Hungary under Victor Orban: From Hero to Zero?

Novinite.com (Sofia News Agency) and Novinite.bg are publishing an opinion article on Hungary's economic situation by Hungarian economist Dr. Peter Heil, an expert on EU development funds.

Having served for 15 years in the Hungarian civil service, 13 of them in leading management positions, Heil has vast experience with the EU's Phare and ISPA pre-accession program and the the EU structural and cohesion funds. He currently works as the Director of ConsAlt, the Consulting Division of the ALTUS Group. Dr. Heil graduated and obtained a Ph.D. at the Budapest University of Economic Sciences. He also studied EU integration at the Universities of Heidelberg and Oxford. The article has been provided by Expat Compass, the economic research bulletin of Bulgarian assent management company Expat Capital.

Peter Heil was in Bulgaria's Sofia on February 8 for a public discussion on the future of the euro zone.

From Hero to Zero? An Unorthodox Story of Economic Policy-making

The attentive newspaper reader has surely not missed the recent turmoil around Hungary's economic fortunes. The country that has been considered for decades as one of the pioneers of liberal economic reforms in Central and Eastern Europe (CEE), is nowadays regarded as one of the leading contenders for the doubtful honour of becoming "the next Greece". Its fate may have an unlikely influence on the development of CEE as a whole. And, indeed, it may offer a number of important lessons for economic policy-makers across Europe.

What can explain that a relatively small country with only 10 million inhabitants and a comparatively small economy – that is not even a member of the euro area – is creating so much apprehension? Who and why should care about what happens to Hungarians? Do they really matter to anyone?

The Magyars like to think of themselves as a small nation with a proud heritage – despite the fact that not many of them would consider their history as particularly fortunate. The last war that Hungarians managed to win dates back to the 15th century. For almost half of its 1000 year old history, the Hungarian state was ruled or occupied by foreigners: Turks, Austrians, Germans, and Russians. Despite that, during most of the last two decades, Hungary was a prime example of peaceful and successful transition from oppression to freedom, from the failed communist model to modern capitalism.

Indeed, it was one of the symbols of the reunification of Europe, and living evidence that the European Union had a potential for stabilising and elevating the less developed countries of the Central and Eastern European region. Paradoxically, it is exactly these last 20 years of their History that many Hungarians want to forget, rather looking for inspiration in their more distant past, however controversial – and often tragic – it may have been.

"We had it too good under K?d?r" – one of the country's leading liberal dailies wrote recently. Accordingly, the inhabitants of the former "merriest barrack of communism" never warmed for any radical economic reform policies.

Indeed, at every occasion they voted for the parties that promised "easy dreams", and the few attempts at any meaningful, sustainable reform of the welfare system are, at least by the majority of members of parliament, nowadays thought of as acts of violence against the people. Which is the exact opposite of what has happened in, say, Estonia or Slovakia – two countries where voters accepted to be put into the dentist's chair, and where the levels of per capita GDP are now higher than in Hungary.

Subsequently, both countries managed to introduce the euro, and they are also enjoying consistently higher growth rates. Even if the social costs of transition – such as the levels of unemployment or the cutbacks of state welfare spending – were far higher, not many would argue that, overall, Hungary had made the better choices. Even in terms of foreign investment, a discipline where Hungary has had a leading status for many years in Central and Eastern Europe, it is by now losing ground.

Indeed, the relationship to the outside world is a particularly touchy point nowadays. Prime Minister Viktor Orban is blaming the world economy for the recent bad performance of the Forint, as well as falling growth levels, just as K?d?r had blamed "the infiltration of outside factors" back in the eighties.

At the same time he still insists that his "unorthodox" economic policies – the introduction of a single-tier tax system, painful "crisis taxes" on the better performing economic sectors, such as banks and telecom operators, the forced de facto nationalisation of private pension funds, and the also forced reconversion of foreign currency denominated mortgages – were the right way out of the recent crisis, and that Hungary would be pointing the way for others in the region, too. He boasts that "for the first time since joining the EU" the state budget was sporting a deficit below 3% of GDP, and that state debt was being consistently reduced – unlike any other country in the European Union.

Unfortunately, the EU, the IMF, foreign investors in general, or the National Bank of Hungary (MNB), for that matter, do not seem to agree.

