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

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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

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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