Summary The dialogue between the EU and Hungary in preparing for the accession negotiations, requires a major effort from all involved, including the business community of Hungary. Conditions have been created which should enable trade and commerce to flourish, and the business community should seize the opportunities in order to bring about an effective integration of economies. Hungary has made excellent progress in political and economic reform. It was among the first to introduce price liberation and currency convertibility, while its reform in the banking sector is showing by substantial investments made by foreign banks. These reforms should continue and be consolidated to prepare Hungary for EU membership. Although reform is on its way and Hungary now is one of the most prosperous applicant countries, Hungary's economic growth is not sufficient yet, due to macro-economic imbalances. In order to improve its economic growth, Hungary needs to try and sustain sound economic policies, since its debt burden and inflation are still relatively high. Trade is another important source of economic growth. Hungary already is an important trade partner for the EU, but its imports are still higher than its exports. Even though at this stage this is a normal development, since Hungary is modernising its economy, it should regard solving trade problems particularly in the field of agriculture as a priority for its future. Hungary's main problem in the field of trade liberalisation is the fact that it still grants special treatment to components from non-European countries and as such excludes its exporters from the advantages of the system of cumulation of the rules of origin. Under this system, trade is giving a boost by allowing goods which contain components from other European countries to benefit from the same favourable customs treatment as if they were produced in one single country. The Commission urges Hungary to bring its customs rules in line with those in the European Union. Hungary's application for membership is being evaluated by the Commission in all possible fields, such as its ability to implement effectively the rights and obligations of the EU, its democratic status, the protection of minorities and its capacity to take on the obligations of the single market. In this last field, all Hungary's legislation is now monitored for consistency with single market rules. The government should see to it that the law to be implemented will meet all EU standards. In order to make the law workable, institutes should establish norms and standards for enforcing the law consistently, and managers need training on how to apply the new laws. Next to an adaptation of the law, Hungary also needs to adapt its infrastructure, industry, and technology to be able to compete in the single market in the next century. Foreign direct investment is an important source of assistance to achieve these reforms. So far, Hungary has attracted most of the foreign investment in central Europe. The investment climate depends on Hungary's prospects of becoming part of the wider process of European integration. In this respect, strengthing its relations with neighbouring countries is very important. The EU is making sure that it will be able to absorb new member states in time and has a demanding agenda ahead. The current IGC sees as its tasks to reform of the institutions in order to be apt for enlargement, to finalise the Economic and Monetary Union, and to develop an area of freedom, security and justice in Europe. These are all issues that in time will also be beneficial to Hungary and the other applicant countries. The EU believes that the efforts required will be recompensed by positive results for future stability and prosperity for Europe as a whole. Dialogue with the business community My visit to Budapest forms part of the Commission's dialogue with the countries which have applied to join the European Union on preparations for membership. It comes just after the Dublin European Council has confirmed the EU's goal of completing the Inter Governmental Conference, which will lay the institutional ground work for enlargement, in Amsterdam next June. So both the EU and the applicants for membership have a busy year ahead in preparing for accession negotiations. This requires a major effort from all sides. But the harder we all work now, the smoother the process of enlargement should be. The Hungarian authorities have made an enormous effort to answer all the Commission's questions about the country's readiness to assume the rights and obligations of EU membership. So it is only reasonable that the Commission should provide some feed-back and that we should exchange views in a free and open manner on the progress made and on what remains to be done. This dialogue should also involve the business community. After all, politicians and diplomats aim to create the conditions which should enable trade and commerce to flourish. But it is up to you, in the different branches of business, to seize the opportunities which have been created and thus to bring about the effective integration of our economies. Your experience of how trade policy and internal market rules work out in practice is extremely valuable. Hungary's reforms Hungary has made excellent progress in political and economic reform. Hungary's political system is now broadly comparable to those in the member states of the European Union and other modern democracies. The same is true of its economic system, as confirmed by Hungary's entry into the OECD in May this year, on which I extend to you my warm congratulations. Hungary was among the first to introduce price liberalisation and currency convertibility and has this year taken further steps to liberalise capital transactions. Banking sector reform has gone ahead and I note that the law requires state ownership in all banks to be less than 25 per cent by the end of next year. The substantial investments made by foreign banks indicate international confidence in this sector. Modern financial services, with improved management and technology, are needed to facilitate economic restructuring in general. According to some estimates, the contribution of the private sector to national income now exceeds 70 per cent. All these reforms need to be continued and consolidated in preparing for EU membership. The importance of economic growth Although Hungary is among the