Hungary Isn’t Another Greece……..Now Is It?

I couldn’t help being struck earlier this week by the following statement in an interview the Financial Times had with Hungarian Finance Minister, Peter Oszkó:

“Structural reforms of the pension and social welfare systems, plus a rebalancing of the tax system, should allow the government to report a 3.9 per cent budget deficit in 2009, on a par with the preceding year and in line with IMF requirements”.

“Structural reforms”, I asked myself, “exactly which structural reforms are we talking about here?” Certainly the EU Commission and the OECD have been pounding away at the Hungarian authorities on the pressing need for major changes in the health and pension systems (these areas – and the way they are rising as the population ages – are, after all, the underlying cause of the structural deficit in the Hungarian budget). In fact it seems to me that the FT is merely re-iterating here Peter Oszko’s own claim that the government’s austerity measures are working (and no matter how many times you repeat something, it doesn’t make it true).

As I have argued time and time (and time) again, major doubts remain about whether the recent “austerity” measures (whether we are talking about the post June 2006 package, or the 2009 one) have really done anything substantial to restore long term competitiveness to the Hungarian economy, since the only measures which could come near to being called “structural reforms” which have been implemented to date are the withdrawal of a 13th month pension payment together with cuts in the maternity leave system (and these are not really “reforms” at all, but deficit reducing measures). The rebalancing of the tax system the FT refers to is the shift from payroll and income to indirect taxes, which could make labour cheaper to employ, but since the reduction is countebalanced by an increase in consumption tax (which weakens domestic demand) to date the only visible consequence has been a sharp fall in retail sales, while we have seen little in the way of noticeable impact on either employment or on Hungarian exports.

Indeed the situation is rather worse than the above chart suggests, since the anti crisis measures have lead to a sharp increase in public employment.

while private sector employment has fallen quite sharply.

Peter Ozsko has also been appearing in the press in recent days to inform us that Hungarian 2010 gross domestic product numbers could be positively revised when compared with an earlier government forecast for a 0.6 percent fall. His reasoning – as put to Reuters – is that “export markets will perform better so there is a better outlook for the country.” In fact what he said was that he expected the country to return to quarter-on-quarter growth in either the second quarter or third quarter of next year – a possibility that is certainly not excluded. What he did not say – although some newspapers seem to have implied this – was that annual growth would be positive. “That does not mean growth, but at most a smaller contraction,” the finance ministry told Reuters later, in order to clarify the reported comments.

The correction to the earlier optimistic interpretation seems totally warranted, since the Organisation for Economic Co-operation and Development currently expect eurozone real final domestic demand to stagnate in 2010, with the Germany economy being forecast to grow by only 0.2 per cent, so it is hard to see the export market in the country that is Hungary’s main customer giving that much-needed lift to Hungarian exports.

But even beside this point, it is hard to see any forseeable increase in exports making up for the drop in domestic demand. In the first place Hungary has badly lost international competitiveness in recent years.

And in the second both the Forint and consumer price inflation have been rising of late, only adding to these competitiveness problems. The best guess is that the Hungarian economy contracted by around 7% in 2009, yet despite this Hungarian consumer prices continued to rise, and are now up a whopping 72% on the 2000 level, yet the Forint has only fallen around 8% over the same period.

Something seems badly out of line in Hungarian policy. As Mark Pittaway, Senior Lecturer in European Studies at the UK Open University points out, the difficult issue for Hungarian economic management has always been what to do about the external debt.

The key is public debt, and the decision to which every Hungarian government has held to, not to ask for any re-scheduling and to insist on its precise repayment. This has forced the government to pursue consistently policies based on overly high interest rates to attract capital into the country – and this has been consistently the case since 1988-9.

During the transition period this had two effects – to deny domestic businesses of credit, and to make it difficult for them to export given that the consequence was an overly strong Forint. In addition, the first post-1990 government was among the first to fully implement its bankruptcy law (earlier than Poland, and way earlier than either the Czech Republic and Slovenia) in 1991, in the depths of the first recession. The real economy was sacrificed on the altar of the financial stability of the state given the decisions made about public debt (remember the Czech debt was small, Slovenia de-facto defaulted on its share of the Yugoslav debt and eventually renegotiated it, and Poland gained partial forgiveness).

Hungarian gross government debt is now expected by the EU Commission to hit over 80% of GDP in 2011, but this is hardly the issue, since unless growth and competitiveness can be restored to the economy, the ageing and shrinking working age population problem will lead to what Moodys recently called (in the Greek and Portuguese cases) a slow death.

