1999 regular report from the Commission on Hungary's progress towards accession
Date: 1999-10-13
Institutions: European Commission
Subjects: EU relations, Hungary, accession to the European Union, economic situation, political situation

COMMISSION OF THE EUROPEAN  COMMUNITIES 

***** 

**  J* 

Brussels,  13.10.1999 
COM(1999) 505 final 

1999 
REGULAR  REPORT 

FROM THE  COMMISSION 

ON 

HUNGARY'S 

PROGRESS TOWARDS  ACCESSION 

* * * * * * * * * * * * * * * * * * * * * ** 

Table of  contents 

A. 

Introduction 

a) 
b) 

Preface 
Relations between  the European  Union and Hungary 
Development  under the EU-Hungary  Europe Agreements (including bilateral  trade) 
Accession  Partnership/NPAA 
Pre-Accession aid  : Phare 
Phare Management  system 
Twinning 
The negotiations/Screening  process 

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. 

3.3. 

3.4. 

Political  criteria 
Introduction 
Recent  developments 
Democracy and the rule of law 
The Parliament 
The Executive 
The Judiciary 
Anti-Corruption  measures 
Human  rights and 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 
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 Union 
General  evaluation 

Ability to assume the obligations of  membership 
Internal  market without  frontiers 
The four  freedoms 
Competition 
Innovation 
Information  society 
Education, training and youth 
Research  and technological  development 
Telecommunications 
Audiovisual 

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 

3.5. 

3.6. 

3.7. 
3.8. 

3.9. 

3.10.  General  evaluation 

4. 
4.1 
4.2 

Administrative  capacity  to apply the  acquis 
Administrative  structures 
Administrative and judicial  capacity  : key areas for the implementation  of the acquis 

C.  Conclusion 

D.  Accession  Partnership  and  National  Programme  for 
the  Adoption  of  the  Acquis:  global  assessment  of 
implementation 
1. 
2. 

Accession Partnership  :  assessment of short and medium-term  priorities 
National Programme for the Adoption of the Acquis — Assessment 

Annexes 
Human Rights Conventions ratified  by the candidate countries 
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  candidate 
State towards accession in the light of the Copenhagen  criteria, in particular the rate at 
which  it  is  adopting  the  Union  acquis."  "In  that  context,  the  Commission  will 
continue  to  follow  the  method  adopted  by  Agenda 2000  in  evaluating  candidate 
States'  ability  to  meet  the  economic  criteria  and  fulfil  the  obligations  deriving  from 
accession." 

The  European  Council  in  Vienna  invited  the  Commission  to  present  its  further 
progress reports with a view to the Helsinki European Council. 

This Regular Report on Hungary follows  the same structure as the  Commission's 
1997 Opinion.  It 

- describes 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.  This  part  gives  special  attention  to  nuclear 
safety  standards as underlined by the Cologne European  Council. 

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. 

The report  takes  into consideration  progress  since the  1998 Regular  Report.  It  looks 
at whether intended reforms  referred  to in the  1998 Regular Reports 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  and 
started to address the medium term priorities set out in the Accession  Partnership. 

While  the  assessment  of  progress  in  meeting  the political  and  acquis  criteria  focuses 
on  that  which  has  been  accomplished  since  the  last  Regular  Report,  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.  This  approach  ensures  equal  treatment  for  all 
the  candidate  countries  and  permits  objective  assessment  and  comparison  between 
countries in terms of concrete progress in preparation for  accession. 

This 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  last  Regular  Report.  Their  presentations  at  the  meetings  held 
under  the  auspices  of  the  Europe  Agreement,  their  National  Programmes  for  the 
Adoption  of  the  Acquis,  the  information  provided  in  the  context  of  the  analytical 
examination  of the acquis (screening)  and in the negotiations  were  additional  sources 
of 
reports  and 
resolutions1  have been  taken  into  account  in  the preparations.  The  Commission  also 
drew  on  assessments  made by various  international  organisations  and in particular on 
contributions  from  the  Council  of  Europe,  the  OSCE  and  the  international  financial 
institutions  as well as non-governmental  organisations. 

information.  Council  deliberations  and  European  Parliament 

For the European Parliament  the rapporteurs are A. Oostlander and E. Baron Crespo; Co-rapporteurs: 

M. Aelvoet, J. Donner, O. Von Habsburg, E. Caccavale, F. Kristoffersen,  M. Hoff, C. Camera 
Gonzales, P. Bernard-Raymond, R. Speciale, J. Wiersma, J.W. Bertens, B. Malone. 

b) 

Relations Between  the European  Union  and  Hungary 

Developments  under the EU-Hungary. Europe Agreement  (including bilateral trade) 

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  December  1999.  An  Association  Committee 
meeting  was  held  in  February  1999.  The  system  of  sub-committees  continues  to 
function  as a forum  for technical  discussions. 

Since the issuing  of the  last Commission's  Report  the Joint  Parliamentary  Committee 
comprising  representatives  of  the  Hungarian  and  European  Parliament  met  once  in 
February  1999. 

Hungary's trade  with  the EU  has  continued  to increase. Hungarian  exports  to the EU 
rose  from  11.7  billion  Euro  in  1997  to  14.5  billion  Euro  in  1998  and  Hungarian 
imports from  the EU from  13.6 billion Euro in  1997 to  16.7 billion Euro in  1998.  The 
most  important  EU  exports  to  Hungary  in  the  first  quarter  of  1999  were  machinery 
and electrical  goods, transport equipment  and chemical  products.  The most  important 
EU  imports  from  Hungary  were  machinery  and electrical  goods, transport  equipment 
and textiles. 

Problems related to the implementation  of the Europe  Agreement  continue  to exist in 
the agricultural  sector where Hungary  granted  Israel  more favourable  conditions  than 
those  granted  to  the  EU.  However,  Hungary  has  indicated  that  it  will  renounce  this 
agreement  with  Israel  upon  accession.  The  issue  of  tax  discrimination  on  spirits  has 
not yet been resolved. In March  1999, the Council mandated the Commission  to open 
negotiations  with  the  associated  countries  on  new  reciprocal  concessions  in  the  field 
of  agriculture.  In  1999,  Hungary  amended  the  procedure  for  the  recognition  of  the 
certificate  for  imported  wines  originating  in  the  European  Union  and  abolished 
certificate  requirements to which the EU  objected. 

In  March  1999  the  EU  imposed  a  definitive  anti-dumping  duty  on  imports  of 
polypropylene  binder  or baler  twine  originating,  inter  alia,  in  Hungary.  Further  anti 
dumping  proceedings  have  been  initiated  on  imports  of  steel  stranded  ropes  and 
cables originating, inter alia, in Hungary. 

Current  discussions  in  the  institutional  framework  of  the  Europe  Agreement  focus 
particularly on the implementation  of the Accession Partnership priorities  (see below), 
and  seek  to achieve progress  in  areas  like excise  duties, competition/state  aid  and the 
transition  to  the  second  stage  to  the  Europe  Agreement.  In  the  competition/state  aid 
context, the implementation  of the Europe Agreement  (article  62) is hampered  by the 
the  Hungarian  Constitutional  Court  declared  that  some  provisions  of  the 
fact  that 
Hungarian  implementing  rules  for  competition  are  unconstitutional.  The  legal  effect 
of this ruling is suspended  until  31 December  1999 and the Hungarian  authorities  and 
the Commission  are currently  working on  a solution  to address this issue.  In the area 

of  industrial  and  conformity  assessment,  negotiations  on  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, are in  a final 
stage. 

In  1997  Hungary  carried  out  a first  Joint  Assessment  with  the  Commission  Services 
on  medium  term  economic  policy  priorities  and  is  working  on  a  medium-term 
economic strategy together with a second Joint  Assessment. 

Accession Partnership/ NPAA 

An Accession  Partnership was adopted in March  1998. Its implementation  is reviewed 
in chapter D of this Report. 

In July  1999 Hungary presented  a revised National Programme for the Adoption of 
the Acquis (NPAA), in which it outlines its strategy for accession including how to 
achieve the priorities contained in the Accession  Partnerships  (see further  part D). 

Pre-Accession Aid: Phare 

In  1999  Phare  was  the  main  instrument  providing  financial  assistance  to  help 
Hungary's pre-accession  strategy. 

The  programme  is  "accession-driven",  concentrating  support  on  the  Accession 
Partnership  priorities  which  help  the  candidate  countries  to  fulfil  the  Copenhagen 
criteria.  Around  30%  of  the  Phare  allocation  is  used  for  "institution  building"  (i.e. 
helping  the  countries  to  improve  their  capacity  to  implement  the  Union  Acquis;  see 
twinning  below)  and  the  remaining  70%  is  used  for  financing  investments  to 
strengthen  the regulatory  infrastructure  needed  to  ensure  compliance  with  the  acquis 
and to reinforce  economic  and social cohesion  including the effects  of restructuring in 
important  sectors of the economy. 

The Phare programme  allocated  €  1.030  million  to  Hungary  during the  period  1990-
1999. 

The  1999 Phare Programme for Hungary consists of a national  allocation of € 
102,87million, concentrated  on the following  priorities : 
• 
•  reinforcing 

integrating the Roma in school  and employment  (€ 5 million) 

institutional  and  administrative  capacity 

in  financial 

services 

supervision, taxation, customs, agriculture  and environment, ( € 35,2 million) 

•  promoting SMEs, (€ 6,2 million) 
•  strengthening  co-operation  in Justice  and Home Affairs  (border management,  fight 

against organised crime, visa and migration  policies), (€  13,6 million) 
• 
infrastructure  and transport investments (€ 20 million,) 
•  development  of public health  laboratories  (€ 8 million) 
•  participation  in  various  Community  Programmes  (€  10,87 million)  and Tempus (€ 

4 million) 

An additional €  10 million have been allocated  for  a cross-border  co-operation  (CBC) 
programme with  Austria, € 5 million for the co-operation  with Romania and 2 M€  for 
co-operation  with  Slovakia. 

Hungary  also  participates  in  and  benefits  from  Phare  funded  multi-country  and 
horizontal  programmes  such  as  TAEIX,  the  Small  and  Medium-sized  Enterprises 
programme and the Large Scale Infrastructure  Facility. 

Since  1990  Phare  has  provided  support  in  addressing  key  economic  transformation 
and  structural  reform  issues.  It  has  been  delivered  mainly  in  the  form  of  technical 
assistance  and  used  primarily 
institution  building  and  policy 
in  support  of 
development.  Increasingly  Phare  resources  have  also  been  mobilised  in  the  form  of 
support  for  investment  priorities  identified  by  the  Government  as  essential  to  the 
fundamental  restructuring of the economy over the medium term. 

Overall  the  impact  of  Phare  has  been  positive.  Effective  transfer  of  know-how  and 
scarce  equipment  and  financial  resources  has  taken  place  in  a  number  of  important 
fields  such  as  industrial  restructuring  and privatisation,  SME  development,  trade  and 
investment  promotion,  energy,  land  registration,  etc. Phare  support  to  agriculture  and 
SME  development  has  succeeded  in  developing  sector  strategies  and  initiating 
essential  institutional  and financial  mechanisms  servicing enterprises in these sectors. 

Phare has for example played an important part in : 

• 

• 

• 

agriculture,  where  Phare  has  supported  the  creation  of  a Rural  Credit  Guarantee 
Fund  (€  20  million).  This  fund  provides  guarantees  for  medium-term  and  long-
term  loans to  small  and  medium-sized  enterprises  which  otherwise  lack  collateral 
for  the  development  of  basic  agricultural,  commercial,  industrial  or  service 
activities. So far,  over  1,200  small  and medium business operations, have received 
guarantees from  the Fund allowing them to consolidate their financial  basis. 

the  transport  sector,  Phare  funding  for  the  co-financing  of  major  infrastructure 
projects  has contributed  to the realisation  the Government's  ambitious  investment 
programme  currently  faced  with  severe  domestic  budgetary  constraints.  Through 
the  combined  mobilisation  of  domestic  and  foreign  resources  a  major  road 
network covering  30.000 km national  highway network  and more than  70% of the 
vehicular traffic  could be rehabilitated. 

developing 

the  area  of  privatisation  and  restructurings  Phare  h as  provided  assistance 
for 
preparing 
restructuring  projects  for  lead  industrial  companies.  It  has  contributed 
to  the  stabilisation  of  around  15000  jobs  which  would  have  been  lost 
otherwise. 

restructuring  methodology 

and 

a 

Phare Management  System 

The Phare management  system was reformed  in  1998 and  1999 to improve the  speed, 
efficiency,  effectiveness  and  transparency  of  Phare  activities.  Phare  assistance  has 
been  implemented  on  a  decentralised  basis  since  it  began.  The  authorities  in  the 
partner  country  have  taken  responsibility  for  contracting  and  payment  of  the 

assistance.  However  the  European  Community's  Financial  Regulation  requires  that 
the  Commission  supervise  the  contracting  procedure  and  endorse  any  contracts 
financed  from  Phare  signed  by  the  partner  country  before  they  go  into  effect.  The 
regulation  co-ordinating  assistance  from  Phare,  SAPARD  and  ISPA,  which  was 
approved  in  June  1999  will  allow  the  Commission  to  move  to  ex  post  control  of 
contracting where the Financial  Control exercised by the partner country is deemed by 
the  Commission  to  be  sufficient.  This  possibility  will  be  reviewed  on  a  country-by-
country, sector-by-sector basis and introduced  gradually. 

In the meantime, and in order to streamline the implementation  of Phare programmes, 
the  Commission  has  transferred  much  of  the  responsibility  for  the  supervision  of 
contracting to its Delegations in the candidate countries. 

Phare  implementation  structures  have  been  rationalised  in  Hungary  to  increase 
transparency  and  avoid  dispersion  of  funds.  This process  increases  the  responsibility 
of  the  candidate  countries  by  using,  as  far  as  possible,  sustainable  institutions  and 
implementing  agencies  which  will  be  responsible  for 
the  management  and 
implementation  of programmes financed  from  Community funds  after  membership. 

Since  December  1998, a National  Fund  located  within  the  Hungarian  State  Treasury 
is the  central  entity  through  which  Phare  and  other EU  funds  will  be channeled.  The 
National  Fund  has  overall  responsibility  for  financial  management  of  funds  and  for 
ensuring  that  Phare  procurement  rules,  reporting  and  financial  management  are 
respected,  and  that  a there  is  proper  project  information  system.  A  Central  Finance 
and  Contracting  Unit  has  also  been  established  within  the  State  Treasury  to  increase 
visibility  and  transparency  in  financial  administration,  accounting  and  payments.  As 
regards the investment  side of Phare, Hungary  started to establish  a limited number of 
Implementing  Agencies which  will be responsible  for  the implementation  for  specific 
projects. 

After  a  decline  of  Hungary's  capacity  to  absorb  Phare  funds  in  the  last  4  years, 
substantial  efforts  were undertaken  to increase the overall contracting level in 1999. 

Pre-Accession Aid 2000 

During  the  period  2000-2006,  pre-accession  aid  to  the  candidate  countries  will  be 
more  than  doubled.  Alongside  the  Phare  programme,  it  will,  as  from  the  year  2000, 
comprise  aid  for  agricultural  and  rural  development  (SAPARD)  and  a  structural 
instrument  (ISPA),  which  will  give  priority  to  measures  similar  to  those  of  the 
cohesion fund  in environment  and transport. 

In  the  years  2000-2002  total  financial  assistance  available  will  be  €  96  million  for 
Phare, € 38,1 million for  Sapard and between € 70 and  100 million for Ispa, per year. 

Twinning 

One  of  the  important  challenges  the  candidate  countries  are  facing  is  the  need  to 
strengthen  their  administrative  capacity  to  implement  and  enforce  the  acquis.  The 
to  mobilise  significant  human  and  financial 
European  Commission  proposed 

resources  to  help  them  in  this  respect,  through 
the  process  of  twinning  of 
administrations  and agencies. The vast body of Member  States expertise is now  being 
made  available  to  the  candidate  countries,  in  particular  through  the  long-term 
secondment  of  civil  servants.  The  strong  support  and  response  from  EU  Member 
States has meant that twinning  partnerships  covering  a total  of  108 projects  involving 
all  candidate  countries  and  almost  all  Member  States  are  presently  being 
implemented. 

Phare  funding  for  twinning  has  so  far  focused  primarily  on  the  priority  sectors  of 
agriculture,  environment,  public  finance,  Justice  and  Home  Affairs  and  preparatory 
measures for the Structural Funds. 

For Hungary,  16 projects have so far been twinned under Phare. Germany is leading a 
project  to  assist  with  implementation  of  the  Common  Agricultural  Policy  and, 
together  with  Spain,  is  also  helping  to  plan  capacity  for  structural  and  agri-
environmental  development  schemes.  Three  environment  projects  cover 
legal 
approximation  in  the  environmental  field,  the  establishment  and  management  of  a 
Central  Environmental  Protection  Fund,  and  the  implementation  of  the  Habitats 
Directive.  In  the  area  of  finance,  France  is  leading  projects  to  develop  a  state  aid 
monitoring  system  and to monitor foreign  aid, while Austria  and the UK  are working 
with  their  Hungarian  partners  to  adapt  the  tax  system.  The  UK  is  leading  a  project 
with  Germany  and Denmark  to support  the state aid office.  Justice  and Home  Affairs 
projects  include  work  on  the  fight  against  organised  crime,  development  of  capacity 
to  deal  with  asylum  and  refugees,  border  management  and  the  training  of  law 
enforcement  bodies.  Work  is  also  underway  on  Single  Market  issues,  notably  the 
development  of a market  surveillance  system in partnership  with the UK, Sweden  and 
France,  and  of  product  testing  and  certification  bodies. France  is  leading  a project  to 
establish  a  framework  for  regional  development  and  to  prepare  for  pre-accession 
structural  assistance. 

Twinning is foreseen  for  six projects  under the Phare  1999 programme  and will  cover 
the  fields  of  agricultural  statistics,  financial  services  supervision,  management  of 
public finances, taxation  harmonisation, asylum, and public  health. 

The negotiations/screening  process 

The analytical  examination  of the acquis (screening) has been  concluded  for  Hungary 
except  with  regard  to the  agricultural  acquis, which  is foreseen  to  be  held  in  autumn 
1999. 

Since the opening  of  accession  negotiations  in March  1998, Hungary  has  participated 
in  two  rounds  of  Ministerial  negotiations.  As  a  result  of  these  negotiations  eight 
chapters have been provisionally  closed  (science and research, education  and training, 
small  and  medium-sized  enterprises,  statistics, industrial  policy,  telecommunications, 
fisheries  and consumer protection)  while  seven  (CFSP, company  law, free  movement 
of  goods,  culture  and  audio-visual  policy,  external  relations,  customs  union, 
competition policy) remain  open. 

10 

B.  Criteria  for  membership 

1. 

Political  Criteria 

Introduction 

In  its  first  regular  report  on  the  progress  made  by  Hungary  in  its  preparations  for 
membership, the Commission concluded that: 

"Developments  in  Hungary  confirm  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. 
Continued  attention  needs to be paid to combating  corruption  more effectively  and to 
improving the situation of the Roma." 

In  the  1998  Accession  Partnership  with  Hungary  "Further  efforts  to  improve  the 
situation of the Roma" were also mentioned as a medium-term  priority. 

Recent 

developments 

In March  1999, Hungary became a member of the North  Atlantic Treaty  Organisation 
(NATO).  In  November  1998, Hungary  took  over  the  Presidency  of  the  Council  of 
Europe for  six  months.  In  October  1998, local  elections  were held for  the third  time 
since  1989. These included  the election  of  mayors, local  councils, county  assemblies 
and  local  minority  self-governments.  Following  an  amendment  to  the  national 
minority law, all  13 minorities have elected National Minority  self-governments. 

1.1  Democracy and the Rule of Law 

As  mentioned  in  the  last  Regular  Report,  Hungary  has  achieved  stability  of 
institutions  guaranteeing  democracy  and  the  rule  of  law.  This  section  therefore 
describes only the most significant  developments of the past year. 

The  Parliament 

Some  preparatory  steps  were  taken  to  ensure  minority  representation  in  Parliament,  a 
right laid down in the Constitution and in the law on Minorities.  However, no legislation 
on minority representation has yet been passed. 

The  Executive 

The  Government  adopted  a new  development  programme  with  the  aim  of  enhancing 
public  administration  in  four  major  areas:  the  development  and  strengthening  of 
regional  public  administration,  the  de-centralisation  of  tasks  from  the  national  to  the 
regional level, the modernisation  of services for the public  and career development  for 
civil  servants  including  financial  incentives  and  training.  The  programme  also 

11 

foresees  a  comprehensive  review  of  salaries  which  will  introduce  performance  -
related pay. 

The Judiciary 

Vacancies in the Constitutional Court are filled  as they arise ensuring that the number of 
judges is always above the constitutional minimum. 

The judiciary continues to function  satisfactorily,  albeit slowly, due to the high case load. 
Whilst  courts  of  first  instance  were  able  to  reduce  the  backlog  of  cases  registered  in 
recent years, the number of appeal cases at the Supreme Court is increasing (see chapter 
4  on  administrative  capacity). In  general,  most  criminal  cases  take more than  one  year, 
whereas civil cases are usually dealt with more rapidly.  Following the judicial reform of 
1997,  technical  facilities  at  the  courts  have  been  modernised  and  auxiliary  staff 
increased. 

Since  1998 the number of posts forjudges  has remained constant. The judicial reform of 
1997  also  resulted  in  improved  pay  for  judges  and  regular  training  programmes 
organised by the National Judicial Council and the Law Training Institute. In  1998 some 
500  judges  participated 
in  training  programmes  on  European  Integration  and 
Community Law. Judges are obliged to attend postgraduate courses on EU law to which 
they are invited. 

Anti-Corruption  measures 

Hungary  continues  to  face  problems  with  corruption.  The  fight  against  corruption  is 
one of the main priorities of the  Government. 

The following  measures have been taken to tackle the problem. 

•  New  rules  were  introduced  with  the  modification  of  the Penal  Code  which  came 
in  March  1999.  These  strengthened  public  safety  and  made 

into  effect 
punishments  stricter. 

•  New  anti-corruption  units  have  been  set  up  at  the  National  Headquarters  of  the 
Hungarian  Police  and  at every  regional  border  guard  directorate. In  addition,  the 
Hungarian  Border  Guards  concluded  an  anti-corruption  co-operation  agreement 
with  their  Romanian  counterparts  to  reinforce  controls  in  the  Hungarian-
Romanian  border region. 

•  The  Government  is  carrying  out  a  complex  review  of  all  legislation  in  order  to 
identify  loopholes  which  provide  potential  for  corruption.  This review  will  need  to 
be followed  up by reinforcing inadequate legislation. 

•  The  Council  of  Europe  Criminal  Law  Convention  on  Corruption  was  signed  by 
Hungary in April  1999.  In May  1999, Hungary  signed an agreement in the context 
of  the  South  East  European  Co-operation  Initiative  to  tackle  cross  border  crime 
and corruption. 

•  The  recommendation  of 

in  International  Business 
the  OECD  on  Bribery 
Transactions (OECD anti-Bribery Pact) was ratified by Hungary in September 1998. 

12 

According  to  the  report  of  the  Chief  Prosecutors  Office  there  were  455  registered 
cases of corruption  in  1998 representing  a 4% increase against  1997. 

1.2  Human  Rights  and  the Protection  of Minorities 

As mentioned in the last Regular Report, Hungary broadly continues to respect  human 
rights  and  freedom  and  has  already  acceded  to  the  most  important  human  rights 
conventions  (see  annex).  The  following  section  concentrates  only  on  major 
developments in the past year relevant to the Copenhagen  criteria. 

In spring  1999, Hungary  promulgated  the European  Charter  for  Regional  or Minority 
Languages  and the Council  of Europe's  Framework  Convention  for  the Protection  of 
National  Minorities.  In  March  1999, the  third  Protocol  to  the  General  Agreement  on 
Privileges  and  Immunities  of  the  Council  of  Europe  came  into  force.  Hungary  also 
adhered to the Council  of Europe Resettlement Fund for National  Refugees. 

Hungary  ratified  the  European  Social  Charter  of  the  Council  of  Europe  in  July  1999, 
although  a  number  of  articles  have  not  been  ratified  because  of  their  financial 
implications.  The  ratification  of  the  Charter  is  a  major  step  in  the  alignment  of 
Hungarian  social legislation  with the Treaty of the European  Union. 

Civil and Political  Rights 

Hungary respects the freedom  of the press.  Nonetheless, there are some concerns  about 
the  government's  perceived  wish  to  be  too  directly  involved  in  the  operation  of  the 
media, by buying a newspaper,  for  example. The board of trustees of the public  service 
TV is currently  formed  solely  by  pro-Government  members,  despite  the  fact  that  the 
Media Law provides for a politically balanced distribution  of seats. 

The  new  asylum  law  of  March  1998  resulted  in  a  substantial  improvement  in  the 
asylum  system  in  Hungary.  However,  following  the  lifting  of  the  geographical 
reservation  to the Geneva Convention  as a result of the new  law, asylum  seekers  from 
any  country  may  now  apply  to  the  Hungarian  authorities  for  protection.  As  a 
consequence, the number  of  asylum  seekers has  grown  significantly.  This has lead to 
an  overburdened  administration  and  a  shortage  of  judges  able  to  hear  appeals  in  a 
reasonable  time.  Asylum  seekers  and  refugees  are  nevertheless  accommodated  in 
reception facilities  which correspond to international  standards. 

Illegal  migrants,  on  the  other  hand,  are  placed  in  community  shelters  until  the  Court 
decides  on  their  expulsion.  In  some  community  shelters,  hygiene  and  living 
conditions  are  sub-standard.  Recommendations  made  by  the  Ombudsman  for  Civic 
Rights led to the closure or up-grading of a number of community  shelters. 

Official  Hungarian  statistics  show that in  1998, over 30,000 persons  were involved in 
illegal  migration  thereof  around  18,000  persons  in  illegal  border  crossing.  A  new 

13 

Penal Code recognising trafficking  in human beings entered into force  in March  1999. 
No statistics for this traffic  are yet available. 

The  procedure  for  illegal  migrants  is  to  a  large  extent  aligned  with  Community 
standards. The Supreme  Court  is the final  court  of  appeal. In  spite of the new  asylum 
law,  some  problems  remain.  For  example,  there  is  a  lack  of  clear  responsibilities 
between  the  Office  of  Refugee  and  Migration  Affairs  and  the  other  authorities 
involved  and  there  remains  limited  legal  remedy  in  cases  of  expulsion  or  re-
admission.  In  view  of  the  growing  flow  of  asylum  seekers, further  efforts  are  needed 
to  upgrade  shelters  and  to  increase  reception  capabilities.  Further  planning  and 
financial  resources should therefore  be made available. 

The  UNHCR  Branch  Office  in Budapest  awarded  its  1998 Menedek  (Refugee)  Prize 
to the Office  of the Parliamentary  Commissioner  for Human  Rights  in recognition  for 
its  work  in  general  and  efforts  on  behalf  of  aliens,  asylum-seekers  and  refugees  in 
particular. The Refugee  Prize was established in  1995 for outstanding contributions in 
the field  of human rights. 

Although  the  authorities  have  dealt  with  specific  cases,  reports  of  police  abuse  of 
suspects continue. Many ordinary people are also reported to be ill-treated by the police 
in the course of simple identification  checks. Persons detained by police complain  about 
abuse and harassment. 

Prisons  are  generally  over-crowded.  The  prison  population  exceeds  capacity  by 40% 
and the situation  in many of the prisons is still of concern, (reported by the Ombudsman 
for Civic Rights) 

Restrictions on the purchase of land by foreigners exists only with regard to arable land. 

Economic,  Social  and  Cultural  Rights 

Services  for  disabled  people  remain  limited.  Government  legislation  sets  out  that  all 
public  buildings  need  to  be  made  accessible  by  2009.  Companies  employing  over  20 
persons are required to reserve 5% of posts for people suffering  some form of handicap. 

A new tri-partite structure for reconciliation, social dialogue and negotiation has been set 
up  in  Hungary  at  the  beginning  of  1999  (see  chapter  3  on  employment  and  social 
affairs). 

Minority  Rights  and  the  Protection  of  Minorities 

Following  the  general  elections  in  Slovakia  in  September  1998,  the  Basic  Treaty, 
concluded  in  1996,  was  finally  fully  implemented  in  November  1998.  A  joint 
Hungarian-Slovak  committee  supervising  the  implementation  of  minority  issues  as 
specified  in the Basic Treaty began operations. Both the Hungarian  minority in Slovakia 
(over 550,000 people) and the Slovak  minority in Hungary  (around  100,000 people) are 
represented in this joint committee. 

14 

Whilst the situation  of other minorities  does not pose any particular problem, continued 
attention  needs  to  be  paid  to  the  respect  of  the  human  rights  of  the  Roma  by  the 
Hungarian  authorities  (the  Roma  minority  numbers  between  400,000  and  600,000 
people). While their situation has not worsened, it has not improved markedly. 

Roma  continue  to  suffer  widespread  prejudice  and  discrimination  in  their  daily  lives. 
They  face  discrimination  in  access  to  education,  employment,  public  institutions  and 
services. Their  health  and  housing  situation  remain  well  below  those  of  the  rest  of  the 
population.  More 
throughout  Hungary. 
International and non-governmental  organisations reported institutional prejudice  against 
Roma,  and  the  use  of  force  by  the  police.  According  to  the  Hungarian  Government, 
identifying  the  ethnicity  of  offenders  is not  allowed  under  the  data  protection  law  and 
thus no statistical evidence on discrimination is available. 

than  150  segregated  schools 

remain 

In  order  to  tackle  prejudices  between  the  Roma  and  the  police,  Government  set  up  a 
specific programme in April  1999. Under the programme, police will have an obligation 
to receive representatives of the local Roma self-government  in case of complaint. 

The  Ombudsman  for  Minority  Rights  has  been  critical  about  labour  market  access  for 
Roma.  He  stated  that  there  is  no  de jure,  but  there  is  de facto  discrimination  against 
Roma  people  looking  for  a job.  To  remedy  the  situation,  the  Ombudsman  proposes 
obliging the labour centres to report on cases of discrimination  against Roma, as well as 
excluding employers engaged in such practices from public works contracts. 