most prosperous of the applicant countries. Hungary would need to achieve a faster rate of economic growth than the Union and to maintain it for many years to bring our respective living standards more into line. This year, however, there will be little daylight visible between growth rates in Hungary and the Union itself. Given the advanced stage of the reform process, the dynamism of Hungarian business and the country's success in attracting foreign investment, the main reason for lagging growth seems to lie in macro-economic imbalances. Reducing the budget deficit The 1995 austerity package has helped to bring public finances under tighter control and has strengthened confidence in the country's economic prospects. But sound economic policies need to be sustained because Hungary's debt burden and inflation are still relatively high. As many of our member states have themselves discovered, an important element in reducing the budget deficit is social security reform, especially the better targeting of assistance. I note with interest that last week a new draft law, on reform of the pension system was put forward. Movement towards a fully funded and possibly privately managed scheme would have many advantages and should be thoroughly explored. Continued improvement in the state of public finances should create a climate favourable to domestic investment and job creation, which have been somewhat disappointing this year. In turn, this should boost economic growth and put Hungary as an applicant for EU membership in a stronger position for eventual participation in economic and monetary union. Trade liberalisation Trade is also an important source of economic growth. Trade flows between the EU and Hungary have been increasing constantly since 1989. Today almost two thirds of Hungary's exports go to the EU, while Hungary is the EU's third most important trade partner in central Europe, after Poland and the Czech Republic. Hungary is our only partner in central and eastern Europe which has a surplus in agricultural trade with the EU. Hungary's overall exports to the EU grew by almost one billion ECUs last year, but imports rose faster still, leaving a trade deficit of some 1.1 billion ECU. To a certain extent, this is not abnormal at this stage of the transition process. Hungary is importing the means to modernise its economy. This will strengthen its competitive position on European and world markets. Hungary's trade balance has improved dramatically since the austerity package was introduced last year and this trend should continue. The Hungarian government's commitment to phase out the import surcharge by the end of June next year is particularly important in the process of trade liberalisation. Twenty-eight European countries have agreed in principle to arrangements which will give trade a further boost from the beginning of next year by allowing goods containing components from other European countries to benefit from the same favourable customs treatment they would enjoy if produced wholly in a single country. This is known as the cumulation of the rules of origin, which forms part of the pre-accession strategy decided at the Essen European Council in 1994. We have been in intensive talks with the Hungarian authorities to ensure that Hungarian customs rules are brought into line with those in the European Union as soon as possible so that Hungarian traders can take full advantage of the new pan-European origin rules. The Commission's opinion on Hungary's application Hungary's application for EU membership, like that of the other nine candidates in central and eastern Europe, is now being evaluated by the European Commission. It is our duty to present to the Council of Ministers next year a clear opinion on each of these applications. In these opinions, we shall be looking at the capacity of the candidate country to implement effectively the rights and obligations which come with Union membership. The Commission will also be examining each candidate's ability to live up to the conditions for membership set out by the Copenhagen summit in 1993. These relate primarily to democracy, the rule of law and the protection of minorities, the existence of a functioning market economy, and the country's capacity to take on the obligations of membership, including those related to the single market. The challenge of the single market The single market is the most tangible example of economic integration in Europe. It comprises 370 million consumers in 15 countries, among which goods, services, capital and labour circulate freely. The countries of central and eastern Europe are now preparing to participate in the single market. They can expect enormous benefits from operating in the world's largest open, competitive market. The Commission's White Paper is a guide to the technical measures required and is backed up by support from PHARE. All new legislation in Hungary is now monitored for consistency with single market rules. But the government and Parliament need to keep a constant check on progress, in terms of the priorities outlined in the White Paper. In any democracy, Parliament is of course free to introduce amendments during the legislative process. But it is in Hungary's own interest that the final laws which emerge from the debate in Parliament meet European standards. In all the associated countries, we are now entering a phase when the proper implementation and enforcement of the new laws is becoming just as important as the laws themselves. It is a major challenge for officials, lawyers and judges to come to grips with a highly specialised body of law. But business people contemplating new investments will want to feel confident that the law will be enforced in a predictable and consistent manner and that technical measures are in place which guarantee the acceptability of Hungarian products on European markets. This means, for example, that Hungarian institutes should be able to establish norms and standards and to carry out conformity testing in a manner compatible with the rules of the single market. The managers and staff of enterprises also need training on how to apply EU rules, concerning, for example, health and safety, in a way which is both efficient and consistent with the law. Hungary also needs to equip itself with the infrastructure, the technology, the industry and the services which will enable it to compete in the European