A STRATEGY TO BRING HUNGARIAN LAND OWNERSHIP LEGISLATION INTO CONFORMITY WITH EUROPEAN COMMUNITY LAW

DORA MAJOROS
COMMERCIAL DIPLOMACY
MASTER’S PROJECT

Advisor: Geza Feketekuty

MONTEREY INSTITUTE OF INTERNATIONAL STUDIES

May 2000

This paper was researched and written to fulfill the M.A. project requirement for completing the Monterey Institute of International Studies’ Master of Arts in Commercial Diplomacy. It was not commissioned by any government or other organization. The views and analysis presented are those of the student alone.

For more information about the Commercial Diplomacy program and the M.A. project requirement, please visit www.commercialdiplomacy.org.

CONTENTS

I.              Scenario
II.             Structure of the Project
III.            Executive Summary
IV.            Background
V.             Arable Land Act of 1994
VI.            Policy Issues
VII.          Economic Issues
VIII.         Political Issues
IX.           Recommendation
X.            Strategy
                 Domestic Strategy
                     Coalition Building Strategy
                     Legislative Strategy
                     Public Relations Strategy
                Strategy for Accession Negotiations
XI.           Timeline
XII.          Sample White Paper
XIII.        Appendices
XIV.        Bibliography
XV.         Negotiation Chart

SCENARIO
   

Hungary applied for European Union (EU) membership in March 1994. Its accession negotiations started in November 1998 during the EU’s first enlargement round. Its target date for accession is January 1, 2002 .  

So far, Hungary has finished nine of the 31 screenings required of accession candidates. The screenings are designed to ensure that candidates’ laws and regulations conform to the 31 chapters of the EU’s acquis communautaire, which details the laws and rules adopted on the basis of the EU’s founding treaties—mainly the treaties of Rome, Maastricht, and Amsterdam.  

In the context of the screening on the Free Movement of Capital (which began on September 30, 1999), Hungary requested a ten-year transition period for conforming to EU policy on arable land acquisition—the country’s longest derogation request so far. Hungary has argued that foreign acquisition of arable land should be prohibited because the price of Hungarian land is extremely low compared to European land prices—a circumstance that would allow foreigners to easily buy up an undue portion of Hungarian land.  

Nonetheless, if Hungary wants to gain full European Union membership with all its attendant benefits as soon as possible, it will need to limit its requests for derogations to those that are truly unavoidable for financial or infrastructure reasons. Moreover, it should be possible to craft arable land ownership requirements that are nondiscriminatory yet ensure that large portions of Hungarian farmland will not come under foreign ownership.  

With the goal of speeding Hungary ’s EU accession, this project provides an analysis of and recommendation for how Hungary can achieve compliance with Community land acquisition law prior to the country’s target date for accession.  The project further argues that it is in Hungary ’s own interests to change its arable land ownership laws because the current laws are impeding the development of a functioning land market, and such a market is a necessary prerequisite to the establishment of mortgage based credit. Hungary ’s farmers are in dire need of credit that will allow them to invest in efficient, up-to-date production technologies. By liberalizing its land ownership laws, Hungary will also help reduce the size and power of the country’s informal economy.  

STRUCTURE OF THE PROJECT

EXECUTIVE SUMMARY

Issue 

In the context of our EU accession negotiations, Hungary has requested a ten-year transition period for changing its restrictions on farmland acquisition. Added to the other derogations we have already requested, this request could delay our full accession beyond the current target date of January 1, 2002. In order to ensure accession by the target date, Hungary needs to rapidly bring its land acquisition policies into conformity with EU law and withdraw this derogation request. We need to fulfill the EU’s non-discrimination requirement between EU nationals and Hungarian persons, as well as between private and legal persons.

Background 

Hungary is preparing to enable the free movement of capital by the accession target date, except in three areas for which we have requested temporary derogations.  One of these areas is foreign ownership of farmland. 

