort  needs to be made  in  the 
area of agricultural statistics. 

3.4.  Sectoral Policies 

Industry 

The industrial policy of Hungary focuses  on creating framework  conditions  for  increased 
competitiveness,  industrial  modernisation,  and  improved  regulation.  This  horizontal 
approach, which has been  gradually  implemented  since  1995, includes  incentives  for  the 
industrial  parks 
promotion  of  FDI  and  exports;  investments  (through  e.g. 
programme);  small  businesses  (through  e.g.  the  suppliers'  networks  programme);  and 
quality;  the  integration  of  environmental  considerations  into  investment  projects;  and 
support for Research and Development and IT. 

the 

Hungarian  industrial  policy  has  been  explicitly  defined  in  the  1996  Medium-term 
Industrial Policy  Strategy. This document  has been continuously  reviewed  and  a revised 
document,  the  Industrial  Policy  Action  Programme,  was  prepared  in  the  first  half  of 
1998.  The philosophy  and  general  approach  of Hungary's  industrial  policy  are  broadly 
compatible with those of the Community. 

Since last year double-digit  increases in output (+11%) and productivity (10%) have been 
recorded.  The  share  of  skill  based  manufacturing  in  total  output  has  increased  and 
product  quality has  improved.  Exports  increased  in all  industrial  sectors  except  energy. 
These  positive  results  would  suggest  that  the  government's  industrial  policy  is 
succeeding in creating an appropriate market-based business  environment. 

Restructuring  and  privatisation  in  a  number  of  major  sectors,  such  as  chemicals, 
mechanical  engineering,  and pharmaceuticals  is nearly  completed.  Nevertheless,  further 
restructuring  efforts  still  have  to be made,  for  example  in the  steel  sector.  Since  1990, 
steel  production  in Hungary  has  decreased  rapidly.  Public  aid has  been  given  while  the 
industry  undergoes  restructuring.  The  restructuring  process  has  not  yet  been  completed 
and Hungary has therefore  requested  an extension of the grace period  for  another  5 years 
that will  allow  it  to  grant  subsidies to the  steel  industry.  The  Commission  will  examine 
this request when individual viability plans for each steel enterprises are received 

Conclusion 

Hungarian  industry  continues  to  develop  its  competitiveness  through  cooperation  with 
Community  industry,  a  high  level  of  investment,  including  foreign  investment  and 
adoption  of  Community  standardisation  and  conformity  assessment  rules  and  practices. 
Further  efforts 
industrial  competitiveness  should  be  made  by 
restructuring the steel sector. 

in  strengthening 

29 

Agriculture 

Agricultural  situation 

Although  agricultural  share in the overall  economy has decreased  in recent years, it  still 
accounts for 6,6% of GDP and employs around 8% of the working population. 

The arable land remains  fairly  stable, with cereals as the main crop, covering  60% of the 
arable  land.  However,  the  current  Government  is  discussing  a possible  reduction  of  its 
cultivated grain area by around  10% in order to reduce overproduction. 

The  livestock  sector  declined  again  in  1997.  Combined  with  a  modest  growth  in  crop 
output,  the result was  a 0,6% decrease  of Gross Agricultural  Output,  compared  to  1996. 
According to preliminary estimates there was no growth in 1997. 

The completion of the mass privatisation process in late  1997 has not led to a break-up of 
farm  structures  in  Hungary  with  large  scale  farms  remaining  important.  However  in 
addition  to  traditional  very  small-scale  production,  a  new  independent  middle-scale 
agricultural sector is developing. 

In  1997 total  agricultural  exports amounted to 2,5 billion ECU  and imports  amounted  to 
959  millions  ECU.  This  resulted  in  a  positive  agricultural  trade  balance  (1,5  billions 
ECU), compared  to  an overall trade deficit  (-1,8  billions  ECU). Recent  developments  in 
Russia  may  however  have  an  impact  on  this  situation,  due  to  the  fact  that  Hungary 
exported 20% of its agro-food  production to Russia  in  1996 and around  18% in 1997. 

Although it varies from  year to year (in  1997 it decreased if compared to  1996), Hungary 
still  had  a  substantial  positive  trade  balance  with  the  EU  in  the  agri-food  sector 
amounting to 509 million ECU. 

Agricultural Policy 

In March  1997 the Hungarian Government adopted "The Basic Principles of the National 
Agricultural Programme". 
In  1998  this  lead  to  a  re-balancing  of  agricultural  spending  from  budgetary  support 
(reduced  from  42% to  35% of the total  allocated  to agriculture)  towards  direct  subsidies 
(which  increased  from  21%  to 27%).  Market  support is mainly provided through  export 
refunds  and,  for  a limited  number  of products, by  direct  price  support.  Direct  subsidies 
include  credit  grants  and  support  for  those  farming  poor  quality  land.  A  new  subsidy 
designed to encourage farm employment was introduced in 1998. 

Structural  policy  instruments  for  agriculture  have  been  developed  and  an  agri-
environmental  policy  is  slowly  emerging  (implementation  in  1997  of  the  1995  Act  on 
environmental  Protection).  However,  there  is  not  yet  a  fully-fledged  concept  of  rural 
policy to accompany changes in agriculture. 

In  mid  1997 Hungary  reached  agreement  with  its  WTO partners  on the  issue  of  export 
subsidies.  Hungary  obtained  a waiver  on its  export  commitments  applicable  until  2002. 

30 

The  export  subsidy  commitments  take  1995  as  a base  year.  Any  export  refunds  will 
have to comply with the levels set out in the and conditions of the waiver. 

Hungary  is continuing  its  efforts  for  approximating  its  legislation  to the acquis.  Various 
measures  such  as  laws  on  the  Protection  and  Handling  of  Animalson  Genetically 
modified  organisms  and  on 
Property  ,  have  been  adopted  by  the  Hungarian 
Government, which are due to come into force in 1999 . 

A compatible cattle identification  system has been drawn up and the preparations  for  the 
inspection of the veterinary border stations, as well as the assessment of requirements  for 
their further  development are well underway. 

Competitiveness  has  improved  in  those  companies  in  the  food  sector  which  have  been 
privatised  thanks  to  considerable  resources  being  invested  in  upgrading  their  technical 
management  and  organisational  efficiency.  However,  some  sectors,  in  particular 
marketing  of  farm  produce  and  primary  processing  of  livestock  products  are  lagging 
behind.  Furthermore,  although  the  largest  food  manufacturers  are  already  applying  the 
Community standards in the veterinary sector, most establishments still need upgrading . 

Hungary has been continuing efforts  in the quality control area.  A new law on vineyards 
and  wine  production  sets  the  framework  for  the  regulation  of  the  sector  and  measures 
were taken to develop the National Institute for Wine Qualification  and National  Institute 
for  Agricultural  Quality  Control.  However,  there  has  been  no  progress  concerning 
Hungarian recognition of EU standards in this area.  Complex  and costly procedures  are 
still  applied  to  imports  of  wine  originating  in  the  Community  (quality  and  health 
certificates). 

Conclusion 

Although 
progress still needs to be made. 

the  current  state  of  implementation  is  broadly  satisfactory,  considerable 

Fisheries 

The law on Fishing  and Fishing Activities passed in  1997 provides the legal basis for  the 
sector.  However  reinforced  institutional  and  supervising  capacity,  especially  for  import 
control needs to be developed as do statistics on freshwater  fishing. 

Energy 

The positive  developments  as  regards  the  adoption  of  principles  related  to  the  internal 
energy  market  and  the  competition  rules  already  stated  in  the  Opinion  have  continued. 
Energy prices, which are approaching market levels, have been further  increased. 

Oil  stocks  are now  close to  the EU target  of 90 days  of  consumption  but  the  legislation 
needs to be fine-tuned  with the acquis. 

31 

Concerning  energy  efficiency,  the  establishment  in  October  1997  of  the  Energy-
Environmental  Centre  and preparations  for  setting  up  regional  energy  centres  should  be 
noted  as  well  as  progress  on  harmonisation  with  the  labelling  directives  (e.g. 
approximation  with  acquis  on  labelling  of  refrigerators,  freezers  and  combinations 
thereof).  However  more  remains  to  be  done.  Energy  networks  are  being  further 
developed. 

In the  solid  fuels  sector  a new  Government  Plan  is being prepared.  Uranium  production 
ceased  in  the  autumn  of  1997.  State  aids  need  to  be  monitored  closely  in  view  of  the 
acquis. 

