Hungary gears up to join EU

For Hungarian lawyers, accession to the EU brings mixed blessings. Alex Wade reports on a potential boom nation

Budapest is known the world over as a health resort, thanks to the 123 warm springs that gush forth at the foot of the mountains of Buda, one of three towns (with Pest and Obuda) that formed the city in 1873. The springs supply the Hungar-ian capital's spas and public baths, the daily enjoyment of which is integral to life in Budapest.

Géza Kajtár, a partner at Martonyi és Kajtár Baker & McKenzie and head of its corporate and commercial group, swears by the spas. Kajtár is a devotee of Széhenyi, a huge, neo-Baroque spa where chess is played in water of 27°C, even in winter. Whether the waters are truly curative or not, one thing for sure is that Kajtár is a sharp, dapper man who knows the Hungarian legal system inside out.

Graduating in 1975, when Hungary was still in thrall to the former Soviet Union, Kajtár was unusual in being one of the few lawyers in communist Hungary to work in private practice. Back then, employment usually meant working for the state. As in many Eastern European countries, Hung-arian in-house lawyers outnumbered their private practice fellows because of the communist nationalisation of agriculture and industry.

However, Kajtár exploited what slack there was in the system and set up in practice, undertaking mostly commercial work. He was invited to join Baker & McKenzie in 1991 following a speech on privatisation in Hungary, made in Chicago two years after the demise of communism across Eastern Europe. Now, as Hungary waits to join the EU (with accession agreed for 2004), Kajtár is again at the vanguard of the developing legal market in Budapest.

“Hungary's privatisation programme is nearly complete,” he says. “But EU membership is generating a great deal of regulatory and compliance work.” His firm, whose name is an amalgamation of his and former foreign minister Janos Martonyi's names, with the global Baker & McKenzie brand, has set up an EU practice group and is finding more clients seeking advice on a myriad of EU-specific issues. Having opened in Budapest in 1987 as the first international law firm in Central-Eastern Europe, and now employing more than 35 lawyers, the firm is well placed to profit from Hungary's position as one of the stronger economic centres of those countries comprising the next wave of the EU.

But EU membership has its downsides. Western companies that were granted significant tax breaks following the creation of the Hungarian Republic in October 1989 are moving east, eager to snap up minimal or negligible corporation tax rates offered by countries such as Romania and Bulgaria. A 10-year tax-free exemption is a powerful incentive to up sticks rather than stay around to pay impending EU corporation tax. This may, as Kajtár says, be “a natural by-product of a maturing economy”, but with the departure of the likes of IBM from Hungary there is concern that any EU advantages will may be nullified by what the country is losing.

Veréb Balázs, a partner with mid-sized firm Andreas Neocleous & Co, sums up the problem: “When the EU was created, all the members were beginners together.” He says some Hungarians fear they may be marginalised by the dominant, longstanding EU countries. And while lawyers may relish the extra legal work, Hungarian companies will have to spend money on being EU-compliant.

Balázs's firm has a joint headquarters in London and Limassol, Cyprus (itself another next-wave EU country), with offices in Budapest, Bucharest, Prague and other Eastern European cities. Most of the Budapest office's time is taken up by Hungarian clients on company law, leasing, M&A and tax matters. Himself bilingual thanks to an English teacher in the communist years, who insisted that he learn “the Queen's English”, Balázs says that many of his countrymen are far from relishing the emergence of English as a second language, which EU membership will bring. “Historically, Hungarians have been used to speaking Czech or German”, he says, although he adds that there is no reason why the country should not continue its traditional role as a gateway between the East and the West.

One firm which has a policy of preserving its Hungarian identity is Gárdos Füredi Mosonyi Tomori. “This is important to us”, says senior partner IstváGárdos, whose firm is a medium-sized practice specialising in M&A, securities, capital markets, finance and banking. Clients include ABN Amro Magyar Bank RT, Alitalia and BNP-Dresdner Bank (Hungary). But if plans to merge with Western law firms are not under consideration, links have nevertheless been forged with US lawyers in particular. Partner Katalin Füredi obtained an LLM from Harvard Law School and has worked for Cleary Gottlieb Steen & Hamilton, from which she now receives referral work.

Füredi says the firm's work is divided equally between international and local clients. The privatisation programme introduced post-1989 brought with it many foreign investors, who benefited not only from market opportunities, but also from a sophisticated legal system, similar to that of Germany. But however sophisticated, Balázs says that Hungary has as many lawyer jokes as anywhere else – and indeed, just as many lawyers. Once there was cap on the number of lawyers permitted to practise in a given area, but the liberalisation of the profession has made for a country with as many lawyers per square foot as the US.

One of the émigré lawyers tramping the snowy streets of Budapest – at least for now – is corporate finance specialist Alex Cook of Allen & Overy (A&O). The firm's operations are led by Hungarian-qualified Éva Hegeds. A&O formed an association with Hegeds' firm in 1999. Hegeds is also US-qualified and fluent in English, German and French.

Cook says that “flexibility is the key” to the firm's work in Budapest and that rigid departmentalisation is not a feature of A&O's office life. A&O has handled a number of substantial transactions in Hungary, including advising MOL Rt, the Hungarian state-owned oil and gas company, on its initial privatisation – the largest in Hungary to date – and assisting a number of telecoms companies, for example KPN Telecoms, which recently acquired major stakes in Hungarian telecoms providers PanTel and Pannon GSM. Cook enthuses about life in Budapest, known as much for its beauty in the summer as the bitter cold of its winters.

And make no mistake, it is cold. Outside the office of Martonyi és Kajtár Baker & McKenzie, as my meeting with Kajtár comes to an end, the city languishes in a sea of snow and mist. Icicles hang from buildings. It is 10°C. Not cold enough, though, to deter Kajtár from his trip to the spa of Széhenyi. And not too cold, one suspects, to hinder Hungary – and its lawyers – from reaping the rewards of EU membership.