1 Introduction 2

2 Hungary’s starting position 4

  2.1 Low potential growth and weak productivity 4

  2.2 A distorted fiscal structure 4

  2.3 A stronger external position, but an appreciating real exchange

rate 5

  2.4 Institutional repair and a changing tradable sector 6

3 Five domestic readiness tests 7

  3.1 Test 1: institutional readiness 7

  3.2 Test 2: a sustainable fiscal transition 8

  3.3 Test 3: inflation credibility and a coherent policy mix 10

  3.4 Test 4: productivity, competitiveness and adjustment capacity 11

  3.5 Test 5: exchange rate, financial resilience and ERM II execution 13

4 Sequencing the adjustment 14

  4.1 Phase 1: establish the framework (first 12 months) 14

  4.2 Phase 2: rotate the policy mix and deliver structural consolidation 15

  4.3 Phase 3: pre-ERM II 16

  4.4 Phase 4: ERM II and euro adoption 17

5 Concluding remarks 17