In  the 
The  modernisation  programme  for  the  Paks  Nuclear  Power  Plant  is  ongoing. 
framework  of  the  Powerplan-2010,  which  does  not  exclude  the  nuclear  options  the 
government is organising a tender to increase electricity generating capacity 

The  Nuclear  Law  entered  into  force  in  July  1997.  The  Hungarian  Atomic  Energy 
Authority  was  created  as  a  separate  body  from 
the  Hungarian  Atomic  Energy 
Commission  (working under  authority  of the Ministry),  although  certain  links  still  exist. 
The Central Nuclear Financial Fund, has been in operation since January  1998.  It was set 
up to  finance  waste management  and decommissioning,  and is funded  through  a levy  on 
electricity  prices.  At  Paks,  a  dry  storage  centre  for  spent  fuel  (50  years)  is  under 
commissioning,  even  if the agreement  for  shipment  of the spent  fuel  to  Russia  is  still  in 
force  (but not  applied). Sites for  final  disposal in Hungary are being investigated. Paks is 
looking  for  alternative  options  for  fresh  fuel  supply  in  order  to  diversify  sources,  an 
approach which fits into the Union's diversification  policy. 

Conclusion 

Further  work  is needed  to  adjust  monopolies, provide  access to networks  and  on  energy 
pricing;  attention  should  also be paid to  state intervention  in the  solid  fuels  and  uranium 
sectors, and the development of energy efficiency  and fuel  quality standards. 

Nuclear safety  standards should continue to be tackled appropriately, for example through 
the  modernisation  programme,  in  order  to  bring  the  nuclear  power  plant  to  the  level 
required. Longer term solutions for nuclear waste need attention and the independence  of 
the nuclear safety  authority should be ensured. 

Transport 

Hungary has continued to adopt measures to align progressively with the acquis. 

In the  area of road transport  new  legislation has been  adopted  on roadworthiness  testing 
of motor  vehicles,  requirements  for  driving  licenses, the  content  of  driver  training  and 
requirements  for  access to the profession  for  domestic  road haulage  operators.  However 
the  legislation  on  driving  licenses,  implemented  through  a Decree  on  policing  of  road 
transport, is not yet fully  in line with Community requirements.. 

32 

As  regards  inland  navigation/maritime  a  new  law  on  water  transport  was  adopted  in 
1998. 

In  maritime  transport,  Hungary  has  already  signed  up  to  the  MARPOL  (International 
Convention  on  the  prevention  of  maritime  pollution)  and  SOLAS  (International 
Convention  on  the  safety  of  live  on  sea)  Conventions  and  has joined  the  international 
STCW  (Convention  on  the  standards  of  training,  certification  and  watchkeeping)  for 
seafarers,  in  line with  the acquis.  Hungary  achieved  also  alignment  with  the  acquis  on 
piloting on the high seas. 

Rules on the transport  of dangerous goods (by road  and rail) have been brought  into  line 
with the relevant international and Community  legislation. 

As  regards  Air  transport,  progress  has  been  made  concerning  noise  pollution  around 
airports and the limitation of noise emissions from  subsonic  aircraft. 

As  far  as  transport  infrastructure  development  and  financing  questions  are  concerned, 
Hungary  is  actively  participating  in  the  Transport  Infrastructure  Needs  Assessment 
(TINA).  Projects  for  road  and  railway  links  are  underway  and  a  number  of  major 
motorway  projects  (including  those  using  private  sector  financing)  as the  M5  (southern 
link) and the M3 (eastern link) have been undertaken in this period. 

Conclusion 

Hungary  has  continued  to  take  important  measures  both  for  legal  and  institutional 
alignment.  Further  efforts  are  needed  to  achieve  a  greater  harmonisation  of  rules  on 
technical requirements  for road vehicles, development  of road safety,  access to market  of 
national road haulage, infrastructure  development in inland waterways and harmonisation 
of legislation  in civil aviation (particularly  safety), rail (access rights to the rail network) 
and combined transport. 

Small  and  Medium-Sized 

Enterprises 

Domestic  SME policy  conforms  to  a  large  extent  with  the  Community  one  and  further 
measures are being taken to complete the policy  framework 

In  1998, the  EU Third  multiannual Programme  for  SMEs  (1997-2000) has been  opened 
to Hungary which will cofinance  EU funds. 

3.5.  Economic  and  Social  Cohesion 

Employment  and Social Affairs 

By the end of the first half of  1998 Hungary's unemployment rate stood at 9.1%. There is 
growing  evidence  of  significant 
long-term  unemployment,  and  there  have  been 
particularly  sharp  increases  in unemployment  among minorities. Regional  disparities  are 
considerable.  Attention  will  need  to be  paid  to  ensuring  effective  coordination  between 

33 

the  Ministries  of  Economics,  Social  and  Family  Policy,  Health  and  Education  (in 
particular  as concerns vocational training) which have recently  assumed  the  employment 
responsibilities of the former Ministry of Labour and Social  Affairs. 

A  number  of  laws  have  been  adopted  to  more  closely  align  Hungarian  legislation  with 
the acquis as regards labour law, equal opportunities, and health and  safety. 

Two  particular  points  raised  by  the  Commission  Opinion  have  been  addressed  through 
amendments  to  the  1992  Acts  on  the  Labour  Code  and  on  Civil  Servants  concerning 
employees'  rights  on  the  transfer  of  undertakings,  and  the  rules  on  collective 
redundancies. However, the Hungarian  authorities have provided no detailed  schedule of 
measures to transpose the remainder of the labour law acquis. 

Ensuring  the  application  of  equal  treatment  for  men  and  women  in  the  field  of  social 
security  provision  has  been  addressed  through  the  enactment  of  a  number  of  statutes 
relating to state and private pension funds, and to the state health insurance system. 

Domestic legislation on social security funds, private pension funds  and private funds  has 
been  extended  to  migrant  workers  and  their  families  in  accordance  with  Community 
principles. 

Hungary will participate in the four  available Community public health programmes  and 
in the Fourth Community Action Programme on Equal Opportunities, as from  1998. 

Conclusion 

Whilst  progress  has  been  made  in  this  area  during  recent  months,  efforts  to  secure 
adoption  of  legislation  covering  the  outstanding  areas  of  the  acquis  in  the  field  of 
employment  and  social  affairs,  and  of  enforcement  across  the  acquis,  continue  to  be 
required. 

Regional Policy and Cohesion 

The  Hungarian  Parliament  adopted  in  March  1998  the  "National  Concept  on  Regional 
Development"  which  lays  down  the  long-term  objectives  for  Hungary's  regional  policy 
and constitutes  a basis  for  the National  Development  Plans. This  constitutes  a first  step 
towards comprehensive regional planning. 

Development  councils have been established on regional and county levels but cannot be 
considered  as  fully  operational  yet.  A National  Regional  Development  Centre  has  been 
set  up  to  develop  the  institutional  framework. 
It  is  responsible  for  co-ordination, 
to  regional  and  county 
promotion,  monitoring  and  providing 
development  councils.  Although  the  law  of  1996  defines  institutional  and  control 
structures in detail it is less specific  on implementing and monitoring systems. 

technical  support 

Human  and  financial  resources  are lacking at all levels.  This  explains  in part  why  there 
has been no progress in the development of Country Development Plans. 

34 

Furthermore,  inter-ministerial  co-ordination  remains  problematic  and  the  National 
Regional  Development  Council  has  not  taken  on  an  effective  coordination  role.  In 
addition,  financial  resources  for  regional  policy  remain  limited  and  are  split  between 
nine ministries. Monitoring procedures also need to be further  strengthened. 

One  of the key  tasks  to  be  addressed  over  the next  year will  be  the  establishment  of  a 
National Development  Programme. 

Conclusion 

Hungary  has  not  adequately  addressed  the  short-term  Accession  Partnership  priority 
relating  to  reinforcement  of  institutional  and  administrative  capacity  in  regional 
development.  Despite  advances  made  in  legislation  and  in  developing  concepts  and 
structures, concrete implementation  of  regional policy  objectives  and the  accompanying 
structures  and  institutions  is  still  weak  and  has  led  to  important  delays  in  the 
management  and implementation  of  Community  assistance.  These problems need  to be 
addressed before Hungary is ready to participate in the EU structural policy. 

3.6.  Quality of Life and  Environment 

Environment 

Since  1997  progress  in  legal  harmonisation  was  rather  slow  and  only  four  major  laws 
have  been  adopted  which  provide  for  full  or  partial  compliance  with  EU  legislation. 
These  laws  are  related  to  chemicals,  genetically  modified  organisms,  good  laboratory 
practice  and  emission  limits of air pollutants  from  combustion plants  exceeding  50 MW 
heat power.  Progress has also been made in the area of eco-labelling. 

A  new  law  regulates  the  scope  of  activities  and  competence  of  environmental 
inspectorates  and  directorates  of  national  parks  and  tackles  the  range  of  activities  and 
powers 
of  the  National  Environmental  and  Nature  Protection  Inspectorate.  The 
institutional  changes  brought  about  by  this  law  are  expected  to  serve  as  a basis  for  the 
further  modernisation of the institutional apparatus to implement and enforce  Community 
environmental  legislation. 

On  16  September  1997  the  Hungarian  Parliament  adopted  the  National  Environmental 
Protection  Programme  for  the  period  1997  to  2002.  This  programme  puts  particular 
focus on measures and investment needed for EU accession. 