The EU has not yet responded to this request. However it seems unlikely it will be accepted. Such a derogation would undermine the EU’s long-standing goal of curbing the ability of its member states to constrain the EU’s four basic freedoms (movement of goods, services, persons, and capital). Acceptance seems yet less likely because Poland has asked for an 18-year transition period for changing its land acquisition laws. If the EU were to allow one country a derogation on land acquisition policy, it would be difficult to deny the other such requests. 

Allowing foreign ownership of land in Hungary will not only help improve our relationship with the EU and improve our chances of acceding to the European Union by the accession target date, it will also help speed the development of our agriculture industries and improve our ability to fight organized crime and reduce the size of Hungary’s informal economy.

Arable Land Act of 1994  

The Arable Land Act of 1994 provides that arable land may only be acquired by domestic private persons.[1] Domestic and foreign legal entities (businesses), as well as foreign private persons, are not permitted to legally acquire land in Hungary. In reality, however, foreign persons often acquire land illegally through pocket contracts while domestic companies are forced to resort to land leases.

Policy Issues 

The current ownership provisions of the Hungarian Land Act violate European Community law, which requires non-discrimination, free movement of capital, and freedom of establishment. The European Court of Justice has upheld these provisions in several cases concerning property acquisition. 

Economic Issues 

By inadvertently preventing the development of a market for land, the Land Act has, in effect, ensured that farmland cannot be used as a security for credit. As a result, farmers have been unable to acquire capital needed to purchase land and to invest in efficient, modern agricultural production systems. Because of these obstacles, as well as the country’s decreasing population size, the number of farmers in Hungary is expected to drop 38 percent by 2010. Changes in the ownership provisions of the Land Act will help fuel the development of a vibrant, self-sustaining agriculture sector in Hungary.

Political Issues 

Land ownership issues are highly political. While Hungary maintains a strong political commitment to join the European Union, it is popular domestically to advocate Hungarian ownership of land. 

Recommendation & Strategy 

In order to comply with Community law, Hungary should amend the Land Act to allow land ownership by all persons and legal entities, regardless of nationality. At the same time, to achieve domestic political goals and stop land speculation, we should establish ownership requirements that favor active farmers and farming businesses.  By maintaining a maximum plot acquisition size of 300 hectares, we can ensure that land ownership does not become concentrated in the hands of just a few wealthy business groups. 

To be able to achieve such legislative changes, the Ministry of Foreign Affairs will need to build a coalition within the government (which will require gaining the support of Hungary’s most powerful political parties). Additionally, we should establish cooperative relationships with relevant interest groups and research institutions. The Official Communication Strategy of the Hungarian Government will provide the primary means of building support from private citizens, including the country’s 1.5 million landowners. 

We will also need to convince the EU that our proposed modifications to the Land Act will bring our land acquisition policies into compliance with Community law, and that the proposed modifications are a far better option than the current derogation request.  Our goal should be to have our proposal accepted as a permanent solution.

BACKGROUND

Foreign Direct Investment in Hungary 

In the past several years, Hungary has made great progress toward freeing capital movements and ensuring the right of establishment. 

·         In 1995, the government established a privatization policy that encouraged the sale of state-owned enterprises to foreign-based strategic investors. The policy led to the country’s greatest influx of FDI to date. 

·         In 1998, Hungary began allowing foreign investment and made its currency (the forint) convertible.  Since then, the government has played an active role in attracting investment; both the central government and local governments have offered special concessions and financial incentives.

·         In February 1999, in accordance with our undertaking in the Europe Agreement, Hungary began allowing foreign nationals to take up and pursue economic activities as self-employed persons under conditions no less favorable than Hungarians.

Foreign capital invested in Hungary now exceeds USD 20 bn,[2] or 40 percent of all FDI invested in the CEEC region.[3] Companies with foreign stakeholders currently produce about 32 percent of Hungary’s GDP and employ 25 percent of private-sector workers.[4] 

FDI was first attracted to Hungary by the country’s cheap and highly skilled labor force. Now, however, foreign companies in Hungary are gradually moving away from labor-intensive production. Foreign-owned firms are exporting more and more high-tech and high value-added products. Rather than competing on price, firms are gradually focusing more on quality and innovation. Hungary’s expected EU membership has also helped attract investors, although there is some concern that accession will cause labor costs to rise. 

