ECB hits out at Hungary's central bank plans

(FRANKFURT) - The European Central Bank hit out Thursday at Hungary's controversial plans, already roundly condemned across Europe, for a radical shake-up in the way it runs its central bank.

In a statement issued after a meeting of its decision-making governing council, the ECB expressed "concern about ... provisions in the draft law on the MNB (Magyar Nemzeti Bank) that could undermine the central bank's independence."

Central bank independence is enshrined in European Union treaties but Hungarian Prime Minister Viktor Orban is hoping to use his two-thirds majority in parliament to push through changes in the make-up of the decision-making bodies of the MNB, with whom he has frequently clashed over policy.

The ECB said it was particularly concerned about the proposed changes, including its monetary policy council.

Orban wants to increase the number of council members and also increase the number of deputy governors, effectively increasingly parliament's influence over the setting of interest rates.

The ECB said such an increase in numbers "without due consideration of the MNB's needs, gives rise to concern as to whether this could be used to influence the decision-making process, to the detriment of central bank independence."

The ECB said it also noted another proposal to merge the MNB with Hungary's financial supervisory authority and create a new institution.

While this particular draft law had not been submitted to the ECB for consultation, it complained, it could "affect the personal independence of the central bank's governor.

"In particular, by appointing a new president with authority over the governor of the MNB -- who would become the vice-president of the new institution -- the personal independence of the MNB's Governor would be impaired."

In addition, a statute of the European System of Central Banks concerning the possible reasons for dismissing the governor of a national central bank "would be breached," it said.

Orban, who makes no secret of his dislike of MNB chief Andras Simor, is seeking to dock the latter's pay and curb his power to appoint key members of the MNB's monetary council.

Ever since Orban came to power in April 2010, tensions have risen between the two men because the prime minister believes the MNB's monetary policy decisions often thwart the government's goal of boosting growth.

In a further escalation of the conflict last week, Budapest unveiled plans to merge the central bank with the country's financial watchdog, effectively a demotion for MNB governor Simor because the new body is to be headed by a figure nominated by Orban and appointed by President Pal Schmitt.

Last week, experts from the European Union and the International Monetary Fund discussing a new credit line for Hungary cut short the talks, citing concerns over the MNB's independence. Budapest denied any breakdown.

In its statement Thursday, the ECB said it has "requested the Hungarian authorities to bring their consultation practice into line with the requirements of European Union law and to respect the obligation to consult the ECB.

"Three major revisions of the central bank law in 18 months are incompatible with the principle of legal certainty," it added.