The  Government  has  adopted  a  revised  medium-term  action  programme  aimed  at 
improving  the  living  conditions  of  the  Roma.  The  programme  puts  particular 
emphasis  on  improved  education  and  employment  possibilities  through  extended 
scholarships  along with  social, health  and housing measures  and agricultural  projects. 
It contains  a communication  strategy  and anti-discrimination  measures. Yearly  action 
programmes  for  the  implementation  of  the  measures  defined  in  the  medium-term 
programme  are worked  out  in coordination  with  the National  Roma  Self-Government 
and  the  Office  for  National  and  Ethnic  Minorities.  Line  Ministries  will  have to  plan 
separate  budget  items  for  the  implementation  of  the  different  measures  within  the 
action  programme.  An  interministerial  Committee  for  Roma  affairs  headed  by  the 
Minister  of  Justice  will  be  responsible  for  handling  Roma  issues  and  for  supervising 
the implementation  of the action programme. 

Public  funding  for  the  Roma  in  1999  included  €  0.5  million  for  the  National  Roma 
Government  and around € 3 million for local minority  self-Governments.  In addition, 
€ 2 million  was  provided  by  the  state  for  Roma  Foundations.  Additional  support  for 
the  Roma  minority  was  given  through  the  Ministry  of  Education's  public  works 
programmes  and  in  the  framework  of  the  development  of  cultural  institutions  and 
services for Roma. 

Following  the elections  of  the  local  minority  self-governments,  the  number  of  Roma 
self-governments  has  almost  doubled.  This  trend  can  be  interpreted  as  an  increasing 
participation  of  Roma  in  public  life.  Specific  Roma  Community  centres  (established 
with  financial  support  from  the  State  budget)  support  local  communities  and 
contribute to preserving Roma culture. 

15 

Despite  the  steps  taken,  the  situation  of  the  Roma  remains  very  difficult.  Further 
attention  needs to be paid to fighting  the prejudices  of the majority  of  the  population, 
to  ending  discriminatory  practices  in  public  services,  and  to  the  full  enforcement  of 
the revised medium term action programme  at regional  and local  level. These  actions 
need to be accompanied  by adequate budgetary provisions. 

1.3  General  evaluation 

Hungary fulfils  the Copenhagen  political  criteria.  Two areas  still need attention.  The 
first  is the situation  of the Roma, where the government  is beginning to implement  its 
medium-term  Roma  action  plan  and  needs  to  make  available  adequate  budgetary 
resources.  The  second  is the fight  against  corruption  where recent  efforts  need  to be 
re-inforced. 

16 

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". 

This finding  was confirmed  in the  1998 Regular Report. 

In  examining  the  economic  developments  in  Hungary  since  the  Opinion,  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: 

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  and the  1998 Regular Report. 

2.2 Economic developments 

Since  mid-1998,  economic  activity  in  Hungary  has  remained  strong,  inflation  has 
fallen  markedly  and  employment  has  grown  for  the  first  time  this  decade.  The 
increase  of  domestic  demand  and  the  deterioration  of  the  international  environment 
have led to a widening current  account deficit.  In the wake of Russian  crisis in August 
1998, the National Bank of Hungary  successfully  defended  the country's crawling peg 
exchange rate regime. The  1998 fiscal  target was met, but the government's  budgetary 
performance  in  1999  has  been  a  cause  of  increasing  concern.  On  structural  reform, 
Hungary has continued to make  progress. 

Macroeconomic 

developments 

In  1998,  the  Hungarian  economy  expanded  by  5.1%  and  GDP  growth  became 
increasingly driven  by domestic demand. The recovery of private consumption,  which 
grew  by 3.8%, strengthened  throughout  the  year,  and retail  sales  went  up for  the  first 
time since  1993. Investment  continued to be strong; capital  expenditure  on  machinery 
increased by more than  20%. Exports  also expanded  strongly in  1998, by  16% in real 
terms,  but  their  growth  dropped  from  nearly  30%  year-on-year  in  the  first  quarter  to 
less  than  10% in  the  fourth.  This  sharp  fall  is  only  partly  explained  by  the  drop  in 
sales  to  Russia.  Other  factors  were  the  general  slowdown  in  world  demand,  the 

17 

increased  competition  from  Asian  producers  on  third  markets  and  the  slower 
expansion  of  Hungary's  export  capacity  compared  to  the  past.  Rising  domestic 
demand for investment  goods and consumer durables, on the other hand, led to higher 
imports. They  grew  much  faster  than  exports  for  the  first  time  since  the  stabilisation 
package  of  1995.  In  the  last  quarter  of  1998,  however,  year-on-year  import  growth 
dropped markedly, as investment and consumption  growth started to decline. 

Value added growth in  1998 has largely followed  past trends; it increased by  12.1% in 
the construction  sector, by 7.5% in transport  and telecommunications  and by  11.8% in 
the industrial  sector. Food processing  and agricultural  value  added contracted  slightly 
in  1998, as a small increase in livestock production  was offset  by a fall  in crop  output. 
In the first  few  months of  1999, year-on-year industrial  output growth fell  below  10%. 

Unemployment  fell  to 7% in the last quarter of  1998 as a result of the first  increase in 
Hungarian  employment  of the past decade. In the first  quarter of  1999, it edged  up to 
7.4% of the labour force. 

In  1998 the current  account  deficit  increased  to  almost  5% of  GDP - double  its  1997 
level  -  and  it  continued  to  widen  during  the  first  quarter  of  1999,  albeit  at  a  slower 
pace. This development  was  driven  by two factors:  the divergent  trends  in  the export 
and  import  of  goods  and  services,  and  the  rise  in  profit  remittances  by  foreign 
companies.  Non-debt  creating  capital  inflows  (equity  and  FDI)  were  insufficient  to 
cover the  country's  rising  external  financing  needs, causing  the  stock  of  foreign  debt 
to  increase  for  the  first  time  since  1996.  Nevertheless,  debt  service  indicators 
continued to improve. 

Inflation  fell  sharply to an average of  14.3% in  1998, dropped to single-digit  levels in 
January  of  this  year,  and  stood  at  8.9%  year-on-year  in  May.  This  deceleration  was 
initially due to a reduction  in the rate of increase of food,  energy and regulated prices. 
However, more recently fuel  and energy prices have  started pick up. The reduction  of 
inflation  was  also  helped  by  the  slowdown  in  nominal  wage  growth  and  the 
diminishing pace of the devaluation  of the forint.  Real wage growth  was again  higher 
than  planned -  at 3.6% -  but  any inflationary  impact of  wage increases  was  offset  by 
more rapid productivity growth. 

The  National  Bank  of  Hungary  (NBH)  faced  new  challenges  in  the  wake  of  the 
Russian  crisis. The widening of the current  account deficit  and the unfavourable  fiscal 
performance  in  1999  up to  now  have  contributed  to  an  increase  in  the  risk  premium 
on  assets  denominated  in  forint.  Nominal  interest  rates  have  continued  to  decline, 
with the notable exception  of  a spike in bond  yields and lending rates at the height of 
last year's international  financial  turmoil. Credit growth remained  buoyant  throughout 
1998, reversing past trends by rising in real terms. Its most  dynamic  part  is still  loans 
to enterprises, but from  mid-1998 credit growth to households also turned positive. 

Hungary  has continued  to  operate the crawling  peg  exchange  rate regime  established 
in  1995, replacing  the D-mark  by the euro in the currency  basket  from  January  1999. 
When  the  forint  dropped  to  the  weakened  within  its  narrow  fluctuation  band  in 
September  1998, the NBH reduced the monthly rate of devaluation,  intervened on the 
exchange market  and, eventually  raised official  interest rates. This  successful  defence 
of  the  forint  was  followed  by  a return  of  official  rates to  their  old  levels  and  by  new 

18 

cuts in the rate  of devaluation  (by 0.1  percentage  points  in January,  July  and  October 
1999;  it  now  stands  at  0.4%  per  month). Last  year,  the  real  effective  exchange  rate 
depreciated  as a result of the steeper-than-anticipated  decline in  inflation. 

With  an  estimated  general  government  deficit  below  5%  of  GDP  in  1998, the  fiscal 
authorities  consider  that  they  have  met  their  target.  As  in  the  last  two  years,  higher-
than-expected  central  government  revenues  offset  a  higher-than-targeted  deficit  on 
social  security.  Nevertheless,  for  the  second  time  in  a  row,  the  primary  surplus 
declined  and the operational  deficit  (the fiscal  deficit  net  of  all  the effects  induced  by 
inflation)  worsened. The budget for  1999 plans a general  government  deficit  of 4% of 
GDP  with  a  slight  increase  in  the  primary  surplus.  By  May,  however,  the  general 
government  deficit  already  accumulated  to  more  than  85% of  its  annual  target.  The 
Health  Fund  continues  to  overshoot  and  the  budgetary  performance  of  the  central 
government  has  also  been  disappointing  so  far  due  to  lower-than-expected  VAT 
receipts and high spending on agricultural  subsidies. 

The  government  has  taken  a  series  of  measures  in  an  attempt  to  address  the  fiscal 
weakness  evident  during  the first  half  of  1999.  In  February  the  government  decided 
to  freeze  the  recourse  to  a  special  contingency  reserve,  equivalent  to  some  0.4%  of 
GDP. In July, the  government  announced that  it would  leave both  VAT  and  personal 
income  tax  rates  unchanged  during  2000, while  the  rules  on  VAT  reclaims  would  be 
tightened.  In  an  effort  to  compensate  for  the  increased  costs  of  changes  in  sickness 
benefit,  the  government  also  announced  that  it  would  introduce  a new  tax  on  certain 
types of insurance. 

Hungary 

1995 

1996 

1997 

1998 

1999 latest 

Main Economic Trends 

19 

Real  GDP growth rate 

Inflation  rate 
-  annual  average 
-  December-on-December 

Unemployment  rate, end-year 

-  ILO definition 

per cent 

per cent 
per cent 

per cent 

1.5 

1.3 

4.6 

5.1 

3.8 

Jan-Mar 

28.3 
28.4 

23.5 
19.7 

18.3 
18.5 

14.3 
10.4 

14.9 
8.9 

Jan-May 
May 

10.2 

9.9 

8.7 

7.8 

General  government budget balance 

per cent of GDP 

-6.6 

-3.2 

-5.4 

Current account balance 

Foreign debt2 
-  debt export ratio 

-  gross foreign  debt 

per cent of GDP 
million  ECU/€ 

-5.5 
-1837 

-3.7 
-1319 

-2.1 
-840 

-4.8 
-2059 

-759 

Jan-May 

per cent 
per cent 
billion ECU/6 
billion  ECU/€ 

186 

144 

24.5 

21.7 

97 
74 
20.9 
18.7 

104 
72 
23.9 
18.4 

Foreign direct investment  net  inflow 
-  according to EBRD 
-  balance of payments data 

per cent of GDP 
million ECU/€ 

10.0 
3408 

4.4 
1585 

3.6 
1464 

3.1 
1293 

415 

Source:  National sources, OECD external Debt Statistics, IMF Government Finance Statistics, EBRD. 

Structural 

reforms 

A few  large enterprises  are still  listed  for  privatisation,  and  the  state  is holding  some 
minority  stakes. At the end  of  1998, the privatisation  agency  held  stakes  in some  388 
enterprises,  150 of  which  were  undergoing  bankruptcy  proceedings; two-thirds  of the 
privatisation  agency's  total  equity  portfolio  is  linked  to  enterprises  which  are  to 
remain  under  state  ownership.  The  privatisation  agency  is  now  also  responsible  for 
managing  the  assets  which  were  previously  in the  hands  the  social  security  funds,  as 
well  as  for  the  shareholdings  of  the  state  in  the  banking  sector.  The  latter  increased 
significantly  when  the  bailout  of  Postabank  -  the  second  largest  commercial  bank  at 
the end of  1997 -  returned it to state ownership. The total revenues from  divestiture in 
1998  amounted  to  nearly  €48  million.  In  May  1999,  a  5.7%  minority  stake  in  the 
telecommunication  company MATAV was sold for € 300.2 million. 

At the end of  1998, the Ministry  of Finance provided  some Euro 600 million  (roughly 
1.5%  of  GDP)  for  a  comprehensive  bailout  of  Postabank  in  order  to  prepare  it  for 
restructuring  and  re-privatisation.  The  smaller  Realbank  was  also  hit  by  a  solvency 
crisis.  After  being  taken  over  by  the  National  Deposit  Insurance  Fund  and 
insufficiently  re-capitalised, it was filed  for liquidation  in early  1999. Furthermore, six 
small  brokerage  firms  went  bankrupt  as  the  sharp  drop  in  the  stock  exchange  index 
following  the  Russian  crisis  revealed  weaknesses  in  their  operation.  In  the  area  of 

The first row is taken from  national sources. The data in the second row are the result of 

cooperation  between BIS, IMF, OECD and World Bank. This source should be more reliable in terms 
of broader coverage, avoidance of double counting, etc., as well as improved  timeliness. 

20 

financial  sector  development,  the  introduction  of  universal  banking  at  the  beginning 
of  1999 is worth noting. 

The  1999  budget  law  contains  a  number  of  noteworthy  improvements,  such  as  the 
combined  collection  of  tax  and  social  security  obligations  and  the  incorporation  into 
the state budget  of four  of the six remaining  extra-budgetary  funds.  Over the medium 
term,  the  government  envisages  a  further  reduction  in  the  tax  burden  on  labour  by 
cutting the marginal  rates of personal  income tax  and by replacing  general  tax  credits 
with specific  ones, such as those for children. As a first  step, the rate of social  security 
contributions  was  also  cut,  accompanied  by  a  broadening  of  the  social  security  tax 
base. On  the expenditure  side, mean  testing  for  family  allowances  was  abolished  and 
exemptions  for  higher education  fees  were re-introduced.  The mandatory  contribution 
rate  to  the  second  pillar  was  left  unchanged,  even  though  the  pension  reform  law 
envisaged  a rise from  6% to 7%. On the other hand, the indexation  of pensions to the 
previous year's nominal  wage increase was abolished ahead of schedule. 

Nevertheless,  the new  administration,  has been  slow  to  spell  out  its  structural  reform 
agenda  in  detail.  Plans  for  the  overhaul  of  the  health  sector  and  the  approval  of  an 
economic strategy have suffered  delays. This has pushed back the revision of the Joint 
Assessment of medium-term economic policy priorities with the Commission. 

Overall,  Hungary  has  made  further  progress  on  structural  issues,  particularly  in  the 
area of fiscal  reform.  Reform  within  the state owned enterprise  sector has  continued, 
but the pace of privatisation  is slowing as an inevitable consequence  of the  significant 
progress made in previous  years. However, progress on health  sector reform  has been 
disappointing,  while  the  government's  decision  not  to  increase  contributions  to  the 
second pillar threatens the long term viability of the new pension  system. 

Main Indicators of Economic Structure in 1998 

Population  (average) 

thousand 

GDP per head 

PPS-€ 
per cent of 
EU average 

10114 

9800 
49 

21 

Share of agriculture3 in: 
-  gross value added 
-  employment 

per cent 
per cent 

Investment-to-GDP ratio  per cent 

Gross foreign  debt/GDP 

per cent 

Exports of goods & 
services/GDP 

per cent 

Stock of foreign  direct 
investment, according to 
EBRD 

billion € 
€ per head 

5.96 
7.5 

22.26 

47.0 

55.0 

14.1 
1395 

Source: National sources, OECD external Debt Statistics, IMF,  EBRD 

2.3  Assessment  in  terms  of  the  Copenhagen  criteria 

The  existence  of  a functioning  market 

economy 

As  set  out  in  Agenda  2000, 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. 

Last  year's  change  in  government  did  not  lead  to  a  fundamental  reorientation  of 
economic  priorities,  confirming  the  existence  of  a  broad  consensus  about  essential 
economic  policy  issues.  However,  the  decision  to  leave  the  mandatory  contribution 
rate  to  the  second  pillar  of  the  new  pension  system  unchanged,  as  opposed  to  the 
provisions of the pension reform  law, casts some doubt on the commitment  of the new 
government  to  a  key  reform  legacy.  The  new  administration  has  sketched  some 
tentative proposals for  an in-depth reform  of the health  sector  and has  already  carried 
out an institutional  reform  of the social dialogue. 

Even  though  external  financing  has  so far  been  readily  available, the current  account 
deficit  should  be  brought  back  to  a  level  compatible  with  a  non-increasing  ratio  of 
foreign  debt  to GDP. On  this point,  fiscal  policy  has  been  less  supportive  than  in  the 
past  and efforts  towards fiscal  consolidation  should not be relinquished.  Although  the 
still high government  debt has continued to fall, the decline in the primary  surplus has 
contributed  to  the  deterioration  of  the  external  accounts  in  1998.  Co-ordination 
between Hungarian  policymakers  is good, as shown by their adequate response to last 
Autumn's financial  turmoil. 

3  Agriculture, hunting, forestry  and  fishing. 

22 

Market  mechanisms  are  working  in  most  sectors  of  the  Hungarian  economy, 
underpinned  by  general  economic  stability.  The  large  majority  of  prices  are  freely 
set; regulated prices account for  16.5% of the consumer  price index. Moreover,  at the 
end of  1998, the private sector accounted for  some  80% of GDP and the  privatisation 
process  is  nearly  completed.  Only  the  power  transmission  company  MVM  and 
Postabank  are still up for privatisation. Yet, the government's  decision  to keep a stake 
in a number of enterprises,  spanning  a wide range of  sectors, is in  sharp contrast  with 
the earlier  accomplishments. 

Land markets  are developing:  a large  part of the  land  used by larger individual  farms 
and  companies  is  leased,  and  part  even  purchased.  Lease  contracts  grow  in  terms  of 
duration  and  sophistication,  improving  tenure  security  for  the  farms  and  thereby 
incentives  for  investment.  The  main  form  of  agricultural  support  is  market  price 
support policies, as well as credit subsidies and export  subsidies. 

The establishment  of new firms  in Hungary remains buoyant, with the total number of 
entries  increasing  by  11%  in  1998.  Bankruptcy  procedures  also  continue  to  be 
relatively  efficient.  Between  1992  and  September  1998,  there  were  nearly  fifty 
thousands filings  for liquidation; the court backlog has been  reduced to less than 20% 
of all cases filed  over the years. 

Contract  enforcement  in  Hungary  is  good  and  investors  generally  consider  the 
business  climate  to  be  positive.  The  regulatory  framework  for  the  largely  privatised 
utility  sector is  advanced,  although  there  remains  a need  to fine-tune  regulations  and 
build up experience in  implementation. 

The  financial  sector  has  continued  to  develop,  but  the  size  of  its  operations  leaves 
much  scope for  further  improvements  in intermediation.  Competition  among banks  is 
strong;  the  spread  between  lending  and  deposit  rates  has  fallen  to  3.8%  in  1998. 
Operating  costs  remain  high  and  profitability  varies  considerably,  so  that  further 
consolidation  of the banking  sector is  likely. The  share  of  classified  assets fell  to 7% 
in  1998,  while  the  average  risk-weighted  capital  adequacy  ratio  was  13% for  large 
banks  and  17%  for  medium-sized  ones.  Credit  to  households  and  enterprises  is 
growing,  but  the  access  of  SMEs,  municipalities  and  house  buyers  to  local  banks 
remains  difficult.  Similar  considerations  apply  to  the  non-banking  financial  sector. 
The insurance  sector is growing rapidly  from  a low  base, while institutional  investors 
are expected to play an increasing role with the emergence of the new pension  system. 
The combined  assets of mutual  and pension  funds  amount to some 4% of  GDP at this 
point  in time. The capitalisation  of  the stock exchange  is equivalent  to  12% of GDP, 
and its growth is driven by privatisation rather than new equity issues. 

Given  the  pace  of  development  of  the financial  sector,  there  is  a need  to  strengthen 
the supervision  and fill  in the regulatory  gaps of companies  which  operate  on  various 
segments  of  the financial  markets. In  particular,  the  authorities  should take  great care 
to  warrant  the  adequate  and  independent  supervision  of  new  pension  providers,  and 
avoid  that  modifications  of  the  original  pension  reform  plans  undermine  the  trust  of 
savers and pension funds  in the new institutional  arrangements. 

Hungary  is  a  functioning  market  economy  and  the  legal  and  institutional  structures 
which  underpin  the market  economy  have been  further  strengthened.  There  remains, 

23 

however,  a need  to  fine-tune  financial  regulation  and  to  enforce  its  implementation. 
The  sustained  pursuit  of  reform  in  a  stable  macroeconomic  environment  has  greatly 
enhanced  the  functioning  of  the  Hungarian  market  economy.  To  preserve  these 
conditions, the government should clarify  its health  and social  security reform  agenda 
and take the actions needed to ensure fiscal  consolidation  in the medium term. 

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

As  set  out  in  Agenda  2000,  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.  Both  the  volume  and  the  range  of  products  traded  with  EU 
Member States provide evidence of this. 

Over  the  last  decade,  the  competitiveness  of  the  Hungarian  economy  has  radically 
improved  as  a  result  of  widespread  enterprise  restructuring,  extensive  green-field 
investment  and  high  FDI inflows.  The  early  establishment  of  a  functioning  market 
economy  has been  instrumental  in achieving this result.  Since the adjustment  package 
of  1995, macroeconomic  conditions have also been  favourable. 

Investment  has steadily risen to 23.5% of GDP last year. Hungary has an impressively 
long  record  in  attracting  FDI,  which  is  associated  with  beneficial  transfers  of 
technology  and  know  how.  Between  1989  and  1998, Hungary  has  received  foreign 
direct  investment  inflows  amounting  to  €  14.1  billion.  However,  since  there  is  a 
growing  need  for  returns  on  the  increasing  stock  of  FDI,  a  larger  part  of  domestic 
savings  should  be  geared  towards  investments  needed  to  catch  up  faster  with  EU 
member states. 

To a large extent, Hungary has established the institutional  infrastructure  and  initiated 
the  reforms  required  to  reap  the  full  benefits  of  private  initiative  in  a  wide  range  of 
includes  utility  services,  pension  provision  and  research  and 
activities.  This 
development.  Yet,  Hungary  still  faces  many  difficult  challenges,  among  which  the 
reform  of  the  health  sector.  The  combination  of  a weak  institutional  framework  and 
adverse demographic  trends will lead to a worsening of the health  situation. A lack of 
reform  in  this  area  would  have  financial  consequences,  posing  a serious  threat  to the 
long-term  sustainability  of  the  public  finance  situation,  as  well  as  depressing  effects 
on  productivity. 

Thanks  to  its  fairly  liberal  trade  regime  and  its  comparative  advantage  in  human 
capital intensive  goods, Hungarian  exporters have already reached  an adequate  degree 
of  competitiveness  vis-a-vis  EU producers. They  sell  more than  70% of their  exports 
on  the  EU  markets,  which  in  return  are  the  source  of  more  than  60%  of  Hungarian 

24 

imports.  Much  of  this  is  intra-industry  trade,  in  particular  in  manufacturing  and, 
increasingly,  the  machinery  industry.  This  trend  is  supported  by  a  continuing  real 
depreciation  of  the  effective  exchange  rate  measured  in  unit  labour  costs.  Sustained 
investment  and  advanced  restructuring,  often  backed  by  foreign  capital  and 
technology,  have  led  to  a re-orientation  of  trade  towards  higher  value-added  export 
goods.  Multinational  enterprises  gradually  integrate  a  larger  share  of  the  Hungarian 
economy  into  the  global  network  of  production  and  distribution  by  establishing 
subsidiaries, taking ownership stakes in Hungarian  firms  and developing  a local chain 
of suppliers. 

Further improvements  of the local education  system and further  reductions  in the high 
non-wage  labour  costs,  notably  by  moving  ahead  with  the  reform  of  the  health 
system, are needed to preserve the smooth functioning  of the labour market. 
In  combination  with  a  fully  operational  SME  strategy,  this  would  also  help  the 
development of small and medium enterprises. 

The  number  of  SMEs  has continued  to exhibit  dynamic  growth.  They  now  generate 
45%  of  Hungary's  GDP  and  employ  70%  of  the  workforce.  Most  of  the  SMEs 
operate  in  the  services  and  construction  sectors  and  have  only  a limited  involvement 
in  foreign  trade.  However,  micro  and  small  enterprises  face  difficulties  which  are 
partly  related  to  fairly  high  administrative  burdens  (complexity  of  rules)  and  to  tax 
burdens which  are much  higher than  for  large enterprises.  The medium  term strategy 
adopted  in  December  1998  will  attempt  to  address  these  problems,  in  particular  by 
improving both the regulatory framework  and the access of SMEs to  finance. 

Individual  farms  now  use  more  than  half  of  agricultural  land  in  Hungary,  but  co 
operatives  and  companies  remain  important.  A  new  form  of  agricultural  labour 
subsidies was introduced in  1998 to stimulate agricultural  employment. 

Hungary  should  be  well  able  to  cope  with  competitive  pressure  and  market  forces 
within  the Union  in the medium term, provided  the conditions  supporting  investment 
growth  and restructuring  remain  in place. It has acquired  high  credentials  for  efficient 
macroeconomic  management,  which  has  allowed  high  inflows  of  FDI,  leading  to  a 
modernisation  of  the  economy  and  the  resulting  trade  integration  in  the  EU.  This 
reputation  should not be jeopardised. Urgent measures  are needed to reform  the health 
system and to put public finance  on a sounder footing.  This will also foster  the  further 
development  and competitiveness  of the enterprise  sector. 

2.4 General  evaluation 
Hungary  is  a  functioning  market  economy  and  the  legal  and  institutional  structures 
which underpin  the market economy have been further  strengthened.  It should be able 
to  cope  with  the  competitive  pressure  and  market  forces  within  the  Union  in  the 
medium term, provided it continues to make further  progress in structural  reforms. 

Macroeconomic  stability  has  been  maintained,  inflation  has  fallen  and  economic 
growth  has  continued.  However,  the  widening  current  account,  if  unchecked,  could 
threaten  the macroeconomic  gains  achieved  in recent  years.  Progress  has been  made 
in  a number  of  structural  areas, most  notably  budgetary  reform,  pension  reform,  and 

25 

privatisation. However,  recent decisions  affecting  the pension  system  have called  into 
question the government's commitment to pension  reform. 

The deterioration  of the fiscal  deficit  needs to be  addressed.  Priority  should  be  given 
to  health  sector reform  which  continues  to be  a major  drain  in the  fiscal  accounts. In 
order to ensure current  account  sustainability,  it is important  that the fiscal  targets  for 
1999 and 2000 are met. 

26 

3.  Ability to assume the obligations of membership 

This  section  aims  to update  the  Commission's  Regular  Report  of  1998 on  Hungary's 
ability  to  assume  the  obligations  of  membership  -  that  is  to  say  the  legal  and 
institutional  framework,  known  as the acquis through  which  the Union  implements  its 
objectives. 

In  the  1998  Regular  Report  on  Hungary's  progress 
Commission  concluded  that: 

towards  accession, 

the 

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

The  presentation  set  out  below  uses  the  same  structure  as  the  1998  Regular  Report 
and  focuses  on  progress  made  since  last  October.  Under  each  heading,  legislative 
decisions and progress in implementing and enforcing  the legislation  are reported. 

3.1 

Internal  market without  frontiers 

The  Union's  internal  market  is defined  in  Article  14 of  the Treaty  as  an  area  without 
internal  frontiers  in  which  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  legislation,  but  also  the  effective  application  of 
common  rules,  such  as  those  designed  for  safety,  environmental  or  consumer 
protection,  as well  as 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. 

27 

The basic  principles  of EU public  procurement  rules  are  already  in place  in  Hungary 
and the current legislation  is applied in a transparent manner. The procurement  market 
is in principle open to European  companies.  However, there are still local  preferences 
in  place.  In  September  1999,  Hungary  amended  its  law  on  Public  Procurement  to 
exempt  projects  co-financed  by  EU  funds  from  the  National  Preference  Clause.  The 
number  of  tenders  advertised  continued  to  increase  over  the  last  year  from  4,338  in 
1997 to 4,481 in  1998 (with  an increase  in value of 25%) whilst the number of  closed 
procedures  decreased. The remaining  discrepancies  with  the acquis relate to the value 
of thresholds, the lack of choice between open and restricted procedures, the deadlines 
for  submission  of tenders  as well  as the definition  of public  works and the  application 
of  the  National  Preference  Clause.  As  to  the  enforcement  and  the  remedies 
procedures,  the  rules  for  initiating  proceedings  and  for  utilities  need  to  be  further 
aligned. Despite the fact  that the Public Procurement  Council  has  launched  a training 
initiative, enforcement  of public procurement rules needs to be strengthened. 

The  framework  legislation  in  the  field  of  intellectual property  is to  a large  extent  in 
line  with  the  acquis.  In  September  1999,  further  progress  has  been  made  with  the 
adoption  of  amending  legislation  which  provides  in  particular  for  protection  of 
computer  programmes,  rental  and  lending  rights,  certain  rights  related  to  copyright, 
including  satellite  broadcasting  and  cable  retransmission  and  the  legal  protection  of 
databases  (but  for  sui  generis  databases).  This  law  contains  certain  transitional 
arrangements.  In  November  1998,  Hungary  deposited  its  ratification  instruments  of 
the  two  new  intellectual  property  conventions  (the  WTPO  treaties).  Hungary 
promulgated  the WTO/TRIPS  Agreement  on intellectual  property  as well  as the  1961 
Rome  Convention  on  the  protection  of  performing  artists, producers  of  phonograms 
and broadcasting  organisations.  However,  further  and timely  legislative  alignment  is 
still  necessary  in  respect  of  Article  10  of  the  Directive  on  the  term  of  protection. 
Further  progress  has  been  achieved  as  regards  the  enforcement  of  intellectual  and 
industrial  property  rights  by  strengthening  controls  at  the  borders  and  amending  the 
related  criminal  provisions. 
Nevertheless,  in  order  to  ensure  more  efficient 
enforcement,  specific  training  programmes  are  required.  Hungary  will  also  have  to 
make  further  efforts  in  the  field  of  patents,  in  particular  concerning  pharmaceutical 
products.  Hungary  will  also  have  to  make  further  efforts  in  the  field  of  patents,  in 
particular  concerning protection  of pharmaceuticals  products, in order to fully  comply 
with the EU level of protection. 

As  foreseen  under  the  Europe  Agreement,  Hungary  has  applied  to  accede  to  the 
Munich  Convention  on the Grant of European  Patents  and has been invited to become 
member  as  of  July  2002.  The  Trademark  Law  Treaty  was  ratified  by  Hungary  in 
November  1998. 