On  basis  of  this  programme  the  1998  Environmental  Action  Plan  was  prepared  and 
incorporated  into  the  1998  National  Budget.  This  plan  deals  extensively  with  the 
implementation of the acquis.  In addition, the National Legal Harmonisation  Programme 
establishes  the required  detailed  transposition with  a precise timetable  for  all chapters  of 
the  acquis. 

Currently  the  main  outstanding  issue  is  the  transposition  of  Integrated  Pollution 
Prevention  Control and Seveso Directives  which are not covered by national  legislation. 

35 

Weaknesses  also exist  in relation to transposition  of wastewater  treatment  and  some  air 
pollution  directives.  The  transposition  and  implementation  of  the  waste  framework 
directive  should  be  accelerated.  More  efforts  should  be  made  in  the  field  of  radiation 
protection. 

The basic legislation on nuclear safety  adopted in  1996 still needs to be supplemented  by 
several other legal acts on radiation protection. 

Conclusion 

Hungary  has  not  been  able  to  address  all  the  short-term  priorities  of  the  Accession 
Partnership. 

The  National  Legal  Harmonisation  Programme  complemented  by  the  necessary 
budgetary provisions foresees  full transposition of the entire environmental acquis for the 
years 2000-2001. 

The implementation  of the above mentioned programme involving effective  enforcement 
and  compliance,  especially  with  parts  of  the  acquis  which  require  high  levels  of 
investment in close cooperation with International Financial Institutions and  considerable 
administrative  efforts  (e.g.  urban  waste  water  treatment,  waste  management  and  some 
aspects of air pollution  legislation), can be achieved  in the long term, providing  that  the 
approximation strategy is fully  complied with on schedule. 

Consumer Protection 

The  adoption  of  the  framework 
weaknesses  identified. 

law  on  Consumer  Protection  addresses  one  of  the 

This  law  took  effect  in  March  1998  and  establishes  the  basic  rights  of  consumers  with 
regard  to  safe  products.  Supervisory  functions  are  ensured  by  the  Consumer  Protection 
Agency. 

Basic provisions  on  consumer  credits  and price indications  are also contained  in the  law, 
but are not in full  alignment with the acquis. The necessary adjustments  concerning  unfair 
contract terms have been achieved with the adoption of new legislation. 

Laws  on  commercial  advertising  and  on  the  prohibition  of  unfair  and  restrictive  market 
practices  do  not  fully  comply  with  the  acquis.  New  measures  on  the  general  safety  of 
goods  and  services  and  the  related  market  surveillance  proceedings  aligns  Hungarian 
legislation with  the  acquis. The new  law on Medical products  for  human  use  introduces 
liability for non-authorised medicines but is only partially aligned with the acquis. 

Despite the fact that consumer protection is only a medium-term priority  in the  Accession 
Partnership,  Hungary  has  made  considerable  progress  in  the  field.  Further  alignment  is 
expected to be achieved in the coming years. 

36 

3.7.  Justice and Home  Affairs 

In its  1997  Opinion,  the  Commission  stressed  as  a priority  the need  for  efficient  border 
controls  including  a  visa  regime  increasingly  close  to  that  of  the  EU  and  an  asylum 
policy without geographical reservations and with sufficient  resources. 

Immigration /Border  controls 

Although  the  needed  reworking  of  legislation  on  foreign  nationals  has  not  occurred, 
Hungary has continued its progress with readmission  agreements. Three new  agreements 
have been  concluded  with Member  States  (France, Italy  and Denmark),  and the  existing 
agreement with Austria, which entered into force  in February  1998, has been revised. No 
information  on adjustments  to visa policy is available. 

A major  effort  has been  focused  on the country's  borders, in particular  through  the  new 
law  on  border  protection  which  came  into  force  in  November  1997.  It  covers 
management  of border controls and the organisation of border guards (who can now deal 
with  organised  crime).  In  May  1998,  the  border  guards  became  a  civilian  force.  The 
government  has  adopted  two  decrees,  one  on the  organisation  of  the border  guards  and 
one on  their numbers and weapons. 

Asylum 

The  new  law  on  asylum  entered  into  force  in  March  1998,  lifting  the  geographical 
reservation  introduced  in  1989  when  Hungary  ratified  the  1951  Geneva  Convention. 
Non-Europeans  can  now  request  asylum  in  Hungary.  In  June  1998,  records  indicated 
225 recognised  refugees  and 2428 "Temporarily  assisted" persons  (mostly  ex-Yugoslavs 
not  yet repatriated), but  2047  asylum  requests  (the majority  from  non-Europeans)  were 
made in the first  half of  1998 alone. This high figure  shows that there  is still much to be 
done in increasing staff numbers to deal with asylum requests. 

Police 

Reforms  in pursuit  of an effective  fight  against organised  crime continued.  In November 
1997, the  Convention  on Laundering,  Search,  Seizure  and  Confiscation  of  the  Proceeds 
from  Crime (Council of Europe, 8 November  1990) was signed,  and it should be  ratified 
by  the  end  of  1998.  In  the  second  half  of  1997,  the  parliament  ratified  the  European 
Convention  on  the  Suppression  of  Terrorism  (Council  of  Europe,  27  January  1977);  it 
entered  into  force  in  November  of  that  year  (see  also  legislation  on  weapons  and 
explosives). 

Beyond  the  progress  on  legislation,  particular  attention  needs  to  be  devoted  to  human 
resources  to  ensure  that  adequate  pay  and  suitable  training  are  provided  to  enable  the 
reform to succeed. 

Drugs 

The national  commission  for  coordination  on drugs set up in April  1998 under the  aegis 
of the Prime Minster's  office  is not yet operational. Progress  still needs to be made  with 

37 

bolstering  the  implementation  of  a  multidisciplinary  strategy,  including  the  role 
attributed to the national contact point for information  on drugs issues. The machinery  for 
combating money laundering needs to be made more operational. 

Judicial  cooperation 

With  regard  to  the  civil  law,  Hungary  has  obtained  the  required  "sponsorship"  from  a 
contracting  party  to the  Convention  on  Jurisdiction  and  the Enforcement  of  Judgements 
in Civil and Commercial Matters (Lugano,  16 September  1988). The process of obtaining 
the agreement of the contracting parties is under way, and it is likely that entry into  force 
will follow before the end of  1999. Effort  is still needed to make the judicial system more 
efficient,  particularly to enable Community law to be applied uniformly  in the  future. 

With regard to the criminal  law, the new procedural  code adopted by the parliament  will 
enter  into  force  in  January  2000.  It  provides  for  witness  protection  in  line  with  the 
criteria laid down by the Council in its resolution of  25 November  1995. 

Conclusion 

Hungary  has  confirmed  its  ability  to make progress  in taking  on the  Community  acquis 
by  focusing  on  the  two  major  deficiencies  identified  in  the  short-term  priorities  of  the 
Accession Partnership: asylum legislation with no geographical limits and a better system 
of managing border  controls. Considerable progress has been made in these areas. In the 
interests of meeting the medium-term  objectives, the existing efforts  should be expanded 
to include: 

-  a law  on  foreign  nationals  and  a visa policy  suited to the requirements  of the EU  (and 
covering the Commonwealth of Independent  States); 

- an increase in human resources, with adequate pay and suitable training, so that the new 
legislation  (particularly  that  on  asylum,  police  cooperation  and  combating  drugs, 
organised crime and corruption) can be implemented. 

3.8.  External Policies 

Trade and International Economic Relations 

As  of  January  1998  trade  in  textiles  was  liberalised  in  accordance  with  the  Europe 
Agreement protocol on textiles. 

In  1997/1998  Hungary  signed  Free  Trade  Agreements  with  Turkey,  Israel,  Bulgaria, 
Lithuania and Estonia. 

As Hungary  will  have  to  comply  upon  accession  with  the  obligations  of the  plurilateral 
WTO  agreements,  the  domestic  enactment  of  the  agreement  on  the  World  Trade 
Organisation  and  its  annexes  is  an  important  step.  The  relevant  provisions  came  into 
force  on  15 March  1998. To  comply  fully  with the acquis  in this field, Hungary  should 

38 

become  party  to  the  plurilateral  Agreement  on  Civil  Aircraft,  on  Government 
Procurement and on Trade in Information  Technology. 

Development 

Hungary  has no preferential  trade  agreements  with  ACP countries,  but has  established 
trade preferences  for imports coming from developing countries. 
There  is a foreign  aid fund  managed  by the Ministry  of Foreign  Affairs  through  which 
Hungary provides development and humanitarian aid. 

Customs 

A  new  integration  office  was  established  in  January  1998 to  ensure  co-ordination  and 
implementation of European integration tasks. Between mid 1997 and mid 1998 five new 
border crossing points were opened at the Ukrainian, Romanian and Slovenian borders. 

The  Hungarian  Customs  and  Finance  Guard  is  implementing  an  anti-fraud  system 
throughout Hungary, with particular emphasis on the Eastern borders. 

