ENERGY AND THE ECONOMY: ONE AS A STRESS TEST FOR THE OTHER

Energy policy is often discussed as if it were a largely separate field of government: a question of power plants, grids, imports and ultimately of how much electricity or gas a country needs. In reality, energy policy and economic policy are difficult to separate. The structure and cost of the energy system influence inflation, industrial competitiveness, external balances and public finances, while the condition of the economy determines which energy investments can actually be financed.

For Hungary, this relationship is likely to become particularly visible over the next year.

The new government has regained access to a substantial part of Hungary's previously unavailable EU resources. In July, the Council approved Hungary's revised Recovery and Resilience Plan, potentially allowing the disbursement of around €10 billion—approximately €6.5 billion in grants and €3.5 billion in loans. For an economy struggling with limited fiscal room and weak investment, these resources could provide considerable stepping forward. Energy will inevitably be one of the areas where this matters most.

At the same time, the direction of the government's energy policy is becoming clearer. Greater emphasis on wind generation, electricity storage and grid development would mark a significant change from the previous model, in which the rapid expansion of solar dominated renewable capacity growth. Geothermal energy, particularly for heating, is also receiving renewed attention, alongside attempts to create more flexible investment and support frameworks. And perhaps just as importantly, it seems that a greater degree of energy awareness is also becoming more visible in the new government's communication.

It should also be noted that, in this context, technical problems are far more difficult to resolve than legal or regulatory ones. The difficulty is that the Hungarian energy system cannot be reconstructed at the same speed as energy policy can be rewritten.

THE ENERGY SYSTEM HUNGARY ALREADY HAS

The government has inherited not only infrastructure but contracts, financing arrangements, import dependencies and investment decisions whose consequences extend decades into the future. Paks II is probably the clearest example.

The difficulties experienced by Paks I this summer demonstrated the importance of nuclear generation in Hungary's electricity balance, but they also made the longer-term question harder to avoid. The operating licences of the existing units currently expire between 2032 and 2037. A further lifetime extension will be prepared, but Paks I cannot provide Hungary's nuclear generation indefinitely in a middle-term period of time.

Paks II was intended to address precisely this longer-term problem. Yet the project agreed with Russia in 2014 has fallen far behind its original timetable, while the new government is now reviewing its contractual, financial and technical foundations. The question is therefore not simply whether Paks II should be continued or abandoned. It is whether the existing project can provide the nuclear capacity Hungary is likely to require within a credible timeframe, under technically adequate conditions and at an economically acceptable final cost. The recent problems on the Danube have added the cooling concept to that assessment. Engineering alternatives exist. But changing technical parameters has implications for costs and implementation, just as abandoning the existing project and beginning a new procurement process would have implications for sunk investment and, perhaps more importantly, time. Paks II therefore illustrates the connection between energy and economic policy unusually well: an energy-security requirement ultimately becomes a question of capital allocation, contractual obligations and long-term fiscal capacity. And Paks is far from the only claimant on that capacity.

Grid development, storage, wind generation, geothermal projects and energy efficiency all require investment at a time when agriculture, transport, defence, healthcare and education are also placing considerable demands on public resources. EU funding can materially expand the government's room for manoeuvre, but it does not eliminate the need to establish priorities.

Inflation adds another colour to the picture.

The latest KSH figures appear encouraging. Consumer prices in July were 1.2 per cent higher than a year earlier and declined by 0.1 per cent compared with June. Food prices fell by 1.1 per cent year-on-year, while services increased by 4.7 per cent and core inflation stood at 1.9 per cent.

The important question is therefore also what we compare these figures with. Hungary is coming out of several years of exceptionally strong price increases, while significant government interventions continue to affect individual prices and market conditions. A low year-on-year headline figure consequently does not by itself answer what happens when some of these interventions are modified or removed. This is one reason why the transition towards a more competitive market structure will require caution. Reducing distortionary intervention may improve the functioning of markets, but the sequence and timing matter. Companies must increasingly respond to genuine price signals and competition, while households may face a different relationship with market prices after years of unusually extensive state intervention. Of course, small tax reductions has been presented by the new government, these provide promising signals of a new direction, but still, it is not clear what the new economic model will look like.

For now, several developments are moving in a favourable direction. EU funding has reopened an important source of investment, the forint has strengthened and headline inflation has fallen substantially. None of these, however, is sufficient to determine the longer-term direction of Hungarian economic policy.

The 2027 budget is likely to provide the first real stress test. It will begin to show how the government intends to reconcile energy investment with the condition of public finances: which projects receive priority, how much fiscal space is actually available, and how rapidly the government intends to alter the balance between state intervention and market competition.

The same test works in the opposite direction. Hungary's economic position determines what can realistically be achieved in energy policy, but the quality of those energy-policy decisions will itself influence competitiveness, inflation, investment and economic growth. This is why energy policy and economic policy cannot be evaluated separately.

For the moment, perhaps the most reasonable approach is to observe the new government's work with a certain degree of patience. It is extremely difficult to produce meaningful results within such a short period of time. Patience, however, does not mean the lack of accountability. Every government must be held responsible for its publicly spoken words, its actions, while the greatest responsibility for shaping the country's political and public culture inevitably rests with those who govern. With a two-thirds parliamentary majority, there is little room for excuses.

Sources: https://www.ksh.hu/en/first-releases/far/efar2607.html ; https://www.consilium.europa.eu/en/press/press-releases/2026/07/10/recovery-and-resilience-facility-council-greenlights-new-plan-for-hungary/