Legislation  in  the  field  of  company  law  is  already  aligned  to  a  large  extent.  Further 
important  progress  has  been  achieved,  as  foreigners  can  now  establish  themselves  as 
private  entrepreneurs  in  Hungary  (see  chapter  on  free  movement  of  persons). 
Remaining  differences  with  the  acquis  are  few  and  concern  mainly  the  scope  of  the 
'nullity' provision, rules  applied to groups of companies  and publicity  requirements in 
the case of mergers. 

In  the  field  of  accounting  and  auditing  law,  Hungary  had  already  achieved  a  high 
degree of conformity.  However, no further  progress has been made. 

28 

In  the  area  of  personal  data protection,  Hungary  has  already  achieved  a  substantial 
degree  of  alignment.  A  law  adopted  in  June  1999  introduced  technical  amendments, 
such  as  the  "data  processor"  concept  beside  that  of  data  controller.  In  the  field  of 
customs,  provisions  on  criminal  investigations  have  been  further  harmonised  by 
amending  the  Hungarian  Customs  Law  on  data  handling  and  data  protection  within 
the  Hungarian  Customs  and  Finance  Guard.  Further  legislative  fine-tuning  is  still 
necessary. 

The four 

freedoms 

In  its  Opinion,  the  Commission  indicated  that  Hungary  had  already  made  good 
progress in  guaranteeing  the  'four  freedoms'.  The  subsequent  Regular  Report  focused 
on  the  continued  need  for  progress  in  the  field  of  standardisation  and  in  liberalising 
the service sector. 

Free movement of goods 

In  the  field  of  standardisation  the  transposition  rate  of  European  standards  into 
Hungarian  legislation  had  been  rather  low.  Some  further  progress  in  the  adoption  of 
European  standards  has  been  made  and  a  level  of  alignment  of  approximately  45% 
has  been  reached.  However,  Hungary  needs  to  accelerate  in  order  to  reach  the  80% 
transposition  rate  which  is  a  pre-condition  for  full  membership  of  the  European 
Standard  Bodies  CEN  and  CENELEC.  Detailed  rules  on  the  designation  of 
conformity  assessment  bodies  have  been  adopted  in  1999,  implementing  the  general 
rules in this  field. 

Hungary  has  already  put  in  place  the  general  principles  of  the  New  and  Global 
approach.  Efforts  have  been  concentrated  on  the  practical  implementation  of 
legislation  on  these  principles.  In  the  sectors  covered  by  New  Approach  Directives 
important  progress  can  be  noted  as  regards  the  transposition  of  the  toys,  machinery, 
lifts,  pressure  vessels,  non-automatic  weighing  instruments  and  gas  appliances 
directives. In  1999 provisions  on classification,  packaging  and  labelling of  dangerous 
preparations  have  been  adopted.  Further  harmonisation  efforts  have  been  undertaken 
(food  additives  and  hygiene)  electromagnetic 
in 
compatibility,  pre-packaging,  recreational  craft  and  construction  products.  The  Law 
on Medicines  for Human  Use has further  aligned Hungarian  legislation  as regards  the 
distribution  of  pharmaceuticals.  Outstanding 
to  motor  vehicles, 
pharmaceutical  products,  cosmetics,  legal  metrology,  wood  and  crystal  glass  where 
additional efforts  are still needed to align the Hungarian  legislation with the  acquis. 

the  sectors  of 

issues  relate 

foodstuffs 

Further  efforts  are  required  as  regards  the  transposition  of  the  directive  on  general 
product  safety  and the creation  of the necessary  enforcement  necessary  structures  (see 
also the chapter on Consumer Protection). 

Free movement of capital 

29 

Hungary  has  already  achieved  significant  progress  in  the  liberalisation  of  capital 
movements.  Medium  and  long  term  market  transactions  are  liberalised  with  the 
exception  of outward financial  credits  and certain  operations  on collective  investment 
and  undertakings.  Export  of  Hungarian  and  foreign  currency  is  possible.  Resident 
foreign  exchange  banks  have  received  the  full  right  to  operate  on  non-resident 
accounts.  Following  these  major  steps  forward  taken  in  the  preceding  reporting 
period, there has been a pause in further  liberalisation  in Hungary. 

In  1998, Hungary  experienced  notable  short-run,  knock-on  effects  on  the  capital  and 
financial  markets. Foreign  portfolio  outflows  amounted  to  more  than  €1.1  billion  in 
August to September  1998, concurrent with a sharp fall  in stock prices and increase in 
bond  yields,  as  well  as  pressure  on  the  Forint.  Based  on  this  experience  the 
Hungarian  authorities,  feeling  the  need  to  keep  some  control  on  short  term  capital 
movements,  decided  to  revise  their  earlier  plans  to  abolish,  by  the  end  of  year  2000, 
the  remaining  short-term  restrictions.  No new  time-frame  has been  given  other  than 
the pledge to remove all short-term restrictions by the date of accession  at the latest. 

The  main  remaining  restrictions  are  on  the  acquisition  of  real  estate,  on  portfolio 
investments  abroad  by  insurance  companies  and  pension  funds,  as  well  as  on  short-
term capital movements aimed at sheltering the Forint from  external pressure. 

Free movement of services 

In relation  to financial  services, Hungary  has already  achieved  a substantial  degree of 
alignment.  In  the  banking  sector  the  directives  on  banking  co-ordination,  Solvency 
ratio  and  bank  accounts  directives  have  been  further  aligned.  Universal  banking  has 
become possible since January  1999 along with  a real Time Gross  Settlement  System 
which  should facilitate  the integration  of  Hungary's  large value payment  system with 
those  of  Member  States.  Some  progress  has  also  been  made  as  regards  alignment  in 
the field  of electronic payment  systems. Further efforts  are needed in particular for the 
transposition  of  the  Directives  on  Netting,  Capital  Adequacy  and  Supervision  on  a 
consolidated  basis, as  well  as  of  the  Directive  on  the  strengthening  of  the  prudential 
supervision  of  financial  constructions  (post  -  BCCI).  Supervision  of  banking 
activities  is  performed  by  the  State  Supervising  Authority  for  Money  and  Capital 
Market  which  carried  out  161 inspections  over the  last  year  . In  15 cases  the  activity 
of the financial  institutions  was  suspended  and in two cases permission  to issue  value 
papers  was  not  granted  (see  also  chapter  4  on  administrative  capacity). 
In  the 
insurance  sector  restrictions  still  exist  on  investments  abroad  as  well  as  certain 
obligations  to invest in State debt instruments. For example, life  insurance  companies 
must invest  30% of their reserves in  State debt instruments  and non-life  insurers must 
maintain  40% of reserves  in cash  or State debt instruments. The  freedom  for  insurers 
to  set tariffs  for  motor  insurance  has  been  enhanced  and  rules  concerning  the  supply 
of  insurance  have been  further  aligned  with  the acquis. The  supervision  of  insurance 
companies has been made more  effective. 

In  the  area  of  securities  Hungary  has  already  achieved  a  substantial  level  of 
alignment.  As  regards  the  UCITS  directive  on  securities,  the  activity  of  the  fund 
manager  and the composition  of  the portfolio  of the managed  fund  need to be  further 
defined. 

30 

Although  Hungary's  law  on money  laundering  is to  a large extent  in  accordance  with 
the  acquis,  full  alignment  will  still  require  some  amendments  and  in  particular  a 
phasing-out of existing anonymous accounts. 

Free movement of persons 

As  concerns  the  freedom  of  establishment,  Hungary  had  already  made  considerable 
progress.  The  entry  into  force  in  February  1999  of  the  law  on  self-employment 
represents  a  significant  step  forward.  EU  citizens  can  now  establish  themselves  as 
self-employed  persons  and  operate  under  the  same  conditions  as  Hungarians. 
Nationality  requirements  on  foreigners  wishing  to  establish  themselves  as  self-
employed  persons  have been  repealed,  notably  for  the professions  of  medical  doctor, 
pharmacists, and veterinarian. Limitations remain, however,  particularly  in relation  to 
lawyers. 

In  relation  with  the  mutual  recognition  of  professional  qualification  and  diplomas, 
Hungary  is  largely  in  compliance  with  the  acquis.  Some  progress  has  been  made  in 
the  area  of  agricultural  higher  education.  Further  alignment  is  needed  with  regard  to 
the  distinction  between  academic  and  professional  recognition.  The  necessary 
professional  structures exist for most professions,  although some further  strengthening 
remains necessary. 

Hungarian  legislation  related to student mobility rights and free  movement  of  workers 
is only partially  aligned. 

Competition 

Hungarian  antitrust  legislation  is  to  a  large  extent  aligned  with  the  acquis.  Three 
further  block exemption  regulations on Research  and Development,  specialisation  and 
technology transfer  agreements have recently been  adopted. 

The  Hungarian  Competition  Office  has  a  good  enforcement  record.  In  39  cases  the 
law was broken  (including  30 consumer fraud  cases, one cartel  case  and five cases of 
the 
abuse  of  position,  see  chapter  4  on  administrative  capacity).  Although 
Competition  office  has, to date, mainly intervened to resolve minor competition  cases, 
it  has  also  efficiently  prevented  unfair  competition 
in  cases  where  important 
Hungarian  companies  have  been  involved  (for  example,  the  decision  to  prohibit  a 
merger  between  the  main  Hungarian  telecom  company  MATAV  and  a  smaller 
company in the sector). 

Hungary  has  also  progressed  in  the  state  aids  field:  the  new  legislation  adopted  in 
May  1999  clearly  identified  the  State  Aids  Monitoring  Authority.  Efforts  to  increase 
transparency in state aid schemes have also been made, as demonstrated by the annual 
reports  on  State  Aids  submitted  by  the  Hungarian  authorities  to  the  Commission  in 
1998.  These  reports  closely  follow  the  methodology  of  the  Commission's  State  aid 
Surveys  and  fulfil  the  criteria  of  transparency.  Some  State  Aids  schemes  have  been 
aligned  with  Community  rules,  but  further  adjustments  will  be  necessary  to  ensure 
compliance. 

31 

Further  efforts  are  also  necessary  to  ensure  effective  implementation  of  state  aid 
rules. Hungary  should  also take  the necessary  steps to ensure  the further  assimilation 
of  the  relevant  acquis.  Special  attention  should  be  given  to  the  legal  basis  for  the 
scrutiny  of  aids  granted  to  sensitive  sectors. The  inventory  on  existing  aid  should  be 
made more comprehensive  by including information  on all indirect  aid measures  such 
as fiscal  aids. 

Undertakings  with  special  or  exclusive  rights  in  Hungary  exist  in  the  fields  of: 
telecommunications,  postal  services,  energy, 
(railway,  road),  water 
management,  the  operation  of  Budapest  Ferihegy  Airport  and  Csepel  Port,  public 
water  utilities,  national  public  roads, motorways,  management  of  public  rivers,  lakes 
and of water facilities. The relevant Community criteria related to special  or exclusive 
rights  are respected  to a large extent  but  no progress  has been  made in the  area  since 
the last Regular Report. 

transport 

Conclusion 

Progress  has  been  made  in  the  area  of  company  law  and  standardisation.  In  order  to 
reach  full  membership  in the European  Standards  Bodies, Hungary  needs  to  continue 
efforts  in  this  area.  The  short-term  Accession  Partnership  priorities  have  been  met. 
As  to  the  enforcement  of  intellectual  property  rights,  further  efforts  are  necessary 
especially  for  copyright  and  patent  protection.  The  short-term  Accession  Partnership 
priority has only been partially met. 

In the  area  of  the four  freedoms,  Hungary  has  already  aligned  its  legislation  with  the 
acquis  to  a  considerable  extend.  Further  efforts  are  needed,  in  particular,  for  the 
transposition  and enforcement  of the directive on general product  safety. 

Progress  has  been  made  in  relation  to  the  State  Aid  acquis.  The  annual  reports  on 
State  Aid  fulfil 
the 
assimilation  of  the EU  State  Aid  rules. Special  attention  should  be given  to the  legal 
basis  for  the  scrutiny  of  sensitive  sectors  and  to  the  adjustment  of  State  monopolies. 
Hungary has adequately addressed the short-term Accession  Partnership priority. 

the  criteria  of  transparency  but  Hungary  should  finalise 

3.2 

Innovation 

Information  society 

Hungary  is  actively  participating  in  the  information  society.  The  number  of  homes 
having  a computer  has  considerably  increased  during  last  year,  as  has the number  of 
internet users. 

The  1997  'intelligent  cities/regions'  program,  which  aim  to  upgrade  information 
infrastructure  in bigger cities and regions, is in the process of being implemented.  The 
Hungarian  National  Council  for  Communications  and  Informatics  is  organising  the 
National Information  Society Forum. 

32 

Education, 

training  and  youth 

Hungarian  policy  in  this  sector  has  already  to  a  large  extent  been  aligned  with  EU 
policy. 

No  major  legislative  nor  institutional  developments  have  occurred  since  October 
1998. Hungary  is making  efforts  to implement  the Directive  on education  of  children 
of  migrant  workers,  in  particular  by  increasing  the  possibilities  for  these  children  to 
have  access  to  teaching  in  their  language  of  origin  and  about  their  cultural.  Special 
training is provided for  teachers working in schools with  a high number  of  immigrant 
pupils.  The  principle  of  non-discrimination,  in  particular  on  grounds  of  nationality, 
must be applied throughout the fields  of education, training and youth. 

Diploma  requirements  in  Hungary  for  the  various  professions  and  professional 
qualifications  are  generally  in  line  with  the acquis.  Hungary  has  been  successfully 
participating  in  Community's  Socrates,  Leonardo  da  Vinci  and  Youth  for  Europe 
Programmes  since  September  1999.  Vocational  training  in  Hungary  has  been 
gradually aligned with EU practices and objectives. 

In  1998-99,  3,150  students  have  benefited  from  Erasmus  mobility  grants  to  study  in 
EU  countries  and  2,256  young  Hungarians  have  taken  part  in  the  Youth  for  Europe 
programme. 
In  1998,  435  Hungarians  have  participated  in  exchanges  within  the 
framework  of the Leonardo programme (vocational training). 

Research and technological development 

into  national 
The  present  Community  acquis  does  not  require 
legislation.  The  Government  has  increased  significantly  the  financial  support  for  the 
sector from 0.6% of GDP in  1998 to 1% in 1999. 

transposition 

The  association  of Hungary  with  the  5th Framework  Programme  (1999-2002)  and  with 
the  Euratom  Framework  Programme  entered  into  force  in  August  1999.  In  order  to 
prepare  the  successful  association,  several  structures  have  recently  been  established  in 
Hungary.  The real  implementation  capacity will be tested  during the association  to the 
5th Framework Programme. Hungary has also decided to open its corresponding research 
activities to enterprises, researchers  and universities from the Member States. 

Telecommunications 

Important  progress  has  already  been  achieved  in  the  Hungarian  telecommunication 
sector both  in  terms  of  networks  and  services. Several  regulatory  instruments  needed 
for alignment with the acquis have been  adopted. 

Installation  of  fixed 
The  telecommunications  sector  has  grown  consistently. 
telephones  went  up from  five  to 34 lines per  100 inhabitants  during  1998 and the rate 
for  mobile  telephones  from  four  per  100  inhabitants  to  10.  The  extent  of  network 
digitalization  increased  by  12% to 81.5%.  The Hungarian  Government  has adopted a 

33 

decision  which  outlines the basic principles of the info-communications  infrastructure 
and services until 2005. 

The  Hungarian  market  has  been  further  liberalized,  in  particular  by  allowing  the 
commercial  provision  of  voice  telephony  to  closed  user  groups,  by  authorizing  the 
provision  of  internet  services  by  Cable  TV  operators  and  by  issuing  two  licenses  for 
internet  telephony to a private company. According to a Government  decision  of May 
1999 all free  mobile  operators received  allocations  for  both  GSM 900  and DCS  1800 
frequencies  providing  them  with  equal  chances  to  compete  in  the  mobile  telephone 
market.  The  privatisation  of  the  incumbent  network  operator,  MATAV  was 
completed. 

In June  1999, new legislation  was adopted prohibiting voice telephone providers  from 
having  exclusive  rights  to establish  or  acquire  cable  television  networks  in  their  area 
of  concession.  This  aims  to  promote  a competitive  environment  after  the  opening  of 
the voice telephony market. 

Despite  the  fact  that  a  new  telecommunications  law  has  not  yet  been  adopted, 
secondary legislation has already been  implemented. 

The  provisions  of  the  acquis  related  to  data  protection  in  telecommunications  has 
been  implemented  for  GSM  mobile  networks.  Tariff  re-balancing  is  progressing 
rapidly  as  an  important  reduction  of  inter-connection  and  leased  lines  rates  has  been 
introduced.  The  rental  fee  for  residential  subscribers,  for  business  lines  as  well  as 
local  call prices  have been  increased  substantially.  The main  remaining  issues  are the 
alignment of the provisions on universal  service, numbering and licensing. 

Some  progress  has  been  achieved  in  postal  services  through  the  signature  of  an 
agreement  with  UNEX  (Unipost  External  Monitoring  System)  and  the  establishment 
of  a department  which  will  assume  the  responsibilities  for  licensing  and  supervising 
the postal  sector. 

Audio-visual 

Hungarian  legislation  is  already  to  a  large  extent  aligned  with  the  acquis.  No 
significant  progress has been made in this area since the last regular report. 

Hungary  must define  the status of broadcasting organisations  and the programming of 
European  works, but also the monitoring of satellite broadcasting. 

Conclusion 

Hungary  has  continued  to  put  emphasis  on  the  information  society,  education  and 
training  and  research  and  technological  development,  where  progress  has  been 
achieved with the full  association to the 5th Framework Programme.  Progress has also 
been  achieved  in  the  opening  in  the  telecommunication  market.  Efforts  need  to  be 
made  to complete the regulatory  framework,  in particular  in the field  of  licensing. In 
the audiovisual  sector, further  alignment is also needed. 

34 

3.3 

Economic and fiscal  affairs 

Economic and Monetary  Union 

Hungary  has  indicated  that  it  accepts  and  will  comply  fully  with  EMU  acquis  as 
defined  by  title  VII  of  the EC  treaty  and  the  other  relevant  texts.  Hungary  has  also 
stated that the administrative  structures to implement  and enforce  the acquis will be in 
place. 

Hungary  has  made  little  additional  progress  in  its  preparation  for  participation  in  the 
Economic  and  Monetary  Union. 
In  particular,  for  the  acquis  that  has  to  be 
implemented  before  accession,  the  National  Bank  can  still  give  short-term  credits  to 
the central  budget  in order to overcome temporary  liquidity problems.  However,  this 
remaining  possibility  for  the  direct  financing  of  the  public  sector  has  not  been  used 
since  1995.  The  public  authorities  also  still  enjoy  privileged  access  to  financial 
institutions,  most  notably  through  the  preference  granted  by  law  to  Government 
securities  in the portfolio  composition  of  home  and  savings  institutions.  The  central 
bank statutes still need to be aligned with the Treaty to assure the independence  of the 
monetary  authorities.  The  Commission  is concerned  by  recent  statements  of  certain 
Hungarian politicians which seem to question this independence. 

Taxation 

The  basic  elements  of  the  VAT  and  excise  duty  structure  are  already  in  place  in 
Hungary. 

Hungary  has  made  further  progress  in  aligning  its  legislation  with  the  6th  VAT 
Directive.  In  1999  it  adopted  a customs  table  following  the  combined  nomenclature 
and  tightened  up  the  reverse  charge  mechanisms  for  certain  services.  The  public 
services  of  television  and  radio  are  now  exempted  from  VAT,  except  those  with  a 
commercial  purpose.  Finally,  the  administrative  burden  of  SMEs  have  been  reduced 
by introducing  annual VAT declarations. 

Nevertheless,  a number  of  discrepancies  between  the Hungarian  VAT  legislation  and 
the  Community  rules  continue  to  exist,  notably  related  to  tax  rates.  Furthermore, 
adaptations  are  particularly  necessary  in  the  areas  of  taxable  persons,  taxable 
transactions,  VAT  refunds  special  schemes,  tax  exemptions  and  simplification 
procedures  to  align  fully  Hungary's  legislation  with  the  acquis.  Administrative  co 
operation  in  the  field  of  taxation  between  Hungary  and  the  EU  Member  states  is 
currently  based  on  bilateral  agreements.  The  scope  of  these  agreements  and 
consequently  also  the  mutual  assistance  between  both  sides  is  often  limited  to 
avoiding double taxation. To comply by the time of accession  with the relevant  acquis 
on administrative  co-operation  and mutual  assistance, Hungary  will have to amend its 
legislation  as regards data protection. 

In  the  area  of  excise  duties,  new  legislation  was  enforced  in  January  1999  which 
opened  up the  possibility  of  establishing  tax  warehouses  for  commercial  purposes  in 

35 

Hungary.  The  duty  suspension  system  was  also  set  out  more  precisely.  The  current 
practice of levying different  rates for fruit  brandies  and other spirits is in contradiction 
with  Community  rules  which  stipulate  a  single  excise  duty  for  interchangeable 
products.  Other  outstanding  issues  relate  to  the  minimum  excise  duty  rate  for 
cigarettes,  and to the duty exemptions  in the field  of  mineral  oils  and the holding  and 
movements of excisable goods. 

The capital  tax  rate  on transactions  needs to be adjusted  to Community  rules. Further 
alignment  is  needed  in  the  area  of  taxation  applicable  to  mergers  and  to  parent 
companies and subsidiaries of different  Member states. 

Conclusion 

Hungary  has made  further  progress  in  harmonising  its tax  legislation  with  the  acquis 
in the field  of  taxation. The  establishment  of  a work  programme  for  harmonising  the 
Hungarian  VAT  system  with  the  acquis  will  make  an  important  contribution  to 
achieving further  progress. 

Statistics 

Hungary  already  compiles  and  provides  statistics  in  a number  of  areas  according  to 
EU  principles.  Statistical  co-operation  with  Hungary  has  been 
increasing 
progressively  over  recent  years,  both  on  a  bilateral  basis  with  Eurostat  and  in  the 
framework  of international  organisations such as UN, IMF and OECD. 

The Hungarian  Statistical  Office  is independent  and well equipped. The  independence 
of  the  statistical  units  of  the  agencies  belonging  to  the  Statistical  Office  need  to  be 
transmission  abroad  and 
The  provisions  on  data 
defined 
confidentiality  have been further  aligned in 1999. 

in  more  detail. 

Hungary has already reached a high level of alignment for price statistics, labour  force 
and  other  social  surveys  and  business  registers.  Weaknesses  still  exist  in:  social, 
business,  industry  and  macro-economic  statistics.  Concerning  regional  statistics,  a 
first  step  towards  alignment  has  been  made  by  establishing  seven  statistical  regions. 
Further  efforts  are  needed  on  collecting  and  providing  data  at  regional  level,  on 
economic environment  statistics and the scope of external trade in goods. 

Much  remains  to  be  done  to  comply  with  the  acquis  in  the  field  of  agricultural 
statistics,  particularly  as  concerns  structural  statistics  and  typology,  fruit  and  wine 
production,  milk  and  slaughter  and  agro-monetary  statistics.  As  a  first  step,  in  May 
1999 a law on the General  Agricultural Census was passed by Parliament. 

3.4 

Sectoral  policies 

Industry 

36 

Significant  convergence  can  be  noted  between  Hungarian  industrial  policy  and  the 
principles  and  objectives  of  EU  industrial  policy.  Hungary's  industrial  policy 
continues to be based on the maintenance of a stable, open  and competitive  economic 
environment,  offering  favourable  and  predictable  conditions  for  the  conduct  of 
profitable  private business. 

Since  last  year,  the  industrial  restructuring  process  has  continued.  The  inflow  of 
Foreign  Direct  Investment  (FDI)  has  been  a  major  influence  contributing  to  further 
transfer  of  technology  and  management  know-how,  the  modernisation  of  production 
facilities  and  the  intensification  of  other  forms  of  cross-border  co-operation.  This  is 
illustrated  by  the  fact  that  Hungary  has  continued  to  attract  foreign  investment  (see 
chapter  2  on  economic  criteria).  Some  35,000  companies  are  operating  today  in 
Hungary  with  some  degree  of  foreign  capital  participation:  producing  around  one 
third  of  GDP,  providing  around  80%  of  the  country's  gross  exports  and  employing 
one fourth  of  the  workforce  in the private  sector. Trade  statistics  confirm  the pace of 
integration with the Union. 

Restructuring  is  proceeding  at  a  slower  pace  in  Hungarian  enterprises  not  directly 
affected  by inward FDI. Hungary now  needs to focus  on fostering  the  local  corporate 
sector.  The large number of multinationals with manufacturing  operations in Hungary 
should  be  a  useful  base  for  the  development  of  a  local  supply  industry,  but  at  the 
moment the linkages are insufficiently  developed. 

No  further  substantial  progress  has  been  made  during  the  year  in  restructuring  the 
steel  industry.  Hungary's  major  steel  producer  is  still  state-owned.  To  proceed  with 
restructuring  it  is  important  that  individual  viability  plans  of  the  steel  works  are 
established.  An  important  dimension  of  industrial  policy  is  control  of  state  aids  (see 
competition chapter). 

Agriculture 

Agricultural  situation 

While  the  overall  economic  performance  in  Hungary  continued  to  show  growth  in 
1998 and in  early  1999, the output  of  the  agricultural  sector has decreased  over  these 
two  years. Thus,  the  share  of  agriculture  in  the  economy  is  on  a declining  trend:  the 
agriculture  and forestry  represent  less  than  6%  of  the  GDP  and  employ  less than  8% 
of the working population. 

After  a  slight  decline  in  1997,  Hungarian  exports  of  agricultural  and  food  products 
managed  to  recover  in  1998  and  reached  a  value  of  €  1,038  million.  This  figure 
represents  7.2%  of  Hungary's  total  exports  to  the  Community.  The  most  important 
Hungarian  export  product  by  far  is  meat  and  meat  preparation  with  a  value  of  about 
€ 365 million. 

The  Community's  agricultural  exports  also rose  by  2.8% compared  to  1997  and  thus 
amounted  to €  546 million,  corresponding  to 3.3% of total  exports to  Hungary.  As a 
result  of  these  developments,  Hungary's  positive  trade  balance  in  agricultural  and 

37 

food  products  with  the Community  reached  € 493  million  compared  to €  488  million 
in  1997. 

In  march  1999, the Council  mandated  the  Commission  to open  negotiations  with  the 
associated  countries  in  view  of  new  reciprocal  concessions  in the  field  of  agriculture 
which will enhance the progressive and orderly liberalisation  of bilateral trade. 

Agricultural  policy 

Concerning  agricultural  support,  the  1999 Hungarian  system  has  4 categories  of  aids 
(support  for  market  access, food  safety,  restructuring  and  modernisation)  with  a total 
budget  of  €  576  million  for  agricultural  subsidies  and  €  46  million  for  rural 
development  measures. 

Market  price  support  policies  are  the  main  form  of  support  in  Hungary  and  they  are 
based  on  a system  of  minimum  and  guidance  prices. The  market  intervention  system 
(buying-in  public  storage, processing  and selling of  intervention  stocks) is  combined 
with  export  subsidizes.  In  1998,  low  international  and  internal  prices  for  supported 
products  (in particular for  cereals and pig meat) led to an increase  in expenditures  for 
market support  (exports were supported through  credit, in particular for dairy  products 
and pig meat, poultry meat). Direct export  subsidies were used for  an increased  range 
of  products  in  accordance  with  a WTO  waiver  granted  to  Hungary  from  its  original 
export subsidy commitments. A reform  of the export subsidy scheme has commenced. 

Export  licenses  are  applied  to  certain  products.  Direct  payments  per  hectare  of 
agricultural  land  are  granted  to  farmers  producing  in  less  favoured  areas.  Payments 
based on  use of inputs are provided  (interest rate  subsidies, capital  grants  and fuel  tax 
subsidies).  A  new  scheme  of  direct  payments  promoting  employment  in  agriculture 
was introduced  in  1998. Income support  measures for arable crops were introduced in 
1999.  A  system  of  registration  of  producers  was  introduced,  which  considers 
registration  as a pre-condition  for receiving any subsidy. 

through 

There  is  not  a  comprehensive  rural  development  support  policy  in  Hungary.  Aid  is 
provided 
individual  measures  and  schemes  (e.g.  support  for  certain 
investment  in  agriculture,  support  for  quality  protection  and  utilisation  of  land, 
support  for  rural  tourism,  co-operatives  and  other  organisations  of  Producers 
purchasing  and  Marketing  certain  products  etc.).  Programmes  and  budgets  are 
currently  annual,  but  the  government  has  prepared  a  long-term  strategy  as  the  basis 
for multi-annual  planning. 

As regards the land register, the government  has started a registry  campaign  early this 
year to register  land use (and actual users) as land ownership records  do not  currently 
reflect  the  real  structure  of  land  use  or  plot-size.  So  far  75%  of  cultivated  land  has 
been registered. A new Law provides the basis for a new agricultural  census. 

the  situation 

Concerning 
restructuring and modernization  of those companies, which had been  privatized. 
In  the  field  of  primary  processing  (meat,  poultry,  cereals,  fruit  and  vegetables)  full 
compliance with food safety, hygiene and quality still need to be addressed. 

in  the  agro-food  sector,  progress  has  continued  in 

38 

In  the  veterinary  sector,  the  animal  health  control  system  applied  in  the  internal 
market and to imports from  third countries still differs  from  the EU system. Under the 
current  veterinary  control  systems,  inspections  are  carried  out  at  the  place  of 
destination,  where  no  animal  records  are  maintained.  Border  inspection  posts  do  not 
meet EU requirements. 
The  system  for  registration  and  identification  of  bovines  is  almost  completed.  The 
system  needs to be extended  to cover pigs, sheep  and  goats. The  necessary  hardware 
for setting up the veterinary information  system ANEVIO is already in place in the 580 
veterinary posts throughout  Hungary. 

A  substantial  part  of  the  plants  processing  products  of  animal  origin  do not  yet  meet 
EU hygiene and public health  requirements. A national  survey of slaughterhouses  and 
establishments  dealing with  animal  products  is being carried  out. The hazard  analysis 
critical  control  point  system  (HACCP) needs to be introduced  in  the food  processing 
units. 

Hungary  is  elaborating  contingency  plans  for  animal  diseases,  including  an  action 
plan  for  classical  swine  fever.  National  Reference  Laboratories  exist  for  all  diseases. 
As  regards  animal  welfare  legislation,  various  rules  of  slaughtering  animals  and 
keeping farm  animals have been  adopted. 