Hungary still has 10 customs free zones and 87 industrial free zones. The exemption  from 
customs duties of certain imported goods which are used in the free zones is incompatible 
with the relevant EC legislation. 

Hungary  still  does  not have  a  system  for  binding  tariff  information  on  customs  levies. 
No  progress  has  been  made  in  the  reform  of  the  customs  code  and  in  developing  an 
integrated customs  tariff. 

As  regards  computerisation  the  necessary  data  bank  for  all  customs  operations  at 
Hungarian  borders  has  been  created.  However  it  is  not  always  sufficiently  and 
appropriately  used.  Consequently,  there  are still  delays  at  the border  crossings.  Better 
staff training is needed. 

In the field of customs cooperation  further  progress needs to be made in order to ensure a 
proper application of rules of origin provisions of the Europe Agreement. 

Conclusion 

Further efforts  are needed particularly to establish  an integrated  customs  tariff,  improve 
and  simplify  border  procedures,  develop  a  posteriori  controls,  more  effectively  use 
electronic  equipment  and  develop  training.  Customs  cooperation  with  Member  States 
needs also to be further  improved. 

Common  Foreign  and  Security  Policy 

39 

The  change  of  Government  of  May  1998  did  not  alter  Hungary's  foreign  policy. 
Foreign  policy  priorities  are  euro-atlantic integration,  good-neighbourly  relations  and  a 
"nation policy" aimed at supporting ethnic Hungarians beyond the borders. 

Political  dialogue  between  the  European  Union  and  Hungary  has  continued.  Hungary 
actively participated  in the regular meetings of political directors, European and  associate 
European  correspondents  and in the CFSP working  groups. Since the Opinion,  Hungary 
joined  all  the  common  positions,  declarations  and  demarches,  to  which  it  was  invited 
including the common positions which introduced  sanctions against the Federal Republic 
of Yugoslavia and the declarations about the Indian and Pakistan nuclear tests. 

On  8  July  1997,  Hungary  was  formally  invited  to  start  accession  negotiations  with 
NATO.  Negotiations  were  launched  on  10  September  1997.  On  16  December  1997 
Hungary signed the Accession Protocol which is currently in the process of  ratification. 

There  continues  to  be  some  outstanding  bilateral  issues  with  Slovakia  concerning  the 
implementation of the Basis Treaty and the Gabcikovo dam. 

Hungary  continues to be  actively  involved  in the area of Common Foreign  and  Security 
Policy. 

40 

3.9.  Financial Questions 

Financial Control 

Since  1997, no  major  developments  can be reported.  The  Government  has  consolidated 
previous  measures  by  adopting  resolutions  on  the  establishment  of  monitoring 
committees. 

The State Audit  Office,  the external  financial  control body,  worked  on the  development 
of  its  accession  strategy  and  on  the  authorisation  to  certify  the  accounts  of  different 
organisations within its sphere of competence. 

The  Government  Control  Office,  the  internal  financial  control  body,  is  now  also 
responsible  for  ex  post  internal  controls, while  ex-ante  controls  are  left  to  the  spending 
ministries and agencies. 

An  Administrative  Cooperation  Arrangement  between  the  government  control  office 
and  the  Commission  provides  for  cooperation  measures  on  public  internal  control  and 
support in accession preparations. 

Conclusion 

In  order  to  adopt  financial  control  structures  in  line  with  the  acquis  Hungary  needs  to 
further  develop internal  financial  control policy and to create proper  institutions with  the 
necessary  skilled  staff  (e.g. paying  agency  for  agricultural  assistance, offices  of  regional 
development  Councils, monitoring  committees). Particular  emphasis  should  be  given  to 
the  strengthening  of  internal  control  and  internal  audit  of  the  management  of  the 
Community's  assistance  programmes  especially  in the perspective  of  the  increased  pre-
accession assistance. 

3.10.  General Evaluation 

Hungary  continues  to  approach  the  approximation  process  in  a balanced  manner.  The 
rhythm  of  transposition  has  remained  steady  and  has  generally  been  accompanied  by 
adequate institutional  and financial  provisions facilitating  implementation.  A slow down 
in  the  pace  of  transposition  in  certain  sectors  such  as  the  environment,  has  been 
accompanied  by  an  increased  focus  on  strengthening  implementation  structures.  This 
suggests  that  the  objective  of  effective  application,  rather  than  simply  transposition,  is 
being  meaningfully  pursued.  Continued  priority  is  being  placed  on  the  completion  of 
internal market  legislation. Hungary has shown determination to tackle the complex  area 
of justice  and home  affairs,  putting  in place  a strategy  and  adopting  measures  which  are 
already beginning to show results. 

While  Hungary  has  addressed  the  Accession  Partnership  short  term  priorities  in  the 
economic  reform  area,  in reinforcing  veterinary  and  phytosanitary  and  financial  control 
institutions  and  in  justice  and  home  affairs,  insufficient  attention  has  been  paid  to 
strengthening  regional  development  structures  and  to  the  internal  market  priorities  of 

41 

alignment  of copyright  and public procurement  legislation  and  enforcement  of state  aid 
legislation. 

4.  Administrative Capacity to Apply the Acquis 

This  chapter  updates  the  information  given  in  the  Opinion.  The  European  Council  in 
Madrid  in  December  1995 referred  to  the  need  to  create  the  conditions  for  the  gradual, 
harmonious  integration  of  the  candidates,  particularly  through  the  adjustment  of  their 
administrative structures.  Taking up this theme  Agenda 2000  underlined the importance 
of incorporating  Community  legislation into national  legislation  effectively,  but the even 
greater  importance  of  implementing  it  properly  in  the  field,  via  the  appropriate 
administrative  and judicial  structures.  This is an essential pre-condition  for  creating  the 
mutual trust indispensable for future  membership. 

In this year's report the Commission has worked with the candidate countries to  identify 
an illustrative  list  of enforcement  bodies  in key areas of the acquis.  Wherever  possible 
legal  powers  to 
information  is  provided  on  whether  these  bodies  have  sufficient 
implement  the  acquis,  on  staffing  levels  and  on  staff  qualifications  and  on  budget 
availability.  In  some  cases  it  is  already  possible  to  give  information  on  the  quality  of 
decisions being  taken.  The Commission  intends to  further  develop  this  aspect  in  future 
reports. 

In  its  Opinion  the  Commission  concluded  that  further  administrative  reform  will  be 
indispensable  if  Hungary  is  to  have  the  structures  to  apply  and  enforce  the  acquis 
effectively. 

4.1.  Administrative structures 

Following  the  modification  of  the  Act  on  the  Legal  Status  of  Public  Officials,  public 
service  employees  are being  prepared  for  EU membership  as part  of the  governments 
medium  term programme. Funding  will be provided  in the  annual  budget  and  HUF  2bn 
has already been earmarked  for the training of  100, 000 officials  over the next few years. 
A  special  language  allowance  will  be  integrated  into  the  salary  structure  and  language 
training of civil servants will remain a priority within the EU integration programme. 

As  from  1 January  1999 about  10,000 management  level  public  service  employees  will 
be obliged to pass a special examination, also covering EU topics, within three years. 

In  this  context  the  Government  has  also  strengthened  the  ethical  rules  for  the  public 
service.  On  1  January  1998  stricter  rules  on  the  economic  incompatibility  of  certain 
activities of public officials  came into force. 

Substantial  structural  changes  within  the  Hungarian  Public  Administration  have  taken 
place  at central  government  level  since July  1998. Following  the change  of  government 
in July  1998, new ministries were created and others abolished. The coordination role of 
the Prime Minister's Office  has been strengthened. 

42 

The number of civil servants in Hungary has increased over the last year and is currently 
about  104, 000 compared  to 98,200 in July  1997. Out  of this  staff-number  about  53,800 
are  employed  in  the  central  and  territorial  state  administration,  and  about  50,000  are 
employed  directly  by  local-government  institutions.  Although  overall  staff  levels  have 
increased  there  have  been  significant  reductions  in  some  sectors  which  may  have  an 
effect  on Hungary's ability to implement the acquis (see below). 

4.2.  Administrative  and 

judicial  capacity:  key  areas 

for 

the 

implementation of the acquis 

The  uniform  application  of EC law: The new  act  on the legal  status of judges  defines 
postgraduate training  as a right  and a duty. Judges are obliged to attend the postgraduate 
courses  on  EU  law  to  which  they  are invited.  Postgraduate  training  is  at  present  in  the 
hands  of  the  Office  of  the  National  Council  for  the  Judiciary  set  up  in  February  1998. 
(Present staff:  95) 
A  new  regulation  of  December  1997  reintroduces  periodic  evaluation  of  judges' 
activity. After  appointment  for life, judges are to be evaluated twice  every 6 years. There 
are currently 2449 judges including  110 in the Supreme Court. 
Since the Opinion, important progress has been made in developing training  programmes 
and structures  and ensuring that judges keep up to date.  Hungarian  courts  already  apply 
community law in specific  areas. 

