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In a week, the Hungarian Prime Minister also made two references to the fact that Hungary considers the next few years to be self-sufficient without the help of the EU, and that it is not even worth it for us to accept the EU rescue package. He reminded Kossuth in an interview with Radio on November 20, and said so at a press conference last week after a meeting with Polish Prime Minister Mateusz Morawiecki. There, he said quite precisely, “for the management of the crisis caused by the coronavirus epidemic, the European Union is, in fact, trying to raise funds on credit, we have to pay our share. We were running another risk ”.
Viktor Orbán’s words are misleading in the first and second hearings, but at least it seems quite probable that although he is trying to base the veto on the rule of law with economic arguments, his reasons are bad, so he is not worth it. Not only is the problem arguing that our economy has a significant need for EU funds, but also that the Union is offering an incomparably better line of credit than what is available on the international market.
From the next generation EU Recovery Fund (NGEU) created to mitigate the economic effects of the coronavirus epidemic, we can not only borrow, but also support.
The NGEU, which amounts to € 750 billion at 2018 prices, has two pockets, with € 390 billion in grants to member states and € 360 billion to borrow.
(At the current exchange rate, these items are much higher because the union will multiply these amounts by the assumed inflation of 2 percent when paid.)
Zsolt Darvas, a Hungarian staff member at the Bruegel Institute in Brussels, did a comprehensive analysis in English of the use of the recovery fund, and we can find out how much non-refundable support we can get each year if we finally waive the veto and take a loan if we want to. With the help of Zsolt Darvas, who also works at the Corvinus Institute of Economics, we discussed how much it would be worth for us to receive an NGEU grant or a NGEU loan.
To create a seven-packet 750 billion NGEU, the syndicate must issue bonds and borrow from the market. The 390 billion will be received by the member states as subsidies; according to Zsolt Darvas calculations, at today’s price, our non-refundable and payable subsidy amounts to 8.24 billion euros. At the same time, the EU loan as a source of aid will be jointly repaid by the Member States between 2027 and 2058.
But then why would Hungary’s involvement be worthwhile from a purely economic point of view? Since per capita income plays a key role in the distribution of subsidies and is well below the EU average, we would receive a large amount of EU funding from the NGEU relative to the size of the economy. At the same time, Hungary will have to subsequently contribute to the reimbursement in proportion to its share of the EU’s gross national product (GNI). As this ratio is extremely low in the case of Hungary, it is expected that it will have to repay much less than what it would receive now.
More clearly, if there is no Hungarian-Polish veto and the Union’s seven-year budget is finally approved along with the recovery fund, Hungary will receive a much larger share of the NGEU support endowment than it will have to contribute to pay the same debt.
So Viktor Orbán’s logic of getting into debt with this cannot prevail here, and we can be wrong with the return of the part of the 390 billion budget that corresponds to us.
There is no such cheap loan on the market
Let’s look at the other pillar of NGEU, the $ 360 billion credit line. With this money, member states can borrow pro rata, and all states have to repay it. However, the interest rate will be surprisingly low compared to the international market, in fact, there will be a term maturity where the interest rate will be negative. According to Zsolt Darvas, in 2021
- the interest rate on an EU loan between 1 and 17 years can be negative;
- For an 18-year loan, the interest rate can be 0 percent;
- and for those of 30 years, 0.2 percent per year.
The technical cost of issuing a bond makes interest rates worse by up to a few basis points, but that seems insignificant.
How much more expensive would it be to finance ourselves with the market instead of an EU loan? In this case, he poured clear water into the glass that the Center for Public Debt Management had issued bonds denominated in euros at 10 and 30 years in mid-November:
- the annual premium of the 10-year bond is 1.2 percent compared to the German government bond;
- for those 30 years old, 1.8 percent.
The principal award of the loan offered by the syndicate is compared to this, as it would mean 1.5 percentage points lower in interest rates over 30 years.
“For 30 years, we can borrow a point and a half better from the EU than from the market. This would make a big difference, it would exempt Hungary from huge interest expenses. ”
Darvas emphasizes.
That is why Viktor Orbán’s reaction last week is limping, according to which Hungary will solve the financing of the coming years on its own, without help from the EU. Although we could probably borrow on the international market, in this respect we could survive without credit from the EU, only at much higher interest rates.
If Viktor Orbán changes his mind in a veto case, Hungary could borrow a maximum of EUR 8.91 billion from this NGEU 360 billion line of credit at around zero percent interest. (On the one hand, Bruegel Institute staff calculated on the basis that, at 2018 prices, member states can borrow up to 6.8 percent of their gross domestic product, and that the 17 countries that previously used the SURE fund would certainly borrow. collected, so you really need it).
So why is Viktor Orbán right?
“There is a risk that we too (together with all the other EU countries) will commit to repaying the loans we have obtained. If a Member State cannot repay its own loan, it must repay that part jointly to the other EU countries. But the chances of that happening are very slim.
After the economic crisis of 2008, five euro area and three non-euro area countries (including Hungary) received loans through an aid program and all repaid the money. Even in the 75-year history of the International Monetary Fund (IMF), there may have been 1 or 2 occasions when someone did not pay, but even non-EU Argentina, which went bankrupt several times, paid back their IMF loan.
So the chances of Hungary paying instead of someone else are almost inexpressible in number, ”argues Zsolt Darvas.
In light of all this, Viktor Orbán may have economically interpretable arguments as to why he should not abandon the announced veto due to the rule of law mechanism, but we do not know them yet.
(Cover image: Vikor Orbán. Photo: Prime Minister’s Press Office / Benko Vivien Cher)
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