Hungary Sees ‘Horrible’ Economic Fallout Without EV Subsidies

Zoltan Simon and Rosalind Mathieson
·3 min read
2

(Bloomberg) -- Hungary said the European Union should reconsider a return to tighter fiscal policy and allow for higher subsidies for the electric-vehicle industry to ward off crushing competition from the US and China.

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Economic Development Minister Marton Nagy singled out Germany in warning that state-backed EV economies in the US and China are putting the 27-member bloc at a competitive disadvantage at a crucial moment. Hungary is a major hub for German automakers.

“The impact on the European economy is horrible because it’s pricing out even German automakers in the EV market,” Nagy said in an interview in Budapest. “That’s leading to overcapacity and eventually output cuts, which could also hit Hungary.”

As EU finance ministers close in on a reform of the bloc’s debt and deficits rules, member states including Italy are urging more flexibility than in the past to promote economic growth. Fiscal restrictions, which were suspended in the economic fallout of the pandemic and Russia’s invasion of Ukraine, will kick in again from January.

The region meanwhile risks falling behind in the EV transition with high production costs and unattractive models putting manufacturers at a disadvantage to competition from China. Slower growth in EV demand risks falling short of the EU’s target of phasing out new sales of combustion-engine vehicles by 2035 into question.

Volkswagen AG signaled last month that it may cut more staff at its namesake brand, after already canceling shifts and laying off temporary workers due to waning EV orders.

Nagy, Prime Minister Viktor Orban’s most influential economic policymaker, said the stakes to fiscal restraint are big for an industry central to the EU’s efforts on the green transition.

“We need to temporarily relax fiscal rules — I’m not talking about a return to fiscal alcoholism — but enough so that we narrow our competitive disadvantage with the US and China,” Nagy said.

The EU has sought to take a tougher line against China as a competitor. The bloc launched an anti-subsidies investigation into electric vehicles made in China. President Joe Biden’s administration has also drawn scrutiny in Brussels, with his Inflation Reduction Act spending billions of dollars to lure EV producers.

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In Europe, Hungary is highly reliant on Germany and its automakers. Orban has positioned the country at the forefront of the EV transition by attracting battery makers from the east, mostly from China, South Korea and Japan. Those producers mainly cater to German premium car brands that have factories in Hungary, including Volkswagen’s Audi, Mercedes Benz Group AG and most recently BMW AG.

Nagy took aim at Germany, Europe’s traditional guardian of fiscal discipline, for stumbling into its own spending crisis. Chancellor Olaf Scholz’s coalition forged an agreement early Wednesday for next year’s financing after a top court ruling torpedoed the government’s climate fund — including funding for EV infrastructure — saying that it violated the nation’s debt-restriction rules.

“We want Germany to succeed, but Germany has been tricking fiscally,” Nagy said. “It’s untenable. We can only hope that German politics or policy changes before the negative economic effects hit us and the rest of Europe.”

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