And to the large government debt must now be added the indebtedness of households in Swiss Francs, which simply reinforces an “unrealistically” high forint policy, as Mark says, sacrificing the future of the real economy to the needs of maintaining financial stability.

And during the term of the present government the situation has only worsened, since last week the Hungarian Central Statistical Office announced that the consumer price index rose 5.6% year-on-year in December (see chart above), up from the 5.2% growth in the previous month, and well above the average consumer price inflation for 2009 of 4.2%.

And the culprit isn’t hard to spot, since the government raised the VAT rate in June by 5%. The impact on retail sales was not that hard to imagine either – they were down an annual 7.5% in October, and by a seasonally adjusted 0.6% on September.

Elections Loom In Hungary

And on top of all these issues, Hungary is shortly to have elections, a situation which is leading to all sorts of speculation about what might happen to the deficit. According to a recent research report from HSBC analyst Kubilay Ozturk, there is a clear risk that Hungary’s budget deficit could deviate from the current fiscal path agreed with the International Monetary Fund (IMF), if – as seems likely – opposition party Fidesz assumes power later this year. While this year’s budget deficit may well come in on target, economists close to the opposition party have been warning that the 2010 deficit could balloon again to 7% of GDP. The ins-and-outs of the argument are complex (since the figure is based on incorporating debt accumulated in state owned entities), but clearly the IMF would not be happy at such a development. But then Peter Ozsko argues Hungary may well no longer need the IMF money – which is only well and good, since the lending agency have specifically warned against declaring this level of deficit, and may be hard to convince if the deficit figure starts to head north again.

Today, the IMF has warned Hungary again that it would not tolerate the country’s budget deficit swelled to 7.0% of GDP this year, a level envisaged by the opposition party Fidesz, the likely winner of this year’s general elections. The government targets a budget shortfall of 3.8% of GDP, under its IMF-European Union credit line. In an interview with Dow Jones, IMF Hungary representative Iryna Ivaschenko noted that “the definitions [of government debt]are not always comparable, so you should not compare the 3.8% [of GDP] with the 7%. You cannot say they are not right, but it is comparing apples and oranges.” “But if you do take, consistent with our definition, the deficit all the way to 7% [of GDP], such policies can clearly not be tolerated, because that would undermine fiscal sustainability and be detrimental for market confidence,” Ivaschenko added.

But what if Fidesz simply didn’t want to accept the unpopularity for a policy which may not be working, and a further fiscal squeeze? The political logic of coming straight out with a “they have overspent” type of argument could be compelling, although it should be remembered what just happened to the last government who did this (in Greece), or what happened in Hungary in June 2006, after the then Prime Minister Ferenc Gyurcsany’s “lies morning noon and night” speech.

“I know that this is easy for me to say. I know. Do not keep bringing it up against me. But this is the only reason it is worth doing it. I almost perished because I had to pretend for 18 months that we were governing. Instead, we lied morning, noon and night. I do not want to carry on with this”.

That time the country had to admit to a fiscal deficit which was way beyond what they had been talking about previously, and the country then enetered a financial crisis which has now lasted three and a half years. Of course, this time nothing so dramatic will have been happening (there has been an IMF programme in place), but this does not mean problems may not arise, since financial markets are, after all, extremely nervous. And certainly analysts are anticipating upward movement in the 2010 deficit level. As Portfolio Hungary notes: “The market is now more convinced than a month ago that Hungary will not meet its budget deficit target in 2010, the consensus estimate of analysts showed in a Reuters poll on Thursday. The median forecast for Hungary’s 2010 budget deficit came to 4.4% of GDP, up from 4.1% a month ago”.

Greece Serves As the Example

“We don’t need IMF money any more and my expectation is that since Hungary is targeting the same track for the future, we won’t need financial help.”
Peter Oszkó, Hungarian Finance Minister

‘We are not expecting anyone to come to our rescue. Greece has not asked for it, nor is it expecting anything of that sort….We will be able to satisfy our borrowing requirements in international markets in the next weeks and months, according to the schedule we have,’
George Papaconstantinou, Greek Finance Minister

So if Hungary does, as seems quite possible, decide not to take up more loans from the IMF, where exactly does that leave the country? Who will have the leverage to ensure the structural reforms which evidently are still needed. Evidently Greece can give us some indication, since while at the present time it is not totally clear whether or not the Mediterranean country will finally have to go the IMF itself, Europe’s institutional structure is changing rapidly as a result of the challenge which Greek statistics and debt have presented for all the other EU countries. Only this week Europe’s Finance Ministers warned Greece that it had to step up its efforts to tackle a fiscal crisis that threatens to spread to other countries across the region.