As  regards  the  phytosanitary  sector,  Hungary  still  needs  to  develop  plant  health 
service  in  order  to  implement  the  Community  quarantine  rules,  introduce  a  plant 
passport  and  protected  zone  registration  systems  and  apply  EC  rules  concerning 
marketing  of  plant  protection  products  and  fertilisers.  Regulations  on  the  use  of 
pesticides and fertilisers  were further  aligned in June  1999. 

Insofar  as  financial  procedures  are  concerned,  the  Agricultural  Intervention  Centre 
has  been  further  developed  and  has  been  designated  as  future  paying  agency.  It  will 
also  be  in  charge  of  pre-accession  aid  (SAPARD)  from  1 January  2000.  Substantial 
progress has been made in preparing the Rural Development  Plan. 

As  regards  forestry,  there  is  support  for  afforestation,  conversion  of  forest  structure 
and  planting.  There  is  no  regime  protecting  forests  against  fire  or  atmospheric 
pollution. The system of forestry  statistics needs to be developed. 

As regards  the market  organisations  of the main  agricultural  products,  the  Hungarian 
basic management  mechanisms are in place but do not reach  yet full  compliance. 

Hungary  has  achieved  some  progress  in  harmonising  the  fruit  and  vegetables  sector. 
Standards  for  the  classification  of  products  are  applied  to  exports  from  Hungary,  but 
not  to  domestic  market  and  imported  products.  No  comprehensive  frame  exists  for 
Producers  Organisations,  although,  legal  basis  for  the  recognition,  establishment, 
investment  and  operation  of  producer  organisations  has  been  recently  adopted.  There 
is no system of production  aid for processed fruit  and vegetables products. 

Concerning quality control in the wine area, progress has been made on recognition of 
EU  standards  with  a  view  to  eliminating  complex  and  costly  procedures  previously 
applied  to  imports  of  wine  from  the  EU.  A  National  Board  of  appellations  and  the 

39 

Committee  of  Wine  appellations  were  established  in  1998.  Collection  of  data  on 
quality wine production  started from  the  1998 harvest. 

A  support  scheme  exists  in  the  beef  sector  (quality  support  for  cattle  for  slaughter; 
support  for  female  breeding  stock  and  bulls  and  for  high  quality  semen).  The 
possibility  of  applying  a buying-in  system  is established.  In  the pig  sector,  support  is 
also  granted  and  intervention  buying-in  for  live  animals  is  provided  together  with 
export refunds.  In the milk sector, quotas for  milk delivered to dairies  or sold  directly 
to  consumers  exist.  They  are  transferable  independently  from  the  land.  The  system 
provides  for  intervention  and  for  the  granting  of  export  refunds..  Subsidies  for  high 
quality milk and school programmes  are granted. 

Conclusion 

Over  the  last  year  Hungary  has  made  some  progress  in  preparing  to  implement  the 
common  agriculture  policy  in  the  medium  term.  Although  building  from  a  strong 
base, progress in harmonisation  of legislation  has proceeded at a slow pace. 

The  implementation  of  a comprehensive  framework  for  rural  development  measures 
also require further  efforts. 

Fisheries 

In  such  a  landlocked  country  as  Hungary  this  sector  plays  a  very  limited  role.  The 
basic  legal  framework  is  already  in  place.  State  aids  available  for  fish  producers  in 
1999  have  been  regulated  in  accordance  with  the  Guidelines  for  the  Examination  of 
State Aids in the fisheries  and  aquaculture  sector. The fishing  rights of  waters  owned 
by local  authorities have also been regulated.  Further efforts  are necessary  for  setting 
up  the  institutions  for  ensuring  import  control  of  provenance  and  species  and  for 
channelling Community  financial  support. In addition, the institutions  for:  controlling 
the implementation  of  common  marketing  standards; collecting  and transmitting  data 
concerning  the  price  reference  regime;  and  applying  the  recognition  conditions  for 
producer organisations  will also have to be established. 

Energy 

Energy  policy 

Hungary  has  already  adopted  the  main  principles  of  the  internal  energy  market  and 
continued to make steps towards further  alignment. 

The  long  term  energy  strategy  adopted  in  July  1999  provides  the  framework  for 
further  alignment  with  the  acquis,  especially  with  regard  to:  opening  the  national 
electricity  and  gas  markets,  third  party  access  to  networks,  the  creation  of  an 
independent  Transmission  System  Operator  and  the  restructuring  of  the  solid  fuel 
sector. The new  strategy  also provides  for  the  strengthening  of the Hungarian  Energy 

40 

Office  in  view  of  creating  an  appropriate  and  efficient  mechanism  for  regulation  as 
required by the acquis. 

The  tariff  structure  for  gas  and  electricity  has  been  adapted.  Electricity  prices  have 
been  further 
levels.  Remaining  price 
distortions  particularly  as  concern  households  should  be  eliminated.  In  line  with  the 
international prices, gas prices have been  reduced. 

increased  and  are  nearing  cost-recovery 

Oil  stocks  have  now  exceeded  the  level  of  at  least  90  days  average  daily  internal 
consumption,  but the legislation  on the security  and  stockpiling  of  imported  crude  oil 
and  petroleum  products  needs  to  be  further  aligned  with  the  acquis,  especially  with 
regard to the rules for the calculation  of the stock  levels and the setting up of  security 
stocks for each of the oil product categories. 

Although  production  and  distribution  of  crude  oil  and  oil  products  have  been 
liberalised, further  alignment  is necessary  in order to eliminate the preference  granted 
to companies controlled by the State. 

Energy  efficiency  is  still  low  and  further  efforts  are  needed  to  align  with  the 
efficiency  acquis.  In  September  1999,  Government  adopted  a  new  €  6.2  million 
energy efficiency  programme. 

Hungary  has  promulgated  the  Energy  Charter  Treaty  as  well  as  the  Energy  Charter 
Protocol  on Energy Efficiency  and related Environmental  Aspects. 

Hungary  participates  in the JOULE-THERMIE programme  and has joined  the  SAVE 
II programme as of July 1999. 

Nuclear energy 

The  Cologne  European  Council  emphasised  the  importance  of  high  standards  of 
nuclear  safety  in Central  and Eastern  Europe  and stressed the importance  of this issue 
in  the  context  of  the  Union's  enlargement.  It  called  on  the  Commission  to  examine 
this  issue  thoroughly  in  its  next  regular  progress  reports  on  the  candidate  countries. 
The present  section is a response to this request. 

Hungary  has  four  VVER  440/213  reactors  in  operation  at Paks  NPP. Nuclear  power 
currently  provides  about 40% of the country's  electricity  production.  The reactors  at 
Paks  are  a  Soviet-type  design  which  is  considered  to  be  upgradable  to  international 
safety  levels.  In  Agenda  2000  (1997),  the  Commission  called  upon  the  candidate 
countries  operating  such  reactors  to  implement  modernisation  programmes  over  a 
period of 7-10 years. 

Hungary  is  pursuing  an  upgrading  programme  at  Paks  nuclear  power  plant.  It  is 
expected  that  after  the  implementation  of  these  plant  safety  improvement  measures 
the  plant  will  be  able  to  reach  a  level  of  safety  which  compares  well  with  plants  in 
Western  European  countries.  Additional  work  is  needed  to  ensure  containment 
integrity following  a severe accident. Periodic  safety  reviews are conducted  similar to 
Western practices and have already led to an increase in  safety. 

41 

Since  the  adoption  of  the  Nuclear  Law,  which  entered  into  force  in  1997,  the 
Hungarian  Atomic  Energy  Authority  has  pursued  an  active  programme  of  issuing 
safety  guidelines.  The  President  of  the  Atomic  Energy  Authority  exercises  the 
supervision  in  order  to  meet  the  international  obligations  of  independent  regulatory 
activities. In connection  with the periodic  safety  reviews  and the related Paks  nuclear 
power  plant  operating  license  renewal,  the  Nuclear  Safety  Directorate  carries  out  an 
extensive inspection  programme. 

The  attention  of  Hungarian  authorities  has been  drawn  to the Council  Conclusions  of 
December  1998 on Nuclear Safety  in the Context  of the Enlargement  of the European 
Union,  including  the  determination  of  the EU  to  keep  under  close review  throughout 
the accession  process the issues covered  therein. In  this  context, Hungary,  its  nuclear 
regulatory  authorities  and  nuclear  operators  are  invited  to  provide  regular  and 
the 
comprehensive 
Commission. 

to  corresponding  requests  from 

in  response 

information 

Concerning  nuclear  safeguards,  Hungary  signed  an  additional  Protocol  to  its  nuclear 
safeguards  agreement  with  the  International  Atomic  Energy  Agency  (IAEA)  in 
November  1998.  Hungary  also ratified  the Convention  on spent  fuel. 

Conclusion 

Some  progress  has  been  achieved  over  the  last  year  particularly  as  regards  the 
adoption  of  the  new  energy  strategy.  Nevertheless,  the  main  recommendations  made 
in  the  previous  report  still  apply.  Particular  efforts  are  needed  to:  prepare  for  the 
internal  energy  market  (electricity  and  gas  Directives);  adjust  energy  monopolies; 
provide  access to networks; develop the Hungarian  Energy  Office  into an  appropriate 
and efficient  mechanism for regulation; adjust  state interventions  in the solid fuels  and 
uranium sectors; eliminate energy price distortions and improve energy  efficiency. 

No  major  difficulties  are  foreseen  for  compliance  with  Euratom  provisions.  Nuclear 
safety  standards  including  the  independence  and  capacity  of  the  safety  authority, 
should continue  to be tackled  appropriately.  Longer  term  solutions  for  spent  fuel  and 
nuclear waste need to be developed. 

Transport 

Hungary  had  already  taken  important  measures  both  for  legal  and  institutional 
alignment  and  continued  its  efforts  to  align  its  legislation  with  the  road  transport 
acquis. 

New  legislation  on  motorway  tolls  introduced  a  single  tolling  system  for  high  speed 
roads,  including  on  the  M3  motorway.  In  the  area  of  road  safety,  speed  limiting 
devices  were  made  compulsory  as  of  October  1999  for  a  substantial  number  of 
vehicles  in international  transport.  Furthermore,  new  legislation  has been  adopted  on 
training,  examination  and  qualification  of  road  vehicle  drivers. The  Government  has 
begun  preparations  to  accede  to  the  AETR  Agreement  by  January  2000.  No 
significant  further  progress  has been  made  in the  areas  of  access  to the profession  of 

42 

road  haulage  and passenger  transport  operator,  maximum  weights  and  dimensions  of 
vehicles, vehicle taxes and road user charges. 

Combined  transport  is already  aligned  to a large extent  with  the aquis and no  further 
progress has been  achieved. 

As  regards  railways,  no  new  legislation  entered  in  to  force  in  the  past  year.  The 
current  poor  economic  situation  of  the  Hungarian  Railways  appears  to  have  had  an 
unfavourable  impact  on  the  approximation  of  the  acquis  on  railways  transport, 
especially  as regards  access  rights  and  allocation  of capacity.  In this respect,  ongoing 
efforts  to restructure the railways  and to settle its debt and marketing problems  should 
be encouraged. 

Because  of  its  maritime  vessels,  Hungary  has  signed  a  number  of  international 
conventions  on maritime  and needs therefore  to transpose  the relevant  acquis. A new 
law  on  Shipping  provides  the  framework  for  harmonisation  in  this  area.  New 
legislation  on  shipping  safety  qualifications  transposes  the  Council  directive  on  the 
minimum  level  of  training  of  seafarers.  However,  further  efforts  are  necessary  as 
regards maritime safety  aspects. 

Inland  waterway  transport  legislation  is  only  partially  aligned.  The  key  problem  for 
this sector is the outdated fleet  capacity. This hampers Hungarian  vessels in  obtaining 
significant  market shares in the transport service sector. 

In  the  area  of  air  transport,  the  Law  on  Aviation  provides  the  main  framework  for 
harmonisation  in this sector, which is already quite well  advanced. However, the pace 
of  further  alignment  is rather  slow.  Progress  in  the  field  of  market  access  is  needed. 
There is still  a nationality  obligation  (51% of the shares in Hungarian  hands)  attached 
to  obtaining  an  air  carrier  license.  There  are  no  financial  capacity  requirements;  the 
technical  conditions  and 
insurance  requirements  also  need  alignment.  Legal 
transposition  of  the  acquis  related  to  airports  (slot  co-ordination)  and  environment 
(noise  emissions)  still  has  to  be  done.  Hungary  is  a  candidate  member  of  Joint 
Aviation  Authorities  (JAA)  since  1995  and  is  awaiting  the  conclusions  of  the  JAA 
inspection  in order to be accepted  as a full  member. Efforts  have  concentrated  on  the 
negotiations of a multilateral European  Common Aviation Agreement  (ECAA). 

Hungarian  policy  in  the  field  of  the  Trans-European  transport  Network  (TEN-T) 
already  takes  into  account  the  objectives  and  priorities  of  the  Community  guidelines 
and  requirements  on  TEN  financing.  Hungary  is  actively  participating  in  the 
Transport Infrastructure  Need Assessment  (TINA) activities, which  will  facilitate  the 
extension  of  TENs  to  Hungary.  Under  the  road  development  programme  major 
motorway  projects  in  the  south  and  east  have  continued.  A  part  of  the  railways 
network has been renewed and the connecting link to Slovenia is being reconstructed 

Conclusion 

Hungary  has  continued  to  take  measures  for  both  legal  and  institutional  alignment 
with the acquis. Further efforts  are nevertheless needed.  It is particularly  important  to 
speed up the restructuring of the national  air carrier and of the main railway company. 

43 

Small  and  medium-sized 

enterprises 

Domestic  SME  policy  conformed  to  a  large  extend  to the  Community's.  As  part  of 
the  government's  medium-term  economic  strategy,  the  Hungarian  government 
adopted  a new  four-year  strategy  in December  1998 and  made  appropriate  budgetary 
allocations.  Key  elements  of  the  strategy  are: reduction  of  the  administrative  burden, 
reduction  of  wage-related  costs, improvement  in  access  to  bank  credits  and  financial 
facilities,  better  access  to  business  information  and  improvement  of  training  and 
education  for  entrepreneurs.  Budgetary  support  to  SMEs  through  various  schemes 
amounts  to  around  €  16-20  million  in  1999.  Currently,  there  are  around  750,000 
SMEs  in  Hungary.  This  means  that  there  are  128  undertakings  per  1000  inhabitants 
which  is  higher  than  the  comparative  EU  figure  (95).  In  practice,  99%  of  the 
registered  enterprises  in  Hungary  are  classified  as  SMEs  (employing  less  than  250 
people). SMEs produce  about  half  of  GDP and employ  around two-thirds  of  the  total 
workforce.  Most  of  the  Hungarian  SMEs  are  micro-sized  companies 
(family 
undertakings). Most  SMEs (90%) operate in the service and construction  sectors. One 
of  the  main  problems  facing  SMEs  is the tax  structure  of  the  corporate  sector  which 
favours  large  multinationals.  While  the  average  tax  burden  of  the  multinationals  is 
about 8% (including tax holidays) the average SME tax burden is around 17%. 

Hungary  has  participated  in  the  Third  Multiannual  Programmes  for  SMEs  since 
December  1998. This implies an expansion  of programmes  and networks  (seven  Euro 
Info  Centres  opened)  and  provides  scope  for  increased  contacts  between  Hungarian 
and EU business organisations  as well  as opportunities  for  direct  business-to-business 
contacts  and co-operation.  This  should  contribute  in  a positive  manner  to the  further 
European  Integration  of the business  sector. 

3.5 

Economic  and  social  cohesion 

Employment 

and  social  affairs 

Over the  last  year the Hungarian  unemployment  rate has  decreased  further  and  stood 
at 7.4%  at the end  of  the first  quarter  of  1999.  Long-term  unemployment  represents 
the  largest  share  and  regional  disparities  remain  considerable.  Active  labour  market 
policies  focus  on  vulnerable  groups  such  as  the  long-term  unemployed  and  school 
leavers. The  Commission  is  currently  carrying  out  an  employment  policy  review  in 
1999 with the Hungarian  authorities. 

In  the  area  of  Labour  Law,  Hungarian  legislation  is  already  partially  aligned.  No 
progress has been  achieved over the last year and further  work is needed to secure the 
adoption  of  measures  transposing  the  remaining  acquis  requirements,  in  particular, 
those on collective redundancies, wage guarantee fund,  posting of workers, safety  and 
health  at work for temporary workers and European  work councils. 

Social  dialogue  in  Hungary  is  in  a process  of  transition.  Since  the  beginning  of  the 
reform  towards  a market economy, trade union  membership  has declined  in  Hungary, 
although  the number of trade unions and employer's organisations remains too high to 
facilitate  effective  social  dialogue.  There  are  currently  six  national  trade  union 

44 

confederations  and  nine  national  employer  organisations  represented  in  the  National 
Labour  Council,  which  differ  considerably  in  their  membership  structure  and 
economic/political  strength.  The  tri-partite National  Labour  Council, which  replaced 
the  Interest  Reconciliation  Council  at  the  beginning  of  1999, discusses  labour  issues 
including wages, but not -  as its predecessor  did -  budgetary, tax and social  insurance 
regulations. 

Equality  of  treatment  is  guaranteed  under  the  Constitution,  which  also  provides  the 
basis  for  sanctions  and  equal  rights.  Implementation  is  guaranteed  through  the 
the  Constitutional  Court.  Hungarian 
to 
Ombudsman  with  recourse  available 
legislation is already partially aligned with the acquis in this area. 

In  the  field  of  equal  opportunities  for  women  and  men,  three  cases  of  alleged  sex 
discrimination  were  handled  by  the  Hungarian  Labour  Inspectorate  in  1998.  This 
demonstrates that the acquis is starting to be enforced  in this area and further  progress 
is  to  be encouraged.  The  Law  on the  support  of  families  came  into  force  in  January 
1999. In line with the equal  treatment  directive this states that parents raising  children 
are  entitled  to  family  benefits  regardless  their  financial  situation,  and  without 
discrimination  as  between  father  and' mother.  Hungary  has  been  participating  since 
November  1998 in the Fourth  Community Action Programme  on Equal  Opportunities 
and  projects have begun in 1999. 

Currently the Government is assessing experience to date with the three-pillar pension 
system  introduced  in  1998.  As  regards  reform  in  the  health  sector,  there  is  still  no 
Government  decision  on  how  to  move  forward  in  reforming  the  health  insurance 
system and progress in this important area is becoming  urgent. 

Hungarian  legislation  in the area of health and safety  at work is only partially  aligned 
to  the  acquis.  Over  the  last  year  only  the  directive  on  manual  handling  of  loads  has 
been  transposed.  Considerable  work  remains  to  be  done  to  secure  the  adoption  of 
measures  transposing  the  remaining  part  of  the  acquis,  especially  with  regard  to 
workplaces, construction  and mining sectors . 

Currently, between  5.5  and  8.5% of GDP is spent on health  and the need for  a strong 
public  health  system  is  recognised.  Further  efforts  are  necessary  to  improve  the 
effectiveness  of  health  care  provided  to  vulnerable  groups.  A  new  law  on  public 
health  provides  the  basis  for  further  implementing  measures  and  actions. Hungary  is 
making  efforts  to  improve  the  effectiveness  of  health  care  provided  to  vulnerable 
groups.  Considerable  preventive  work  is  already  done  through  the  school  health 
programme  and  the  health  teacher  training  programme.  Various  measures  have  been 
adopted  to  combat  drug  addiction,  which  is  increasing.  Public  health  Community 
programmes  (Combating Cancer, Prevention  of Drug Dependence, Health  Promotion, 
Prevention  of Aids) were opened to Hungary in November  1998 and projects  began in 
1999. 

Conclusion 

Whilst  limited  progress  has  been  achieved  during  the  last  year,  Hungary  is  relatively 
advanced  in terms of  legal  transposition  of the employment  and  social  affairs  acquis. 

45 

Particular attention  will need to be paid to the implementation  and enforcement  of the 
health  and safety  at work and labour law acquis. 

Regional policy  and cohesion 

The  Union  supports  the  strengthening  of  cohesion,  mainly  through  the  Structural 
Funds.  Hungary  will  have  to  implement 
these  instruments  effectively  whilst 
respecting the principles, objectives  and procedures  which  will be in place  at the time 
of its accession. 

Despite being in an advanced state of preparation  for the implementation  of  structural 
funds, Hungary has done little as regards concrete implementation  of regional policy 
objectives. 

In  1996, average GDP per capita in Hungary was 47% of the EU average. Regional 
GDP per capita ranged from  70% of the EU average in Middle Hungary to 33% of the 
EU average in North  Hungary. 

The  Law  on  Regional  Development  and  Physical  Planning  specifies  the  objectives, 
tasks, institutional  structure  and financial  instruments  of regional  policy based  on the 
cooperation  of counties within regional development councils. 

Seven  statistical  planning  regions  similar  to  Nuts  2 were  introduced  in  1998. The  7 
regions  will  be led by Regional  Development  Councils. As their establishment  is not 
regulated  by  binding  law,  only  5  Regional  Development  Councils  have  been 
established  so  far.  The  Regional  Development  Councils  are  responsible  for  the 
preparation  of regional  development  programmes  and for the evaluation  of the county 
development  plans.  At  regional  level  Hungary  is  divided  into  20  counties  similar  to 
regions  defined  according  to  EU-methodology  (NUTS  III)  which  are  led  by  directly 
elected  County  Development  Councils.  The  Councils  adopt  the  county  development 
programmes  providing  the  general  framework  for  regional  support  measures.  The 
Councils at regional and County level  are not yet fully  operational. 

In  the  field  of  budgetary  and  financial  capacity,  Hungary  needs  to review  its  system. 
The  overall  financial  responsibility,  measures  in  the  case  of  irregularities  and  the 
independence  of control  bodies  within  ministries  needs  to be clarified.  A  mechanism 
focused  on  coordination  of  financial  resources  from  different  sectoral  budget  lines 
needs  to  be  introduced.  Certain  budgetary  provisions,  in  particular  as  regards  co-
financing  including multi-annual  commitments, needs to be put into place. 

The  appropriate  human  and  financial  resources  are  still  lacking  and  inter-ministerial 
coordination  is weak leading to delays in the establishment  of the Development Plans. 

The  experience  in  appraisal  and  evaluation  procedures  according  to  the  structural 
funds  regulations is limited. 

Conclusion 

46 

Hungary  has  advanced  in  its  preparations  for  the  implementation  of  structural  funds 
support  with  a  legal  basis  in  place  and  many  important  procedures  now  established. 
Ineffective  inter-ministerial  coordination  caused stagnation  in the preparatory  process, 
notably concerning project  preparation  and implementation.  Improvements have been 
made, but the result of these remains to be assessed. 

3.6  Quality  of life and  environment 

Environment 

In  1998,  Hungary  adopted  an  ambitious  programme  for  National  Environment 
Protection  including  an  investment  programme  covering  the  years  1998-2002,  but 
achieved limited progress in  1998. 

Hungary  has  established  an  inter-ministerial  committee  on  sustainable  development, 
which  involves  key  actors from  the ministries  of Environment,  Agriculture,  Transport 
and  others  and  which  establishes  guidelines  for  the  integration  of  environment  into 
other sectors. 

In  relation  to  horizontal  legislation,  no  particular  progress  was  made,  although  it 
should be noted that Hungarian  legislation  already complies to a very large extent with 
the  access  to  environmental  information  directive.  More  efforts  are  required  to  fully 
align  national  legislation  with  the  Environmental  Impact  Assessment  Directive,  in 
particular the scope of projects  subject  to an assessment  needs  to be extended.  This is 
particularly  important,  as the  relevant  legal  provisions  will  be  applied  for  all  projects 
financed  by  the  Community.  Particular  efforts  should  be  made  to  include  reporting 
requirements  in  the  corresponding  sectional  legislation,  in  order  to  comply  with  the 
reporting Directive. 

In  the  water  sector,  no  progress  was  made  in  terms  of  legal  alignment  and  all 
legislation  still  requires  transposition.  Nevertheless,  important  implementation  steps 
were  taken  with  regard  to  urban  wastewater  treatment  (capacity  enlargement, 
technological  upgrading,  sewerage  development  and  construction  of  mechanical 
treatment  facilities).  The  timetable  and  schedule  for  the  transposition  and  technical 
needs  of  the  wastewater  treatment  Directive  are  currently  being  studied  and  the 
impacts of the drinking water Directive being assessed. 

In  the  field  of  industrial  pollution  control  and  risk  management,  pollution  from 
industrial  plants and large combustion  plants has been  gradually  reduced  over the last 
20  years  and  the  relevant  acquis  is  almost  fully  aligned.  However,  alignment  in  the 
area  of  integrated  pollution  and  prevention  control  will  require  substantial  financial 
efforts  to up-grade some  1000 existing installations. 

The  adoption  of  the  law  on  catastrophes  in  June  1999  transposes  the  acquis  on  the 
control of major  accident  hazards  (Seveso II).  Important  implementation  steps should 
be taken for its implementation.  The total number of establishments coming under the 
Directive in Hungary is estimated to be around  80-100 of which  around 20-40 will  be 
"upper tier" establishments with an obligation  to establish  safety  management  systems 
and internal  emergency  plans and to produce  safety  reports.  (The investment  cost  for 

47 

the industry  concerned  is estimated  to be around €  80 million).  Hungary  was  one of 
the first  signatories  of  the UN/ECE convention  on industrial  accidents  and is also the 
first  of  the  Candidate  Countries  to  have  ratified  this  convention.  Co-operation  in  the 
framework  of  this  convention,  in  particular  regular  signatories'  meetings,  should 
facilitate  transposition  and  implementation  of  the  directive.  The  Directive  on  the 
protection  and  reduction  of  environmental  pollution  by  asbestos  still  needs  to  be 
adopted. 

No  particular  progress  was  made  in  the  field  of  air  quality,  where  the  main  issues 
remain transposition  and implementation  of the Directive on the quality of ambient air 
and its subsidiary  Directives,  such  as on ozone and the Directive  on non-road  mobile 
machinery.  Institutional  strengthening  is  required  in  particular  as regards  monitoring 
and  data  exchange.  Identification  of  zones  where  there  is  heavy  concentration  of 
pollution  is still to be carried  out.  Full  alignment  still needs to be achieved  as regards 
the  Vocational  Organic  Compounds  Directive.  Hungary  is  a party  to  the  Convention 
on long-range  trans-boundary  air pollution  which  also requires  the implementation  of 
pollution  abatement  measures.  Hungary  fully  participates  in  and  implements  the 
Convention. 

Hungary  is  already  in  line  with  the  acquis  on  the  lead  content  of  petrol. Funds  have 
already  been  allocated  by  the  Hungarian  Oil  and  Gas  company  to  comply  with  the 
requirements relating to petrol. 

Currently,  there  are  mandatory  standards  for  noise  produced  by  lawnmowers  and 
household  appliances,  but  construction  plant  equipment  is  not  yet  covered.  Quality 
assurance and control  started in  1998 and further  progress will be needed to align with 
the acquis on noise from  machinesand  vehicles. For monitoring purposes the existing 
laboratories will need to be improved. 

In  the  sector  of  Chemicals  and  Biotechnology,  there  has been  significant  progress  in 
the domain  of  animal  protection.  A new  Law entered  into force  on January  1999 that 
further  aligned Hungarian  legislation  with the directive on animal experiments. 

The  1998 Framework  Law  on  Gene  technology  which  entered  into  force  in  January 
1999  provides  the  legislative  framework  for  harmonising  legislation  in  the  field  of 
genetically  modified  organisms. The newly  adopted Law  on  chemical safety  prepares 
the  ground  for  aligning  the  acquis  in  the  sector  of  chemicals.  The  Institute  for 
Chemical  Safety  has been created  and will enhance the implementation  of the adopted 
legislation.  In 
for 
Environmental  Management  has been  improved. 

laboratory  capacity 

the  same  field, 

the  Institute 

the 

in 

Despite  the  fact  that  waste  management  policy  is  granted  a  high  priority  in  the  key 
national  environmental  strategy  document,  no  progress  has  been  achieved  over  the 
last  year.  Waste  represents  the  weakest  sector  in  Hungary,  as  the  entirety  of  the 
corresponding  acquis  needs  to  be  transposed.  The  adoption  of  a  Law  on  Waste 
management  should  be  considered  as  a  priority,  since  it  will  allow  the  adoption  of 
subsidiary  legislation  on  specific  types  of  waste  that  are  currently  all  missing  in 
Hungary.  Important  implementation  measures were taken  with  the construction  of  10 
new  regional  landfills. 
It  remains  to  be  assessed  if  these  comply  with  the 
requirements  of  the  recently  adopted  Community  Directive.  Environmental  product 

48 

charges  were introduced  for  oil  products, and  under this  system,  the establishment  of 
the collection  and processing systems of waste oils was commenced  and the collection 
system  for  used  batteries  was  created.  The  collection  system  for  packaging  reached 
25%. 

In  the  field  of  radiation  protection,  progress  has  been  limited  to  aligning  national 
legislation  to  the  "maximum  permitted  levels  of  the  radioactive  contamination  of 
foodstuffs".  The  main  acquis  still  needs  to  be  transposed.  A  solution  needs  to  be 
found  for  disposal  of  Paks  NPP  operational  waste.  Hungary  ratified  the  Joint 
Convention  on  the  Safety  of  the  Spent  Fuel  Management  and  on  the  Safety  of 
Radioactive Waste  Management. 

In  relation  to  climate  change,  Hungary  ratified  the  climate  convention  in  1995  and 
adhered to the Kyoto protocol with a 6% reduction  target. 

In  the  area of  nature  protection  a good  level  of  protection  had  been  already  achieved 
(enshrined  in  the Law  on  Nature  Protection)  with  an  important  part  of  territory  being 
protected  under  various  statutes.  No  further  progress  regarding  transposition  of  the 
Habitats and Birds Directives has been made and a ban on the use of leghold traps still 
has  to  be  introduced.  Hungary  is  an  active  party  to  the  Washington  convention  on 
trade  in  endangered  species  (CITES),  which  requires  implementation  arrangements 
similar  to  those  of  the  acquis.  Progress  in  this  area  was  limited  to  the  adoption  of 
some implementing measures concerning the acquis on protected  animal species. 

Hungary  has  established  in  its  NPAA  a  detailed  financing  plan  estimating  the  costs 
over 3 years to € 95 million. 

The issue of nuclear safety  is dealt with in the energy  chapter. 