Single Market: The Hungarian National Accreditation  Office  is a public body called  the 
"National  Accreditation  Committee"  (hereinafter:  Committee).  The  Committee  consists 
of  55 members,  representing  the  following  bodies: ministries,  Hungarian  Institution  for 
Standardisation,  Hungarian  Metrology  Authority,  chambers  of  trade  and  commerce,  14 
accredited  bodies,  institutions  of  higher  education  and  scientific  organisations,  consumer 
It  operates  under  the 
protection  and  other  professional  interests-representing  bodies. 
supervision of the Minister of Economics. It is authorised to accredit testing  laboratories, 
calibration  laboratories,  certification  bodies  and  inspectors.  There  are  eight  professional 
accreditation  commissions  (6 for testing laboratories,  1 for  calibration  laboratories  and 1 
for  certification  and inspection)  which help the operation  of the Committee. To date the 
Committee  has  accredited  212 testing  laboratories  (while  an additional  165  applications 
are under process), 70 calibration  laboratories (while 32 applications  are under process ), 
3  certification  bodies  (while  23  applications  are  under  process)  in  accordance  with 
European  standards  (based  on  EN  45000  series  standards).  There  are  200  qualified 
accreditation  assessors  who  are  responsible  for  accreditation  activities.  Hungary  is  full 
member  of  the  International  Laboratories  Accreditation  Committee  and  of 
the 
International  Accreditation  Federation.  Hungary  is  also  an  affiliated  member  of  the 
European Cooperation for Accreditation. 

The Hungarian  Institution  for  Standardisation  is an accredited  certification  body  and the 
only  national  system-certification  institution  for  ISO  9000  and  ISO  14000.  Since  June 
1998  the  Institute  is  a  full  member  of  the  IQNet.  It  is  a  non-profit  public  body  and 
legally  fully  independent  from  the Hungarian  Government.  The Institute  currently  lacks 
sufficient  financial resources to facilitate the introduction of EU standards. 

In  the  area  of  free  movement  of  services  the  Hungarian  Banking  and  Capital  Market 
Supervisory  Authority  was  set  up  as  a merged  supervisory  body  in  1997.  It  authorises 

43 

level  of  independence,  but  is  still 
trade  in  bonds,  securities  etc.  It  enjoys  a  certain 
supervised  by  the Finance  Minister.  The  Supervisory  Authority  can be  considered  well-
staffed  with  a  current  level  of  staff  of  263  (former  figure:  235).  Nevertheless  further 
progress  is  needed  in  strengthening  the  relevant  financial  sector  supervisory  bodies 
particularly  in  training.  The  State  Insurance  Supervisory  Authority  functions  well,  the 
staff has increased and the present figure is 38. 

In  the  area  of  data protection,  the  duties  and  scope  of  authority  of  the  Ombudsman  are 
determined  by  the  data  protection  law.  In  particular  the  Ombudsman  observes  the 
implementation  of  the  law,  examines  the  complaints  lodged  with  him  and  ensures 
maintenance of the data protection register. 

The  Public  Procurement  Council  is  responsible  for  the  implementation  of  the  Public 
Procurement  law.  The  Council  consists  of  21 members  and  is  required  to  report  to  the 
Parliament  annually. A special Public Procurement  Decision-making  Committee was  set 
up  to  deal  with  enforcement.  It  consists  of  13 Public-Procurement  Commissioners.  The 
Committee  is  assisted by  a four-person  secretariat.  This  Committee  is  fully  independent 
of the Government and of the Council. 

With  regard  to  intellectual  property  law  and patents, the  administrative  implementation 
bodies, such as the Hungarian Patent Office  seem to work satisfactorily,  but  improvement 
is  still  required  in  the  area  of  police, 
in  human  and  financial  resources  and  training 
judicial and customs  enforcement 

Competition: The Office  of Economic Competition (OEC) is the central authority  for 
competition matters. With  106 members, the Office  of Economic Competition can be 
considered as well- staffed.  The operation of the OEC is governed by the law on the 
prohibition of unfair  and restrictive market practices,  which entered into force in 
January  1997. 

Over  the  past  year  the  Office  adopted  61  decisions,  40%  of  which  were  related  to 
misleading  consumers  and  30%  to  abuse  of  dominant  position.  The  value  of  fines 
increased.  However  the  enforcement  capacity  of  the  Office  of  Economic  Competition 
could  be  further  improved,  in  particular  in  regulated  sectors  and  with  respect  to 
professional  skills. 

As far  as the State Aid monitoring authority is concerned, Community requirements have 
not yet been met. According  to the latest modification  of the law on Public Finance,  the 
Minister  of  Finance  should  provide  for  the  alignment  of  Hungarian  state  aid  practice. 
However the relevant legislative measures have not yet been prepared.  '"' 

Telecommunications: The Ministry of Transport, Telecommunications and Water 
Management (staff number: 302) is  responsible for the adoption of policy and 
regulations.  The National Communications Authority deals with the application of the 
regulations and the exercise of control functions  such as approvals, frequency  allocations 
and monitoring. The Communication Authority employs 500 people.  There are seven 
regional  offices. 

44 

In April  1998, the Hungarian Government adopted a decree on co-operation between the 
telecommunication  organisations  and  authorities  entitled  to  carefully  intercept  messages 
or telecommunications  networks.  To assure a smooth implementation  of this decree, the 
capacity of the relevant government authorities should be strengthened. 

Customs and indirect taxation: A new Office  was set up in January  1998 for the co 
ordination and implementation of European integration tasks.  An EU support division 
deals with the management of EU programmes and an Integration Division is responsible 
for the adaptation of customs regulations  and indirect taxation linked to the acquis and 
with the preparation of an administrative strategy . 

From  1998  the Hungarian  Customs  & Finance  Guard  was  given  the  mandate  to  handle 
indirect  taxation  matters  and  is  authorised  to  levy  and  collect  excise  duties.  This 
strengthens  the  authority  and  responsibility  of  the Hungarian  Customs  and,  at the  same 
time, it separates and decentralises the implementation of the taxation legislation which is 
in line with the acquis. 

The total staff of the Customs and Finance Guard remained unchanged since  1997 and 
amounts to 6000. 

Agriculture: The Ministry of Agriculture and Regional Development  is now  responsible 
for  rural  and  regional  development.  The  establishment  of  the  Agricultural  Market 
Intervention  Centre  has  been  an  important  step  in  the  direction  of  implementing  and 
enforcing  the policy instruments of the CAP. The Centre has currently 26 staff. 

The  Institute  of  Geodesy  Cartography  and  Remote  Sensing  has  set  up  a  modern 
production  forecast  service based  on remote sensing.  In  1997, a regional  database  was 
set up and the Centre for  Information  Development  in Cartography was also  established. 
The Institute currently counts  150 persons. 

Concerning  administrative  capacity  in  respect  of  veterinary  and  phytosanitory  controls, 
Hungary has a good basic infrastructure.  As regards  staffing,  there are 20 Animal  Heath 
and  Food  Control  Stations,  employing  2,880  staff  of  which  1100  veterinarians,  and  a 
National Institute for  Agricultural  Quality Control employing  660 staff  (ie a reduction  of 
50  compared  to  the  number  given  in  the  Opinion).  Priority  should  be  given  to  the 
extension  of  the  network  of  Veterinary  and  phytosanitary  control  stations  to  the  future 
borders. 

Transport: In the recent  government re-structuring,  some minor responsibilities in the 
field of water management were transferred  to the Ministry of Agriculture and Rural 
Development. The number of staff in the Ministry of Transport,  Telecommunications 
and Water management is currently 302 (a reduction of 40 persons since July  1997 ). 

Employment  and  Social  Policy:  Two  separate  institutions  are  responsible  for  the 
enforcement  of health and safety  legislation in Hungary, namely the National  Service  for 
Public Health Care and the Labour Inspectorate. While each appears to have a  clear  grip 
in its own  fields  of responsibility,  there is a need  for  regular  and  organised  co-operation 
between the two bodies for rationalisation and reinforcement. 

45 

The  National  Service  for Public  Health  Care  is  a nation-wide  network  of  services  in 
charge  of  health  protection  and  prevention,  professional  control  and  co-ordination  of 
public health care, examination of diseases, epidemics.  The services include the National 
Service  for Public  Health  Care  Comprising  20 regional  offices  and 136 city  offices  the 
National Centre for Epidemics and the National Centre for Public Health Care. 

The number of total staff is 6,881. 

The  National  Inspectorate  for  Labour  Safety  and  Labour  Affairs  deals  with  safety  at 
work. The number of staff is 67. 

Regional  Policy  and Cohesion: Following the change  of government  in May  1998 the 
portfolio  of  regional  development  and  planning  was  transferred  from  the  Ministry  of 
Environmental Protection to the Ministry of Agriculture and  Regional  Development. 

