Hungary is likely to face short-term budget pressures due to drought damage and geopolitical shocks, but could still join the eurozone in 2032, according to an assessment published by Eurasia Group in London on Thursday.
The political and economic risk consultancy forecasts that Hungary’s general government deficit will rise to around 7.7 to 7.8 per cent of gross domestic product (GDP) this year.
The main pressures on public finances, particularly high oil prices and the economic damage caused by prolonged drought, stem from factors largely beyond the Hungarian government’s control, the report said.
Financial markets have already begun responding to weaker deficit expectations, Eurasia Group added. One indication is the recent increase in the cost of credit default swaps (CDS), financial instruments used to insure against the risk of a sovereign debt default.
Hungary’s public debt, which stood at 75.6 per cent of GDP in the middle of the year, is expected to approach 77 per cent by the end of 2026. The consultancy noted that advance market borrowing to cover expenditure ahead of EU fund disbursements would also contribute to the increase.
Eurasia Group expects Prime Minister Péter Magyar to be reluctant to introduce policies that would directly burden voters. Instead, the government could favour additional taxes on large companies, following an approach used by former Prime Minister Viktor Orbán.
The key difference, according to the analysis, is that Magyar could present such measures as temporary sacrifices necessary to secure eurozone membership. The government would aim to bring Hungary into the EU’s Exchange Rate Mechanism II (ERM II) by 2030, a required step before adopting the euro.
Eurasia Group considers entry into ERM II by 2030 plausible. If Hungary meets the necessary conditions and remains in the mechanism for at least two years, eurozone accession in 2032 could become possible.
Such a move into ERM II would represent a major political achievement for Magyar, the report said, while euro adoption in 2032 would strengthen Hungary’s position within the European Union.
‘If Hungary meets the necessary conditions and remains in the mechanism for at least two years, eurozone accession in 2032 could become possible’
The consultancy also expects a credible accession timetable to have positive effects on financial markets. It could help narrow the difference between yields on Hungarian sovereign debt denominated in forints and euros.
Other major London-based analysts have also highlighted Hungary’s fiscal challenges while pointing to euro adoption as a potential medium-term policy objective.
In a recent report examining public finances and macroeconomic prospects across Central and Eastern Europe, credit rating agency Fitch Ratings forecast that Hungary’s budget deficit would reach 7.3 per cent of GDP this year.
Fitch expects the deficit to decline to 5.8 per cent in 2027. Its analysis also noted that the Hungarian government intends to use its commitment to meeting eurozone accession requirements by 2030 as a central anchor for medium-term fiscal consolidation.
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