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Hung(a)ry for German Investment

Gerwald Herter (jam)
February 21, 2005

Germany is Hungary's largest trading partner and has invested heavily in the country since the fall of the Iron Curtain. But Hungary wants more investment, since competition with lower-wage countries is getting tougher.

Hungary's Ferenc Gyurcsany (left) with Gerhard SchröderImage: AP

Without the participation of German companies, Hungary's economic development since the end of communism would look much different. Over the past 15 years, German industry has invested around €12 million ($15.68 million) in Hungary, making up about a third of total foreign investment. It's a close economic relationship that has both its good side and its bad.

"When the German economy gets the flu, Hungary gets a cold," said Prime Minister Ferenc Gyurcsany.

Still, despite Germany's less than stellar economic performance over the past few years, Hungary has benefited greatly from its relationship with Europe's largest economy. German carmaker Audi produces its TT sports wagon there, the Hungarian phone company MATAV, once state owned, has long been a part of Deutsche Telekom. Other well-known German multinationals, such as EON, Bosch and Commerzbank, have made names for themselves in Hungary.

Foreign investment: essential

At a conference on Monday in Bonn, heads of state of both countries, Prime Minister Gyurcsany and German Chancellor Gerhard Schröder, gathered with about 350 firms to talk about what the future economic landscape in Hungary might look like and whether it can continue the rapid pace of growth and investment it has enjoyed over the last decade and a half.

Schröder called on German firms to continue investing abroad, including Hungary. He said the fact that Germany was so dependent on exports -- one of the few motors driving the economy forward -- foreign investment was essential.

"It secures access to markets that we otherwise wouldn't have," he told conference participants. "It also helps us secure jobs here at home."

Tough competition

Despite Hungary's economic accomplishments, the country can ill afford to sit on its laurels, since some of the shine it had acquired in the 1990s is beginning to wear off. Its eastern neighbors, such as Romania and Ukraine, are increasingly attracting investors -- that might have once considered Hungary -- due to their lower wages and tax rates.

Ungarn sagt ja zu EU Feuerwerk
The city of Budapest celebrates Hungary's EU referendum with fireworks on Saturday night, April 12, 2003, in front of the historical Chain Bridge and the Royal Caste of Budapest. Hungary will decide whether to join the European Union in this referendum.Image: AP

Even if Hungary wanted to compete in these areas, it finds itself hemmed in by European Union rules. It has already been warned by the bloc, which it enthusiastically joined this year, that its debt is higher than Brussels would like to see. One-time plans to join the euro zone early and replace the forint with the European common currency have had to be shelved. Even though Hungary is still sticking to its plans to join the euro zone in 2010, and thereby become a more attractive place for investors, not all analysts are certain that the country can meet that goal.

Good health

While Hungary might not be able to compete with low-wage, low-tax countries further east, it is still attracting foreign companies who are choosing the central European country as a research and development site, including Deutsche Telekom. Finnish mobile phone giant Nokia also wants to invest more in Hungary in the future.

That is reflected in its healthy growth rate. In 2004, the country's economy expanded by four percent.

According to Gyurcsany, Hungary's entry into the European Union had been easy going for the nation's economy and its people.

"It seems that a large portion of the country didn't even notice that we joined," he told German television. Or if they did, he added, it was because "whisky was suddenly cheaper."