FINANCE MINISTER ON THE FATE OF REFORM AND THE

C O N F I D E N T I A L SECTION 01 OF 02 BUDAPEST 000445 SIPDIS SIPDIS DEPARTMENT FOR EUR DAS BRYZA AND EUR/NCE E.O. 12958: DECL: 04/29/2013 TAGS: PGOV ECON PREL ENRG HU SUBJECT: FINANCE MINISTER ON THE FATE OF REFORM AND THE FUTURE OF SOUTH STREAM REF: BUDAPEST 442 AND PREVIOUS Classified By: P/E COUNSELOR ERIC V. GAUDIOSI; REASONS 1.4 (B) AND (D) STILL STANDING ¶1. (C) Meeting the day after a major restructuring of the Gyurcsany government (reftel),Finance Minister Janos Veres emphasized the GoH's continuing commitment to structural reform, expressed concern over the political impact of an impasse over the 2009 budget, and outlined his recent discussions with GAZPROM on South Stream. ¶2. (C) Opening the meeting with a wry assurance that he "would have cancelled our meeting if I had been fired," Veres laughingly commented that "our great associate has decided he does not want any changes here." EU TO THE RESCUE ¶3. (C) Looking ahead, Veres identified employment and development as the government's leading priorities. Responding to the Ambassador's question regarding the government's ability to increase spending given its fiscal constraints, Veres responded that EU development funds will provide "40 percent of profit-earning investments" and "80 percent of non-profit projects." As a result, he concluded, the GoH will only need to provide 20 percent of the total cost, enabling it to reduce government spending by 2 percentage points, from 52 percent of GDP to below 50 precent even as it expands public works, increases employment incentives, and assists employers by subsidizing employee contributions. THAT DEPENDS ON WHAT THE MEANING OF "STRUCTURAL" IS ( ¶4. (C) Turning to structural reforms, Veres noted archly that the government's plans would "depend on your definition." On health care, he expects "small steps to improve cost efficiency" but allowed that "no one wants harsh measures ) just a period of calm." The government would consider marginal changes in education, and expects to see savings from regionalization of local administration. Pensions remain a difficult issue, but the government has been working to tighten the conditions for early retirement and to gradually increase the retirement age. The goal, he concluded, is to see benefits "not in the next three years but over the next thirty." He appealed to the Ambassador not to be "taken in" by the "liberal media echo that all reform has come to a halt." THE BUDGET AND THE "SPIRIT OF THE CONSTITUTION" ¶5. (C) Turning to the budget, Veres stated confidently that Hungary will meet its EU Convergence Program targets for both 2008 and 2009. That said, he expressed concern over the prospect that the failure to adopt a 2009 budget would cause President Solyom to "call for new elections 'in the spirit of the Constitution.'" (Note: Although Hungary's Constitution provides for the continuation of the previous fiscal year's spending levels in the absence of a new budget, Veres and others believe that Solyom might feel free to capitalize on any impasse to interpret the "spirit" of the Constitution broadly. As the "Father of Hungary's Constitution," he may feel uniquely empowered to do so. End Note.) "This threat exists," Veres emphasized, and "both the MSzP and SzDSz are very interested in not letting Solyom into this equation." ¶6. (C) Surveying the new political balance with a dispassionate eye, Veres commented that the MSzP could pass its budget with the SzDSz's open support, with the tacit support of their abstention, or by securing four individual votes from the SzDSz faction if party discipline breaks down. As for an opposition motion of no-confidence, Veres regards the prospect as "possible but not probable." SOUTH STREAM: FEW ANSWERS IN MOSCOW; FEW QUESTIONS FROM BUDAPEST ¶7. (C) Turning to his recent trip to Moscow, Veres downplayed the significance of his discussions with GAZPROM's Alexei Miller. Veres had tabled a draft detailing the composition of the entity created to represent Hungary in South Stream. He reported that the MOL-GAZPROM joint venture has completed its feasibility study of the Hungarian portion of the program, but he believes there will be little forward movement until "the Medvedev government settles in." Although Veres emphasized that there is still "no signed contract," he reported that he had received assurances that South Stream will pass through Hungary whether it goes BUDAPEST 00000445 002 OF 002 through Austria or Slovenia. ¶8. (C) Veres repeated the GoH argument that projected increases in European demand will make multiple pipelines viable, but expressed uncharacteristically little interest in the details. "They haven't told us where the gas will come from," he stated matter-of-factly, and he seemed inclined to accept GAZPROM's blanket assurance of a uniform transfer price without due diligence. Veres noted that Hungary is assuming a ten-year payback period for its investment, but he admitted that the GoH has no fixed transit fee and no evaluation of the relative costs of its various options. ¶9. (C) Comment: For someone with all the answers about Hungary's economy, Veres seems inclined to ask very few questions about the South Stream project. With the latest reshuffle moving energy issues from the Ministry of Economy to the new Ministry of Infrastructure, we sense that Veres has the bureaucratic edge in influencing Hungary's energy policy. We will continue to cultivate him, and to keep a close eye on his very sincere concerns that an impasse over the budget could open the (trap)door to new elections. End Comment. Foley