Impact of the International Credit Crisis on Hungary

Impact of the International Credit Crisis on Hungary

Hungary has made a transition from communism to a democratic country in 1989. This transition not only changed the government and the people, but it mostly changed the economy. The country’s private sector account is more than 80% of GDP, and the cumulative foreign direct investment worth more than $70 billion. Foreign ownership of Hungarian firms is all over the country so as foreign investments. However, the international credit crisis made an impact on the country, which led Hungary to receive a financial assistance package from the EU, the IMF and the World Bank which was worth over $25 billion. (CIA factbook)

Hungary was one of the Eastern European countries that did not use responsible fiscal policies during the past decade. The country’s budget deficit as percent of GDP was higher than other Eastern European countries’ budget deficit. The public debt was 66% of GDP by 2007 and it reached up to 75% of GDP by 2009. (Marer, p. 10). Hungary’s public debt was the highest in the European Union in 2007. One of the biggest problems was political inactivity. After 1989, Hungary was one of the leading reformer, but after 1998 politicians refused to continue with needed reforms, which led to a higher share of government expenditure. Some of the reforms the politicians should have continued were welfare, pension, health, education, and tax system. The other problem was that 43% of the working-age population was receiving payments from the budget without contributing to its revenues (Marer, p. 10).

Hungary has its own currency called the Forint. When a country has its own currency, external events (international credit crisis) can affect domestic economy through the exchange rate channel. Also, the exchange rate regime a key to Hungary’s monetary policy, and it is also a key to the country’s ability to handle the external events, in this case to respond to the global crisis. As of today, Hungary is planning to...