Source: EURLEX
Language: en
Format: md

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_**_ _J*_

COMMISSION OF THE EUROPEAN COMMUNITIES

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)** **Preface**
**b)** **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. Political criteria

Introduction
Recent developments
**1.1.** **Democracy and the rule of law**
The Parliament

The Executive
The Judiciary
Anti-Corruption measures
**1.2.** **Human rights and protection of minorities**
Civil and political rights
Economic, social and cultural rights
Minority rights and the protection of minorities
**1.3.** **General evaluation**

2. Economic criteria

**2.1.** **Introduction**
**2.2.** **Economic developments**
Macroeconomic developments
Structural reforms
**2.3.** **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
**2.4.** **General evaluation**

3. Ability to assume the obligations of membership
**3.1.** **Internal market without frontiers**

The four freedoms
Competition
**3.2.** **Innovation**
Information society
Education, training and youth
Research and technological development
Telecommunications

Audiovisual

**3.3.** **Economic and fiscal affairs**
Economic and Monetary Union
Taxation

Statistics
**3.4.** **Sectoral policies**
Industry

Agriculture
Fisheries

Energy
Transport
Small and medium sized-enterprises
**3.5.** **Economic and social cohesion**
Employment and social affairs
Regional policy and cohesion
**3.6.** **Quality of life and environment**
Environment

Consumer protection
**3.7.** **Justice and home affairs**
**3.8.** **External policies**
Trade and international economic relations
Development
Customs
Common foreign and security policy
**3.9.** **Financial questions**
Financial control

**3.10.** **General evaluation**

4. Administrative capacity to apply the _acquis_
4.1 Administrative structures
4.2 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. Accession Partnership : assessment of short and medium-term priorities
2. 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 information. Council deliberations and European Parliament reports and
resolutions [1] 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.

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 antidumping 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
fact that the Hungarian Constitutional Court declared that some provisions of the
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 19901999.

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

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

- reinforcing 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 in support of institution building and policy
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 longterm 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.

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

_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-bycountry, 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
European Commission proposed to mobilise significant human and financial

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 agrienvironmental 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
into effect in March 1999. These strengthened public safety and made
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 HungarianRomanian 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 the OECD on Bribery in International Business
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 readmission. 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 than 150 segregated schools remain 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.

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, higherthan-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.

**Main Economic Trends**

**Hungary** 1995 1996 1997 1998 1999 latest

19

Real GDP growth rate

Inflation rate

- annual average
- December-on-December

Unemployment rate, end-year

- ILO definition

General government budget balance

Current account balance

Foreign debt [2 ]

- debt export ratio

- gross foreign debt

Foreign direct investment net inflow

- according to EBRD

- balance of payments data

Jan-Mar

Jan-May
May

**3.8**

14.9

8.9

-759 Jan-May

415

```
 5.1

14.3

10.4

 7.8

-4.8

-2059

 104

 72

23.9

18.4

 3.1

1293

```

```
 1.3

23.5

19.7

 9.9

-3.2

-3.7

-1319

 144

21.7

4.4

1585

```

```
4.6

18.3

18.5

8.7

-5.4

-2.1

-840

97

74

20.9

18.7

3.6

1464

```

per cent

per cent
per cent

per cent

per cent of GDP

per cent of GDP
million ECU/€

per cent
per cent
billion ECU/6

billion ECU/€

per cent of GDP
million ECU/€

```
 1.5

28.3

28.4

10.2

-6.6

-5.5

-1837

 186

24.5

10.0

3408

```

_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 per cent

- employment per cent

Investment-to-GDP ratio per cent

Gross foreign debt/GDP per cent

Exports of goods & per cent
services/GDP

Stock of foreign direct billion €
investment, according to € per head
EBRD

5.9 [6 ]

7.5

22.2 [6 ]

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
activities. This includes utility services, pension provision and research and
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 cooperatives 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 towards accession, the
Commission concluded that:

"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 openmarket 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
in the sectors of foodstuffs (food additives and hygiene) electromagnetic
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 issues relate 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._

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 shortterm 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 selfemployed 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
abuse of position, see chapter 4 on administrative capacity). Although the
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, transport (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.

**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 criteria of transparency but Hungary should finalise 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.

**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_

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

The association of Hungary with the 5 [th] 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
5 [th] 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.

The telecommunications sector has grown consistently. Installation of fixed
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 5 [th] 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 6 [th] 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 cooperation 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
defined in more detail. The provisions on data transmission abroad and
confidentiality have been further aligned in 1999.

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.

There is not a comprehensive rural development support policy in Hungary. Aid is
provided through 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.

Concerning the situation in the agro-food sector, progress has continued in
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.

**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 increased and are nearing cost-recovery levels. Remaining price
distortions particularly as concern households should be eliminated. In line with the
international prices, gas prices have been reduced.

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
comprehensive information in response to corresponding requests from the
Commission.

