Hungary brushes off EU criticism on central bank bill

Hungary's parliament ignored criticism from the European Union and European Central Bank by making few changes Friday to a disputed central bank law and approving further controversial bills. The parliament, dominated by Prime Minister Viktor Orban's centre-right Fidesz party, approved amendments to the central bank bill, which has drawn strong criticism from Brussels, the ECB and the International Monetary Fund. With just minor changes, the government will go ahead with its plan to expand the bank's rate-setting monetary council and increase the number of deputy governors, measures criticised by the ECB. Critics say the piece of legislation, which is due to be voted on next week, would increase government influence over monetary policy. It takes away from bank governor Andras Simor the choice of naming his deputies, handing the decision to the Fidesz-dominated parliament, and also injects further parliament nominees into the monetary council. In a potential conciliatory gesture, the bill nevertheless included a declaration that the government would not attempt to influence the central bank or its leaders. Parliament also passed a second central bank reform, in the form of a constitutional amendment that creates a legal option to merge the market regulator and the central bank, while demoting the central bank governor to a deputy position. Simor has described the reforms as a "total takeover" by the government, bringing "the final elimination of the central bank's independence dangerously close." Earlier this week, European Commission head Jose Manuel Barroso wrote a letter to Orban "strongly" advising him to withdraw the central bank bill and a so-called "Economic Stability Act" until their compatibility with European law is assured. The second bill, approved by the Hungarian parliament on Friday, cements the 16-percent flat rate personal income tax introduced by the Orban government and which has already contributed to a massive hole in the budget. As any future modification will require a two-thirds majority, this will leave future governments effectively with their hands tied as regards to fiscal policy. The Economic Stability Act also postpones until 2016 compliance with a constitutional rule that requires a cut in the public debt every year until it reaches 50 percent of output -- even though this rule was introduced by the Orban government earlier this year. Hungary's debt is just under 80 percent of GDP, while the EU requires a ceiling of 60 percent. On Friday, several dozen opposition lawmakers staged a protest in front of parliament against the policies of the Orban government, while in the evening, about 3,000 demonstrators gathered near the assembly building to voice their anger. Hungary is seeking a credit line of 15-20 billion euros ($19.7-26.2 billion) from the EU and IMF, whose officials quit talks here last week in protest over government changes at the central bank. In reaction to the rift in talks, a second ratings agency -- Standard & Poor's -- decided to downgrade Hungary's debt to non-investment grade on Wednesday, listing the bank legislation among its reasons for the move. The planned reforms "raise questions about the independence of oversight institutions and complicate the operating environment for investors," S&P said.