Conclusion 

Some  progress  has  been  achieved  in  the  areas  of  nature  protection,  pollution  from 
industrial plants and large combustion plants as well as the control of major  accidents. 
However,  substantial  efforts  are  still  needed,  in  particular,  in  the  areas  of  waste  and 
waste  management,  water  and  air  quality.  Hungary  has  made  steps  to  address  the 
short term Accession  Partnership priorities. If Hungary  wants to achieve its  ambitious 
target  for  full  transposition  in  2001  it  will  need  to  urgently  speed  up  both  legal 
alignment  and  investment  in  environmental  technology  and  infrastructure.  In  this 
context,  it would  be particularly  important  that  the budgetary  provisions  made  in  the 
NPAA are adequately reflected  in the annual budget. 

Nevertheless,  a  number  of  important  steps  in  relation  to  implementation  are  being 
taken  and  a  very  thorough  and  comprehensive  plan,  both  for  transposition  and 
implementation  (including  costs  analysis  and  investment  strategies)  has  been 
established in the National Programme for the Adoption  of the acquis. 

Consumer protection 

49 

In  1998,  Hungary  addressed  the  medium-term  Accession  Partnership  priority  on 
consumer protection  when adopting the legal framework  in the field  of consumers  and 
health  protection.  The  law  contains  provisions  on  product  liability,  but  the  threshold 
value for product  liability is still much lower in Hungary than in the Union. 

Hungary  has  continued  to  make  progress  in  this  area.  Legislation  has  been  further 
aligned  in  the  fields  of  unfair  terms  in  consumer  contracts,  contracts  relating  to  the 
purchase  of  the  right  to  use  immovable  properties  on  a  timeshare  basis,  contracts 
negotiated  away  from  business  premises,  and  package  travel,  package  holidays  and 
package  tours. However,  discrepancies  still  exist  in  legislation  related  to  misleading 
advertisements, consumer  credit  and indication  of prices. Minor  differences  remain  as 
regards doorstep and distance selling. 

A  market  surveillance  system,  as  well  as  the  necessary  structures  to  implement 
product liability, were set up in April  1999 but are not  yet functioning  in a  satisfactory 
manner.  Central  problems  relate  to  the  existence  of  pre-market  control,  the  lack  of 
competent  personnel  and  lack  of  some  technical  equipment.  The  central  laboratories 
of  the  inspection  bodies  are  nevertheless  reasonably  well  equipped  and  the  testing 
instruments  used  are  relatively  modern.  However,  in  order  to  ensure  that  the  whole 
system  operates  smoothly,  Hungary  still  needs  to  enhance  consumer  awareness,  as 
well  as  producer  awareness,  on  consumer's  rights  and  producer's  responsibilities. 
Furthermore,  although  Hungary  already  has  in  place  the  basic  instruments  to 
implement  market  surveillance  (legal  structures,  laboratories,  institutional  set  up), 
further  institutional  strengthening  is  necessary  to  reach  EU  standards,  in  particular 
through  the  provision  of  professional  training  and  the  modernisation  of  certain 
equipment.  Efforts  have  also  to  be  made  to  familiarise  the  legal  profession  with 
product liability related cases. 

The  general  inspectorate  on  Consumers  Affairs  (the Bureau  of  Consumer's  affairs)  is 
the monitoring body. 

3.7 

Justice and  home  affairs 

The  1998  Regular  Report  stated  that  Hungary  had  the  capacity  to  made  progress  in 
adopting  the  acquis,  satisfied  the  short-term  priorities  of  the  Accession  Partnership 
and  had  made  substantial  progress  in  the  areas  of  legislation,  asylum  and  border 
management. 

The Commission  underlined  the necessity  of  adopting  a new  law  on  foreigners  and a 
visa  policy  suited  to  the  requirements  of  the  EU.  The  report  recommended  among 
other  things,  that  : "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." 

Immigration/border  control 

In the field  of immigration, the  1993 law on the admission, residence and immigration 
of foreigners  was amended in March  1999.  It introduced the possibility for  foreigners 
to  be  self-employed  and  provided  a  general  framework  for  foreigners  working  in 

50 

Hungary.  In  the  same  law,  illegal  employment  has  been  defined  as  a  criminal  act. 
Further efforts  have been made concerning readmission  agreements. In  1998 and  1999 
Hungary  signed  bilateral  readmission  agreements  with  Bulgaria  and  Slovenia. 
Bilateral  readmission  agreements  came into force  with France, Germany  and Italy. In 
the  field  of  admission,  Hungary  has  concluded  bilateral  agreements,  which  aim  at 
simplifying  mutual  exchange  of  seasonal  workers.  These  new  agreements  include  a 
provision  on the issuing of a standard travel  document. 

In  the  area  of  visa  policy,  Hungary  has  prepared  a  programme  to  harmonise 
Hungarian  visa  requirements  with  the  acquis.  The  visa  obligation  for  airport  transit 
for  nationals  of  certain  countries,  introduced  in  September  1998  in  accordance  with 
the  relevant  EU  Joint  Action  on  airport  transit  arrangements,  has  not  yet  been 
implemented. 

Hungary  should  continue  progressive  alignment  of  visa  legislation  and  practice  with 
that of the EU. 

Concerning  border controls,  Hungary  has taken  steps  to  implement  border  checks  in 
accordance  with  EU  requirements.  However,  the  effectiveness  of  border  control  and 
the immigration  services  have to be improved.  In this context,  particularly  training of 
the  relevant  staff  and  up-grading  of  the  necessary  equipment  are  essential.  It  is  also 
important  to  provide  for  a  direct  online  connection  between  immigration  offices, 
border posts and diplomatic  representations. 

Asylum 

The  number  of  asylum  seekers  in  Hungary  has  considerably  increased  following  the 
lifting  of  the  geographical  reservation  on  the  Geneva  convention  and  the  start  of  the 
crisis  in  the  Federal  Republic  of  Yugoslavia/Kosovo.  Out  of  the  8,521  asylum 
applications  received  in  the  first  eight  months  of  1999,  there  is  a  serious  backlog  of 
4,249 where decisions are still pending. 

Much  effort  is  still  needed  in the  area  (see chapter  4  on  administrative  capacity).  In 
particular,  the  operation  of  the  court  of  appeals  in  the  case  of  a negative  decision  as 
concerns  the  status  of  a refugee  needs  to  improve,  existing  reception  centers  need  to 
be  upgraded  and  new  centers  need  to  be  set  up  in  order  to  cope  with  the  increasing 
number of asylum  seekers. 

Police 

Hungary  has made  very significant  progress  in further  aligning its legislation  with  the 
acquis.  Regarding  the establishment  of  an independent  national  data  protection  body 
according to the Europol  provisions, Hungary  has taken  the necessary  legal  measures 
in  1999  in  order  to  meet  the  data  protection  and  supply  criteria  as  well  as  the 
communication  regulations.  An  independent  national  data  protection  body  and  the 
post of a data protection  ombudsman  have been created. 

As far  as customs  are concerned,  a special  department  has been  set up in  1998 to deal 
with  'risk  analysis'  and  in  1999  a  special  unit  prepared  the  introduction  of  a 
management  system for  analysing risks. As regards the implementing  of the technical 

51 

requirements  of  the  Schengen  Information  System,  the  Hungarian  Government 
decided  in  June  1999  to  set  up  an  International  Police  Co-operation  Centre  housing 
the  national  office  of  Interpol,  the  future  national  office  of  Europol  and  a  Central 
Information  Office. 

Concerning  the  fight  against  organised  crime,  the  Hungarian  authorities  increased 
efficiency,  notably  through  training  of  police  forces  and the  adoption  of  new  laws in 
March  1999.  These  cover  witness  protection,  informants  and  people  leaving  and 
denouncing  a  criminal  organisation.  Furthermore,  participation 
in  criminal 
organisations  was  made  a  criminal  offence  and  stricter  rules  for  punishment  were 
introduced.  Additionally,  a comprehensive  package  of  public  safety  measures  ('anti-
Mafia  package7)  came  into  force  in  September  1999  which  increases  the  police 
investigative  and  operational  powers  when  dealing  with  suspected  organised  crime 
cases.  Following  the  bilateral  agreements  Hungary  has  concluded  with  most  of  its 
neighbouring  countries,  foreign  law  enforcement  bodies  are  allowed  to  carry  out 
pursuits across the border. 

However,  Hungary  has  not  yet ratified  the  Council  of  Europe  Convention  on  Money 
Laundering.  A  further  up-grading  of  equipment  and  intensification  of  co-operation 
between  police,  customs  and  border  guards  is  essential.  Particularly,  the  system  for 
information  exchange  between  the  different  services  has  to  be  improved.  Hungary 
should also continue to work on the conclusion  of co-operation  and mutual  assistance 
agreements  in  the  field  of  customs  with  EU  Member  states  and  its  neighbouring 
countries. 

Drugs 

Hungary,  a  transit  country  for  drug  trafficking,  is  becoming  a  target  country  as 
consumption  is increasing. 

The  1988  Vienna  Convention  on  the  prohibited  trading  of  drugs  and  other 
psychotropic  substances  entered  into  force  in  November  1998.  In  March  1999,  the 
Hungarian  Criminal  Code  was  harmonised  with  the  acquis  concerning  the  sanctions 
against 
illegal  drug  trafficking.  Hungary  foresees  co-operating  with  EU  law 
enforcement  agencies  on  drug-related  matters  through  Europol.  As  regards  synthetic 
drugs, the co-operation  with the industry  for  ensuring  precursor  control  appears  to be 
satisfactory. 

Judicial  co-operation 

Regarding  civil  matters,  in  February  1999  Hungary  promulgated  the  Strasbourg 
Agreement  relating  to Persons  Participating  in Proceedings  of  the European  Court of 
Human Rights. 

As concerns criminal matters, the Penal  Code was amended  in March  1999 to combat 
organised  crime  more  efficiently.  The  provisions  of  the EU  Joint  Action  making  it  a 
criminal  offence  to  participate  in  a  criminal  organisation  were  also  incorporated  in 
Hungarian  legislation  in  March  1999.  The  definition  of  organised  crime  has  been 
further  harmonised with the acquis. 

52 

Hungary needs, however, to make further  efforts  to align  legislation  with the  1995 EU 
Convention  on the protection  of the European  Communities'financial  interests-and its 
protocols;  in  particular  corporate  liability  needs  to  be  defined  according  to  EU 
standards. Particular  attention  should  be given  to enforcement  of  the  new  legislation 
on organised  crime. 

Conclusion 

Hungary has made some progress in the area of Justice and Home Affairs.  Significant 
progress has been made in the areas of the police and the fight  against corruption  with 
more  measured  progress  on  immigration,  drugs  and  justice.  However,  no  real 
improvement can be reported on border control and asylum. 

Further  efforts  are  required  in  all  the  above  mentioned  fields  and  in  particular  on 
border  control,  both  at  border  posts  and  on  areas  without  border  posts  ("green 
border")  in  accordance  with  Schengen  standards,  and  on  asylum  through  the 
establishment  of  new  reception  facilities  for  asylum  seekers, an  increase  of  qualified 
staff  and further  harmonisation with the EU procedures. 

Besides, in  all Justice  and  Home  Affairs  sectors, special  attention  should  be  given  to 
the upgrading  of  equipment,  including the improvement  of  automatic  transmission  of 
law  enforcement  agencies,  border  checking  points  and. 
data  system  between 
embassies. 

3.8 

External  policies 

Trade  and  international 

economic 

relations 

Hungary  applied  tariffs  average  12.4  %  on  all  products,  33.3  %  on  agricultural 
products  15 % on fishery  products and 7.4 % on industrial products. 

In January  1999, Hungary  signed the agreement on financial  services of Protocol  V of 
the General  Agreement  on  Trade  of  Services  (GATS).  In  November  1998, Hungary 
signed  a  Free  Trade  Agreement  with  Estonia  and  with  Lithuania  and  in  June  1999 
with Latvia. Taking  into account  that the rights and obligations of  membership  imply 
the  termination  of  any  international  agreement  which  is  incompatible  with  EU 
membership,  the Free Trade Agreements  with the EFTA  and CEFTA  Member  states 
as well as with Turkey and Israel will have to be renounced by the time of  accession. 

Outstanding  issues  concern  the  safeguard  measures  regime  and  accession  to  the 
plurilateral  WTO  agreements  on  Civil  Aircraft,  on  Government  Procurement  and on 
Trade in Information  Technology.  Hungary  has expressed  its  willing to  work  closely 
with  the  EC  in  the  forthcoming  WTO  Round,  with  a  view  to  aligning  positions  and 
policies as closely as possible. 

Development 

33 

Hungary  has  no  special  development  policy,  but  96%  of  all  imports  coming  from 
developing  countries  receive  trade  preferences.  GSP  schemes  exist  for  all  products. 
Hungary  has  no  specific  budget  for  developing  countries.  The  Ministry  of  Foreign 
Affairs  has  limited  funds  of  €  80,000)  which  are  mainly  used  for  humanitarian 
purposes.  Hungary  should  have  no  difficulties  in  applying  the  acquis  in  the  field  of 
development  policy. 

Customs 

Hungary  had  started  to  align  its  customs  legislation  with  the  acquis.  However,  little 
progress in harmonising the Hungarian  customs legislation  has been made since 1997. 

the  EU  combined 
its  Customs  Tariff  annually,  applying 
Hungary  updates 
nomenclature. The  average  of the customs  tariffs  applied  by Hungary  is  12.4% on  all 
products:  33.3%  on  agricultural  products,  15%  on  fishery  products  and  7.4%  on 
industrial  products.  Binding  Tariff  Information  is  not  applied.  An  expert  group  was 
established for the development  of an integrated  tariff. 

In the field  of Origin of products, Hungary participates  in the pan-European  system of 
cumulation  which  has  been  applied  since  January  1999.  The  use  of  simplified 
procedures  remains  limited.  Stricter rules on payment  of customs  duties  and on  duty 
relief  are currently maintained  and justified  by Hungary  by the need to combat  fraud. 
Further  harmonisation  is  also  needed  regarding  regulations  on  customs  procedures 
with economic  impact. The Hungarian  system for  administering  tariff  quotas, ceilings 
and  duty  suspensions  is  only  partially  harmonised  with  the  acquis.  Quotas  are 
allocated on a first  come first  served basis. 

Hungary  has  a  large  number  of  customs  free  zones  (approximately  110).  Any 
company  can  request  the  creation  of  a  free  zone  in  Hungary  and  some  free  zones 
contain  only  one  company.  The  extensive  use  of  such  zones,  as well  as certain  rules 
applied to them, are incompatible with the acquis. 

Within  the  headquarters  of  Hungarian  Customs,  eight  'accession  task  forces'  were 
created  in  January  1999  to  develop  harmonised  legislation  and  work  on  its 
implementation.  The  Hungarian  customs  administration  has  carried  out  a  wide-
ranging  computerisation  programme  for  phyto-sanitary  and  veterinary  products. 
Furthermore, a risk analysis system was introduced  in a pilot phase with the  objective 
of  improving  border  control  efficiency.  The  pilot  phase  of  an  Electronic  data 
exchange  initiative  has  been  launched.  A  strategic  training  plan  for  the  customs 
administration  was  developed  in  1998.  The  efficiency  of  tax  and  customs  duties 
collection  continued  to  improve.  Strict  custom  rules  have  been  introduced  to  curb 
illegal  tobacco  and  alcohol  trafficking.  As  regards  border  posts,  good  progress  has 
been  achieved  at  the  main  posts  which  are  approaching  EU  standards,  but  further 
efforts  are needed  for  smaller  posts  which  are  short  of  the  equipment.  In  December 
1998,  one  new  border  post  has  been  opened  at  the  international  airport  at  Ferihegy 
and  another  has  been  re-opened  at  Tiszabecs  at  the  Ukrainian  border  after 
modernisation  in line with the acquis. 

Conclusion 

54 

The lack of progress in the customs  area over the past  year has been  a cause for  some 
concern.  Further  efforts  are required  to: the reform  of the Hungarian  Customs  Code, 
create  integrated  tariff  structures,  introduce  binding  tariff  information,  establish 
binding  information  on  Origin  and  introduce  rules  applying  to  free  zones.  Progress 
has  been  made  on  up-grading  the  major  border  posts,  but  further  efforts  are  still 
required to up-grade small posts. 

Common foreign  and security policy 

Hungary  continues  to  orientate  its  foreign  and  security  policy  towards  the  EU.  It 
participates  actively  in the multilateral  political  dialogue  within  the framework  of  the 
Common  Foreign  and  Security  Policy  (CFSP),  including  the  regular  meetings  at 
political  directors', European  correspondents' and Working  Group  level. Hungary  has 
regularly  aligned  its positions with  those of the EU and, whenever  invited,  adhered to 
the  Union's  statements,  declarations  and  demarches,  including  in  the  context  of  the 
UN  and  the  OSCE.  Thus  it  aligned  itself  with  the  common  position  on  Kosovo,  the 
ban on Yugoslav flights  and the oil embargo on  Yugoslavia 

In March  1999, Hungary became a member of the North Atlantic Treaty  Organisation 
(NATO).  In  January  1999  it  ratified  the  Treaty  on  Conventional  Armed  Forces  in 
Europe.  During  the  Kosovo  crisis, Hungary  actively  supported  the  NATO  operation 
against  Yugoslavia.  Hungarian  soldiers  participated  in  the  humanitarian  mission  in 
Albania.  Hungary  also  participates  in  KFOR  and  SFOR  and  sent  in  this  context 
soldiers to Kosovo. 

In  view  of  its  full  participation  in  the  CFSP,  Hungary  still  needs  to  make  certain 
structural  changes.  In the first  half  of  1999 Hungary  assumed the rotating  presidency 
of the Council of Europe. 

Hungary  strives  to  contribute  to  regional  stability  through  a  policy  of  good-
neighbourly  relations  and  regional  co-operation,  i.a.  by  participating  in  the  Central 
European  Initiative,  the  South  East  European  Co-operative  Initiative  (SECI)  and  the 
Royaumont  process  and the  relaunched  Visegrad-4  dialogue  (involving  Slovakia,  the 
Czech  Republic,  Poland  and  Hungary).  Relations  with  Romania  and,  following  the 
general  elections of September  1998 there, with  Slovakia  improved considerably.  The 
Basic  Treaty  with  Slovakia,  signed  in  1996, is  now  being  implemented.  Discussions 
on  a  solution  to  the  dispute  over  the  Gabcikovo  dam  project  are  on-going  on  a 
technical  level  without  standing  in  the  way  of  renewed  bilateral  relations.  Hungary 
participates  in  the  Stability  Pact  for  South  East  Europe.  In  the  first  half  of  1999  it 
assumed the rotating presidency of the Council of Europe. 

3.9 

Financial  questions 

Financial  control 

55 

Hungary  has  continued  to  consolidate  the  policy  framework  for  financial  control  by 
defining  in  more  detail  the  scope  of  financial  audits  and  the  distribution  of  tasks 
between  the  State  Audit  Office,  the  external  financial  control  body,  the  Government 
Control  Office,  the internal financial  control  body and the State Treasury. In  addition, 
an integrated internal control policy was introduced. 

The State Audit  Office  acts as an external  auditor  independent  from  the  Government. 
The  Office  will  provide  the  accounting  control  of  the  paying  agency  in  the  field  of 
agriculture,  which  will  be  established  under  the  supervision  of  the  Ministry  of 
Agriculture  and Regional  Development. 

The  role  of  the  Government  Control  Office  has  been  further  strengthened  with  the 
extension  of  its  responsibilities  to  the  following  areas:  ex-post  evaluation  of  the 
effects  of  decisions  of  the  Government,  control  of  expenditures  from  the  Central 
Budget, control  of subsidies  and of the use of funds  (from  international  donors) by all 
kinds  of  beneficiaries  including  regional  and  local.  At  the  end  of  1998  a  new 
monitoring system was set up to monitor the different  foreign  aid programmes  and the 
related  co-financing.  The  administrative  co-operation  agreement  of  December  1997 
between  the  Government  Control  Office  and  the  Commission's  financial  control  has 
led to a first joint financial  control mission in Budapest. 

The State Treasury is the accountant for the central budget and since  1998 responsible 
for  foreign  assistance  to  Hungary.  It  executes  payments  after  ex-ante  control  for  the 
Hungarian  central  administration, but is also responsible  for  a nation  wide  monitoring 
system  for  funds  and  certain  state  aids  devoted  to  regional  development.  There  is  a 
need  to  improve  co-ordination  in  cases  involving  several  sectoral  budget  lines. 
Following  an  agreement  with  the  Commission,  the  National  Fund  and  the  Central 
Finance and Contract Unit have been  set up within the State Treasury. 

Conclusion 

Hungary  continued  to  align  its  internal  financial  mechanisms  at the central  level, but 
further  efforts  are  needed  as  regards  the provision  of  skilled  staff  and  of  appropriate 
technical equipment. Particular emphasis should be given to the establishment  and the 
strengthening  of  the  regional  and  local  internal  audit  units  in  view  of  Hungary's 
participation  in the new pre-accession  instruments. Within  each  Ministry  a number of 
issues need to be clarified  such  as the overall financial  responsibility,  measures  in the 
case of irregularities and the independence of control bodies within the ministries. 

3.10.  General  evaluation 

Hungary  continues  to  make  progress  aligning  and  implementing  the  acquis  in  most 
sectors.  In  the  internal  market,  progress  has  continued  as  regards  laws  on  public 
procurement  and intellectual  property  (except as regards retroactive patent  protection) 
and  efforts  have  been  focused  on  ensuring  their  effective  implementation.  Notable 
progress  has  been  made  in  adopting  legislation  on  self-employment  which  removes 
restrictions  on EU-individuals wanting to establish  in Hungary. Although  efforts  need 
to  pick  up  in  transposing  EU  standards  and  to  ensure  the  functioning  of  market 
surveillance,  Hungary  is  well  advanced  in  implementing  the  new  approach  in  the 
standards  and  certification  areas.  Hungary  has  adopted  a  law  on  state  aids  which 

56 

should  facilitate  the  development  of  an  effective  system  of  state  aid  monitoring  and 
control. 
Progress  is  quite  steady  but  slow  in  the  agricultural,  veterinary  and 
phytosanitary  fields  and  efforts  need  to  be  accelerated  considerably  if  a  sufficient 
level of alignment is to be achieved over the medium term.  Hungary is relatively well 
advanced in alignment in the transport sector although the rail  sector is lagging behind 
in terms of alignment  and actual restructuring of the railways.  Hungary has continued 
to  consolidate  the  policy  framework  for  financial  control  by  defining  the  scope  of 
audits  and  the  distribution  of  tasks  and  responsibilities  between 
the  various 
institutions  involved. 

Important  progress  was  made  in  overall  alignment  in  the  VAT/excise  area,  but 
discriminatory  provisions  in  the  excise  area  are  still  causing  problems.  Further 
alignment  is  needed  in  the  audio-visual  areas  as  concerns  European  works  and 
satellite broadcast monitoring.  Aside from  the fight  against organised crime, the pace 
of  alignment  has been  slow  in  the  area  of justice  and  home  affairs,  particularly  with 
respect  to  border  management  and  asylum.  Little  progress  has  been  made  with 
regard  to  labour  and  health  and  safety  at  work.  There  has  been  a  noticable  slow 
down  in  the  adoption  of  environment  legislation  and  no  progress  has  been  made  in 
customs.  Given  the  size of  the transposition  task  which  remains  to be done in  these 
sector,  significant  efforts  need  to  undertaken  to  ensure  further  progress.  While 
in  the  environment  and  energy  sectors,  it  is 
strategic  plans  have  been  adopted 
essential  that  they  be  quickly  implemented. 
In  some  areas  such  as  regional 
development,  whilst  the  legislative  framework  has  been  in  place  for  some  time, 
progress  in  implementation  has  been  limited  due  to  a  lack  of  budgetary  and  human 
resources. 

Hungary  has made  steady  progress  in building  up its administrative  capacity to  apply 
the  acquis.  Steps  have  been  taken  toward  general  public  administration  reform  and 
continued  emphasis  has been  placed  on the  development  of  specific  European  policy 
and  law  training  courses  throughout  the  administration  and  in  the judiciary.  Most  of 
the  key  institutions  needed  for  implementation  of  the  internal  market  are  in  place. 
Nonetheless  the administration  still  needs to be  strengthened  in specific  areas  such  as 
state  aid control,  market  surveillance  (implementation  of product  liability  legislation) 
and  veterinary  and  plant  health.  Hungary  needs  to  allocate  sufficient  budgetary  and 
administrative  resources  to  regional  development  and  environment  and  improve 
capacities  to  use,  monitor  and  control  EU  financial  assistance.  There  is  room  for 
granting  further  independence  to  authorities  such  as  the  Government  Control  Office 
and the Communications  Authority. 

Hungary  has  satisfactorily  addressed  most  of  its  short  term  Accession  Partnership 
priorities with the exception  of  administrative  strengthening  in regional  development, 
steel  sector  restructuring  and  alignment  in  the  environment  sector.  Hungary  has  also 
made good progress in implementing the medium term priorities. 

57 

4. 

Administrative  capacity to apply the  acquis 

This  chapter  updates  the  information  given  in  the  Commission's  Regular  Report  of 
1998.  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.  Agenda  2000 
underlined  the  importance  of  incorporating  Community  legislation  into  national 
legislation  effectively,  and more importantly,  of implementing  it properly  in the  field, 
via the appropriate  administrative  and judicial  structures.  The administrative  capacity 
became a central issue in the negotiation process. 

For this  year's report the Commission  continued to work with the candidate  countries 
to  identify  an  illustrative  list  of  enforcement  bodies  in  key  areas  of  the  acquis. 
Wherever  possible  information  is  provided  on  the  Ministry  or  organisation  which  is 
responsible  for  a  specific  part  of  the  acquis,  its  legal  powers,  staffing  levels  and 
budget.  As  in  the  Member  States  each  administration  has  to  decide  how  to  allocate 
scarce  human  and  financial  resources,  ensuring  that  it  has  sufficient  capacity  to 
implement  the  acquis.  There  is no  'ideal'  level  of  staffing  and numbers  alone  are no 
indication  of  capacity  to  implement  the  acquis  effectively.  However,  wherever  they 
are  available,  staff  numbers  and  changes  in  staffing  levels  are provided.  It  is  clear 
that in areas where there is a heavy control and enforcement  burden  one or two people 
are not  sufficient  and  in  such  cases  very  low  staff  levels  can  indicate  a need  to  give 
greater priority to administrative  capacity. 

Many  of  the  enforcement  structures  covered  in  this  report  have  only  recently  been 
established.  They  are  beginning  to  take  decisions  in  acquis-related  areas  but  it  is 
often  too  early  to  assess  the  quality  and  compatibility  of  these  decisions  with  the 
acquis  or  the  information  needed  is  not  available.  However,  in  some  areas  it  is 
possible  to provide  data to illustrate  that the  acquis  is becoming  a living  and  integral 
part  of  domestic  decision-making.  During  the  coming  year  the  Commission  will 
continue  to  work  with  each  of  the  candidate  countries  to  build  up  a  data  base  on 
administrative  capacity  and  information  on  enforcement  which  will  allow  the  Union 
to assess operational capacity to implement the acquis. 

In the  1998 Regular Report, the Commission  concluded  that: 

"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." 

4.1.  Administrative  structures 

The Hungarian  Government  has continued to take important  steps towards the  reform 
and  strengthening  of  its Public  Administration.  Since July  1998 the role  of  the Prime 
Minister's  Office  in the overall  co-ordination  between  the Ministries has  significantly 

58 

increased.  The  new  duties  include  the  supervision  of  (i)  privatisation  and  (ii)  State 
Treasury  Assets  Management  (KVI).  The  head  of  the  Prime  Minister's  Office  co 
ordinates  governmental  work  and  relations  with  Parliament.  The  increased  workload 
of  the  Prime  Minister's  Office  has  been  accompanied  by  a  staff  increase  of  140 
people.  The  total  is  now  441.  In  August  1998,  a  new  department  was  set  up  to 
strengthen  co-operation  with  the  non-profit  sector  in  the  following  areas:  the  drugs 
situation, social problems and European  integration. 

In  1998,  average  pay  for  civil  servants  increased  by  15%. The  total  number  of  civil 
servants  is  103,296  (state  administration:  53,717,  local  government:  49.579),  which 
shows  a  decline  of  1,350  compared  to  July  1998.  Whilst  the  number  of  state 
administration  staff  has again  slightly  increased this year (some  1,000  new  employees), 
local governments have been particularly affected  staff  losses (some 5,000 between  1996 
and  1998). Although the professionalism  and preparedness of Hungarian civil servants is 
satisfactory,  the relatively  high  average  age and the  lack of  language  skills  are a matter 
of  concern.  Public  administration  development  foresees  a  comprehensive  review  of 
salaries in the public sector aimed at performance-related  pay. 

Courses  on  the  European  Union  continue  to  provide  well-targeted  training  for  public 
administration  and local government staff.  Special training in EU languages is provided 
to Hungarian conference  translators of English, French  and German. 

4.2.  Administrative  and 

judicial  capacity:  key  areas  for 

the 

implementation  of the  acquis 

The  uniform  application  of EC  law  : Since  1998 there has been  further  progress  in 
preparing  the Hungarian judiciary  for  EU  accession.  In  this  respect,  special  attention 
was paid to the launching of training programmes  and courses forjudges  in EC law. 

In  a total  of  156 courts  there  are  2350  posts  for judges  (almost  all  are  filled).  In  the 
last  year  11  new  judges  were  appointed,  and  23  new  auxiliary  staff  posts  created. 
However, the number of technical  support  staff  is only one third of the  average in the 
EU Member states and the level  of  computerisation  is low. According  to the National 
Council  of Justice  around €  32 million  will be needed  to adequately  equip the  courts 
by 2004. 

Judges  are appointed  and can  be removed  on the proposal  of the National  Council of 
Judiciary  by  the  President  of  the  Republic.  Only  Hungarian  citizens  are  eligible  for 
the  post  of  a  judge  and  they  have  to  meet  certain  academic  and  psychological 
requirements. Knowledge in EC legislation  is not yet required. 

There  are  already  106 registered judges  specialised  in EU  law.  A further  700 judges 
are  participating  in  a  training  programme.  In  addition,  the  National  Council  of 
Judiciary  has organised  several  other training courses  for Hungarian judges  on an  ad-
hoc basis. 