Indeed the bulk of the discussion an the finance ministers meeting was occupied up with their concerns over Greece, since despite being in the eurozone, the country’s credit ratings have plunged following the revelation that its government deficit estimates for 2009 were grossly understated.

Greece has now presented the commission with a new plan aimed at cutting its deficit from the currently estimated 12.7 per cent of gross domestic product to below the EU’s threshold of 3 per cent of GDP by the end of 2012. As a result of that report, the commission will propose an action plan in February and will ‘lay down certain dates from June onwards in order to launch a discussion at least three times during the rest of the year on how the programme and reforms are going to be implemented,’ according to Commissioner Almunia. That is, progress in deficit correction procedures will now be carefully monitored. As many observers have commented, this is the closest the EU has so far come to putting its hand directly on the economic policy of a eurozone member. ‘The Greek programme concerns Greece firstly, but also concerns all the eurozone,’ Luxembourg Finance Minister Jean Claude Juncker said on leaving the meeting.

The Credit Rating agency Moody’s Investors Service maintained its negative outlook on Greece following the announcement of country’s stability and growth program saying that while the Greek government’s plan to restore its fiscal credibility, reform its tax system and combat tax evasion is relatively well designed, at least for the short term, uncertainty remains about the Greek government’s ability to implement the program. That is to say, it is action not words which now matter in the financial markets, and both Greek and Hungarian governments would do well to remember this.

Where Does Greece Go From Here?

The next step is for the EU Council to set a deadline for when the Greek government must achieve its goals. This deadline is likely to be 2012, simply because the Greek government itself has set this target. All the relevant recommendations will finally be endorsed by euro zone finance ministers at their next meeting on Feb. 15-16 when they formally give notice to Greece to reduce the deficit, marking the last stage of the procedure before sanctions of various kinds that are provided for under the EU Stability and Growth Pact.

Greece will then have four months, so until June, to act on the recommendations for policy action endorsed by the ministers. If it acts in a way which the Commission consider to be consistent with the undertakings given, the excessive deficit procedure will be then held in abeyance, until Greece reaches its target of a deficit below 3 percent. If, at the end of the three year period the Commission believes that the improvement is sustainable, it will ask the ministers to end the excessive deficit procedure.

If on the other hand the Commission decides in June that Greece has not complied (unlikely), the Finance Ministers can then consider imposing sanctions. Since such measures should be imposed no later than 16 months after the decision that Greece had an excessive deficit, which was taken on April 27, 2009, the time scale would imply August 2010.

The sanctions envisaged in EU agreements first take the form of a non-interest-bearing deposit with the European Commission and comprises:

* a fixed component equal to 0.2 percent of GDP;

* a variable component equal to one tenth of the difference between the deficit as a percentage of GDP in the year in which the deficit was deemed to be excessive and the reference value of 3 percent of GDP.

The deposit cannot, however, be higher than 0.5 percent of GDP per year. If Greece were to find itself at that stage, this is how much it would have to pay.

Sanctions could also include:

– stopping the EU’s cohesion funds to Greece.

– stopping credit from the European Investment Bank.

– asking Greece to issue additional information, as specified by the ministers, before issuing bonds and securities.

If Greece continued to ignore the recommendations, ministers could in 2011 intensify the sanctions by requiring an additional deposit equal to one tenth of the difference between the deficit as a percentage of GDP in the preceding year and the reference value of 3 percent of GDP.

If, after two years, the deficit still remains above 3 percent, the deposit is converted into a fine. If the deficit falls below 3 percent, the deposit is returned.

The interest on the deposits lodged with the Commission and the yield from any fines is distributed among EU countries without an excessive deficit, in proportion to their share of the total gross national product of those eligible.

Commission Powers Now To Extend Well Beyond Monitoring Deficits

Luxembourg Finance Minister Jean-Claude Juncker also announced that there was about to be an overhaul of how the 16 nations using the euro coordinate their economies, with countries being be formally warned if they are running much higher inflation, average wage rises or current account deficits than their neighbors. Juncker said Finance Ministers are about to get involved into a range of far wider issues on how the economy is run, including government policies on structural reforms – such as making labour markets more flexible.

From next month, countries will probably be warned by the European Commission if their countries differ too much from the rest of the euro zone on broad policy guidelines or on specific areas such as inflation, wages or current account deficit. That warning would not be backed by any penalty.

“We need to broaden surveillance in the euro area,” Juncker said, adding that closer monitoring should also extend to European countries whose currencies are linked to the euro and who hope to join the currency zone, such as Estonia and Latvia.