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
Ombudsman with recourse available to the Constitutional Court. Hungarian
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 cofinancing 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 the same field, the laboratory capacity in the Institute for
Environmental Management has been improved.

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 ('antiMafia package [7] ) 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
data system between law enforcement agencies, border checking points and.
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.

Hungary updates its Customs Tariff annually, applying the EU combined
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 wideranging 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 goodneighbourly 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
strategic plans have been adopted in the environment and energy sectors, it is
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 coordinates 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 adhoc 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.

Since 1 [st] 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, these decisions can be brought before 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 chairman of the Committee and the
Commissioners and publishes the Public Procurement Bulletin.

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._

In the field of _metrology,_ the National Measurements Office under the statutory
supervision of the Ministry of Economic Affairs is 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 to enforce the
Competition Act.

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 crossborder/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._

**Audiovisual services** : the National Radio and Television Commission ("ORTT")
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-thespot 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 Inspectorate also conducts on-the-spot checks, verifying licences,
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 28,00030,000.

_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._

As regards _inland waterways,_ six county inspectorates perform the necessary
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 down from 7,905 (1992) and 7,124 (1995)). It conducts its inspections separately
from the National Labour Inspectorate, due to differences in jurisdiction and
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 in a rather limited_
_administrative capacity._

**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.

The Ministry of Environment is responsible for policy making and legislation,
whereas implementation and enforcement is carried out by 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.

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_
_ensure the completion of the legal alignment by the Hungarian target date. It is_
_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 Cooperation in Combating Crime (National Law Enforcement Contact Point) was set up.
A co-ordinating body and a network of liaison officers were established between lawenforcement 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 contractout 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
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

**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
customs. . Given the size of the transposition task which remains to be done in these
sectors, significant efforts need to be undertaken to ensure further progress. While
strategic plans have been adopted in the environment and energy sectors, it is
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 Partnership [4] 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 exante 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 cofinanced 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.
Outstanding issues relate in particular to administrative capacity in regional
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 1 [st] 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._

**Assessment** :The policy framework for financial control has been further
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
been adopted defining clearly the State Aids Monitoring Authority The
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.

**Agriculture:** _including alignment with the agricultural acquis (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._

**Assessment** :. The joint review of employment policies as preparation for
participation in EU co-ordination is being carried out. In terms of legal
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**

**T**

**X**

**X**

**0**

**0**

**0**

**X**

**X**

**0**

**0**

**0**

**0**

**0**

**0**

**0**

**X**

**0**

**X**

**X**

HUMAN RIGHTS CONVENTIONS RATIFIED BY THE CANDIDATE COUNTRIES,

JUNE 1999

CY

**X**

**X**

**X**

###### **o** **o**

**X**

**X**

###### **o**

**X**

**X**

**X**

**X**

###### **o**

**X**

**X**

**X**

**X**

**X**

MT

**X**

**X**

**X**

**X**

###### **o**

**X**

**X**

**0**

###### **o**

**X**

**X**

**X**

**X**

**X**

**X**

**X**

**X**

**X**

SK

**X**

**X**

**X**

**X**

**X**

**X**

**X**

**0**

###### **o**

**X**

**X**

**X**

**0**

**X**

**X**

**X**

**X**

**X**

HU

**X**

**X**

**X**

**X**

**X**

**X**

**X**

**0**

**0**

**X**

**X**

**X**

**X**

**X**

**X**

**X**

**X**

**X**

LV

X

X

X

X

X

X

0

0

0

###### **o**

**X**

**X**

**0**

**X**

**X**

**X**

**X**

**X**

**LIT**

**X**

**X**

**X**

**X**

**X**

**X**

**0**

###### **o**

0

###### **o**

**X**

**X**

###### **o**

**X**

**X**

**X**

**X**

**X**

PL

**X**

**X**

**X**

###### **o** **o**

**X**

**X**

###### **o** **o** **o**

**X**

**X**

###### **o**

**X**

**X**

**X**

**X**

**X**

RO

**X**

**X**

**X**

**X**

**X**

**X**

**0**

**X**

###### **o**

**X**

**X**

**X**

**X**

**X**

**X**

**X**

**X**

**X**

ANNEX

**sv**

**X**

**X**

**X**

**X**

**X**

**X**

**0**

**X**

###### **o**

**X**

**X**

**X**

**X**

**X**

**X**

**X**

**X**

**X**

EE

**X**

**X**

**X**

**X**

**X**

**X**

**0**

**0**

**0**

**X**

**X**

**X**

**0**

**X**

**X**

**X**

**X**

**X**

_Adherence to following_

_conventions and protocols_

**ECHR** (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**

**European Social Charter**

**Revised European Social**

**Charter**

Additional Protocol to the ESC

(system of collective complaints)

**Framework Convention**

**for National Minorities**

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

**ICESCR** (International
Covenant on Economic, Social
and Cultural Rights)

**CAT** (Convention against
Torture)

**CERD** (Convention on the
Elimination of All Forms of

Racial Discrimination)