Hungary’s Derogation Request for Land Acquisition Policy 

In September 1999, the EU began examining Hungary’s laws on the free movement of capital. Hungary indicated that, although further liberalization of short-term and outward capital movements is still needed, it expects to fulfil the requirements regarding the free movement of capital by the time of accession with three exceptions. One of these is a 10-year derogation concerning foreign ownership of farmland.[5] Currently, only domestic private persons are allowed to acquire arable land. Foreign private persons, as well as domestic and foreign legal entities, are prohibited from doing so. 

Hungary has argued that, because land prices are between five and 40 times more in the EU than in Hungary, the country needs a transition period to ensure that a few speculators, foreign or domestic, do not buy up an undue portion of the country’s farmland. Although Hungary is on its way to becoming a market economy based on private property, its land market has not yet had enough time to evolve.  The acquisition restrictions are needed, Hungary has argued, to ensure that Hungarian farmers have a reasonable opportunity to buy land. 

Hungary has further argued that the prohibition on foreign acquisition is reasonable during the transition period and does not conflict with the Europe Agreement. In Hungary’s view, it should be sufficient to permit foreigners the right to usufructuary lease. Hungary’s stated long-term goal is to ensure unrestricted access to land ownership. 

The Accession Implications of Hungary’s Derogation Request on Land Acquisition

Although farmland ownership is not specifically regulated by the EU, prohibiting acquisition based on nationality goes against the principle of non-discrimination and conflicts with Community law on the free movement of capital and the right of establishment.[6] The EU has long tried to restrict Members’ ability to limit capital movements.  Accepting applicant country derogations in this area would undermine these efforts. Consequently, Hungary’s chances of gaining approval for this derogation seem slim at best.  

Derogation requests for laws that violate fundamental EU principles may also hurt Hungary’s image in Europe.  In an interview given in early 1999 (before the receipt of our position paper requesting the derogation on farmland ownership), Mr. Nikolaus van der Pas, head of the European Commission’s Task Force for Accession Negotiations, stated that Hungary had been more successful than any other EU applicant in fulfilling EU requirements for membership.  Similarly, Eurobarometer, a Brussels-based, EU-funded pollster, found that of the CEEC applicants for EU membership, EU public opinion is most favorable toward Hungary.[7]  We cannot afford to lose this trust. 

The Domestic Implications of Hungary’s Derogation Request on Land Acquisition

In addition to creating an obstacle to EU accession, Hungary’s current restrictions on land ownership are 1) impeding the development of an efficient agriculture industry in Hungary and 2) undermining our efforts to fight organized crime and diminish the strength of the country’s informal economy. Currently:  

·         Urban dwellers and retirees are unable to sell their land at a realistic price—which means that there is little incentive to sell land and therefore little hope of consolidating plots that became fragmented as a result of privatization.

·         Certain domestic legal entities (especially transformed cooperatives) have no opportunity to purchase land. Accordingly, they continue to lease land and have no incentive to make long-term investments in the plots they farm.

·         Land prices that had started to rise in the past two years have become stagnant again and can be expected to remain stagnant until the Land Act is changed. In turn, this is delaying the development of a credit system based on mortgage guarantees. 

·         Foreigners are buying farmland illegally through pocket contracts.

·         Speculation prevails because the Land Act does not require proof of intent to cultivate the land.

Hungary’s Informal Economy

Hungary’s informal economy has flourished within communities that have been marginalized as a result of the political changes of 1989. Small and medium sized farms often fall into this category; they participate in a great variety of untaxed activities. The volume of the hidden economy has been estimated at 23-24 percent of GDP.[8] 

Recent Attempts to Fight Illegal Land Ownership Practices 

Although 60 percent of Hungary’s cultivated land is leased land, no registration requirement existed until, in April 2000, the Central Statistics Office established a property registry and began implementing a land-use reporting requirement.[9]  The new registration system is now nearly finished.