So, Hungarian politicians be warned- You are not Greece right now, but you could so very easily end up where that poor, unfortunate country finds itself, and especially so if you make wildly optimistic growth scenarios, and debt to GDP forecasts, and doubly so if you think that coming out of the loving arms of the IMF will leave you free to go about your business as you see fit. The world around you is changing, and you need to get ready to adapt to those changes.

This entry was posted in A Fistful Of Euros, Economics and demography, Economics: Country briefings, Economics: Currencies by Edward Hugh. Bookmark the permalink.

About Edward Hugh

Edward 'the bonobo is a Catalan economist of British extraction. After being born, brought-up and educated in the United Kingdom, Edward subsequently settled in Barcelona where he has now lived for over 15 years. As a consequence Edward considers himself to be "Catalan by adoption". He has also to some extent been "adopted by Catalonia", since throughout the current economic crisis he has been a constant voice on TV, radio and in the press arguing in favor of the need for some kind of internal devaluation if Spain wants to stay inside the Euro. By inclination he is a macro economist, but his obsession with trying to understand the economic impact of demographic changes has often taken him far from home, off and away from the more tranquil and placid pastures of the dismal science, into the bracken and thicket of demography, anthropology, biology, sociology and systems theory. All of which has lead him to ask himself whether Thomas Wolfe was not in fact right when he asserted that the fact of the matter is "you can never go home again".

16 thoughts on “Hungary Isn’t Another Greece……..Now Is It?

  1. This may well be a foolish question, but has anyone done any comparisons between where we are today and the Gründerjahre? It seems to me that there are some parallels between the formation of the EU and the adoption of the Euro, and the creation of the German Empire and the demonetization of Silver in favour of the Gold standard.

    I don’t suppose that the German states that Prussia took over were necessarily economically “ready” for the Gold Standard, nor Austria for that matter, so are there any lessons to be learned from that part of history? Did unifying Germany and taking it onto Gold lead to economic stability or instability?

  2. It seems wildly unfair to me that while the deficit of Poland was cut in half, the always paying Hungary is now being forced to pay and reduce deficit amid a recession.
    It is my understanding, that structural reforms usually cost money up front. The requirements toward Greece and other countries with a deficit problem are being a bit vague, IMHO.

  3. Your chart shows that the employment in the public sector has grown in the last year. This is not true at all. The growth is only statistical, because instead of paying unemployment benefits, local municipalities “hired” so called public workers for maintaining public parks and cleaning roads. This is a social program measured at a different column but with the same cost of that the unemployment benefits are. There are more elements of the pension reform worth to mention, like the increase of the retiring age, eliminating a few reasons for early retirement and changing the taxation if the pensioner works.

  4. Import decreased in a much faster rate than export and first in the history Hungary has positive trade balance. Export in Euro decreased because of the crisis but the local currency devaluated and the competitiveness of the country increased. Because of the increased competitiveness, more and more foreign investors consolidated their production capacity to Hungary and closing less competitive facilities in other countries.

  5. @edward hugh: it’s true, the export markets of Hungary stagnates, but the pressure of the financial crisis forces the Western-European companies to reconsider their suppliers and production costs too. Despite of the falling Hungarian competitivnes, Hungary is still an ideal place to move the production from Western European countries, and the crisis accelerate the necessary shift to East. Maybe the export expactations of Mr. Oszko is over optimistic, but significantly better than the German 0.2% growth prognosticates. I have experienced several German/Swedish companies expandig their production and r&d capacity in Poland, Hungary and Slovakia in the last month.

    @observer, the increase of the retiring age etc. is maybe worth to mention as cost cut, but these are still not structural reform

  6. “Hungarian consumer prices continued to rise, and are now up a whopping 72% on the 2000 level, yet the Forint has only fallen around 8% over the same period.”
    This is true, but without analyzing how much the Hungarian consumer prices were lower in 2000, how much the currency was under-valuated, this does not tell the full story. As I remember in 2000 the living expenses in Hungary were much lower compared to France or Germany. Rent prices were less than half, and a daily food expenses were less than third. So even 70% increase in prices might only narrowing the gap. It is possible that even now the currency is seriously undervaluated, and the buying force is considerably stronger than the exchange value.
    The curve about the Hungarian gross government debt does not agree with the curve published in the official Hungarian website ( For example I see there 51.4% for 2001, much lower than the value shown on the figure you cite. I am curious which value is the true value?