Budgetary  support  for  courts  amounted  to €  122 million  in  1999 and €  87 million  in 
1998.  Both  in  1998  and  1999  the  Government  was  unable  to  grant  the  budgetary 
requests  submitted  by the National  Council  for  Judiciary.  In  1999, these  requests  are 

59 

approximately  seven  times  more  than  the  governmental  central  budgetary  plans 
submitted to Parliament in the draft  bill on the 2000 Central Budgetary  Act. 

these  decisions  can  be  brought  before 

Since  1st January  1999  the  system  of judicial  review  of  administrative  decisions  has 
changed  significantly.  The  two  instance  system  of  appeal  was  transformed  into  a 
single-instance  judicial  review  mechanism.  This  means  that  these  decisions  by  the 
county  courts  and  the  Capital  Municipality  Court  can  not  be  appealed  legally. 
However, 
the  Supreme  Court.  This 
development  has  led  to  a  significant  overloading  of  the  Supreme  Court.  At  present 
there  are  3,249  pending  cases  at  the  Supreme  Court.  In  addition,  at  least  200  new 
cases reach the Supreme Court each month. The 3 tribunals of the Supreme Court can 
only decide on  150-160 cases a month. Therefore,  it was necessary to set up three new 
tribunals  in  September  1999.  Currently,  the  average  duration  of  related  litigation  is 
about one year in the lower courts, but one and a half  years at the Supreme Court. 

Under the constitution  the main role of the Supreme Court should be the unification  of 
the  court  practice  and  judicial  guidance  to  the  lower  courts.  The  backlog  of  cases 
reduces  the  possibility  of  the  Court  to  execute  this  function.  Additional  funding  for 
training of judges should be increased in order to ensure that they are able to apply EC 
legislation by the time of  accession. 

Although  a  number  of  actions  have  been  taken  to  improve  the  function  of  the 
judiciary,  further  efforts  in this  area  will  be necessary,  especially  with  regard  to the 
backlog  of  court  cases  and  the  computerisation  of  Courts.  Training  of EC  law  for 
judges  should be continued. 

Single  market  : The Public Procurement  Council  is responsible  for  the  enforcement 
of  public  procurement  rules.  The  Council  answers  to  Parliament,  to  which  it  is 
required to report annually. The Council is independent from  the  Government. 

The Public  procurement  Council  monitors the enforcement  of  the rules  of  the law; in 
particular  contracts  concluded.  The  Council  defines  qualification  criteria;  publishes 
annually  the  list  of  qualified  tenders,  determines  the  number  of  member  of  the 
Arbitration  Committee;  appoints 
the 
Commissioners  and publishes the Public Procurement Bulletin. 

the  Committee  and 

the  chairman  of 

Within  the  Council,  the  Public  Procurement  Arbitration  Commission  acts  as  an 
independent  administrative  review  body. It can  be considered  as a semi-judicial  body 
as required  by the  Remedies  Directive.  The  Public  Procurement  Council  consists  of 
21 members and the Public Procurement  Arbitration Commission  of  17. 

More than 700 complaints  have reached the public procurement  tribunals, but only 35 
cases were appealed to the Supreme Court for judicial review. In almost 90% of these 
cases the lower-level decisions were finally upheld by the Supreme Court. 

The  increase  of  public  procurement  procedures  and  the  decrease  of  negotiated 
tenders indicate that Hungary has an increasingly effective capacity to implement the 
acquis in this area. 

The  enforcement  of  intellectual  and  industrial property  rights  is  carried  out  by  the 
Hungarian  Patent  Office.  At  the  end  of  1998, the  number  of  staff  was  virtually  the 

60 

same  as  in  the  previous  year,  around  263.  In  1999  its  budget  amounted  to  €  8.31 
million compared with € 5.4 million in  1998. 

There  are  five  collective  management  organisations  administering  copyright  and 
related  rights.  These  are  associations  formed  by  a  representative  number  of  right 
holders. 

The  Budapest  Metropolitan  Court  is  a  special  court  having  exclusive  competence  to 
hear most of the industrial property cases. There are two further  expert bodies (one for 
industrial  property  and  one  for  copyright)  administered  by  the  Hungarian  Patent 
Office  providing, upon request, expert assistance to courts and other authorities. 

In  general,  the  Office works satisfactorily,  but continued  improvements  especially in 
training of staff and infrastructure  are still needed.  In  the context  of training, special 
attention  should  be paid  to  those prosecutors  and judges  dealing  with  Intellectual 
Property  Rights-related  cases,  as  up  to  now  courts  have  often failed  in  imposing 
criminal sanctions and penalties. 

In  the  area  of  company  law,  the  19  County  Courts  and  the  Capital  Court  of 
Registration  are  responsible  for  the  registration  of  companies  and  partnerships. 
Following  the  introduction  of  legally  binding  registration  deadlines  the  number  of 
pending  cases  have  been  be  reduced.  Currently,  these  deadlines  are  generally 
respected. The courts forward  company  data to the Companies  Information  Network, 
administered  by  the  Ministry  of  Justice.  The  courts  of  registration  control  the 
incorporation  of companies in Hungary. 
As  to  the  new  registration procedure  defined  in  the  new  company  law,  it should  be 
mentioned  that  the  Company  Register  is  still  rather  unreliable  and  its  information 
technology system needs to be up-graded. 

In  the  field  of  accounting  and  auditing,  the  Hungarian  Chamber  of  Auditors 
established  in  1997 is responsible for:  (1) representing  auditors'  interests nation  wide, 
(2)  education  and  the  training  of  the  auditors,  (3)  the  application  of  the  Rules  on 
Ethics,  (4)  the  qualification  of  the  auditors,  and  (5)  sanctioning  infringements  of  the 
rules. 

There  are currently  6683  auditors  registered  and  1537 registered  auditing  firms  (with 
legal  entity).  A further  5146  individuals  are  authorised  to  provide  auditing  services. 
National  accounting standards do not yet exist. 

The  Hungarian  Chamber  of  Auditors  has  good  record  but  national  accounting 
standards still need to be introduced. 

In  the  area  of  data protection,  a data  Ombudsman  who is elected  by  and  responsible 
only  to  Parliament  is  exclusively  responsible  for  the  protection  of  personal  data  and 
the  disclosure  of  data  considered  of  public  interest.  The  Ombudsman  monitors  the 
implementation  of  law,  examines  complaints  and  ensures  maintenance  of  a  data 
protection  register.  He  submits  an  Annual  Report  on  the  data  protection  situation  to 
the Parliament.  At the end of  1998 the Office  of the Ombudsman  for Data  Protection 
employed a total of 29 staff  which  shows a slight increase over  1997 (25). 

61 

Data protection  seems to be well enforced. 

The Hungarian  standardisation  body  is legally  fully  independent  of  the  Government. 
It  is  the  Institute  responsible  for  the  introduction  of  European  and  international 
standards.  National  standards  are  automatically  repealed  on  the  introduction  of  EU 
standards.  Voluntary  standards  may  also  be published  in  Hungarian,  but  shortage  of 
funds  prevents  this in  practice. Hungary  therefore  relies  on  the  'cover  sheet  method', 
with the text of the standard in English  and the cover sheet in Hungarian. The Institute 
has a staff  of  104 which shows an overall increase of some  10% over  1997 (95). 

Represented  by  its  Standardisation  Institute,  Hungary  is  a  full  member  of  European 
Telecommunications  Standardisation  Institute  and  affiliated  member  of  the European 
Standard  Bodies  CEN/CENELEC  since  1992.  It  has  applied  for  full  membership 
which will only be possible once a 80% transposition  rate has been  achieved. Hungary 
applies  the  relevant  rules  of  these  bodies  in  form  and  content.  The  internal  rules  of 
Hungarian  Standardisation  Institute  require  a  standstill  at  national  level  when 
European  standardisation  work is under way. 

Further  efforts  are  needed  for  speeding  up  the  adoption  of  the  remaining  EU 
Standards  in  order  to  achieve  the  80%  transposition  rate  required  to  become  a full 
member of  the European standard  bodies. 

The  Hungarian  National  Accreditation  Office  is  a  public  body  called  the  'National 
Accreditation  Committee'.  This  Committee  consists  of  55  members,  representing  all 
interested parties in this activity including ministries and consumers organisations. 

The  technical  capacity  of  the  Office  seems  adequate.  Participation  in  international 
accreditation associations  is also ensured. 

Most of the institutes dealing with  testing, inspection  and certification  in Hungary  are 
public  limited  companies. The majority  of the  shares of the bodies  designated  for  the 
implementation  of EU technical regulations  are state owned. 

The  infrastructure  of  testing,  inspection  and  certification  bodies  is  being  reinforced, 
as  Hungary  has  started  to  transform  its system  of pre-market  control  into  a  system 
with greater emphasis on market surveillance. 

is 

the  Ministry  of  Economic  Affairs 

In  the  field  of  metrology,  the  National  Measurements  Office  under  the  statutory 
supervision  of 
legally  responsible  for 
measurements.  The  President  of  the  National  Measurements  Office  is  appointed  by 
the Prime Minister on the proposal  of the Minister of Economic  Affairs.  The  National 
Measurements  Office  has  eight  regional  sub-offices 
.  It  also  functions  as  an 
administrative  authority,  the  decisions  of  which  can  be  challenged  in  court.  The 
National  Measurements  Office  is  well-staffed,  currently  244  employees  are  working 
at the headquarters  in  Budapest  (240  in  1997) while in the eight  regional  sub-offices 
232  persons  are  employed  (229  in  1997). In  1999  its  budget  amounted  to  some  €  7 
million  (€ 4.28 million in  1998). 

The  National  Measurements  Office  is  well  staffed  and  seems  to  have  a  good 
enforcement record. 

62 

Supervision  of  banking  activities  and  investment  firms  is  performed  by  the  State 
Supervisory  Authority  for  Money  and  Capital  Market  which  carries  out  its  activities 
independently  and is supervised by the Government. This body is funded  by fees  from 
the financial  sector.  Its  staff  has increased from  252 in  1997 to 289 in  1998. Its own 
budgetary  income  amounted to € 20.78 million  in  1999 (€  10.39 million /1998).  The 
Chairman  of  the  supervisory  authority  is  nominated  and  dismissed  by  the  Prime 
Minister  upon  proposal  of  the  President  of  the  National  Bank  and  the  Minister  of 
Finance. Supervision  covers credit institutions and financial  undertakings,  investment 
services providers, investment  funds,  stock exchanges, commodities  exchange traders, 
commodity  exchanges,  public  warehouses  and  specialised  credit  institutions.  The 
current  staff  of 300 carry out three main types of activities: participating  in  regulatory 
activities,  licensing  of  companies  and  public  offerings,  and  inspections.  The 
Supervisory  Authority  is  also empowered to carry  out  on-site  inspections. During the. 
reporting  period  21  banks  had  comprehensive  on-site  inspection,  2  had  targeted 
inspections  and  on-site  inspections  were  conducted  in  138  co-operative  credit 

63 

institutions.  In  case  of  a  violation  of  the  rules  by  market  players,  the  Authority  is 
empowered to take measures and impose sanctions such as the withdrawal  of licenses. 
In  1999 for example, the activity of the financial  institution  was suspended in  15 cases 
and the permission  for  issuing  value papers was not granted in 2 cases. The  Authority 
is allowed  to conclude  agreements  with  foreign  supervisory  authorities  and has  done 
so  with  Germany,  France,  Italy,  Austria  and  Luxembourg.  The  information  obtained 
can  only  be  used  for  licensing,  supervision  and  sanctioning  purposes.  Hungary  is 
member of IASCO and the Basle Committee. 

The  State  Supervisory  Authority  for  Money  and  Capital  Market  has  also  conducted 
comprehensive  inspections  at  29  securities  traders  and  members  of  the  commodity 
exchange  and  a targeted  inspection  was  conducted  at  the  Budapest  stock  exchange. 
The  activities  of  9  traders  were  suspended  as  result  of  detected  irregularities.  The 
National  Supervision  of Insurance is under the supervision  of the Finance Minister. It 
is an independent  body with its own budget. In  1998 the number of civil servants was 
45  (38  in  1997). In  1999 its  budgetary  revenue  amounted  to  some €  2.2  million.  A 
further  12 people are employed part time. The State Private Funds  Supervision  Office 
has seen  its responsibilities  increased  as the number  of people  choosing  a second  and 
third pillar private pension  fund  has increased rapidly. The Agency had a staff  of  102 
people in  1998.  In  1999 its budgetary  support amounted to € 2 million. 

In  order  to  make  inspections  more  efficient,  co-ordination  among  the  various 
supervisory agencies needs to be further  strengthened. 

Concerning  Free  movement  of persons,  the  Hungarian  Equivalence  and  Information 
Centre  within  the  Ministry  of  Education  is  in  charge  of  the  recognition  of  graduate 
and  undergraduate  higher  education  degrees,  accredited  higher  educational 
qualifications  and the recognition  of  scientific  degrees.  In  July  1998 the  Scholarship 
Committee  was  separated  from  the  Hungarian  Equivalence  and  Information  Centre 
and by taking this  step of rationalisation  an important  institutional  requirement  of EU 
accession  was  met.  The  Hungarian  Equivalence  and  Information  Centre,  whose 
responsibilities  have been  broadened  over the  last  year, has  a staff  of  12 (an  increase 
of  some 50% over the figure  of the previous  year  (8)). Further  staff  increases  are still 
needed. 

It  is  still  of  concern  that  most  professional  chambers,  of  which  membership  is 
currently  compulsory,  link membership  to  Hungarian  citizenship.  Only  the chambers 
of  architects,  medical  doctors,  pharmacists  and  veterinarians  do  not  require 
Hungarian citizenship. 

Competition  : the Hungarian  Competition  Office  set up in  1999 is responsible for the 
enforcement  of  competition  rules. Currently,  it  has  115  employees  (106  in  1997). In 
1999  its  budgetary  support  amounted  to  €  2.1  million  (1.6  million  in  1998).  The 
Office  has  broad  powers  to  enforce  competition  control,  including  the  seizure  of 
documents,  the  prohibition  of  certain  types  of  practices  and  the  possibility  of 
imposing  fines  including  in  consumer  fraud  cases.  The  decisions  of  the  Office  are 
passed  by  the  Competition  Council,  which  works  with  full  autonomy  within  the 
Competition  Office.  Three-member  panels  within  the  Council  designated  by  the 
President  decide  on cases. Final  decisions  can  be  challenged  before  the  Metropolitan 

64 

Court.  The  qualification  of  the  staff  appears  to  be  sufficient 
Competition  Act. 

to  enforce  the 

In  1998, the Competition  Office  took  180 decisions. In  39 cases the law  was  violated 
(including  30  consumer  fraud  cases,  one  cartel  and  5 abuses).  In  one  merger  case, a 
negative decision was taken  (MATAV). 

State  aid  control  is  entrusted  to  the  State  Aid  Monitoring  Office  of  the  Ministry  of 
Finance. At present, it employs  6 staff  members. It has started to receive  notifications 
on aid plans. 

Whereas  the  Competition  Office  performed  well,  the  State  Aid  Monitoring  Office 
needs to be further  strengthened  in order to enable it to carry out a proper  monitoring 
of State aids. 

Telecommunications  :  the  Hungarian  Communication  Authority  is  the  licensing, 
supervising,  regulatory  and  administrative  agency  for  telecommunications,  postal 
services  and  frequency  management  in  Hungary,  carrying  out  its  activities  under  the 
control of the Ministry of  Transport. It is financed  from  the State budget, has a nation 
wide  competence  and  independent  accounting.  The  appointment  of  the  President  of 
Hungarian  Communication  Authority  is  made  by  the  Minister  of  Transport  on  a 
proposal  of the National  Council  for  Communications  and Informatics.  The  President 
reports  directly  to  the  Minister  and  has  specific  responsibility  for  regulatory  affairs, 
informatics  and frequency  management. 

The  Hungarian  Communication  Authority  is  divided  into  nine  directorates,  five 
inspectorates  and  the  Presidential  Office.  The  directorates  provide  all  central 
regulatory  and resource management  functions.  The 5 regional inspectorates deal with 
licensing and inspection. The Presidential  Office  is responsible for  appeals against the 
decisions of the regional  inspectorates. 

The  staff  of  Hungarian  Communication  Authority  consists  of  approximately  516 
persons,  269  in  central  directorates  (the  same  as  in  1997)  and  247  in  the  regional 
directorates  (a  substantial  drop  from  341  in  1997).  More  than  half  the  staff  have 
professional  qualifications  (of  which  nearly  90%  are engineers).  Although  compared 
to  similar  institutions  in  the  EU  the  staff  figures  appear  to  be  somewhat  high,  the 
figures  also  include  people  employed  to  work  in  the  Hungarian  Communication 
Authority's  various laboratories. 

In May  1999, the Communications  Authority set up a. postal  department  which  will in 
the future  assume responsibility for licensing and supervising the postal  sector. 

Domestic  quality  control  monitoring  is  currently  carried  out.  The  question  of  cross-
border/international  monitoring  has  been  addressed  by  Hungary's  signing  an 
agreement  with UNEX  (Unipost External  Monitoring  System) to allow  the country to 
participate  in  monitoring  and  measuring  the  quality  of  external  mail,  using  UNEX's 
established  methods.  The  main  200  post  offices  are  being  equipped  with  on-line 
networked terminals. 

65 

In  the  area  of  telecommunications,  further  efforts  are  needed  to  consolidate  the 
independence  of the Regulatory  Authority  as the  influence  of the  Government bodies 
is still  noticeable  in certain  areas. In  order to  be able  to face  competition  in the EU 
internal market, the financial  aspect  of  the universal service  obligations  will need to 
be addressed and Hungary will have  to develop further  its postal  infrastructure.  The 
institutional set up in the postal  sector should also cover the establishment of a legally 
separate and functionally  independent regulatory authority. 

("ORTT") 
Audiovisual  services  :  the  National  Radio  and  Television  Commission 
was set up under the law on Radio and Television  Services. The seven members of the 
Commission  are elected by a majority  vote in Parliament  for  one four-year  term. The 
members  are  backed  up  by  an  office  of  103  civil  servants.  The  Commission  is  an 
independent  central  public  organisation  with  nation-wide  competence  under  the 
supervision  of  the  Parliament.  Its  role  is  centred  on  protection  of  the  freedom  of 
speech, the prevention  of information  monopolies, the protection  of the  independence 
of  broadcasters  as  well  as  monitoring  the  principles  of  a free  press  and  reporting  its 
findings  to Parliament. 

The  Commission  is  empowered  by  Law  to:  evaluate  broadcasting  rights  and  tender 
bids for  satellite channels; perform  supervisory  tasks, including  the  award  of  licences 
for commercial  radio and television  and the levying of fines  together  with  withdrawal 
of  licences  in defined  circumstances; operate  a Complaints  Committee  (charged  with 
the  task  of  assessing  complaints  related  to  the  violation  of  the  criteria  of  providing 
balanced  information)  as well  as a programme  monitoring  and  analysis  service;  form 
and  express  opinions  on  the  draft  bills  related  to  frequency  management;  and 
determine  broadcasting  fees.  The  Commission  undertook  approximately  500-550 
actions in 1998. 

The large number of actions seem  to confirm  that the National  Radio  and Television 
Commission has a good enforcement record. 

Taxation  : the Ministry of Finance is the supervising authority of the Tax Office.  At the 
end of  1998 the 24 county directorates had a total staff  of 9170 which shows a significant 
increase  on  1997  (8308). The  Criminal  Investigation  Directorate  was  set  up  in  January 
1999 within the Tax Office  with a staff  of 240. It is authorised to investigate tax evasion, 
fraudulent  bankruptcy,  accounting  discipline,  unfair  economic  advantage  and  to 
document forgery matters. Progress has been registered concerning the number of on-the-
spot checks in the retail sector and ad- hoc checks of VAT refund  claims. The setting up 
of the Criminal Investigation Directorate has also contributed to improved tax collection. 

The Tax Office has improved its control capacity over the last year. 

Agriculture 
:  the  Department  for  Agro-Environment  Management  and  Plant 
Protection  at  the  Ministry  of  Agriculture  and  Regional  Development,  with  a staff  of 
17  members,  has  two  main  sections:  a  Division  for  Plant  Protection  which  deals 
mainly  with  matters  concerning  the  registration  of  pesticides  and  fertilisers,  plant 
health  regulations,  plant  protection  regulations,  quality  control  of  inputs  and  safety 
control of outputs and a Division for Agro-Environment  Management  which is mainly 
concerned  with  legislative  and  administrative  matters  regarding  soil  conservation, 

66 

environmental  aspects  of  agricultural  production,  water  management,  waste  disposal, 
and nature conservation. 

The Plant Health  and Soil Conservation  Inspectorate  operates  under the  responsibility 
of  the  Ministry  of  Agriculture  and  Regional  Development.  There  are  currently  20 
Plant Health  and Soil Conservation  stations (one in each  county  and one in Budapest) 
with  a staff  of 938 persons. There are also  10 specialised  laboratories. 

Finally,  the  National  Wine  Qualification  Institute  is  a joint  organisation  of  various 
departments.  It  is  in  charge  of  testing  and  qualifying  all  wine  and  wine  products  in 
Hungary. The Institute has a staff  of 61 which  shows  a significant  increase over  1997 
figures  (49). 

The  Animal  Health  and  Food  Control  Department  with  a  total  staff  of  2707  and  20 
control  stations  (at  the  Ministry  of  Agriculture  and  Regional  Development),  headed 
by  the  Chief  Veterinary  Officer,  provides  the  central  management  and  control  of 
animal  health  in Hungary. The department  deals with  administrative  questions  related 
to licences for veterinary  drugs and biologicals, the import  and transit of live animals, 
products  of  animal  and  plant  origin  which  might  be  the  carriers  of  disease-causing 
agents,  and  animal  welfare  during  transportation  and  Food  Hygienic  and  Quality 
Control. 

There  are 24 veterinary  border  offices  running  30 veterinary  border  inspection  posts, 
most  of  which  are  manned  on  a 24-hour  basis,  which  control  the  import,  transit  and 
export of animals and animal products. 

The Central  Veterinary Diagnostic  Institute is the central  co-ordinating  laboratory  for 
animal  disease  diagnosis  and  also  provides  specialist  support  and  a  quality  control 
service for  the other diagnostic  laboratories. At end of  1998 it had  a staff  of 78  (75 in 
1997).  The  5  field  diagnostic  laboratories  each  cover  a  designated  territory 
comprising 2-3 counties. 

The  Control  Institute  for  Veterinary  Biologicals,  Drugs  and  Feed  serves  as  a  central 
government  advisory  agency  and  laboratory  in  controlling  the  quality  of  veterinary 
drugs  and  biologicals  intended  for  sale  and  use,  regardless  of  whether  produced 
domestically  or  imported  from  abroad.  It  has  only  diagnostic  functions.  The  number 
of staff  has not changed in the last two years: it was 75 both in  1998 and 1997. 

The  Food  Investigating  Institute  serves  as the  central  laboratory  supporting  the  food 
safety  activities of the Ministry of Agriculture and Regional Development  and its field 
stations.  It  comes  under  the  direct  management  of  the  Animal  Health  and  Food 
Control  Department  and  the  Chief  Veterinary  Officer.  The  number  of  staff  is 
practically unchanged in the last two years: 97 in  1997 and 98 in  1998 

In  the  field  of  agricultural  market  regulation,  the  Agricultural  Market  Regime  Office 
is responsible for the principles of market regulation  and the Agricultural  Intervention 
Centre  has the executive  function.  Agricultural  Market  Regime  Office  is in charge of 
policy  and  regulatory  matters  such  as  marketing,  export  policy,  buy-up  regulation, 
domestic  trade,  international  trade.  It  deals  with  animal  and  plant  products.  The 
Agricultural  Market  Regime  Office  has  a  staff  of  42.  The  Agricultural  Intervention 

67 

Centre  is responsible  for  organising  the  payment  of  state  refunds,  operating  financial 
control, and  ensuring  proper  use of  funds.  It has  access to the database  of  Hungarian 
agricultural  foreign  trade, through  which  it  identifies  unlawful  applications  of  funds. 
The  Agricultural  Intervention  Centre  registers  and  approves  applications  for  export 
refunds.  It  is  still  funded  by  the  Ministry  and  has  been  nominated  as  the  paying 
agency  for  SAPARD.  Although  the  Agricultural  Intervention  Centre  is  independent 
from  the Ministry, the two are closely  linked and the Agricultural  Intervention  Centre 
influences  agricultural  market  regulations.  It  has  a  staff  of  60  and  comprises  four 
departments  dealing  with  market,  controlling,  accounting  and  organisation.  The 
number of staff  shows an impressive increase over  1997 (26). (Its budget amounted to 
€ 2.2 million in  1999). 

The National  Institute for Agricultural  Quality Control  is in charge of all seed quality, 
issuing  of  licences  and  quality  control  of  breeding  animals  and  semen.  The  Central 
Feed  Laboratory  of  the  Institute  is  in  charge  of  diagnosing  inorganic  components  in 
feeds. 

Progress  has  been  made  in  setting  up  administrative  structures for  veterinary  and 
phytosanitary  control.  Further  efforts will be necessary  in order to up-grade control 
standards in accordance with the acquis. 

Fisheries  : the Department  of Fishery, Wildlife  and  Water  Utilisation  is in charge of 
fishery  matters  within  the  Ministry  of  Agriculture  and  Regional  Development.  The 
Department 
is  heavily  understaffed  (2  staff,  including  the  head  of  the  department). 
Each  county  has  a  wildlife  and  fishery  inspectorate  (19  units)  which  employs  one 
fishery  inspector,  who  is  in  charge  of  following  up  and  intervening  in  fish  breeding, 
illegal fishing  and related matters. 

Staff  in  the  department  of  fisheries,  wildlife  and  water  utilisation  needs  to  be 
reinforced. 

Energy  : the Energy Department within the Ministry  of Economic  Affairs  is in charge 
of  energy  policy  and  has  a  staff  of  28.  The  Hungarian  Energy  Office  is  a  state 
administrative  agency  with independent  responsibilities  and jurisdiction  on  a national 
level,  controlled  by  the  Government,  and  supervised  by  the  Minister  of  Economic 
Affairs.  The  activities  of  the  Office  are  performed  by  individual  departments: 
consumer  protection  and  pricing;  energy  supply;  internal  financing;  and  legal  and 
management.  Operating costs are covered by fees  levied on the energy price.  It has a 
staff  of  85  (1997  :  64).  The  main  tasks  of  the  Office  are  the  regulation  and 
supervision  of  gas  and  electricity  companies  with  a  natural  monopoly  position,  and 
the  protection  of  consumer  interests.  Regulation  basically  covers  licences,  operation 
codes,  ownership  questions, prices, networks  and the  general  regulatory  environment 
of the companies.  (Its budget  amounts to € 3 million  in  1999 and to € 2.2 million  in 
1998) 

The  Office  can  levy  fines,  amend  or  withdraw  licences  and  approve  the  separation, 
union  or merger of the licence holder or sale of  a substantial  ownership  share, as well 
as reduction of capital. 

68 

Hungary  has  to  establish  an  appropriate  and  efficient  mechanism for  regulation  as 
required  under  the  gas  and  electricity  Directives.  In  this  respect  the  further 
development  of  the  Hungarian  Energy  Office  as provided  for  in  the  Government's 
new long term strategy  is significant. 

Transport  :  the  competent  administrative  authority  in  the  field  of  transport  is  the 
Ministry of Transport, Communication  and Water Management. In addition, the Civil 
Aviation  Authority,  with  a staff  of  86 in  1998  (52  in  1997), has  responsibility  for  air 
transport.  The  Superintendent  for  Shipping  at  the  General  Inspectorate  of  Transport 
shares  responsibility  in  the  area  of  maritime  transport.  The  Ministry  of  Transport, 
Communications  and  Water  Management  is  implementing  a  staff  reduction  plan 
which  decreased  the number  of  staff  by 40 persons  since July  97 to currently  302. In 
1999, the Hungarian  administration  is planning further  3% staff  reduction. 

The transport  inspectorate  has altogether a staff  of  1,706  (1,679 in  1997), divided  into 
20  geographical  divisions  (19  counties  plus  Budapest),  with  a  central  Inspectorate 
Authority  located  in the capital.  Each  local  office  is responsible  for  road  and rail. Its 
operating  costs  are  financed  by  fees  collected  for  services  and  procedures.  The 
Transport 
licences, 
Inspectorate  also  conducts  on-the-spot  checks,  verifying 
documentation,  and  state  of  the  vehicle  (500,000  or  so  checks  annually  excluding 
excess  weight  and  on-site  inspections).  Excess  weight  checks  are  conducted  by  the 
relevant  inspectors  at  border  inspection  posts,  and  have  a  yearly  figure  of  28,000-
30,000. 

Hungary  needs  to  strengthen  its  administrative  institutions  in  charge  of  allocating 
railway capacity and monitoring  the operations of railways  companies.  Currently the 
Railway Superintendent  does not have sufficient staff to deal with this responsibility. 

the  necessary 
As  regards  inland  waterways,  six  county  inspectorates  perform 
navigation  tasks.  Some  20,000  cases  a  year  (licensing,  examining,  monitoring)  are 
administered  by  30  people.  The  navigation  unit  of  the  Transport  Inspectorate  with  a 
staff  of  30 people  deals  with  shipping,  vessels  port  matters  and  maritime  navigation 
issues.  There  are no people exclusively  dedicated  to inspection.  Staff  inspect  vessels 
in  addition  to their normal  duties. The effectiveness  of  the  Office  could  be  improved 
by increasing its staffing  and equipment resources. 

The number  of  checkpoints  on  the  Danube  river  needs  to  be  increased.  Navigation 
inspections are only carried out in cases of, for  example, hazardous substances  being 
transported  on  the  Danube for  which  reporting  and  monitoring  must  be carried  out 
during the substance's passage  through Hungarian waters. 

The Ministry  should  ensure  that staff  reduction plans  do  not  affect  the  timetable  for 
transposition and implementation of the acquis. 

Employment  and  social  policy  : in  January  1999 the  Ministry  of  Economic  Affairs 
was  given  formal  responsibility  for  employment  strategy,  (in  particular  active  labour 
market  policy)  and  social  dialogue.  The  Ministry  of  Social  and  Family  Affairs 
remains  responsible  for 
implementing  employment  policy,  such  as  operating 
employment  centres  responsible  for  job  search,  retraining  and  placement.  The 
Ministry is also responsible for the development  and implementation  of social  policies 

69 

and  has  been  designated  as  the  lead  organisation  for  preparations  for  eventual 
participation  in the European  Social Fund (ESF). Since under the new ESF Regulation 
the  Fund  will,  to  a  large  extent,  be  the  operational  arm,  at  European  level  of  the 
European  Employment  Strategy.  The  two  Ministries  will  need  to  work  very  closely 
together. As regards  vocational  education  and training, the Ministry of Education  also 
plays a major role. 