Brussels was particularly angered by a recent law that would enable the government to depose the head of the National Bank through a merger of MNB with the state Financial Services Supervisory Authority – in which case the new body would "obviously" require a new president.

The enlargement of MNB's Monetary Council through new members nominated by the governing majority is a further "hair in the soup". In any case, the latter move already seems to show an effect. It is the likely explanation behind MNB's recent decision not to raise interest rates further – a major surprise for most analysts. The head of the National Bank himself – fearing a rise in inflation – seemed "not amused" either.

The EU is also investigating the regularity of the recent banking and telecom taxes, as well as the forced reconversion of EUR and CHF-based mortgages into Forints, which has caused severe losses for the country's foreign-owned banks. As it is widely feared, the destabilisation of the Hungarian banking sector could have serious knock-on effects on banks in Austria and other EU countries.

This is clearly the last thing that the Union, fighting with the consequences of the Greek crisis, nowadays needs. As an immediate result, commercial banks are already reducing their lending activity in Hungary – again, the worst possible news for growth.

As to the budget deficit, the EU Commission as well as the Council of Economic and Finance Ministers (ECFIN) have officially concluded that Hungary was failing to comply with the Maastricht deficit criterion, as the low deficit figure Orban is so proud about was a product of one-off effects, while the structural deficit was much worse than in 2010, when the current right-wing populist government took over.

A possible consequence of this decision could be the suspension of 2 billion euro of financial aid from the EU's Cohesion Fund to Hungary, threatening much-needed investments into the transport, environmental and energy sectors.

The overall state debt – said to be declining according to the Prime Minister – reached an all-time-high of 82.9% of GDP according to the National Bank's statistics. Partly an effect of the recent fall of the Forint (in January, the Hungarian currency plummeted to ca. 84% of its value of 2010), but also a sign that not all of Orban's unorthodox policies seem to be working that well.

In parallel to the EU, the International Monetary Fund is also arming itself for a battle with the Hungarian government. While the previous socialist-led administration successfully sought IMF assistance in 2008 to avert the risk of state default – due to the government's inability to finance the national debt from the free market – Orban proudly kicked out the IMF from Hungary in 2010, unwilling to comply with their economic policy demands.

Ever since he has proclaimed that Hungary did not need an IMF loan. However, following a number of unsuccessful government bond auctions, international observers were already counting the time until Hungary's money was running out. Accordingly, in late 2011, faced with continued currency fluctuations, and increasing international discontent, the government restarted talks with the Monetary Fund.

Again, unwilling to compromise, preliminary negotiations spectacularly failed in December. When rumours started that all the theatre about the National Bank's leadership was essentially an indication of the prime minister's immediate plans to get his hands on the reserves of MNB in order to continue financing his unorthodox Orbanomics, the Forint fell into the abyss, and bond yields rose to record heights.

In recent weeks, Orban seems to be backtracking. According to recent polls, 84% of voters think that "things in Hungary are going into a wrong direction", and popular support for the governing coalition is, for the first time in many years, lower than that for the opposition.

The EU Commission is playing hard, and the IMF is not even ready to open official talks until the government undertakes concrete structural adjustment steps. Simultaneously, thousands of doctors threatened to quit their jobs, and planned spending cuts for university education led to outrage well beyond academic circles. Pressure from the EU's conservative parties also seems to increase. The house is burning on all corners.

Whose fault is it then? Can Orban blame the Greeks? Or previous governments? Predictably, a bit of both. The main lesson, however, is that small and open economies, especially those in a precarious macro-economic situation are not likely to succeed with "economic freedom fights".

The Prime Minister's declared "right hand", economics and finance minister Gy?rgy Matolcsy, is an unlikely candidate for the Nobel prize for economics any time soon. When he proudly proclaimed that he was implementing "economic policies from textbooks that are not yet written", his targeted readership did not seem to be very keen.

Ultimately, as perhaps as the first minister of finance ever, he even had to be withdrawn from the Hungarian delegation for the IMF talks. While Orbanomics was, for a remarkably long time, pretty much ignored by the outside world, by the end of 2011, markets, and the EU, and the IMF, had obviously lost their patience with Hungary. So have most influential economists at home.

Nevertheless, whether or not Orban will ultimately give in, is still in doubt. He still is a man on a mission – even if on an increasingly dangerous one.

This article in BULGARIAN

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