At  the  regional  level,  development  councils  have  been  established,  but  still  lack 
permanent  staff.  To  develop 
framework  a  National  Regional 
Development Centre has been set up to back up the regions. The centre is managed by the 
Ministry of Agriculture  and Regional Development  and is the secretariat  of the National 
Regional Development Council. The current staff is 12. 

the  institutional 

in  making  use  of  EU  funds  (Phare)  for  regional 
Hungary  has  had  difficulties 
development.  These  illustrate  the  need  for  strengthening  of  project  development  and 
management  capacity to be able to absorb increased pre-accession  aid and to prepare for 
Hungary's  participation  in the Structural  Funds.  Hungary  has not adequately  addressed 
the short term Accession Partnership priority relating to regional  development. 

Environment: The Ministry of Environmental Protection has been most affected  by the 
government restructuring since the large portfolio  of regional development and planning 
was transferred  to the Ministry of Agriculture and  Regional Development. 

The Chief Environmental Inspectorate, the Regional Environmental Inspectorates and the 
Nature  Conservation  Directorates  carry  out environmental  protection.  In a  modification 
of the scope of their tasks and responsibilities, first instance jurisdiction in environmental 
and nature conservation matters was given to the inspectorates and directorates. 
There is a clear need to increase the number of staff  in the regional inspectorates  as they 
will  be responsible  for  the licensing  under  the Integrated  Pollution  Prevention  Control 
Directive.  There is also a need for training of staff. 

The  number  of  staff  in Ministry  is 472 (March,  1998) including  regional  development 
staff. 

The number of staff in regional instance is: 1171 (March, 1998) 

Consumer  Protection: With the entry into  force  of the Act on Consumer Protection  in 
March  1998, the authority of the Consumer Protection Agency (CPA) has been  extended. 
It will be entitled  to launch  investigations  into  any complaints  and to impose  unlimited 
consumer protection  fines. The Consumer Protection Agency and civil organisations will 
be able to apply  to the courts to protect consumers in cases when damage does not  affect 
a  particular  person.  All  companies  providing  public  services  must  have  consumer 

46 

services.  The  law  also  sets  up  conciliatory  bodies  connected  to  regional  economic 
chambers which are independent institutions responsible for mediating in cases dealt with 
by the CPA before  they go to court.  In addition,  an unlimited  consumer protection  fine 
will be introduced replacing the current limit of HUF 30,000 (ECU 30). The CPA is well 
staffed  with  144 persons. 

Justice and Home Affairs: After the adoption of the new law on border protection in 
November  1997 border guards are authorised to carry our investigations in the area of 
organised crime. 

Technical  skills of the Border  Guards need  to be upgraded.  In  addition,  steps need  to be 
taken  to  strengthen  border  management,  upgrade  border  equipment,  IT  systems,  and  to 
strengthen institutional capacity and training. 

As regards  asylum  in  order  to handle  the  increased  number  of  asylum  seekers, there  is  a 
need  to  increase  staffing,  technical  facilities  and  appropriate  housing  facilities  in  both 
community  shelters  and  refugee  centres. The  law  on Asylum  which  entered  into  force  in 
March  1998 gave the responsibility  for  asylum proceedings  and  for non-European  asylum 
seekers to the Office  for Migration and Refugee Affairs.  Further training of officials  in this 
office  as well  as  court judges  specialised  in  asylum  cases  is needed.  Appeals  on  asylum 
judgements  can  be  made  to  the  courts.  Responsibilities  in  immigration  cases  were 
transferred from the police to the regional public administration  offices 

The  staff  in  the  Ministry  of  Interior  was  substantially  increased  since  July  1997.  The 
current number is 676 whereas it was only 549 in last year. 

Financial Control: The State Audit Office,  the external financial  control body 
performing  independent review and audit of public finance is well staffed  (383  staff). 
The Internal financial  control body,  the Government Control Office,  has a staff of 57. 
Hungary needs to further  develop internal financial  control policy and to create adequate 
control functions  with skilled staff in institutions such as the Regional Development 
Councils and monitoring committees. 

4.3.  Twinning 

In  order  to  help  candidate  countries  meet  the  challenge  of  strengthening 
their 
administrative  capacity  and  adapting  their  administrations  to  implement  the  acquis  the 
Commission  and  the  Member  States  are  developing  a  process  of  twinning  under  the 
Phare  programme. 
In  the  EU  the  acquis  is  implemented  in  the  Member  States  by 
national  administrations  (at  central,  regional  and  local  level)  and  by  agencies, 
professional  bodies and the private sector.  This vast body of administrative and technical 
expertise is now being made available to the candidate countries.  Initially twinning will 
cover  four  sectors  -  agriculture,  environment,  finance  and justice  and  home  affairs  but 
will gradually be extended to the whole of the acquis. 

Hungary is participating actively in twinning. 

47 

4.4.  General evaluation 
Hungary  has  continued  to  make  progress  in  building  up  its  administrative  capacity  to 
apply  the  acquis.  In  so  doing  it  has  addressed  one  of  the  short  term  priorities  of  the 
accession partnership.  The emphasis on training in European  affairs  throughout the civil 
service  and  the  judiciary  is  a  positive  development  which  reflects  the  seriousness  of 
Hungary's preparations for membership.  However, administrative capacity in certain key 
areas  such  as  standardisation,  state  aid  control  and regional  development  is weak  and  a 
concerted effort  will be needed to strengthen institutions in these areas. 

C.  Conclusion 

Hungary continues to fulfil  the Copenhagen political criteria.  Continuing  attention needs 
to be paid to combating corruption more effectively  and to improving the situation of the 
Roma. 

Hungary  can  be  regarded  as  a  functioning  market  economy.  It  should  be  well  able  to 
cope with  competitive pressure and market  forces within the Union in the medium  term, 
provided  that  it  maintains  the  conditions  for  trade  integration  and  ongoing  enterprise 
restructuring. 

Hungary's  rhythm  of  transposition  has  remained  steady  and  has  generally  been 
accompanied  by 
facilitating 
implementation.  The  Commission  considers  that  Hungary's  steady  progress  will,  if 
sustained,  enable  it  to  take  on  the  obligations  of  membership  in  the  medium  term 
provided the pace of transposition in environment picks up. 

financial  provisions 

institutional 

adequate 

and 

D.  Accession  Partnership  and National  Programme  for  the 
the  Acquis:  Global  Assessment  of 

Adoption  of 
Implementation 

The purpose  of the Accession Partnership  is to set out in a single framework  the priority 
areas  for  further  work  identified  in  the  Commission's  Opinions,  the  financial  means 
available  to  help  the  candidate  countries  implement  these  priorities  and  the  conditions 
which  will  apply  to  this  assistance.  Each  candidate  country  was  invited  to  adopt  a 
National  Programme  for  the Adoption  of the Acquis  setting  out  how  it  would  deal  with 
the  Accession  Partnership,  the  timetable  for  implementing  its  priorities  and  outlining 
human  and  financial  resource  implications.  Both  the  Accession  Partnerships  and  the 
National  Programme  for  the  Adoption  of  the  Acquis  will  be  revised  regularly  to  take 
account of progress made and to allow for new priorities to be set. 

48 

1.  Accession Partnership  :  Assessment of short term priorities: 

The Accession Partnership2 sets out the following  short term priorities for Hungary : 

•  Economic  reform:  review  and  update  the  country's  medium-term  economic  policy 
priorities within the  framework  of the Europe  agreement;  advance  structural  reforms 
(particularly with regard to  the health care system). 

•  Reinforcement  of  institutional  and  administrative  capacity:  in  particular  in  the 
areas  of veterinary  and phytosanitary  controls  (particularly  as regards  facilities  at  the 
external borders)  environment,  customs policy  internal  financial  control  and  regional 
development. 

•  Internal  Market:  including  certification  and  standardisation  (further  alignment  of 
legislative  measures),  state aids  (adoption  of  legislative  framework,  definition  of  role 
and powers of monitoring  authority, enforcement)  and increased transparency  through 
improvement  of aid inventory. Enforcement  of intellectual property  rights  and  further 
alignment  of company  law.  Complete  alignment  of public procurement  legislation  to 
cover fully  utilities sector. 

• 

• 

Justice  and  Home  Affairs:  implementation  of  appropriate  refugee 
legislation 
consistent  with  1951  Geneva  Convention,  development  of  effective  border 
management. 

Environment:  continue  transposition  of  framework  legislation,  establishment  and 
commencement  of  implementation  of  detailed  approximation  programmes  and 
implementation  strategies related  to individual  acts.  Planning  and  commencement  of 
implementation of these programmes and strategies. 

Progress  concerning  the  short  term  priorities  of  the  Accession  partnership  can  be 
summarised as follows: 

• 

• 

Economic  reform:  progress  has  been  made  in  this  area.  The  mass  privatisation 
scheme  has  been  completed  and  a  new  pension  system  was  introduced  as  from  1 
January  1998. Since the beginning of  1998 branches of foreign  credit  institutions  are 
allowed to operate in the Hungarian banking sector, subject to a license from  the State 
Financial  and  Capital  Market  Commission.  In the  field  of trade policy  Hungary  has 
eliminated all trade-related charges, except some customs duties which, in accordance 
with the EA, are due to be progressively abolished until  1.1.2001. 

