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Last Updated: Tuesday, 11 April 2006, 11:48 GMT 12:48 UK
Hungary struggles to compete
Women eating lunch by Danube in Budapest
Despite EU membership Hungarians are feeling the pinch
Hungary's ruling Socialists and the conservative opposition Fidesz are locked in a close parliamentary election race, in which the role of smaller parties may prove crucial.

It is the first such battle since the country joined the European Union in 2004.

The BBC's Europe analyst Jan Repa examines how Hungary has fared in the EU compared with its neighbours.

When Communist rule ended in 1990 - the result, as in Poland, of a negotiated transfer of power - Hungary enjoyed certain advantages. It had a cadre of economic bureaucrats, many of whom had had training in the West. They understood how banks and other financial elements of a market economy were supposed to function.

Much was made of the country's historic links with the German-speaking countries - which were seen as a source of new investment and diplomatic support.

Domestic politics, however, revolved between two poles: a Western, liberal one, based in Budapest; and a populist-national one, which emphasised Hungary's distinctive traditions.

The latter trend gave much publicity to the large Hungarian minorities living in neighbouring Romania, Slovakia, Serbia and Ukraine: a relic of the time, before 1918, when Hungary comprised one half of the Austro-Hungarian Empire.

Budget woes

What all recent Hungarian governments have felt obliged to do is to feed public expectations. This has produced recurring cycles of overspending, followed by financial retrenchment and austerity.

Prime Minister Ferenc Gyurcsany
PM Ferenc Gyurcsany: A Socialist who favours the free market
The current election campaign has been no different - with the Socialists and Fidesz both making promises of jobs, lower taxes and more state subsidies.

But they have not said what they will do about the budget deficit, which now stands at over 6%, and may soon reach 8%.

Some foreign experts have suggested that Hungary will not be ready to adopt the euro before 2014. The Socialists' target date is 2010.

While Hungary's annual growth rate of 4-5% is comparable with Poland it lags behind the 6-7% currently enjoyed by the Czech Republic and Slovakia.

Hungary's finances, however, are in worse shape than any of its Central European neighbours.

Structural weaknesses

In fact, Hungary's economy - focused as it is on consumer goods and agriculture - is quite vulnerable.

It lacks the size and internal market dynamism of Poland. Its reputation as a manufacturing centre is not as well established as that of the Czech Republic.

Hungary's tax incentives are not as generous as those now being offered by Slovakia.

A number of foreign companies, which moved into Hungary in the 1990s, seeing it as a fairly cheap assembly point close to the West European market, have pulled out and taken their business to South Asia and other even cheaper locations.

Regional disparities persist in Hungary, with western areas, between Budapest and the Austrian border, enjoying higher living standards than eastern areas, closer to Romania and Ukraine.

Given their reputation for cleverness and effervescence, Hungarians have maintained a surprisingly low profile in the European Union: unlike the Poles, for instance, who have been accused of throwing their weight around in a manner more usually associated with countries like France.

Size may be a factor. So may be a historical propensity to compromise and seek a way through the conflicting ambitions of larger states.

Hungary may also be suffering from the after-effects of some rather clumsy diplomacy in the run-up to EU membership, when it threatened several times to put obstacles in the way of other EU-aspirant countries over the status of Hungarian minorities.

These tactics did not go down well in Brussels, with the Hungarians being told the EU did not like to get involved in bilateral disputes between members or would-be members.

Q&A: Hungary election
07 Apr 06 |  Europe
Country profile: Hungary
19 Mar 06 |  Country profiles
Timeline: Hungary
12 Oct 05 |  Country profiles

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