**CEDAW** (Convention on the
Elimination of All Forms of

Discrimination against Women)

**CRC** (Convention on the Right
of the Child)

BG

**X**

**X**

**0**

###### **o** **o**

**X**

**0**

###### **o** **o**

**X**

**X**

**X**

**X**

**X**

**X**

**X**

**X**

**X**

**cz**

**X**

**X**

**X**

**X**

**X**

**X**

**0**

###### **o**

**0**

**X**

**X**

**X**

###### **o**

**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)

Gross domestic product per capita [1] at current prices

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 variation [8 ]

  - Exports of goods and services

  - Imports of goods and services

Inflation rate

Consumer price

Balance of payments

-Current account

1994 1995 1996 1997 1998

in 1000

10 261 10 229 10 193 10 155 10 114

in km [2 ]

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

7800 8100 8600 9200 9800

% of Gross Value Added [6 ]

6.7

25.3

5.1

62.9

84.2

58.0

26.2

20.1

2.2

28.9

35.4

6.7

26.3

4.6

62.3

77.3

53.8

23.6

20.0

3.9

36.9

38.2

6.6

26.3

4.3

62.8

5.9

28.1

4.6

61.4

as % of Gross Domestic Product

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

% change over the previous year

19.2 28.3 23.5 18.3 14.3

Mio EURO

-3 696 -1837 -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.

-1904

18 505

20 409

610

-1 675

910

-41

-1828

9911

11 739

531

-1366

826

10

-1 525

17 386

18 911

1 051

-1 264

897

-4

-2 088

11 215

13 302

1 186

-1 139

721

-12

-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

-1282

829

12

**89**

1998

**;**

_Public finance_

General government deficit/surplus

Financial indicators

Gross foreign debt of the whole economy

Monetary aggregates

  - M l

-M2

  - Total credit

Average short-term interest rates

  - Lending rate

  - Deposit rate

EURO exchange rates

  - Average of period

  - End of period

  - Effective exchange rate index

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

Infant mortality rate

Life expectancy : Males

Females

1994

-9.2

64.8

74.2

1995 1996

% of Gross Domestic

-6.6 -3.2

1997

Product

-5.4

% of Gross Domestic Product

69.0 65.5 60.8 46.3 43.3

in 1000 Mio EURO

28.2

20.6

6.8

15.6

25.3

7.1

14.5

30.9

27.2

20.3

125.0

136.7

164.5

183.3

5.7

12.8

26.0

32.4

24.8

6.0

13.8

24.6

7.0

24.6 25.3 25.3

% per annum

23.0

17.6

20.1

15.4

240.6

252.4

(lEURO=..National currency)

193.7

206.9

1990=100

211.7

224.7

64.6 50.2 42.9 38.6 32.0

Mio EURO

5571

5536

12235.2

8996.1

-3239.1

9203

9170

11824.1

9837.1

-1987.0

7847

7817

Mio EURO

14289.4

12367.8

-1921.6

8106

8081

22929.5

20520.2

7703

7676

18724.2

16842.4

-1881.8

-1987.0 -1921.6 -1881.8 -2409.3

corresponding period of the previous year = 100

102.3 101.3 97.7 101.2 101.7

as % of total

64.1

72.9

-4.3

45.3

51

-3.0

0.0

61.5

62.8

0.0

0.0 0.0 0.0

per 1000 live-births

62.3

69.7

per 1000 of population

62.8

71.2

-3.8

-3.3

-3.7

0.0

0.0

11.5 10.7 10.9 9.9 9.7

at birth

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**

**Length of motorways**

Industry and agriculture

**Industrial production volume indices**

**Gross agricultural production volume indices**

Standard of living

**Number of cars**

**Telephone subscribers**

**Number of Internet connections**

- Provisional

: Not available

Source: United Nations.

1994 1995 1996 1997 1998

% of labour force

54.0

10.7

19.4

9.2

8.7

27.6

5.4

58.3

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

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

Km per 1000 Km2

**83** **83** **83** **83** **83**

Km

**293** **335** **365** **381** **448**

previous year = 100

109.6

103.2

212

173

220

208

104.6

102.6

103.4

106.3

112.6

99

220

335

8.2 [ 9 ]

Per 1000 inhabitants

111.1

96.2

227

303

223

261

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 noncomparable.

**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 extrabudgetary 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) have no work,
(ii) are actively seeking a job and,
(iii) are ready to take up a job within a fortnight.
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.

**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 wagoncarrying 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:

(a) is provided, except at special points or temporarily, with separate carriageways
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) does not cross at level with any road, railway or tramway track, or footpath;
(c) is specially sign-posted as a motorway and is reserved for specific categories of
road motor vehicles.

Entry and exit lanes of motorways are included irrespectively of the location of the
signposts. Urban motorways are also included.

**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

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