Reinforcement  of institutional  and  administrative  capacity:  as regards  veterinary 
and phytosanitary controls, Hungary has an elaborated basic infrastructure  comprising 
20 Animal Health and Food Control Stations and a National Institute for  Agricultural 
Quality  Control.  The  office  in  charge  of  internal  financial  control,  the  State  Audit 
Office  seems has the basic  institutional  and  administrative  capacity,  although  efforts 
to  align Hungarian  audit  standards to those of the EU need to be maintained.  This is 

2  Council Regulation 622/98, OJ L85 of 20 March  1998 

49 

not  the case  for  regional  development, where  substantial  institutional  strengthening 
is necessary. 

• 

Internal  Market: progress  has been  made  in the  adoption  of  a new  Companies  act, 
together  with  the  Companies  Registration  Act.  Some  progress  regarding  the 
enforcement  of  intellectual  property  rights  can  also  be  noted  although  some  issues 
still  have  to  be  resolved.  Legislation  has  been  adopted  on  pharmaceutical  and 
industrial products, thus confirming  that the pace of adoption  in these  areas has been 
maintained.  On  the  other  hand  Hungary  failed  to  align  its  public  procurement 
legislation  with  respect  to  the  utilities  sector.  Progress  continued  in  the  area  of 
certification  and  standardisation,  although  it  was  rather  slow  and  should  be 
accelerated.  Substantial  efforts  are  still  required  to  strengthen  the  State  monitoring 
authority. 

•  Justice and Home Affairs: a new law on asylum has extended the right of asylum to 
non-European 
the  Geneva 
Convention.  Despite  some positive  developments  border  management  needs  further 
strengthening over the coming years. 

the  geographical  reservation  of 

refugees, 

lifting 

•  Environment:  a  National  Environmental  Protection  Programme  was  adopted,  but 
law harmonisation was rather slow and only four major  laws have been adopted  over 
the last year. 

Hungary  has  not  fully  addressed  all  of  the  Accession  Partnership  short  term  priorities. 
While  an  effort  was made to  address priorities  in the economic  reform  area  (completion 
of  mass  privatisation,  introduction  of  a  new  pension  system),  in  the  reinforcement  of 
institutional  and  administrative  capacity  in  certain  sectors  (veterinary  and  phytosanitary 
controls,  financial  control)  and  in justice  and  home  affairs,  Hungary  did  not  adequately 
address  certain  priorities  in  the  areas  of  internal  market  (copyright  legislation,  full 
alignment of public procurement  legislation, improved  state aid monitoring)  and regional 
development. 

2. 

National Programme for the Adoption of the Acquis Assessment 

In  response  to  the  Accession  Partnership  the  Hungarian  Government  has  adopted  the 
National Programme  for the Adoption  of the Acquis  on 26 March  1998 and presented  it 
on  30 March  1998. The National  Programme  for  the Adoption  of  the Acquis  follows  a 
similar  structure  to  the  Commission's  Opinion, but  the  identification  of priorities  is  not 
the same as in the Accession Partnership. 

Some  short-term  priorities  in  the  Accession  Partnership  (e.g.  Public  Procurement)  are 
medium term priorities in the National Programme for the Adoption of the Acquis.  Other 
medium  term priorities  of the Accession  Partnership  are short-term  tasks  in the National 
Programme for the Adoption of the Acquis (e.g. agriculture, Justice and Home  Affairs). 

Some  Accession  Partnership  priorities  such  as  those  dealing  with  the  Roma  and  those 
relating  to  employment  and  labour  market,  are not  covered  in  the National  Programme 
for  the  Adoption  of  the  Acquis.  Others  are  dealt  with  in  a  less  precise  manner,  For 

50 

example,  the  chapter  on  Justice  and  Home  Affairs,  the  section  on  'fight  against 
organised  crime',  lacks  specific  details  on  sub-fields  (e.g. money  laundering,  drugs  and 
trafficking  in  human  beings).  There  are  few  details  on  visa  policy  and  admission 
provisions  for immigrants  and nothing on corruption. In the transport chapter the areas of 
combined transport and rail are not sufficiently  covered. 

The National  Programme  for  the Adoption  of the Acquis  does not  cover the  full  acquis. 
In most  areas the information  is incomplete, and no  link  is drawn between  the proposed 
Hungarian  measures  and  the  respective  acquis.  Weaknesses  in  particular  have  been 
identified  in  the  chapter  on  the  Single  Market, 
telecommunication,  sectoral  policies 
industry),  environment  protection  and  consumer 
(energy,  agriculture, 
protection. 

transport, 

Although the National Programme  for the Adoption of the Acquis  differentiates  between 
short- and  long-term priorities, a systematic  and precise time  schedule  envisaged  for  the 
implementation  of the foreseen  measures is lacking. In some areas, such as single market 
and environment, the time frame provided seems irrealistic. 

Information  on implementation  structures  is poor  and the  administrative  implications  of 
the adoption of the acquis need to be further  elaborated. Detailed plans are only presented 
for a few cases. 

As there is no indication of human resources requirements in the National Programme  for 
the Adoption  of the Acquis,  the programme  does not  allow  for  the definition  of  concrete 
actions in the area of institution building. 

No reference  is made to the budgetary implications of the adoption of the acquis, neither 
in relation to the national budget nor to Phare. 

The Hungarian Government has indicated that it will revise the document. On basis of the 
revised  text 
the  Commission  will  take  a  position  on  the  document  which  it  will 
communicate  to the  Council  during  the  second  semester  of  1999  on the  occasion  of  the 
re-examination of the Accession Partnership. 

51 

Annex 

STATISTICAL DATA 

52 

STATISTICAL DATA 

Basic data 

Population (end of period) 

Total Area 

National Accounts 

Gross Domestic Product at current prices 

Gross Domestic Product at current prices 

1993 

1994 

1995 

1996 

1997 

in 1000 

10277 

10246 

10212 

10174 

10135 

in 1000 hectares 

9303 

9303 

9303 

9303 

9303 

in Bn Forint 

3548.3 

4364.8 

5614.0 

6893.9 

8372.2 

in Bn ECU 

33.0 

34.9 

34.1 

35.6 

39.6 

in ECU per capita 

3200 

3400 

3300 

3500 

3900 

Gross Domestic Product at current prices 

in % of Total Gross Value Added 

Structure of Production 

- Agriculture 

- Industry 

- Construction 

- Services 

Structure of expenditure 

- Final consumption  expenditure 

- household and NPISH 

- general government 

- Gross fixed capital  formation 

- Exports of goods and services 

- Imports of goods and services 

Gross Domestic Product 

6.7 

26.3 

4.6 
62.4 

as 

% of Gross Domestic  Product 
77.3 

74.2 

53.8 

23.6 

20.0 

37.3 

38.5 

52.2 

22.0 

21.4 

38.9 

39.9 

% 

change over the previous ye 

ar 

-0.6 

2.9 

1.3 
in Purchasing Power parities 

1.5 

72.6 

51.2 

21.4 

22.3 

46.4 

46.9 

4.4 

Gross Domestic Product per capita 

7100 

7600 

7800 

8300 

8900 

Inflation rate 
Consumer Price Index 

Balance of payments 

-Exports of goods 

-Imports of goods 

> change over the previous ye 

ar 

°/« 
22.5 

18.8 

28.2 

23.6 

18.3 

in millions of ECU 
6429 

9835 

11171 

9553 

11695 

13259 

6933 
10367 

53 

-Trade balance 

-Services, net 

-Income, net 

-Net current  transfers 

-of which government  transfers 

-Current account balance 

-Reserve assets (incl. Gold) 

-Reserve assets (excl. gold) 

-3434 

-3124 

-1860 

184 

134 

491 

-1016 

-1182 

-1379 

626 

18 

765 

11 

810 

10 

-2089 

1179 
-1147 

725 

-12 

-3640 

-3408 

-1938 

-1330 

6109 

6069 

5571 

5536 

9203 

9170 

7847 

7817 

7703 

7676 

Public Finance 

in 

%  of Gross Domestic  Product 

General Government  Deficit/Surplus 

Gross foreign  debt 

67.2 

63.4 

65.1 

63.1 

Financial indicators 

Monetary  Aggregates 

- Ml 

-M2 

- Total credit 

Average short-term interest rates 

- Lending rate 

- Deposit rate 

ECU exchange rates 

- Average of period 

- End of period 

- Effective  exchange rate 

Foreign Trade 

Imports 

Exports 

Balance 

Terms of trade 

Imports with EU-15 

Exports with EU-15 

1993 

1994 

1995 

1996 

1997 

in Bn ECU 

7.1 

14.5 

30.9 

5.7 

12.9 

26 

%  per annum 

27.4 

20.3 

32.6 

24.8 

6 

13.8 

24.6 

27.3 

20.6 

8 

15.7 

31.9 

25.4 

15.7 

6.8 

15.6 

25.3 

21.8 

17.6 

(lECU=..National  currency) 