Employment  relationships  are  regulated  by  the  national  labour  inspectorate,  which 
operates  as an  autonomous  body  under  the  supervision  of  the  Ministry  of  Social  and 
Family  Affairs. 

The main responsibilities for  approximation  of  law in the field  of health and safety at 
work  are  divided  between  the Ministry  of  Social  and  Family  Affairs,  the Ministry  of 
Health, the  Ministry  of  Economic  Affairs  and  the  State  Mining  Office.  The  National 
Labour  Inspectorate,  under  the  Ministry  of  Social  and  Family  Affairs,  is  also 
responsible for  seeing to the approximation  of a small number of EC measures. 

The National Labour Inspectorate is responsible for occupational  safety/safety  at work 
and  has  an  overall  staff  of  600  (including  support  staff),  with  about  80 based  at  the 
headquarters  (64 in  1997) and about 400 inspectors. 200 of  these inspectors  check on 
labour  law  whilst  the  rest  check  on  health  and  safety.  The  Occupational  Health 
Inspectorate  operates  in the institutional  framework  of the National  Public Health  and 
Medical  Officer's  Service,  and  is  responsible  for  health  protection  of  employees  and 
prevention  of occupational  diseases in Hungary. There are 6,881 members of staff.  In 
1999 its budgetary income amounted to some €  1.28 million (€  1.2 million in 1998). 

The National  Public  Health  Inspectorate  forms  part  of  the Ministry  of  Health  and  its 
tasks  are  to  improve  public  health  and  prevent  diseases.  The  service  is  under  the 
central  National  Medical  and  Public  Health  Office  and  its  head,  the  Chief  Medical 
Officer,  reports directly to the Minister of Health  and is assisted by four deputies. 

The  inspectorate  covers  a  total  of  149  county/city  offices  plus  the  central  office  in 
Budapest.  It  employs  some  6,731  staff  (2,168  in  towns,  3,085  in  the  counties,  and 
1,478  in the National  Medical  and Public  Health  Office  and other national  institutes  -
It  conducts  its  inspections  separately 
down  from  7,905  (1992)  and  7,124  (1995)). 
in  jurisdiction  and 
from  the  National  Labour  Inspectorate,  due  to  differences 
approach . 

Co-operation  between  the  National  Public  Health  Inspectorate  and  the  National 
Labour  Inspectorate  needs  to  be reinforced.  Progress  is also  required  in setting  up 
implementation structures for  health and safety at work legislation. 

Regional  policy  and  cohesion  :  The  law  (1996)  on  Regional  development  and 
Physical  Planning  in  Hungary  provides  the  legal  basis  for  regional  development 
policy-making  .  The  law  foresees  seven  development  regions  in two ways. First of 
all,  it  is  stipulated  that  Regional  Development  Councils  shall  be  (re)established 
according  to  the  new  regulations  with  an  identified  residence  (still  lacking).  The 
Regional  Development  Councils  shall  also  set  up  their  agencies  responsible  for  the 
implementation  of  spatial  development  programmes.  Beyond  this,  the  amendment 
provides  a solid  financial  base  for  the  above  by  stipulating  that  the operational  costs 

70 

of  the  implementing  agencies  shall  be  born  by  the  central  state  budget.  The 
Government  is  going  to  be  authorised  by  Law  to  adopt  rules  on  establishing  the 
regulatory  framework  in  terms  of  the  organisational  and  the  operational  basis  of 
programme-monitoring. 

Although  the  law provides  for  the  setting  up  of  new  bodies,  no  adequate  financial 
resources were, however,  made available to these new organisations in order to have 
the  envisaged  system  really  functioning.  The  institutional  set  up  for  regional 
development  is  still  very  weak  and  there  is  lack  of permanent  staff  in  development 
councils.  The  target  is  to  employ  by  the  end  of  1999  8-10 persons  assisting  the 
Regional  Development  Councils.  This  situation  results 
limited 
administrative capacity. 

in  a  rather 

Environment  :  The  Ministry  of  Environment  exercises  the  main  co-ordination 
responsibility in relation  to environment, but the responsibilities  are shared with  other 
Ministries  or  Agencies  such  as  the  ministry  of  Transport,  Telecommunication  and 
waste  management  for  waste  management  issues.  The  Ministry  of  the  Interior  is 
responsible  for  household  waste  management  of  municipalities.  The  Ministry  of 
Health  is  responsible  for  air  and  water  quality  (drinking  and  bathing  water). 
Responsibility  for  soil  belongs  to  the  Ministry  of  Agriculture,  which  is  also 
responsible for  forestry  and game management. The National  Atomic Energy  Agency 
(under the responsibility  of the Ministry of Economy) is responsible for nuclear  safety 
issues. The National  Radiation  Protection  and Nuclear  SAFETY  Agencies  (under  the 
responsibility of the Ministry  of Health) are responsible for radiation  protection. 

implementation  and  enforcement 

The  Ministry  of  Environment  is  responsible  for  policy  making  and  legislation, 
whereas 
the  Regional 
Environmental  Protection  Authorities.  Only  three  lawyers  work  on  the  transposition 
of the Community environment  legislation  within the legal department of the Ministry 
of the Environment. 

is  carried  out  by 

There are  12 regional Environmental Protection  Authorities  , with  a total  staff  of  1,137 
(1,134  in  1997), and  12 Nature  Conservation  Authorities  all  co-ordinated  by  a  Chief 
Inspectorate  (which  falls  under  the  competence  of  the  Ministry  of  the  Environment). 
There  are  19  Public  Health  Authorities,  responsible  for  public  health  issues,  which 
come under the Ministry  of Health. There are also  12 Water  Management  Authorities, 
under  the  competence  of  the  Ministry  of  Transport,  Telecommunications  and  Water 
Management,  responsible  for  water  quality  issues  and  environmental  disasters.  The 
number  of  staff  of  the  National  Chief  Directorate  of  Water  Management  has  slightly 
declined from  115 in  1997 to  110 in  1998. Under the same Ministry comes the  Traffic 
Transportation  Authority responsible for traffic  pollution  and noise. 

Problems  of  co-ordination  exist  between  all  these  Ministries  and  the  allocation  of 
responsibilities  needs  to  be  reviewed.  Although  administrative  capacity  in  the 
environmental  field  is relatively  good, it needs to be strengthened. 

As  regards  radiation protection,  the  Ministry  of  Health  is  the  competent  authority.  In 
addition, there  are  eight  "radiation  protection  centres", responsible  for  supervision  and 
licensing within each county. Since the entry into force of the Atomic Law, full  authority 
in  nuclear  safety  matters  is  exercised  by  the  Hungarian  Atomic  Energy  Authority,  a 

71 

central  administration  organisation  supervised  by  the  Government  (its  own  budget 
amounted to € 4.9 million in 1999 and to € 3.8 million in 1998.) The director general and 
its  deputy  are  nominated  by  the  Prime  Minister.  The  Joliot-Curie  National  Research 
Institute  for  Radiobiology  and  Radiohygiene  (OSSKI)  is  responsible  for  the  national 
register on occupational  exposure (15000 exposed workers including 6000 in the nuclear 
industry).  Concerning  continuous  monitoring,  Hungary  has  set  up  a  national 
"• monitoring  and  surveillance  system  for  nuclear  emergency  cases,  but  environmental 
monitoring  required  for  normal  circumstances  (evaluation  of  population  exposure) 
still  needs  a  legal  basis.  Some  ninety  monitoring  stations  are  operating  24  hours  per 
day. Water  and  soil  samples  are  taken  periodically  by the  Ministry  of  Health  and  by 
the  Ministry  of  Agriculture.  Aerosol  samples  are  taken  on  a  daily  or  weekly  basis, 
other  samples  on  a  monthly  and  drinking  water  fortnightly  basis.  There  are  no 
contaminated  sites. In  1998, Hungary's only uranium mine was closed. 

According  to the Hungarian  National Programme for  the Adoption  of the Acquis,  the 
total amount of staff  in the Inspectorates  and other Ministries should  be increased by 
1,613  to  ensure  full 
implementation  of  the  acquis.  The  Hungarian  Ministry  of 
Environment needs an increase of  approximately 52 new staff,  especially  lawyers, to 
It  is 
ensure  the  completion  of  the  legal  alignment  by  the  Hungarian  target  date. 
important that those provisions  are properly  implemented. 

Consumer  protection  : From  April  1999, the  Bureau  of  Consumer  Affairs  has been 
transformed  into  the  General  Inspectorate  of  Consumer  Protection.  It  is  responsible 
for  market  surveillance  of  all  consumer  products  except  for  pharmaceuticals,  health 
related  products  and  chemicals.  It  is  a  member  of  the  International  Marketing 
Supervision Network and of the International Consumers  Association. 

There  are 20 regional  county  inspectorates  (19 counties  including  one  for  Budapest). 
The  General  Inspectorate  of  Consumer-Protection  has  an  autonomous  budgetary 
chapter  in  the  Ministry  of  Economic  Affairs,  whereas  the  regional  offices  are  under 
the  Public  Administration  Offices.  Additional  income  comes  from  fines  paid  by 
distributors and manufacturers,  but this income may only be used  for publications  and 
training.  The  number  of  staff  in  the  Inspectorate  was  163  in  1998,  which  shows  a 
significant  increase over  1997 (144). The 20 regional  offices  employ  about  11 persons 
each.  Institutional  co-operation  between  the  General  Inspectorate  of  Consumer 
Protection  and regional  offices  should be improved. 

Prior to full  participation  in the EU RAPEX  (Rapid exchange  mechanism)  system  the 
General  Inspectorate  of  Consumer  Protection  is  involved  in  the  setting-up  of  a 
transitional  RAPEX  system  between  Central  and  Eastern  European  countries.  The 
General  Inspectorate  of  Consumer  Protection  is  also  preparing  to  set-up  a  Central 
Information  System  on  Market  Surveillance  that  will  contain 
information  on 
inadequate and dangerous  products. 
Product  liability legislation  exists, but is not yet properly  enforced. 

In  the  field  of  market  surveillance,  the  Hungarian  Customs  and  Finance  Guard  is 
obliged  to  refuse  the  customs  clearance  of  products  which  are  considered  hazardous 
or inadequate pursuant to the product  safety rules. 

Problems  relate  to  the  existence  of  pre-market  control,  the  lack  of  competent 
personnel  and  lack  of  some  technical  equipment.  The  central  laboratories  of  the 
inspection bodies are, however,  reasonably well equipped and  the testing  instruments 
used  are  relatively  modern.  However,  in  order  to  ensure  that  the  whole  system 
operates smoothly,  Hungary  still  needs to enhance  consumer  awareness,  -as  well as 
producer  awareness-,  on  consumer's  rights  and  producer's  responsibilities.  Efforts 

72 

have also  to be made to familiarise  the legal profession  with product  liability related 
cases. 

Justice  and  home  affairs:  In  February  1999,  the  International  Centre  for  Co 
operation  in Combating Crime (National Law Enforcement  Contact Point) was set up. 
A co-ordinating  body and a network  of liaison  officers  were established  between  law-
enforcement  agencies  and  national  security  services  to  improve  the  exchange  of 
information  and  co-ordinate  action  on  national 
level.  A  new  national  police 
commander  was appointed  in July  1998. The Directorate  Against  Organised  Crime at 
the  National  Police  Headquarters  was  reinforced  and  now  a  total  of  256  staff  are 
employed  including  200  officials.  Some  20  organisational  units  are  deployed  at 
regional  level.  Hungarian  liaison  officers  were  accredited  to  Moscow,  Kiev  and 
Wiesbaden. 

The Office  for  Refugee  and Migration  Affairs  is the main  government  agency  dealing 
with  refugee  issues  and  asylum  procedures.  Staffing  in  the  Office  for  Refugee  and 
Migration  Affairs  has not changed:  in  1998 it  was  60 including  27 eligibility  officers 
dealing  with  asylum-applications.  While  Hungary  generally  applies  asylum  rules  in 
conformity  with  the  Geneva  Convention,  there  are  still  gaps  in  enforcement.  A  large 
number  of  asylum-seekers  and  illegal  migrants,  are  kept  in  detention  by  the  Border 
Guards.  Despite  funding  gaps  the  budget  of  the  Office  of  Refugee  and  Migration 
Affairs  was  cut  in  nominal  terms  by  some €  120,000  in  1999.  (Budgetary  support  in 
1999 amounts to € 3.9 million in  1999 and to € 4.1 million in  1998). This means that 
there  is  a  shortfall  in  funding  for  the  necessary  staff,  training  and  additional 
infrastructure,  including expanded refugee  facilities. 

The Office  for Refugees  and Migration Affairs  continues to be understaffed  and the 
situation  of asylum seekers and refugees  continues to be problematic. 

In  1999 the newly-established Ministry of Youth  and Sports assumed responsibility of 
the Drug  Co-ordination  Committee  in  developing  a national  anti-drugs  strategy.  The 
anti-drug  portfolio  within  the  Ministry  is  headed  by  a Deputy  State  Secretary  with  a 
staff  of  7.  The  Hungarian  National  Police  had  an  anti-narcotics  strategy  since  1994. 
Its  Department  for  Enforcement  of  Drug-Related  Crime  has  36  staff  at  HQ  and  5 
regional  offices. 

Progress  has been made in border management  and  in fight  against corruption.  The 
capacity  to  handle  asylum  and  migration  questions  need  to  be further  improved 
together with facilities  for  refugee  reception.  The staff  number of the Department  for 
enforcement of Drug related crime is  considered inadequate relative to the workload. 

Customs  : the  Border  Guards,  transformed  into  a  law-enforcement  agency  in  1997, 
was entrusted  with  investigative  powers  in  5 categories  of  crime  including  organised 
crime  (trafficking  in  human  beings,  document  forgery).  In  some  10 regional  Border 
Guard Directorates there are 29 investigative units. 

As  regards  staffing,  Parliament  approved  a  budget  for  staff  of  some  14,000 
professional  staff  .  The  current  staff  structure  comprises  :  3,000  passport-handling 
officers,  3,000  patrols,  1,500  "border  hunting  staff",  500  alien  police  officers,  450 
anti-crime cover agents.  (Its budget  amounted to € 95.6 million in  1999 and to € 70.6 

73 

million  in  1998).  2,270  posts  are  not  filled  due  to  lack  of  financial  resources.  The 
Border Guard proposes to recruit some  1,500 extra staff  in view of EU  accession. 

From  1998, the Hungarian  Customs  and Finance  Guard  was  given  the  responsibility 
collecting indirect  taxes  including  excise  duties.  In  1998 the  guards  achieved  record 
success  in  uncovering  financial  irregularities,  with  the  number  of  cases  up  14%. 
Despite increased needs, the staff  level of the Hungarian  Customs and Finance  Guard 
grew  only moderately,  reaching  7866  at the end  of  1998  (an  increase  of  270  persons 
over  1997). 

The general  use  of  electronic forms  of  clearance  (e.g. bar code  system)  needs  to be 
developed  to  make  the  customs  guards  work  more  efficient.  The  efficiency  of 
inspections could be increased further  with improved risk analysis methods. 

Financial  control  :  The  State  Audit  Office  is  the  supreme  audit  and  control 
institution  in Hungary. Its tasks include the control  of the budgets of central  and  local 
governments,  social  security  funds  and  all  other  funds  financed  by  Hungarian 
taxpayers. It is responsible  for  the  co-ordination  of  all  development  efforts  related  to 
external  audits,  and  it  has  also to  ensure  that  Hungarian  audit  standards  comply  with 
EU  requirements.  The  State  Audit  Office  reports  directly  to  Parliament.  Its  budget 
amounted to some €  10.4 million in  1999 and to € 7 million in  1998. 

The Government  Control  Office  was established  in  1994 to control  central  budgetary 
organisations. In addition to this function,  it controls the use of international  aid  funds 
provided  to  Hungary.  It  is  responsible  for  the  co-ordination  of  efforts  aimed  at  the 
establishment  of a financial  control  system in Hungary, including a proper  monitoring 
system  encompassing  both  the  central  and the  local  levels. The  Government  Control 
Office  reports  directly  to  the  Government  with  only  66  staff  out  of  which  48  are 
employed  in  audit  work,  the  Government  Control  Office  is  clearly  understaffed. 
Budgetary support amounts to €  1.4 million in  1999. (€  1  million /1998). 

The  audit  and  financial  control  units  within  each  co-ordinating  Ministry  are  not 
involved  in  spending  activities.  All  central  control  units  rely  on  the  internal  audit  or 
control  organisations  existing  within  the  different  institutions  or bodies  that  are  parts 
of  their respective  budgetary  chapters. Internal  audit  units have not  however  been  set 
up  yet  in  all  organisations.  Furthermore,  when  such  units  exist,  the  average  number 
of staff  is limited to one single person.  The central  audit units are entitled to contract-
out  the  work  to  audit  firms  of  the private  sector.  In fact  they do so in  a very  limited 
number of cases but this can not be regarded as a solution  in the long run. These units 
report directly to the top management of the Agency  and the Ministry itself. 

The  Hungarian  State  Treasury  has  860  staff,  half  of  them  in  the  central  office  in 
Budapest,  half  spread  over  the  country  in  20  branch  offices.  The  State  Treasury  is 
responsible  for  state  accounting.  It  intends  to  carry  out  more  and  more  budgetary 
functions,  including  control  tasks. Treasury  systems  are currently  a fairly  fragmented 
mixture  of  IT  and  manual  procedures  but  there  are  plans  to  introduce  an  integrated 
online system in the future.  Ex-ante control is currently performed  by the Treasury on 
a  very  limited  scale. The checks  performed  by the branch  offices  of  Hungarian  State 
Treasury  are  purely  formal  (authorised  signatures,  positive  balance  in  the  nominal 
sub-account, positive balance in the appropriation  account). 

74 

Financial  Control is partially  in line with good practices  in EU Member States.  As a 
priority  the Treasury needs to strengthen  its control functions.  The independence and 
capacity of the Government Control Office and other internal audit bodies needs to be 
improved. 

75 

C.  Conclusion 

Hungary  fulfils  the Copenhagen  political  criteria.  Two areas  still need attention.  The 
first  is the situation  of the Roma, where the government  is beginning to implement  its 
medium-term  Roma  action  plan  and  needs  to  make  available  adequate  budgetary 
resources.  The  second  is the fight  against corruption  where recent  efforts  need to be 
re-inforced. 

Hungary  is  a  functioning  market  economy  and  the  legal  and  institutional  structures 
which  underpin  the market economy have been further  strengthened.  It should be able 
to  cope  with  the  competitive  pressure  and  market  forces  within  the  Union  in  the 
medium term, provided it continues to make further  progress in structural  reforms. 

Macroeconomic  stability  has  been  maintained,  inflation  has  fallen  and  economic 
growth  has  continued.  However,  the  widening  current  account,  if  unchecked,  could 
threaten  the macroeconomic  gains  achieved  in recent  years.  Progress  has been  made 
in  a number  of  structural  areas,  most  notably  budgetary  reform,  pension  reform,  and 
privatisation. However,  recent  decisions  affecting  the pension  system  have called  into 
question the government's commitment to pension  reform. 

The  deterioration  of the fiscal  deficit  needs to be  addressed.  Priority  should be  given 
to health  sector reform  which  continues  to be  a major  drain  in  the  fiscal  accounts. In 
order to ensure current  account  sustainability,  it is important  that the fiscal  targets  for 
1999 and 2000 are met. 

Hungary  continues to make progress in  aligning and implementing the acquis in  most 
sectors.  In  the  internal  market,  progress  has  continued  as  regards  laws  on  public 
procurement  and intellectual  property  (except as regards retroactive patent  protection) 
and  efforts  have  been  focused  on  ensuring  their  effective  implementation.  Notable 
progress  has  been  made  in  adopting  legislation  on  self-employment  which  removes 
restrictions on EU-individuals wanting to establish in Hungary. Although  efforts  need 
to  pick  up  in  transposing  EU  standards  and  to  ensure  the  functioning  of  market 
surveillance,  Hungary  is  well  advanced  in  implementing  the  new  approach  in  the 
standards  and  certification  areas.  Hungary  has  adopted  a  law  on  state  aids  which 
should  facilitate  the  development  of  an  effective  system  of  state  aid  monitoring  and 
Progress  is  quite  steady  but  slow  in  the  agricultural,  veterinary  and 
control. 
phytosanitary  fields  and  efforts  need  to  be  accelerated  considerably  if  a  sufficient 
level of alignment is to be achieved over the medium term.  Hungary is relatively well 
advanced in alignment in the transport  sector although the rail  sector is lagging behind 
in terms of alignment  and actual restructuring of the railways.  Hungary  has continued 
to  consolidate  the  policy  framework  for  financial  control  by  defining  the  scope  of 
audits  and  the  distribution  of  tasks  and  responsibilities  between 
the  various 
institutions  involved. 

Important  progress  was  made  in  overall  alignment  in  the  VAT/excise  area,  but 
discriminatory  provisions  in  the  excise  area  are  still  causing  problems.  Further 
alignment  is  needed  in  the  audio-visual  areas  as  concerns  European  works  and 
satellite broadcast monitoring.  Aside from the fight  against organised crime, the pace 
of  alignment  has  been  slow  in  the  area  of justice  and  home  affairs,  particularly  with 
respect  to  border  management  and  asylum.  Little  progress  has  been  made  with 

76 

regard  to  labour  and  health  and  safety  at  work.  There  has  been  a  noticable  slow 
down  in  the  adoption  of  environment  legislation  and  no  progress  has  been  made  in 
.  Given the size of the transposition  task which remains to be done in these 
customs. 
sectors,  significant  efforts  need  to  be  undertaken  to  ensure  further  progress.  While 
in  the  environment  and  energy  sectors,  it  is 
strategic  plans  have  been  adopted 
essential  that  they  be  quickly  implemented. 
In  some  areas  such  as  regional 
development,  whilst  the  legislative  framework  has  been  in  place  for  some  time, 
progress  in  implementation  has  been  limited  due  to  a  lack  of  budgetary  and  human 
resources. 

Hungary  has made steady  progress  in  building  up its administrative  capacity  to apply 
the  acquis.  Steps  have  been  taken  toward  general  public  administration  reform  and 
continued  emphasis  has been  placed  on the  development  of  specific  European  policy 
and  law  training  courses  throughout  the  administration  and  in  the judiciary.  Most  of 
the  key  institutions  needed  for  implementation  of  the  internal  market  are  in  place. 
Nonetheless  the administration  still  needs to be strengthened  in  specific  areas  such  as 
state aid control, market  surveillance  (implementation  of  product  liability  legislation) 
and  veterinary  and  plant  health.  Hungary  needs  to  allocate  sufficient  budgetary  and 
administrative  resources  to  regional  development  and  environment  and  improve 
capacities  to  use,  monitor  and  control  EU  financial  assistance.  There  is  room  for 
granting  further  independence  to  authorities  such  as  the  Government  Control  Office 
and the Communications  Authority. 

Hungary  has  satisfactorily  addressed  most  of  its  short  term  Accession  Partnership 
priorities  with  the exception  of  administrative strengthening  in regional  development, 
steel  sector  restructuring  and  alignment  in  the  environment  sector.  Hungary  has  also 
made good progress in implementing the medium term priorities. 

77 

D.  Accession  Partnerships  and  National  Programmes  for 
the  Adoption  of  the  Acquis:  Global  assessment  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 candidate countries implement these priorities, 

the conditions which will apply to this assistance. 

Each candidate country  was invited to adopt  a National  Programme  for the Adoption  of 
the  Acquis.  This  sets  out  how  it  would  deal  with  the  Accession  Partnership,  the 
timetable for implementing its priorities and human  and financial  resources 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. 

1.  Accession Partnership: Assessment of short and  medium-term 

priorities 

Short-term priorities 

The  short-term  priorities  of  the  Accession  Partnership4  and  an  assessment  of  the 
progress made concerning their fulfilment  are indicated below. 

•  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). 

Assessment  :  In  1999,  Hungary  adopted  a  medium-term  economic  strategy 
including  sectoral  strategies  aiming  at  improving  conditions  for  growth  and 
competitiveness.  As  part  of  the  structural  reform, 
the  reform  of  the  pension 
system  has  been  completed,  although  a comprehensive  reform  of  the  health  care 
system  has  not  yet  been  started.  The privatisation  process  is  near  to  completion. 
A  large  overshooting  in  the  accounts  of  the  social  security  funds,  makes 
comprehensive  reform  urgent. Although there is an ongoing need for  restructuring 
industries  such  as  steel  and  continued  attention  needs  to  be  part  to  structural 
reforms.  On balance, this priority has been met. 

•  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. 

Assessment  :  In  the  area  of  veterinary  and  phytosanitary  controls,  progress  has 
only been  made  as regards  computerisation.  In the field  of  environment,  Hungary 

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

78 

re-organised  the  regional  inspectorates,  institution  building  plans  have  been 
developed  including  a detailed  programme  for  IPPC,  a new  institute  on  chemical 
safety  was  established  and  an  information  data  base  for  waste  water  and  soil 
pollution  was  set  up.  The  Hungarian  customs  computer  system  has  been  further 
developed  and  training  of  staff  has been  carried  out.  As regards  internal  financial 
control,  Hungary  has  taken  steps  to  reinforce  control  and  monitoring.  For  the 
management  of  EU  assistance,  a  National  Fund  and  a  CFCU  have  been  set  up. 
Further  efforts  are  still  necessary  to  establish  concrete  regional  control  units, 
reinforce  control  units within  the  line  ministries  and  clarify  the tasks  between  the 
latter,  the  local  governments,  the  Government  Control  Office  and  the  State 
Treasury  in  the  fields  of  ex-ante  financial  control  and  monitoring.  As  concerns 
regional  development,  Hungary  has  failed  to  address  sufficiently  the  short-term 
Accession  Partnership  priority.  Adequate  and  sufficient  human  and  financial 
resources are still lacking within the bodies in charge of programming  and control 
functions.  Budgetary  efforts  need  to be reinforced  in order  to strengthen  the  local 
government  bodies  with  a  view  to  political  and  budgetary  decentralisation. 
Therefore  this priority has only been partially met. 

• 

Internal  Market:  including  certification  and  standardisation  (further  alignment 
of  legislative  measures  and  conclusion  of  a  European  Conformity  Assessment 
Agreement),  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  the utilities sector. 
Assessment  :  Further  steps  have  been  made  towards  meeting  the  short-term 
priorities  of  the  Accession  Partnership,  notably  with  regard  to  company  law  and 
standardisation.  As  to  enforcement  of  intellectual  property  rights  progress  has 
been  achieved  on copyright  protection, but  further  efforts  are necessary  especially 
for  pharmaceutical  products  to  provide  for  retroactive  patent  protection  and  to 
change  the  practice  to  allow  for  pre-patent  expiry  development  work  carried  out 
by  generic  companies.  Hungary  has  also progressed  in  the  area  of  State  Aids  by 
strengthening the State Aid Monitoring Authority and by establishing rules for ex-
ante  control  and  improving  the  annual  reports  on  State  Aid  which  now  fulfil  the 
basic  criteria  of  transparency. 
In  the  area  of  public  procurement  further  steps 
have  been  made  in  aligning  the  Hungarian  legislation  by  exempting  projects  co-
financed  by  EU  funds  from  the  national  preference  clause.  Enforcement  and 
remedies  procedures  need  to  be  further  aligned  particularly  as  regards  utilities. 
Therefore  this priority has been partially met. 

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

Assessment  :  In  1998, Hungary  addressed  this priority by lifting  its  geographical 
reserve  to the  Geneva  Convention.  Steps  have  also  been  taken  to  improve  border 
management.  The  border  guard  has  been  transposed  into  a  civilian  force  and 
preparatory  measures have been  undertaken  to develop  a nation-wide  and  modern 
border management  system in line with to EU standards. 

79 

•  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. 

Assessment  :  While  alignment  in  the  areas  of  nature  protection,  pollution  from 
industrial  plants  and  large  combustion  plants  as  well  as  the  control  of  major 
accidents  is  well  on  track,  progress  is  slow  in  the  areas  of  waste  and  waste 
management,  water  and  air quality. Therefore  this priority  has only been  partially 
met. 

Generally  Hungary  has  made  good  progress  in  addressing  the  short-term  priorities. 
in  regional 
issues  relate  in  particular  to  administrative  capacity 
Outstanding 
development,  the  restructuring  of  the  steel  sector  and  the  need  for  further  alignment 
with the acquis in the area of  environment. 

Medium-term  priorities 

In addition to this progress made on the short-term priorities, Hungary has also moved 
ahead on the following  medium term priorities of the Accession Partnership. 

•  Political criteria '.further efforts to improve the integration of the Roma. 

Assessment  : The Government  made further  efforts  to improve the situation  of the 
Roma  by  adopting  a  revised  medium-term  Roma  action  programme.  The 
programme  puts  particular  emphasis  on  education  and  employment  and  also 
foresees  social, health  and housing  measures. Despite the steps taken, the  situation 
of  the  Roma  remains  difficult  and  continued  attention  must  be  paid  to  the  full 
enforcement  of the new programme at the regional and local levels. 

•  Economic  Reform:  continue  to  consolidate  the  conditions for  strong  investment 
growth  through  the  sustained  implementation  of prudent  macroeconomic  policies 
and the advancement  of structural reforms. 

Assessment  :  After  meeting  the  1998  target  for  the  general  government  deficit, 
Hungary continued to tighten fiscal  policy, increase the transparency  of the budget 
through  the abolition  of the many  separate  state funds,  and set aside a contingency 
reserve in  case GDP  growth  slows  down  or the external  accounts  deteriorate  more 
than envisaged.  The new economic  strategy  provides the framework  for  improved 
conditions for growth  and competitiveness. 

•  Economic  Policy:  regular  review  of  the joint  assessment  of  economic  policy 
priorities,  within  the  Europe  Agreement  framework,  focusing  on  satisfying  the 
Copenhagen  criteria for  membership  of  the  Union and  the  acquis  in  the  area  of 
economic and  monetary policy  (co-ordination of economic policies,  submission  of 
convergence programmes,  avoidance  of  excessive  deficits);  while Hungary  is  not 
expected  to  adopt  the  Euro  immediately  upon  accession,  it  is expected  to  pursue 

80 

policies  which  aim  to  achieve  real  convergence  in  accordance  with  the  Union's 
objectives  of economic  and social  cohesion,  and  nominal  convergence  compatible 
with the ultimate goal of adoption of the Euro. 