single market in the next century. The use of resources, ranging from water to electricity, needs to become more efficient. The telephone network, for example, a vital tool of modern business, needs modernising. A recent report showed that Hungary still has less than 25 telephone lines per hundred people, whereas the EU average is around 50. The average waiting time for a new line in Hungary is three years, according to the EBRD, whereas in the EU it is less than one month. To give another example, the amount of electricity needed per unit of output in Hungary is still much higher than in the EU and emissions of sulphur dioxide from power stations are also much higher. Hungary's transport network also needs modernising, with better facilities for border crossings. The EU is helping with work in these areas but the main impetus for modernising Hungary's industry, services and infrastructure comes from foreign direct investment. Foreign capital, management and industrial skills, research and development can do much to accelerate the reform process. It is one of the best ways to introduce modern management techniques and introduce a more competitive approach. Foreign investment Hungary has done well in this regard, attracting the lion's share of foreign investment in central Europe across a range of sectors from financial services to energy. Since 1990 some thirty billion ECUs in new investment have flowed into the countries of central and eastern Europe. Almost a third of total foreign investment for the period went to Hungary, closely followed by Poland and the Czech Republic. The lesson is clear. Investors are attracted to markets with political stability, clear regulatory framework and well-developed legal systems. This is particularly important in sectors, such as energy, where private sector firms compete in markets where state monopolies still play an important role. Clearly the confidence of investors depends on a climate in which it can be taken for granted that contracts and best business practices are fully respected. Regional co-operation The investment climate in Hungary also depends on Hungary's relations with neighbouring states and on its prospects of becoming part of the wider process of European integration. Hungary plays an active part in regional co-operation in central and eastern Europe. Hungary's trade within the Central European Free Trade Area is expanding. I welcome the ratification of the Basic Treaties with Slovakia and Romania, and would encourage Hungary to continue to extend co-operation with its neighbours. Preparations for membership are a two way street Preparations for membership are, of course, a two-way street. We do not expect Hungary to accomplish alone what has taken our own member states many years to achieve by working together. Under the Union's Phare programme, Hungary has received grants totalling over 600 MECU since 1990 and is eligible to receive more than 425 MECU in the period up to the end of 1999, in addition to loans from the European Investment Bank and the European Bank for Reconstruction and Development. The Union is also doing everything in its power to ensure that the EU is in a position to absorb new members while maintaining the momentum of integration. This is the purpose of the inter-governmental-conference which is scheduled to complete its work in Amsterdam next June. Why is it so important that the IGC succeeds? The Union's institutions and decision-making system were designed in the 1950s for a community of six member states and have never been fundamentally reformed since then. Yet today we are fifteen and by the early years of the next century we will be more than twenty. Our prime task is to ensure that these institutions function effectively after enlargement and that the Union can speak with a single voice and act together in the world, in foreign and security policy and, increasingly, in fighting international crime. Just as important in preparing for enlargement is economic and monetary union, which will give Europe an immense competitive advantage in the future. The Union is firmly committed to introducing the euro, the single currency, on time, in 1999. There is no reason why European citizens and businesses should still be denied one of the major advantages long enjoyed by our competitors in the United States and elsewhere. If I have raised some difficult questions this evening, it is not because I am pessimistic about enlargement or about the prospects for working with Hungary to make it a success. But it would be a disservice both to the Union and to the applicant countries to gloss over the magnitude of the task that lies ahead. I am convinced, by my talks in Budapest, that Hungary is committed to making a success of the pre-accession strategy which we are working on together. The European Union remains ready to provide full support to Hungary in its efforts to prepare for the many challenges of Union membership. An ambitious political agenda Hungary's application for EU membership is part of an ambitious, wider European political agenda. With each day that passes, Hungary and the other applicant countries are becoming more closely implicated in this political agenda and will share in the benefits of a successful outcome in the many areas involved. Besides strengthening EU institutions, this agenda includes the development of an area of freedom, security and justice in Europe, with the Union acting together and speaking with one voice in world affairs; and closer cooperation in the fight against drugs, organised crime, terrorism, racism and xenophobia. Both Hungary and the EU have much to gain from enhancing police cooperation and ensuring high levels of security for all our citizens, especially the most vulnerable. The agenda for the years ahead also includes : introducing the single European currency, the euro; reinforcing relations with Russia, Ukraine and the Union's other major partners, and establishing the financial framework for the Union's activities in the early years of the next century. A new round of multilateral trade negotiations in the WTO setting is on the horizon and will have far-reaching consequences. This is a demanding agenda for the existing Union and for the new member states. But the efforts required will be more than recompensed by positive results which will contribute to the future stability, security and prosperity of Europe as a whole. ***
