EU wants Hungary to withdraw cbank pay cap-UPDATE 1

Trade the News

Wednesday September 08, 2010 11:20:13 AM GMT

* EU letter says pay cap hurts cbank independence

* Cap law incompatible with EU Treaty, should be amended-EU

* If law unchanged, infringement procedure could come

(Recasts with EU letter, background)

BUDAPEST, Sept 7 (Reuters) - Hungary should change its law which caps central bankers' salaries as it infringes central bank independence and the European Union's (EU) treaty, the EU said in a document obtained by Reuters on Tuesday.

Hungary's Economy Ministry said late on Monday that the Commission had asked the government to provide it with further information about a public sector wage cap introduced on Sept. 1, which also affects the pay of central bankers.

The cap means a 75 percent cut to about 2 million forints ($8,900) in central bank Governor Andras Simor's monthly salary.

The letter to Hungary from the EU's Directorate General for Economic and Financial Affairs said the timing and proportionality of the change raised serious concerns and called on Hungary to amend the legislation.

"Should the Hungarian authorities maintain the law unchanged, the College of Commissioners will be asked to decide the opening of an infringement procedure in accordance to Article 258 of the Treaty," it added.

According to Article 258, if a member state does not comply with the Commission's opinion within the period it lays down, the Commission may bring the matter before the Court of Justice of the European Union.

The letter gave the government until Oct. 1 to respond.

Simor has come under fire from top officials in the ruling centre-right Fidesz party, including over the bank's conduct of monetary policy, but he has rejected calls for his departure, and branded moves to reduce central bank salaries as an infringement of the bank's independence.

Government officials were not immediately available to comment on the EU document. On Monday the Economy Ministry said the public sector wage cap was justified and it did not harm central bank independence.

The law on the cap -- criticised earlier this year by the European Central Bank (ECB) -- cut the monthly pay of the National Bank of Hungary's governor to about 2 million forints from about 8 million a month or some 96 million forints ($427,000) a year.

In comparison, ECB President Jean-Claude Trichet made 360,600 euros ($459,600) last year, while the Czech central bank's governor earns 383,000 Czech crowns ($19,740) a month.

The letter said the Commission did not contest the legal capacity of the government to set the salary of NBH officials but the law on the cap had immediate effect and thus it affected officials who had been recruited under more favourable terms.

The ECB in its earlier criticism said any pay cap should not be retroactive and should apply only to future appointments.

The Commisssion said the measure also affects the central bankers more than public sector officials, who are often entitled to bonuses and fringe benefits which are prohibited for the NBH's governor and deputy governors, the Commission said.

It added that the Hungarian law negatively affected the NBH's financial independence, and may hinder its capacity in the future to recruit high-quality people by offering financial conditions comparable to those offered by the financial sector. (Reporting by Sandor Peto/Krisztina Than and Reuters bureaus; editing by Stephen Nisbet)

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