Assessment  : Hungary  has already finished  a first  Joint  Assessment in  1997 and is 
progressing  on  the  second  Joint  Assessment.  Hungary  has  also  continued  to 
progress  in  its  preparation  for  joining  Economic  and  Monetary  Union.  The 
Government  deficit  has  been  further  reduced  and  the  inflation  rate  has  declined. 
The  National  Bank  is  pursuing  an  exchange  rate  policy  which  will  result  in  the 
Forint being linked entirely to the Euro by  1st January 2000. 

• 

Reinforcement  of  institutional  and  administrative  capacity:  development  of 
anti fraud  unit  and  state  audit  office,  improved  operation  of  the judicial  system, 
training for  the judiciary  in Community law and  its application;  reinforcement  of 
justice  and  home  affairs  institutions  (ensuring  sufficient  and  properly  trained 
personnel  in particular  police,  border guards,  ministries  and  courts),  reform  of 
customs  and  tax  administrations  to  ensure  readiness  to  apply  the  acquis,  the 
reinforcement  of food  control  administration  and  strengthening  of  the  nuclear 
safety authority. 

:The  policy  framework  for  financial  control  has  been  further 
Assessment 
consolidated  by  defining  in  more  detail  the  scope  of  financial  audits  and  the 
distribution  of  tasks  between  the  various  financial  control  bodies.  In  addition  an 
integrated internal control policy was introduced.  As regards the judiciary,  special 
training  programmes  ad  courses  for  judges  in  EU  Laws  have  been  launched. 
Progress  can  also be  noted  in  the  area of  Justice  and  home  affairs  particularly  as 
regards  institution  building  aspects  of  the  fight  against  organised  crime  and 
combating  corruption.  The  Border  Guards  were  entrusted  with  additional 
investigative powers including on organised crime. 

Internal  Market: 
including  further  development  of  standardisation  and 
conformity  assessment  bodies  and  establishment  and  operation  of  a  market 
surveillance  system,  alignment  of  technical  legislation  on  industrial  products, 
further  alignment  of  competition  law,  in particular for  state  aid,  reinforcement  of 
monitoring  authorities  both for  competition  and  state  aids,  alignment  of  capital 
liberalisation,  financial  services,  audio-visual policies  and  consumer  protection, 
promotion  of enterprise  development,  including SME's,  alignment  with  the  acquis 
in the fields oftelecoms,  consumer protection  and the internal energy market. 

Assessment 
:  Hungary  has  made  further  progress  concerning  conformity 
assessment,  market  surveillance,  the  adoption  of  EN  standards  and  of  technical 
legislation  on  industrial  products.  In  the  area  of  state  aids,  new  legislation  has 
The 
been  adopted  defining  clearly  the  State  Aids  Monitoring  Authority 
transparency  of  aid schemes  has also been improved. The enforcement  practice of 
the  competition  Office  can  be  considered  as  satisfactory  whereas  the  State  Aids 
Monitory  Authority  needs  to  be  further  strengthened  in  order  to  enable  it  to 
effectively  carry out its duties.  As regards the liberalisation  of capital  movements, 
consumer  protection,  telecommunication  and  energy,  significant  progress  was 
achieved  in  1998  and  continued  in  1999.  SMEs  have  been  further  supported 
through  a new strategy combined with appropriate budgetary allocations. 

Justice  and  home  affairs:  including  implementation  of  migration  policy  and 
asylum  procedures  as  well  as  the  fight  against  organised  crime  (in  particular 
money  laundering,  drugs  and  trafficking  in  human  beings)  and  corruption,  and 
clarification  of admission provisions for  immigrants,  and to align visa policy  with 
that of  the EU  and  to complete alignment  to  international  conventions,  notably  in 
view of the Schengen  acquis. 

Assessment  : Hungary  has continued  to make  efforts  to improve its capabilities  in 
all  Justice  and  home  affairs  areas,  notably  by  adopting  new  legislation  on 
organised  crime,  corruption  and  on  admission  provisions  for 
immigrants. 
Institutional  reform  has  continued  and  the  various  law  enforcement  bodies  have 
been able to modernise their equipment. 

the  agricultural  acquis 

including  alignment  with 

Agriculture: 
(including 
veterinary  and  phytosanitary  matters,  in  particular  external  border  controls), 
attention to environmental  aspects of agriculture  and biodiversity. Development  of 
the  capacity  to  implement  and  enforce  the  CAP,  in particular  the  fundamental 
management mechanisms and administrative structures  to monitor the agricultural 
markets  and  implement  structural  and  rural  development  measures,  adoption  and 
implementation  of  the  veterinary  and  phytosanitary  requirements,  upgrading  of 
certain  food  processing  establishments  and  testing  and  diagnostic  facilities, 
restructuring  of the agri-food sector. 

Assessment: Over the last year only limited progress was made in preparations  for 
gradually implementing the Common  Agriculture Policy . 

Transport: further  efforts  on  alignment  to  the  acquis  in particular  on  rail  and 
road  transport  (technical  controls),  and  to  provide  necessary  investment  for 
transport infrastructure, notably extension of trans-European networks. 

Assessment  :  Hungary  continued  to  develop  its  infrastructure.  A  part  of  the 
railways network has been renewed  and major  motorway projects  in the south and 
east have continued. Some progress has been made in alignment with the acquis in 
the road and rail sectors. 

Employment  and  social  affairs:  development  of  appropriate  labour  market 
structures and joint  review of employment policies  as preparation for  participation 
in  EU  co-ordination;  alignment  of  labour  and  occupational  health  and  safety 
legislation and development  of enforcement structures  in particular  early  adoption 
of  the framework  directive  on  health  and  safety  at  work;  enforcement  of  equal 
opportunities  between women and men; further  development of active,  autonomous 
social dialogue; further  development of  social protection,  undertake steps to bring 
public  health standards  into line with EU norms. 

in  EU  co-ordination 

Assessment  :.  The  joint  review  of  employment  policies  as  preparation  for 
is  being  carried  out.  In  terms  of  legal 
participation 
transposition  of  the  employment  and  social  affairs  acquis  Hungary  is  relatively 
advanced.  In  the  area  of  Labour  Law,  Hungarian  legislation  is  already  to  a  large 
extent  aligned.  At  the  beginning  of  1999,  a  new  institutional  framework,  the 

82 

National  Labour  Council,  has  been  set  up  for  the  social  dialogue  providing  for  a 
tri-partite  forum  of  social  partners  to consult  and  negotiate  labour  issues  including 
wage  issues. The  social  protection  system  is  rather  well  developed.  Progress  has 
been made in the area of public health with the adoption of a new  law which  forms 
the basis for  a series of implementing measures and actions. 

•  Environment:  including  the  development  of  monitoring  and  implementation 
control  structures  and  capacities,  continuous  planning  and  implementation  of 
approximation programmes  related to individual legal acts.  A particular  emphasis 
should  be given  to  waste  water,  waste  management,  air pollution  and  integrated 
industrial  pollution  control  and  risk  management.  Environmental  protection 
requirements  and the need for  sustainable  development  must be integrated  into the 
definition and implementation of national, sectoral policies. 

Assessment  :  Despite  the  rather  ambitious  law  harmonisation  programme,  little 
progress  has  been  achieved  in  1999.  If  Hungary  wants  to  achieve  its  ambitious 
target  for  full  transposition  in  2001  it  will  need  to  urgently  speed  up  both  legal 
alignment  and  investment  in environmental  technology  and  infrastructure.  In  this 
context  it  is  particularly  important  that  the  budgetary  provisions  made  in  the 
NPAA are also properly reflected  in the annual  budget. 

•  Regional  Policy  and  Cohesion:  further  strengthen  budgetary  procedures, 
financial  instruments,  monitoring  and  control  mechanisms  in order  to  participate 
in EU structural programmes  after membership. 

Assessment  : Hungary  continued  to consolidate  its  internal  financial  mechanisms 
at the central level. 

2. 

National  Programme  for  the Adoption  of the  Acquis 

The  revised  version  of  the  Hungarian  National  Programme  for  the  Adoption  of  the 
Acquis  (NPAA)  was  adopted  by  the  Hungarian  Government  on  29  June  1999.  The 
NPAA  is part  of  the Government's  strategy  'for  catching  up with  Europe',  adopted  in 
June  1999.  This  strategy  sets  out  the  economic  framework  for  the  NPAA.  The 
planning  documents  required  for  the  pre-accession  financial  instruments  will  be 
completed in the autumn and will form  part of the NPAA. 

Following  the  Hungarian  Government's  strategic  goal  to  complete  preparedness  for 
EU  membership  by  December  2001, the  NPAA  foresees  full  alignment  by  that  date, 
except in certain  areas. The NPAA thus covers the period 1999-2001. 

The  revised  version  of  the  NPAA  follows  a  similar  structure  to  the  Commission's 
Opinion and First Progress Report on Hungary. It introduces each chapter with  a brief 
description  of  the  current  situation  of  the  sector,  particularly  highlighting  the 
achievements made in 1998. 

The NPAA is in general coherent with the priorities of the Accession Partnership. The 
different  tasks  to  accomplish  the  various  Accession  Partnership  priorities  are  spelled 
out  in  a  necessarily  comprehensive  manner  and  cover  all  aspects,  such  as  law 

83 

harmonisation,  institution  building  and  budgetary  implications.  However  the  non-
acquis  related  areas  of  the  Accession  Partnership,  for  example  the  economic  criteria 
of restructuring  the health care system, do not appear in the NPAA which  only covers 
acgwz's-related  matters.  These  areas  are  supposed  to  be  covered  by  the  documents 
elaborated  for  the  Joint  Assessment  of  Hungary's  Medium-term  Economic  Policy 
Priorities  to  be  prepared  jointly  by  the  Hungarian  Ministry  of  Finance  and  the 
Commission  .  Given  the Hungarian  working  hypothesis  to become Member  by  2002 
no distinction  is made in the NPAA between short-term  and medium-term  priorities. 

The NPAA covers all chapters of the acquis.  It is focusing  particularly  on the binding 
parts  of  the  acquis,  but  also  covers  harmonisation  in  the  non-binding  areas.  The 
sections  on  common  trade  regime  and  data  protection  do  not  provide  sufficient 
information.  The  information  provided  on  the  sector  of  banking,  insurance  and 
securities  is too  general.  Clear  links  are  consistently  made  between  the  relevant  EU 
legislation  and the proposed Hungarian  actions. The information  given in the  different 
sub-chapters  seems to be complete. 

In  general, there  is  a systematic  implementation  timetable.. The  major  steps  planned 
in the  approximation  of  laws  are subdivided  in  goals to be achieved  in  1999, 2000 or 
2001. As indicated  above, the NPAA  does not  go beyond  2001, as full  harmonisation 
with  the  acquis  is  scheduled  to  be  achieved  by  December  2001, except  for  certain 
areas.  However,  the  scheduling  for  the  EMU,  standardisation  and  conformity 
assessment  and energy,  chapters  is not  clear.  Some  target  dates, for  example  those in 
the  field  of  Justice  and  Home  Affairs  seem  to  be  too  optimistic  given  the  important 
financial  implications of alignment in the sector. 

In  general,  institution  building  aspects  are  adequately  handled  in  the  respective 
chapters.  The  last  chapter  of  the  NPAA,  called  'administrative  capacity',  provides  an 
overview of the institution building actions described in detail in the relevant  chapter. 
The  information  given  is  in  most  cases  quite  detailed.  Budgetary  needs,  staff 
requirements, training  aspects and the necessary technical  equipment  are described. In 
the market surveillance  section, it is not clear how the system will be implemented  on 
regional  and local levels. 

The  budgetary  implications  of  the  different  actions  are  clearly  spelled  out  for  each 
sub-sector. There is always a clear division between the contribution  from  the national 
budget  and  expected  Phare  funding  as  well  as  expected  contributions  from  the 
International Financing Institutions. 

The Hungarian  NPAA is  a good  accession  policy  instrument,  covering  the key  issues 
of  the  process.  It  provides  for  the  necessary  budget  and  is  an  integral  part  of  the 
budgetary decision making process. 

84 

HUMAN  RIGHTS  CONVENTIONS  RATIFIED  BY THE CANDIDATE  COUNTRIES, 

JUNE  1999 

ANNEX 

BG 

CY 

cz 

EE 

HU 

LV 

LIT 

MT 

PL 

RO 

SK 

sv 

T 

European Social  Charter 

0 

X 

0 

Adherence to following 
conventions and protocols 

E C HR  (European  Convention 
for  Human Rights) 
Protocol  1  (right of property et 
al.) 

Protocol 4 (freedom  movement et 
al.) 
Protocol 6 (death penalty) 

Protocol 7 (ne bis in idem) 

European Convention  for 
the Prevention of Torture 

Revised European  Social 
Charter 
Additional Protocol to the ESC 
(system of collective complaints) 

Framework  Convention 
for National Minorities 

I C C PR  (International  Covenant 
on Civil and Political  Rights) 
Optional Protocol to the ICCPR 
(right of individual 
communication) 
Second  Optional Protocol to 
ICCPR (abolition death penalty) 

I C E S CR  (International 
Covenant on Economic, Social 
and Cultural Rights) 

C AT  (Convention  against 
Torture) 

C E RD  (Convention on the 
Elimination of All Forms of 
Racial  Discrimination) 

C E D AW  (Convention on the 
Elimination of All Forms of 
Discrimination  against  Women) 

C RC  (Convention on the Right 
of the Child) 

X 

X 

X 

X 

X 

X 

X 

X 

o 

0 

X 

X 

X 

X 

0 

0 

0 

X 

X 

0 

o 
o 

X 

X 

X 

X 

o 
o 

X 

o 

o 

X 

X 

X 

X 

X 

o 

X 

X 

X 

X 

o 

X 

0 

0 

X 

X 

X 

X 

X 

o 

X 

X 

X 

0 

X 

X 

X 

X 

X 

0 

0 

o 

o 

0 

o 

X 

X 

X 

X 

0 

X 

o 

X 

X 

X 

X 

X 

X 

X 

X 

X 

X 

X 

X 

X 

X 

X 

X 

X 

X 

X 

X 

X 

X 

X 

X 

X 

X 

X 

X 

X 

X 

X 

X 

X 

X 

X 

X 

X 

o 

X 

X 

X 

X 

o 
o 

X 

X 

X 

X 

X 

X 

X 

X 

X 

X 

X 

X 

X 

X 

X 

X 

X 

X 

X 

X 

X 

0 

0 

0 

X 

X 

0 

0 

X 

X 

0 

X 

0 

X 

X 

0 

X 

0 

o 

X 

X 

X 

X 

X 

X 

X 

o 

o 
o 

o 

X 

X 

X 

X 

X 

o 

X 

X 

X 

X 

X 

X 

X 

0 

0 

0 

0 

0 

0 

0 

o 

X 

X 

X 

X 

X 

X 

X 

X 

0 

o 

X 

X 

X 

0 

X 

X 

X 

X 

X 

X 

X 

X 

X 

X 

X 

X 

X 

X 

X 

X 

X 

X 

X 

X 

X 

X 

X 

X 

X 

X 

X 

X 

X 

X  =  Convention  ratified 
O =  Convention  NOT  ratified 

BG = Bulgaria; CY = Cyprus; CZ = Czech Republic; EE = Estonia; HU = Hungary; LV : 
Latvia; LIT = Lithuania; MT = Malta; PL = Poland; RO = Romania; SK = Slovakia; SV 
Slovenia; T = Turkey 

f ^ J* 

Annex 

STATISTICAL DATA 

87 

STATISTICAL  DATA 

Basic data 

Population  (average) 

Total  area 

National  accounts 

Gross  domestic  product  at current  prices 

Gross  domestic  product  at current  prices 

Gross  domestic  product  per capita  at current  prices 

Gross  domestic  product  at  constant  prices  (nat. 
currency) 

1994 

1995 

1996 
in 1000 

1997 

1998 

10 261 

10 229 

10  193 

10  155 

10  114 

in km2 

93 030 

93 030 

93 030 

93 030 

93 030 

1000 Mio Forint 

4364.8 

5614.0 

6893.9 

8540.7 

10210.7 

1000 Mio EURO 

34.9 

34.1 

35.6 

40.4 

42.4 

EURO 

3400 

3300 

3500 

4000 

4200 

% change over the previous year 

2.9 

1.5 

1.3 

4.6 

5.1 

in Purchasing Power Standard 

Gross  domestic  product  per capita1  at current  prices 

7800 

8100 

8600 

9200 

9800 

Structure  of production 

-  Agriculture 

-  Industry  (excluding  construction) 

-  Construction 

-  Services 

Structure  of  expenditure 

-  Final  consumption  expenditure 

-  household  and NPISH 

-  general  government 

-  Gross  fixed  capital  formation 
-  Stock  variation8 

- Exports  of goods and services 

-  Imports  of goods and services 

Inflation  rate 

Consumer  price 

Balance of payments 

-Current  account 

% of Gross Value Added6 

6.7 

26.3 

4.6 

62.3 

6.6 

26.3 

4.3 

62.8 

5.9 

28.1 

4.6 

61.4 

as % of Gross Domestic Product 

77.3 

53.8 

23.6 

20.0 

3.9 

36.9 

38.2 

74.3 

52.2 

22.0 

21.4 

5.4 

38.9 

39.9 

72.6 

50.6 

21.9 

22.2 

5.7 

45.5 

46.0 

6.7 

25.3 

5.1 

62.9 

84.2 

58.0 

26.2 

20.1 

2.2 

28.9 

35.4 

% change over the previous year 

19.2 

28.3 

23.5 

18.3 

14.3 

-3 696 

-1837 

Mio EURO 
-1319 

-840 

-2 059 

Figures  have been  calculated  using the  population  figures  from  National  Accounts, which  may 

differ  from  those  used  in demographic  statistics. 
6 Including  FISIM. 

The item  "Services" includes statistical  discrepancies. 
These figures  include changes  in inventories, acquisitions less disposals of valuables and  the 

statistical  discrepancy  between  the GDP and  its expenditure  components. 

-Trade  balance 

Exports  of  goods 

Imports  of  goods 

-Services,  net 

-Income,  net 

-Net  current  transfers 

-of  which  government  transfers 

-3 388 

6  974 

10 362 

145 

-1828 

9911 

11 739 

531 

-1282 

-1366 

829 

12 

826 

10 

-2  088 

11 215 

13 302 

1  186 

-1  139 

721 

-12 

-1  525 

17 386 

18 911 

1  051 

-1  264 

897 

-4 

-1904 

18  505 

20  409 

610 

-1  675 

910 

-41 

89 

Public  finance 

General  government  deficit/surplus 

-9.2 

-6.6 

-3.2 

-5.4 

; 

1994 

1995 

1996 

1997 

1998 

% of Gross Domestic 

Product 

Financial  indicators 

% of Gross Domestic Product 

Gross  foreign  debt  of the  whole  economy 

69.0 

65.5 

60.8 

46.3 

43.3 

Monetary  aggregates 

- Ml 

- M2 

-  Total  credit 

Average  short-term  interest  rates 

-  Lending  rate 

-  Deposit  rate 

EURO  exchange  rates 

- Average  of  period 

-  End  of  period 

7.1 

14.5 

30.9 

27.2 

20.3 

in 1000 Mio EURO 

5.7 

12.8 

26.0 

32.4 

24.8 

6.0 

13.8 

24.6 
% per annum 

28.2 

20.6 

6.8 

15.6 

25.3 

23.0 

17.6 

(lEURO=..National currency) 

7.0 

25.3 

20.1 

15.4 

125.0 

136.7 

164.5 

183.3 

193.7 

206.9 

211.7 

224.7 

240.6 

252.4 

-  Effective  exchange  rate  index 

64.6 

50.2 

Reserve  assets 

-Reserve assets  (including  gold) 

-Reserve assets  (excluding  gold) 

External  trade 

Imports 

Exports 

Balance 

Terms  of  trade 

Imports  with  EU-15  (EU-12  in  1994) 

Exports  with  EU-15  (EU-12  in  1994) 

Demography 

Natural  growth  rate 

Net  migration  rate 

1990=100 

42.9 
Mio EURO 

38.6 

32.0 

5571 

5536 

9203 

9170 

7847 

7817 

7703 

7676 

8106 

8081 

Mio EURO 

12235.2 

11824.1 

14289.4 

18724.2 

22929.5 

8996.1 

9837.1 

12367.8 

16842.4 

20520.2 

-3239.1 

-1987.0 

-1921.6 

-1881.8 

-2409.3 

corresponding period of the previous year = 100 

102.3 

101.3 

97.7 
as % of total 
62.3 

69.7 

101.2 

101.7 

62.8 

71.2 

64.1 

72.9 

61.5 

62.8 

per 1000 of population 

-3.3 

-3.7 

0.0 
per 1000 live-births 

0.0 

-3.8 

0.0 

-4.3 

0.0 

45.3 

51 

-3.0 

0.0 

Infant  mortality  rate 

11.5 

10.7 

10.9 

9.9 

9.7 

Life  expectancy  : 

Males 

Females 

at birth 

64.8 

74.2 

65.3 

74.5 

66.1 

74.7 

66.4 

75.1 

90 

Labour  market (ILO  methodology) 

Economic  activity  rate 

Unemployment  rate,  total 

Unemployment  rate  of persons  < 25 years 

Unemployment  rate  of persons >= 25 years 

Average  employment  by NACE  branches  (LFS) 

- Agriculture  and  forestry 

- Industry  (excluding  construction) 

-  Construction 

-  Services 

Infrastructure 

Railway  network 

1994 

1995 

1996 

1997 

1998 

54.0 

10.7 

19.4 

9.2 

8.7 

27.6 

5.4 

58.3 

%  of labour  force 

52.4 

10.2 

18.7 

8.7 

8.0 

26.7 

5.9 

59.4 

51.8 

9.9 

18.0 

8.5 

%  of  total 

8.3 

26.7 

6.0 

59.1 

Km  per  1000 Km2 

51.2 

8.7 

15.9 

7.5 

7.9 

27.1 

6.0 

59.0 

51.7 

7.8 

13.5 

6.7 

7.5 

28.0 

6.2 

58.3 

83 

83 

83 

83 

83 

Km 

Length  of  motorways 

293 

335 

365 

381 

448 

Industry  and  agriculture 

previous year = 100 

Industrial  production  volume  indices 

Gross  agricultural  production  volume  indices 

109.6 

103.2 

104.6 

102.6 

103.4 

106.3 

111.1 

96.2 

112.6 

99 

Standard  of  living 

Number of  cars 

Telephone  subscribers 

Number of Internet  connections 

Per  1000 inhabitants 

212 

173 

220 

208 

223 

261 

227 

303 

220 

335 
8.2 9 

*  Provisional 
:  Not  available 

Source: United  Nations. 

91 

Methodological  Notes 

National  account 
Gross domestic  product  per capita in PPS. Revised  data use the PPP figures  from  the 
International  Comparison  Project. 

Inflation  rate 

Consumer price The EU Member States have designed a new consumer price index in 
order to meet the obligations in Treaty  of the EU, as a part of the preparations  for  the 
common currency. The aim was to produce CPIs comparable between Member States. 
The  main  task  was  to  harmonise  methodologies  and  coverage.  The  result  was  the 
Harmonised Index of Consumer Prices (HICP). 
A  similar  exercise  has  been  started  with  Candidate  Countries.  In  respect  to 
enlargement,  it  is  equally  important  that  their  economic  performance  is  assessed  on 
the  basis  of  comparable  indices.  Some  progress  has  already  been  made  towards 
adapting  the  new  rules. However,  it  will  still  take  some  time  before  genuine  HICPs 
will  be  available  in  Candidate  Countries,  and  it  must  be  emphasised  that  the  figures 
reported  in  the  table  are  based  on  national  CPIs,  which  are  demonstratively  non-
comparable. 

Financial  indicators 
Sources 
Where  possible,  Eurostat  questionnaire  on  monetary  and  financial  statistics  has  been 
used  as  the  source.  Candidate  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  is  used  as  the  source  for  exchange  rates  against  the  EURO, 
where available. 
Concerning  gross  foreign  debt,  the  OECD  External  Debt  Statistics  publication  has 
been  used  as  the  source  for  1994-6.  The  data  for  1997-8  are  the  result  of  closer 
cooperation  between  BIS/ IMF/ OECD/ World  Bank,  and  published jointly  by  them. 
Debt  is  of  the whole  economy,  and  includes both  short-  and  long-term.  According  to 
the convention, the stock of outstanding debt is converted from  US dollars into EURO 
at  end-year  exchange  rates,  whereas  GDP  is  converted  into  EURO  using  annual 
average exchange rates. 
Concerning  general  government  deficit  /  surplus,  Candidate  Countries  are  presently 
unable to provide reliable data on a national  accounts basis. 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). 

Method 
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) 

92 

methodology.  The  general  government  deficit  /  surplus  is  obtained  by  adding  the 
consolidated  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. GFS data are on a cash basis. 
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  (net  of  deposits,  including  non-financial  public  enterprises),  plus  the 
private  non-financial  sector,  plus  other  non-monetary  financial  institutions.  It  should 
be  noted  that  the  problem  of  measuring  the  circulation  of  foreign  currency  in  some 
Candidate 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  EURO  exchange  rates  are  those  officially 
notified.  The  effective  exchange  rate  index  is  weighted  by  major  trading  partners, 
with a base year of  1990. 

External  trade 
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  licences, 
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. 
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. 
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 has been  changed. 
Imports and exports with EU-15. Data declared by the republic of Hungary. 

Demography 
Net migration rate. Crude rate of net migration  (recalculated by EUROSTAT) for  year 
X, is: population  (X+l)  - population  (X) - Deaths  (X) + Births  (X). This assumes  that 
any  change  in  population  not  attributable  to  births  and  deaths  is  attributable  to 

93 

migration.  This  indicator  includes  therefore  also  administrative  corrections  (and 
projection  errors if the total population  is based on estimates  and the births and deaths 
on registers). Figures  are in this case  more consistent.  Further,  most  of  the  difference 
between  the  Crude  rate  of  net  migration  provided  by  country  and the  one  calculated 
by Eurostat is caused by an under reporting or delay in reporting of migration. 

Labour force 
Economic  activity  rate  (ILO  Methodology),  according  to  the  Labour  Force  Sample 
Survey  (LFS),  represents  the  labour  force  as  a  percentage  of  population  at  working 
age (15 years or more), where: 
-  Labour  force:  employed  and  unemployed  persons  (in  the  sense  of  the  ILO 
definitions). 
-  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, 
and  members  of  co-operatives  or  contributing  family  workers.  Members  of  armed 
forces  are considered as employed. 
- The  unemployed:  all  persons  aged  15+, who concurrently  meet  all  three  conditions 
of the ILO definition  for being classified  as the unemployed: 
(i) 
(ii) 
(iii) 
LFS monitors only person's aged 15-74. 
Unemployment  rate  (by  FLO  methodology).  Percentage  of  the  unemployed  in  labour 
force. 
These  rates  are derived  from  LFSS  (Labour  Force  Sample  Survey)  observing  the  ILO 
definitions  and recommendations mentioned below. 
Average  employment  by NACE  branches  (LFS). This  indicator  is derived  from  LFSS 
(Labour Force Sample Survey) observing the ILO definitions  and recommendations. 

have no work, 
are actively seeking a job  and, 
are ready to take up a job within  a fortnight. 

Infrastructure 
Railway network.  All railways in a given area. This does not include stretches of road 
or  water  even  if  rolling  stock  should  be  conveyed  over  such  routes;  e.g.  by  wagon-
carrying trailers or ferries. Lines solely used for tourist purposes  during the season  are 
excluded  as are railways constructed  solely to  serve  mines; forests  or other  industrial 
or  agricultural  undertakings  and  which  are  not  open  to  public  traffic.  The  data 
considers the construction  length of railways. 
Length  of motorway. Road,  specially  designed  and built for  motor traffic,  which  does 
not serve properties bordering on it, and which: 
is provided, except at special points or temporarily,  with  separate  carriageways 
(a) 
for  the two  directions  of  traffic,  separated  from  each  other,  either  by  a dividing  strip 
not intended for traffic,  or exceptionally by other means; 
(b) 
(c) 
road motor vehicles. 
Entry  and  exit  lanes  of  motorways  are included  irrespectively  of  the  location  of  the 
signposts. Urban motorways are also included. 

does not cross at level with any road, railway  or tramway track, or footpath; 
is specially sign-posted  as a motorway  and is reserved  for specific  categories of 

Industry and  agriculture 

94 

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  includes the data of all industrial  enterprises. The 
indices  by branches refer to enterprises with more than  10 employees. 
Gross agricultural  production  volume indices. Indices  were calculated  using the  fixed 
price basis applied for national  accounts. Until  1996 the prices of  1991, from  1997 the 
prices of  1995 serve as fixed price basis in the calculation. 

Standard  of living 
Number of cars. Passenger car: road motor vehicle, other than  a motor cycle, intended 
for  the  carriage  of  passengers  and  designed  to  seat  no  more  than  nine  persons 
(including the driver). 
The  term  "passenger  car"  therefore  covers  microcars  (need  no  permit  to  be  driven), 
taxis  and  hired  passenger  cars,  provided  that  they  have  less  than  ten  seats.  This 
category may also include pick-ups. 
Connected  main  line  Actually  operating  or  temporarily  suspended,  private  and 
institutional/communal  main  lines  that  connect  terminal  equipment  to  a  switching 
exchange. Connected main lines (installation) include lines of  subscriber's  equipment, 
lines  of  public  payphones  which  are  open  for  anybody,  and  telecommunications 
service lines of the operator. Residential  and  institutional/communal  subscribers  have 
been  defined  in  the  tariff.  Installation  can  also  be  classified  by  the  purpose  of  the 
station  into  the  classes  of  dwelling,  business  and  public  main  lines.  Mobile  sets  are 
excluded. 
Note:  Since  the  passing  of  Hungarian  Telecommunication  Law  Hungarian  Central 
Statistical  Office  (like the  countries  of the EU  ) has been  collecting  data  of  the main 
lines.  Before  1993,  the  new  Telecommunication  Law,  statistics  surveyed  main 
stations. 
Number  of  Internet  connections.  Data  collection  of  Internet  connections  starts  in 
1999. 

95 

Sources 

Total  area,  infrastructure,  industry  and  agriculture,  external  trade,  labour  market: 
National  sources. 
National  accounts,  inflation  rate,  balance  of  payment,  public  finance,  finance, 
demography:  Eurostat. 

96 

ISSN  0254-1475 

COM(1999) 505  final 

DOCUMENTS 

EN 

17  01  11  06 

Catalogue number: CB-CO-99-514-EN-C 

Office  for Official  Publications of the European  Communities 

L-2985 Luxembourg