  7. I have just found your posts and I really appreciate that there is someone in Western Europe who can disprove an FT article with facts. The quoted article is a great example that such an unbiased and proportional newspaper with high reputation as the FT or the Economist transmits an incorrect picture about an economic situation in a CEE country. This was not the first time that they have echoed the Hungarian government’s “success propaganda”. In addition these articles are used by the government to verify their own measures and achievements.

    So finally I would have just one remark on your findings. It is true that Fidesz, the main opposition party, who is likely going to win the next elections, said that the budget deficit in 2010 could reach 7%, but they did not say that this would happen because of an fiscal expansion or reversing the passed austerity measures. They are just claiming that the deficit is going to be much higher because 1) there are some disbursements which are postponed to the next year by the government to present lower figures this year, 2) some state owned companies need for a reconsolidation (e.g. the debt of the public transport company of Budapest is around 3 billion (10^9) euro).

  8. @andras
    “This was not the first time that they (The FT and the Economist)have echoed the Hungarian government’s “success propaganda”. In addition these articles are used by the government to verify their own measures and achievements.”

    May I remind you, that Mr Orban was forced to apologize to FT editors for similar words. Would be nice of you to follow suit.

  9. @oldboy73:

    1. Mr. Orban was forced for nothing.
    2. If I should apoligize for my comment, I should apoligize for the turth.
    4. Finally the facts confuted that the mentioned article was not correct.

  10. @andras
    1. Mr. Orban was forced to apologize
    In a letter to Orban on 22th December the Editor in Chief of FT threatened with libel process for statements by FIDESZ politicians similar to yours. On behalf of Orbán, Tamás Deutsch responded. See here:

    This is a verbose gobbledigook of a document, but it contains the single sentence that satisfied FT:

    “….if the statements of the politicians of FIDESZ and the advertisements published by the party have made the impression in you that FIDESZ have offended the personality rights and the goodwill of The Financial Times, then it was against our intentions and I express my sincere apologies…..”
    Once again: Please follow suit!

    2. Prophets are always right if not…

    4. ????

  11. Oh my!

    The date of the FT letter is 22th December 2005, that of the Deutsch response 6th January 2006.

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  13. I write about the financial crisis, and have been doing so for 3 years, since Feb. of 2007.

    I have noticed in almost all the commentary about the deficit/debt crisis in Greece, Spain, Ireland, Italy, Portugal, and now here, in Hungary, that the discussions entirely focus on the public sector, there is none on private debt, the role of western European banks in encouraging borrowing in other currencies, or the fact that the IMF is up to its old ways of imposing pro-cyclical policies or deficit reduction, public sector contraction and often further privatization – all at the time when the objective economic situation – a near depression, calls for deficit spending and public job creation.

    We should throw the situation in Latavia and Iceland into this trend as well.

    But let’s focus on Greece and Hungary; what is the vaunted private sector doing? In Greece, we have shipping, energy, tourism, agriculture – and tax avoidance as the major industries. Innovation? Investment? Job expansion? Where are the plans for solar power in sunny Greece? In all the articles I’ve read, including at the vaunted Financial Times, there is apparently no shorting coming in Greece’s private sector…even worthy of discussion: it’s all good, we are supposed to assume…

    In Spain: good infrastructure, but exactly what would be Spain’s old reliable, the proverbial “comparative advantage,” vis-a-vis eastern Europe, including Hungary? The periphery countries are all implicitly to gut the pay and the size of the public sector, thereby driving down wages in the private arena, but since this is everyone else’s game plan, and it still will be undercut in Asia, where’ the logic? Labor market inflexibility is the neo-liberal whipping boy everywhere, but in all the public beatings of public sector, no one seems to mention that Ireland delivered all the neo-liberal check-list items, and then some…and how’s old Ireland doing?

    Maybe, just, maybe, a new model is needed. Rather than obsessing over the deficits, we need to emphasize public investment, if the private sector won’t, in energy (and therefore income saving) efficiency and conversions….that would seem to be better in the long run than another round of Goldman Sachs and companies latest models in currency swaps, credit default swaps, and interest rate swaps…which, budget balancers though they theoretically are supposed to be, they none-the-less seemed to be more than happy to pedal to Greece…with the well-publicized results.

    As for Hungary, please explain how the current private sector stregth industries, or promising new ones, will be able to market their products or services to Europe and beyond…to generate the missing jobs? Any promising trends? Or is it all top secret, because like in America’s Wall Street, they don’t know the next hot area until they wake up that morning…?

    If the current game plan consists of pure public spending bashing, then I think there is a logical burden to show what the promise in the private sector will be…

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