MINISTER KAKOSY COMMITTED TO REFORM, CONCERNED

C O N F I D E N T I A L SECTION 01 OF 02 BUDAPEST 000115 SIPDIS SIPDIS STATE FOR EUR/NCE FOR NORDBERG, COMMERCE FOR SILVIA SAVICH, E.O. 12958: DECL: 02/01/2028 TAGS: PREL ENRG ECON HU SUBJECT: MINISTER KAKOSY COMMITTED TO REFORM, CONCERNED ABOUT ENERGY Classified By: Ambassador April H. Foley for reasons 1.5 (b) and (d) ¶1. (C) Summary: In a first official meeting with Ambassador Foley, recently appointed Minister of Economy and Transport Csaba Kakosy outlined minority coalition party SzDSz plans for tax reform, highlighted potential problems with health reform, and underscored Hungary's complex energy challenges. State Secretary Abel Garemhegyi may join Ambassador Foley in Cleveland for commercial outreach. Both Garemhegyi and Kakosy expressed interest in renewing meaningful business dialogue. Specifically, Kakosy pledged to maintain a high level of business community focus that started with a successful AmCham meeting with Prime Minister Gyurcsany, but also to establish an advisory group of individual businesses to consult with the Ministry. Kakosy renewed a request for a courtesy call in Washington for Ambassador Somogyi with Secretary of Commerce Gutierrez and asked for positive SIPDIS consideration in the Special 301 report. With warm atmospherics, the meeting appeared to set the stage for productive cooperation. End Summary. Tax Reform and Health Care: Issues to Watch ¶2. (C) Minister Kakosy discussed a series of reforms in the context of SzDSz-MSzP relations, noting that intra-MSzP tensions and concerns are the sole possible factors that may derail either health or tax reform. He noted that the health care bill, that has been debated or over a year and is slated for a final vote on February 11, is "not nearly as certain" as when the coalition initially reached agreement. Kakosy does not project an easy few weeks of discussions, but deferred to Gyurcsany, saying, "the Prime Minister is confident that health care reform will continue as planned. I am confident in the Prime Minister." In all aspects of reform, but notably health care and tax, Kakosy expressed relief and confidence in negotiations and discussions that are taking place behind closed doors, "not in the media" (as we saw late last year). ¶3. (C) Tax reform is an SzDSz priority, and their goal is to have a package ready by June. In order to achieve this, an agreement would have to take place by the end of April, and Kakosy said Gyurcsany could go "either way." With approximately 200 billion forints extra revenue expected from the austerity package, SzDSz and MSzP agree that this money could be used to lower taxes, or for another purpose (presumably increased social programs),without jeopardizing the Convergence Program targets. Views quickly diverge on the validity of a more ambitious cut that might jeopardize revenue targets in 2009, but Kakosy and SzDSz will support more aggressive tax cuts. Major tax reform is a third option, but Kakosy notes the coalition tried and failed to introduce this in 2005. Instead, options are more closely tailored to reducing or eliminating the much-maligned 4% solidarity tax. This could be offset by an increase in corporate tax rates, but this is another debate taking place in private coalition meetings. ¶4. (C) While Kakosy supports the Veres plan of restoring investor confidence via maintaining fiscal stability, some flexibility may be needed to support competitiveness. This is a battle at the highest levels, with Ministers Draskovics and Bajnai, SzDSz MP Gabor Horn, and current SzDSz President Koka united with Kakosy in support of meaningful tax reform. Competitiveness goes deeper, though, and Kakosy highlighted effective use of European Funds and strong solicitation of foreign direct investment (FDI) under Abel Garemhegyi as further strategies. (Note: FDI flows are currently in decline in Hungary.) Transparency ¶5. (C) Agreeing to continue the legacy of former Minister Koka and to work in harmony with Koka and Minister Bajnai, Kakosy expressed confidence in a new Law and Order office charged with anti-corruption work. The coalition has agreed to look at campaign finance and is hoping for success by adopting a former FIDESZ opposition party proposal to place limits on certain campaign activities. Acknowledging that the business community is leading the charge against corruption, Kakosy argued that it is now clear the government is taking the problem seriously, and he pledged to try "to listen -- and actually to hear" business concerns ranging from transparency to tax reform. Energy -- South Stream, Nabucco ¶6. (C) Kakosy sees both South Stream and Nabucco as potentially diversifying energy sources for Hungary, noting BUDAPEST 00000115 002 OF 002 that "geopolitically, we are always open to friendly dialogue with the Russians." However, Hungary supports a European approach and is the first European country to enact legislation paving the way for a "European" pipeline project such as Nabucco. In contrast, Garemhegyi noted, "if the Russians do (South Stream),they do it alone." Kakosy and Garemhegyi acknowledged that South Stream would bring transit diversity by avoiding contentious routing through Belarus and Ukraine but expressed greater concern about potential Russian involvement in the Nabucco process. Calling EU Nabucco Coordinator van Aartsen "the invisible man," they said potential EU leadership from van Aartsen and Energy Commissioner Piebalgs is "just not there." Moreover, Garemhegyi questioned van Aartsen's objectivity, noting that van Aartsen spends a lot of time in Vienna, which is "a virtual incubator for making deals with the Russians." In Hungary, however, Kakosy does not see room for Ukrainian PM Tymoshenko-style insistence on direct dealings with Gazprom because of Hungary's delivery-at-the-border gas contracts. Energy -- EMFESZ, Nuclear ¶7. (C) When asked about EMFESZ's expansion into Hungary's domestic retail market, Kakosy and Koka expressed surprise at these activities and denied and/or questioned press reports that EMFESZ had consulted with their energy office. To lessen Hungary's dependency on gas, Kakosy said he strongly supports adding nuclear capacity to buttress domestic, relatively independent power generation. With opposition to nuclear "destined to grow," he sees now as the best window for pushing through a nuclear expansion package despite mixed feelings about nuclear power even in his own party. Request for Support; Gutierrez, Special 301 ¶8. (C) Kakosy and Garemhegyi asked for U.S. support in two areas: a possible Ambassador Somogyi meeting with Secretary of Commerce Gutierrez and for recognition of Hungarian progress on intellectual property rights protection in the Special 301 report. Kakosy acknowledged the difficulty of scheduling with Secretary Gutierrez. Comment ¶9. (C) In an unusually positive discussion, Kakosy convincingly laid out a pro-business agenda with open consultation and cooperation with the U.S. Consulting voluminous notes before answering most questions, Kakosy is clearly still adjusting to his new role and may be acting as SzDSz spokesman as well as sitting minister. From business outreach to energy policy, he appeared to appreciate and be ready for complex, extended engagement in key areas. With the economy in the doldrums following the aggressive austerity measures, a growing chorus of economists is supporting more business-friendly measures. If tax reform goes through, we suspect this would act as a well-timed stimulus for Hungary's all-important manufacturing and export sector, an area of opportunity for U.S. investors. End comment. FOLEY