107.65 

135.61 

164.55 

193.74 

211.65 

112.35 

136.73 

71.1 

58.9 

183.3 

45.7 

206.91 
40.7 

224.71 

36.7 

in millions of ECU 

10701 

12240 

11824 

14289.4 

18724.2 

7607 

9000 

9837 

12367.8 

16842.4 

-3094 

corresp 

102.3 

-3240 

-1987 

-1921.6 
onding period of the previou 
100 
101.3 

102.3 

97.7 

-1881.8 
s year = 

101.2 

as %  of total 

40.1 

46.5 

45.3 

51 

61.5 

62.8 

62.3 

69.7 

62.8 
71.2 

Demography 

per 1000 of population 

54 

Natural growth rate 

Net migration rate 

-3.2 

0.0 

-3.0 

0.0 

-3.3 

0.0 

-3.7 
0.0 

: 

: 

per 1000 live-births 

Infant mortality rate 

12.5 

11.5 

10.7 

10.9 

10.0 

Life expectancy  :  Males 

Females 

at birth 

64.5 

73.8 

64.8 

74.2 

65.3 

74.5 

66.1 

74.7 

66.5 

75.0 

Labour market 

Economic Activity rate (ILO methodology) 

Unemployment rate (ILO methodology): 

Total 

< 25 years 

> 25 years 

Average  employment  by  NACE  branches 
(LFS) 

- Agriculture and Forestry 

59.2 

11.3 

19.2 

9.8 

- Industry 

- Construction 

- Services 

Infrastructure 

Railway network 

in % of labour force 
57.1 

55.9 

55.6 

10.2 

9.5 

9.2 

55 

8.1 

17.6 

8.7 

16.6 

8.2 

15.7 

13.9 

8 

7 

in % of total 

8.3 

26.6 

6 

59.1 

7.9 

27.1 

6 

59 

in Km per 1000 Km2 

83 

83 

83 

83 

83 

in km 

Length of motorways 

: 

: 

293 

336 

'. 

Industry and Agriculture 

Industrial production volume indices 

Gross 
indices 

agricultural 

production 

volume 

previous year = 100 

104 

90.3 

109.6 

103.2 

104.6 

102.6 

103.4 

106.3 

111.1 

99.4 

55 

Methodological Notes 

Gross  domestic  Product  per  capita  in  PPS:  Revised  data  using  the  new  PPP  results 
from the  1996 International Comparison  Project. 

Reserve  assets:  are  end-year  stock  data.  They  are  defined  as the  sum  of  central  bank 
holdings  of  gold,  foreign  exchange,  and  other  (gross)  claims  on  non-residents.  Gold  is 
valued at end-year market price. 

General  government  deficit  /  surplus:  is  an  approximation  of  the  national  accounts 
definition,  derived  from  data  based  on  the  IMF's  GFS  (government  finance  statistics) 
methodology.  The general government  deficit  /  surplus  is obtained by adding the  central 
government  deficit  /  surplus  (normally  including  certain  extra-budgetary  funds)  to  the 
local  government  deficit  /  surplus.  The  total  is  adjusted  for  net  lending  /  borrowing  for 
specific policy purposes, which is a financing  item in the national accounts. 

Monetary  aggregates:  are  end-year  stock  data.  Ml  generally  means  notes  and  coin  in 
circulation plus bank  sight  deposits. M2  generally means Ml  plus  savings  deposits  plus 
other  short-term  claims  on  banks.  Total  credit  generally  means  domestic  credit  to  the 
government  and  private  sectors.  It  should  be  noted  that  the  problem  of  measuring  the 
circulation  of foreign  currency  in  some Applicant  Countries  may  affect  the reliability  of 
the data. 

Interest  rates: Annual  average rates. Lending rates generally  consist  of the average rate 
charged  on  loans  granted  by  reporting  banks.  Deposit  rates  generally  refer  to  average 
demand and time deposit rates. 

Exchange rates: Where available, the ECU exchange rates are those officially  notified  to 
DGII. The effective  exchange rate index is weighted by major trading partners, with a 
base year of 1990. 

Imports  and  exports  (current  prices):  The  data  is  based  upon  the  "special  trade" 
system,  according to which,  external trade comprises  goods crossing the customs  border 
of the country. Trade data excludes direct re-exports, trade in services as well as licenses, 
know-how  and patents.  Since  1997, trade data includes trade between industrial  customs 
free  zones  and  foreign  markets.  Since  1997  also,  operative  leasing  and  repair  are 
excluded  from  external trade turnover.  The data for  1996 were recalculated  according to 
the methodological changes in  1997. The data for periods up to  1996 are published  in the 
original content, therefore they are not comparable with the data of  1996 and  1997. Value 
of  external  trade  turnover  includes  the  market  value  of  the  goods  and  the  additional 
costs(freight,  insurance etc.). 
Trade Classification: Until  end of  1996, the recording  of merchandise  trade  occurred  by 
two types of classification  in parallel: the Hungarian External Trade Classification  (KTJ) 
and  the  Harmonised  Commodity  Description  and  Coding  System  (HS)  nomenclature. 
The customs documentation is the statistical data source of external trade turnover.  Since 
1996, the  data  are  collected  according  to  the  Combined  Nomenclature.  The  earlier  data 
are updated on the basis of the later processing. 

56 

Imports  are  recorded  on  CIF  basis  and  are  captured  on  the  date  of  custom  clearance. 
Exports  are  recorded  on  FOB  basis  and  are  captured  with  the  date  on  which  the 
commodities cross the state border. 
Eurostat  has  converted  the  National  Currency  to  the  US  dollar  by  applying  the 
International Monetary Fund annual average exchange rates. 

Terms  of  trade:  "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.  Since  the  I  quarter  of  1996  due  to  the 
modifications  in the calculation of unit value indices and the application of Fisher indices 
instead of Paasche indices, the quarterly volume indices have been changed. 

Imports  and  exports  with  EU-15: Data  declared  by the Hungary. Data  for  years  1993 
and  1994 refer to trade with EU-12 only. 

Economic  activity  rate  (ILO  Methodology):  -  Percentage  of  labour  force  in  total 
population aged 15+. 
Unemployment  rate  (by  ILO  methodology):  -  Percentage  of  the  unemployed  labour 
force. 
These rates are derived from LFSS (Labour Force Sample Survey) observing the  following 
ILO definitions and recommendations: 
Labour 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. 

Average  employment  by NACE  branches  (LFS): This  indicator is derived  from  LFSS 
(Labour Force Sample Survey) observing the ILO definitions and recommendations. 

Industrial  production  volume  indices:  Industrial  production  covers  mining  and 
quarrying,  manufacturing  and  electricity,  gas, steam  and water  supply  (according  to  the 
NACE Rev.l  Classification  Sections C,D,E). 
Index of total  industrial production  and industrial  sales includes the data of all  industrial 
enterprises. The indices by branches refer  to enterprises with more than 20 employees up 
to the end of 1994 and with more than  10 employees since 1995. 

Gross agricultural production volume indices: Chain indices were calculated using the 
fixed  price basis applied for national  accounts. The prices that  serve as fixed  basis  in the 
calculations are: 

-Until  1996: prices of 1991 
-For  1997: prices of 1995 

57 

Sources 

Basic  data,  National  Accounts,  Foreign  trade,  Demography,  Labour  market, 
Infrastructure, Industry and Agriculture  : New Cronos. 

Reserve  assets  and Financial  indicators  : Where possible Eurostat  B-4's  questionnaire 
on monetary  and financial  statistics has been used as the source. Applicant  Countries  are 
asked to supply regularly an update of tables contained in the questionnaire. The statistics 
covered  include  foreign  official  reserves,  monetary  aggregates,  interest  rates,  and 
exchange rates. Failing this, the IMF's  'International  Financial  Statistics'  publication  has 
been  used  as  the  source.  The  European  Commission  (DG  II)  is  used  as  the  source  for 
exchange rates against the ECU, where possible 

Concerning  gross  foreign  debt,  the  OECD  External  Debt  Statistics  publication  has  been 
used as the source. 

Concerning  general  government  deficit  /  surplus,  Applicant  Countries  are  presently 
unable to provide reliable data. Unit B-4 is working closely with these countries with the 
aim  of improving  their national  accounts based  government  finance  statistics.  Given  the 
lack of reliable data, an approximation  for general government deficit  / surplus is derived 
from  the  IMF's  Government  Finance  Statistics  Yearbook  (for  an  explanation  of 
methodology, see below). 

58 

ISSN 0254-1475 

COM(98) 700 final 

DOCUMENTS 

EN 

01  02  06  11 

Catalogue  number  :  CB-CO-98-641-EN-C 

Office  for Official  Publications of the European  Communities 

L-2985 Luxembourg