11A

GATT (1947) – General Agreement on Tariffs and Trade – This is an international treaty, that
promotes free trade between its members by diminishing import tariffs and quotas eliminating state
subsidies or discriminative measures. It is also created for handling trade disputes. Hungary joined
the GATT in 1973.

WTO (1994) - World Trade Organization – This is an international organization, whose main function
is to encourage international trade by dismantling the barriers of trade. Those who are members of
the GATT automatically became members of the WTO too. Currently, the WTO has 164 members. It
provides a forum for negotiations and trade disputes; it provides technical assistance and training for
developing countries.

The World Bank or IBRD (1944) is owned by 189 member countries. It finances major industrial
projects like dam buildings, power plants etc. It also allocates loans for social matters such as
education, nutrition improvement for children and public health. Its resources come from the
developed countries who subscribe in proportion to their economic weight. The bank uses its capital
to extend long-term loans to nations whose projects seem economically feasible. Most of the loans
the World Bank offers must be paid back within a period of 25 years.

IMF – International Monetary Fund (1944) -- its mission is to supply the member states with money
to help them overcome short-term difficulties. It also promotes international trade. When a country
joins the IMF, it is required to contribute a particular sum of money as a kind of membership fee. It is
called a quota. These quotas create reserves from which member states can borrow if they get into
financial difficulties.

11B

The idea of a united Europe took shape after the World War II. The three pillars of the EU are the
European Community, and the Economic and Monetary Union (EMU) and the third pillar is
constituted by justice and home affairs.

The main objectives of the EU are: to promote economic and social progress, to introduce European
citizenship, to develop the area of freedom, security and justice and to maintain and build on EU
law.

The main institutions of the EU are the European Commission, Council of the European Community,
European Parliament, European Court of Justice, European Investment Bank, European Central Bank,
and Economic and Social Committee, which are the most important ones.

Member countries of the EU are Austria, Belgium, Bulgaria, Croatia, Republic of Cyprus, Czech
Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia,
Lithuania, Luxembourg, Malta, Netherlands, Poland, Portugal, Romania, Slovakia, Slovenia, Spain and
Sweden.

Debt crisis: It started at the end of 2009 and is still going on. Some countries have failed to generate
enough economic growth to be able to pay the debts they have accumulated in the past decades
and they have had to finance their government debt from external sources. Greece, Spain, Portugal,
Ireland and Italy are the countries which have been hit the most.
Hungary’s economy
Even before the debt crisis, Hungary had already been dependent on foreign credit as it had and still
has serious economic problems due to the high level of private and public indebtedness in foreign
currencies. Due to the general uncertainty created by the crisis, banks cut their loans which caused
an even greater fallback in investments. Decreasing consumption has led to job losses and the
reduction of real wages. In 2009, the Hungarian economy shrank by 6.3%. In 2010 the new
government implemented a number of changes including cutting business and personal income
taxes, but imposed "crisis taxes" on financial institutions, energy and telecom companies, and
retailers. The economy began to recover in 2010 with a big boost from exports, especially to
Germany and achieved a growth of approximately 1.4% in 2011.
Since 2010, the government has backpedalled reforms and taken a more nationalist and populist
approach towards economic management. The government has favoured national industries, and
specifically government-linked businesses, through legislation, regulation, and public procurements.
In 2010 and 2012, the government increased taxes on foreign-dominated sectors, such as banking
and retail, because the move helped to raise revenues and decrease the budget deficit, thereby
allowing Hungary to maintain access to EU development funds. The policy deterred private
investment, however.
In 2011 and 2014, Hungary nationalized private pension funds. The move squeezed financial service
providers out of the system, but it also helped Hungary curb its public debt and lower its budget
deficit to below 3% of GDP, as subsequent pension contributions have been channelled into the
state-managed pension fund. Hungary’s public debt (at 73.9% of GDP) is still high compared to EU
peers in Central Europe. Despite these reversals, real GDP growth has remained robust in the past
several years because EU funding increased, EU demand for Hungarian exports rose, and domestic
household consumption rebounded. To further boost household consumption, the government
increased the minimum wage and public sector salaries, decreased taxes on foodstuffs and services,
cut the personal income tax from 16% to 15%, and introduced a uniform 9% business tax for small
and medium-sized enterprises and large companies. Real GDP growth increased to 3.8% in 2017, and
4.4 in 2018.
COVID-19 interrupted a period of strong economic growth in Hungary. After increasing in 2019, real
GDP fell by 13.6% year-on-year in the second quarter of 2020. Although the policy measures to
mitigate the first wave of infections were less stringent than the EU average, Hungary’s economy
was affected due to its large exposure to highly cyclical industries (e.g. the automotive sector), as
well as tourism and air transport, which have been severely constrained by the pandemic. Economic
activity rebounded vigorously as the lockdown measures were eased and international supply chains
were restored. By August 2020, industrial production and retail sales were down. Hungary
experienced a strong second wave of the pandemic. Household confidence and some mobility
indicators decreased. In 2021, there was already a recovery and the gross domestic product
increased to 182.28 billion US dollars (=111.1% of 2019).

However, Hungary’s economic prospects have considerably worsened since the war broke out in
Ukraine. This is mainly due to the country’s heavy (pre-war) energy-import dependence on Russia
and the impact of EU sanctions against Russia on the domestic economy (for example rising inflation
and a potential energy crisis). In 2022, economic activity in Hungary still held up better than initially
expected, thanks to robust consumer spending, investment and external demand. Statistical base
effects also helped to achieve growth of around +5% annually. However, the impact of surging
inflation, rising interest rates, weakening external demand and deteriorating business confidence
will take full effect in 2023. We expect both domestic and external demand to slow down markedly.
A recession is likely in the first half of 2023 and for the full year, real GDP is likely to grow at less than
+1%. The tentative forecast for 2024 is a modest recovery to just around +2% growth.
Inflationary risks have increased against the backdrop of rising global energy and food prices and
comparatively loose monetary policies in Hungary. Monetary policy by the Magyar Nemzeti Bank
(MNB, the central bank) is officially based on inflation targeting (3% ± 1pp) but has been loose for a
long time. The real interest rate has been negative since end-2016, i.e. the key policy interest rate
has been below the inflation rate, even as the latter has been above the target range since early
2021 amid rising energy prices. The latter, combined with a weakening forint (HUF, the local
currency) that pushes up import costs, drove consumer price inflation into double digits for most of
2022 (25% at year-end) and we expect this to remain the case until at least mid-2023. The MNB
began monetary tightening earlier than peers in the region (in June 2021) and eventually also more
decisively in H2 2022 – it hiked its policy rate from 0.60% in May 2021 to 13.00% at end-2022.
However, this did not prevent headline inflation from surging to the highest rate in the CEE region in
2022. Meanwhile, the HUF depreciated by -8% against the EUR in the course of 2022, more than any
other CEE currency. We expect it to weaken further in 2023 against the backdrop of a large current
account deficit and low foreign exchange (FX) reserves.