ARABLE LAND ACT OF 1994[10]

The Arable Land Act of 1994 covers all arable land in Hungary, [11] including protected natural land unless a nature preservation law provides otherwise. The Act covers ownership rights, land use, formation of property plots, and land protection.  

The following sections of the Act apply to ownership and acquisition: 

·         Chapter II, Section 5 of the Land Act, “Acquisition of Ownership by Domestic Private Persons,” provides that a domestic private person can obtain ownership of arable land that is “not more than 300 hectares or worth more than 6,000 Gold Crowns.”[12] 

·         Chapter II, Section 6 of the Act stipulates that no “domestic legal entity” can acquire arable land except from the Hungarian state, local governments, forest-owners’ and pasture-owners’ associations, or public foundations.[13] 

·         Chapter II, Section 7 of the Land Act, “Acquisition of Ownership by Foreigners,”  stipulates that “no foreign private person or legal entity may acquire arable land or protected nature areas.”  The prohibition does not apply in the following cases:

Þ    If the land is situated on the territory of a homestead[14] formed as an independent property with a surface area of no more than 6,000 square meters;

Þ    If a land owner held his land on July 27, 1994 (when the Act came into force), he may exchange his plot for a new plot if the area and Gold Crown (GC) value of the new plot do not exceed the area and value of the original;

Þ    If, on July 27, 1994, the surface area and GC value of a plot of land, purchased from the amount of indemnification received for expropriation, exceeded 300 hectares or the value of 6,000 GC;

Þ    If, on July 27, 1994, the surface area and GC value of a plot passing into ownership through the termination of a co-ownership exceeded 300 hectares or the value of 6,000 GC.

The Act offers rights of pre-emption in certain cases. Leaseholders of a full or partial plot, as well as those cultivating land by contract, have a right of pre-emption if ownership by such person is not prohibited by law. In cases of protected nature areas, the Hungarian State has a right of pre-emption that trumps the persons listed above.

Legal Means for Foreigners to Buy Arable Land in Hungary 

A foreign person may legally become an owner of an infinite amount of arable land or protected natural land on Hungarian territory as a result of legal inheritance, usucaption, building,[15] or through auctions held for the purpose of indemnification for past expropriations of arable land.[16] 

Foreigners can also acquire arable land legally by joining or gaining ownership of organizations that may acquire or have acquired land. Three forms of organizations make indirect ownership possible:  

·         Businesses such as limited liability companies and joint stock companies.

·         Forest-owners’ and pasture-owners’ associations.  Joining these types of organizations requires prior possession of land. As a result of joining, however, co-ownership of an unlimited amount of forest and grazing land is possible.

·         Establishment of an ecclesiastic legal entity, which requires 100 persons.  Such organizations may receive title to an infinite amount of land by testamentary disposition, deed gifts, and contracts for maintenance.

Means of Circumventing Regulations on Land Acquisition 

Foreigners have used various strategies to circumvent Hungary’s land acquisition laws. They have acquired land by:  

·        Gaining Hungarian citizenship. 

·        Discontinuing the arable land registration of a plot they wish to purchase.

·        Acquiring authorization to change the status of the plot they wish to purchase (land that is deemed to be part of the “inner area” is not considered to be farmland). 

·        Signing pocket contracts—signed sales contracts that are not recorded in the land register so that, although the official record shows that a Hungarian citizen owns the land, in practice, a foreign person owns the property. (Pocket contracts are the most common method foreigners use to acquire arable land.) 

·        Signing leasing contracts, under which foreigners and Hungarian citizens have the same rights. Since lessees have a right of pre-emption, land can become the property of foreign lessees. However, as of May 28, 1999, rights of pre-emption or purchase cannot be established for persons prohibited from land ownership—not even contingent upon changes in the prohibition.

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