Hungary: New President & Debt Downgrade

This week Hungary has a new President. The election of Laszlo Solyom as Hungary’s new President was a major setback for the governing Socialist Party (MSZP), at the same time as it was widely lauded as a victory by the right wing opposition Fidesz party. The outcome was largely the result of the behaviour of the MSZP?s junior coalition partner, the liberal leaning Free Democrats, who abstained. Katalin Szili, the MSZP choice, was regarded by Free Democrats as being far too involved with the MSZP. Only 3 votes separated the two candidates, and this reflects the current balance within the Hungarian parliament between Fidesz and MSZP ? a handful of independents and the Free Democrats in fact have the deciding votes.

This result will only serve to increase tensions within a coalition that has always looked slightly ill at ease. If it doesn?t create enough friction between the two partners to lead to early elections, it will certainly result in the kind of stand-off which means that little of importance is likely to be achieved between now and the general election next spring – apart, that is, from snide remarks and recrimination. There is an MSZP convention scheduled for this Saturday and it is always possible that the future of the coalition will be up for debate.

Sadly the normal state of affairs is for the politicians in Hungary to spend more time trying to smear each other than they do working on really important matters such as the economy.

In fact Hungary seems to be heading for deep trouble, economically speaking, due to its ballooning twin deficits. In addition to the repeated criticism from the European Commission over the state of Hungarian finances, Standard & Poor?s recently gave Hungary a sovereign debt downgrade due to the poor fiscal outlook: they forecast a budget deficit of 5.2% of GDP, and a current account deficit of over 8% of GDP.

At the end of last month the government had already consumed 82% of its budgeted public deficit target so overshoot is more than likely. Despite this situation it looks very much as if the current incumbent at the Finance Ministry is not going to embark on anything that has even a hint of austerity to it, since such measures could damage the chances of the MSZP getting back into power in next Spring’s general election. If anything there is a risk that they will spend more in an attempt to garner political support in the run-up to the election. This risk seems not to be unfoundation if history can serve as a guide: the MSZP, in a fit of idealistic largesse, offered many public sector employees a 50% pay rise in the latter stages of the 2002 election campaign. They actually delivered on the promise and the costs remain an immense fiscal burden.

Bringing the deficits down, a task facing whichever party wins power next May, is going to require the government to cut public spending and raise more from taxation. Public spending appears to be already way down ? I have lost count of the number of times Ministers and officials have, when asked why there is no money available to make much need improvements in key areas such as healthcare, transport infrastructure etc, bluntly replied there is no money. The tax system needs restructuring to make it both flatter, and one that makes evasion by businesses and individuals less profitable.

A primary driver, aside from fiscal responsibility, behind the need to bring down the deficit is the path to Eurozone membership ? 2010 is the target date. However, with all the criticism being heaped upon the ?uro at present it may be that some in Hungary’s political class, both on the left and the right, might are now considering whether membership of the European single currency is really such a good idea. The drive to meeting ERM2 criteria might force desperately needed reform ? official red tape here is a nightmare, and huge savings could certainly be made by streamlining the bloated, and inefficient, bureaucracy that is a legacy of the Communist era. That said, it is also the case that public spending cuts are going to be deeply unpopular; some 20% of the working population are employed in the public sector and any reform of this soviet-legacy bureaucracy is going to cost votes.

In the short term, at the rate things are going, Hungary?s twin deficits will soon cause major problems ( possibly before the year is out) and put the currency, the Forint, under intense stress. A weakening Forint is especially bad news for all those people persuaded by banks to take out mortgages and debt in foreign currency; the repayments have already become more expensive in the past month of so. I would add that these types of mortgages and loans are also widely sold in many of the Central European EU member states; I doubt if the risks are properly explained to customers but that is another matter. The government has also been financing its debt in foreign currency ? see Magyar Allampapir

In many respects I think Hungary, and some other ?less developed? EU member states, should be permitted to run a higher deficit whilst they are bringing their economies and social models up to parity with the rest of the EU. To allow such a situation means that they will have to postpone their ambitions for Eurozone membership, and it also means that financial markets will have to permit such an adjustment. This type of scheme would mean less demand on an increasingly thin EU budget, and avoid the inevitable scowls that Eurozone accession will generate in other parts of the EU already sceptical about the costs and benefits of EU enlargement. Clearly there would need to be some strict parameters and supervision of this to ensure it isn?t a licence for profligacy. The damage done by nearly half a century of central planning and communist dictatorship are immense, and it is fair to say that weekend break tourists, visiting dignitaries and business people, and a fair number of ?expats?, only see the glossy veneer of prosperity and carefully restored cultural attractions. Not to adopt some sort of plan such as this is to risk what has been already gained and / or mean these states spend much of the next half century running at double speed to achieve economic parity with their counterparts in the rest of Europe. Ask a Hungarian what have been the tangible benefits of EU membership and the response is more often than not ? ‘none’.

Postscript: Many thanks to Afoe for giving me the possibility to put up this guest post on Hungary, where I live and work. For those who are interested: you can check-out this Reuters poll on what to expect after elections in Hungary.

7 thoughts on “Hungary: New President & Debt Downgrade

  1. “it may be that some in Hungary?s political class, both on the left and the right, might are now considering”

    This wouldn’t surprise me at all. This situation would counsel prudence. To take important economic decisions under political pressure would be extremely foolish. The ‘option call’ on waiting and watching just went up a lot. I think the most intelligent thing to do now would be to let the experiment continue with the 12 existing ‘guinea pigs’.

    I would want to see strong evidence of things working a lot better, if it were my future at stake.

  2. I would agree Edward. To-date I have rather had the impression that adopting the ?uro here has been regarded more as a matter of status than anything else. That opinion ought to be changing.

    As an addition to the post today Finance Minister J?nos Veres is quoted as saying:

    {{ – ?Analysts want to force me to carry out a Draconian package of measures, but I don’t think that’s needed. If and when measures become necessary, I won’t hesitate to act,” Veres said.

    ?There’s no reason to make a move hastily. If for instance oil prices went through the roof, that would be another thing. They are already rather high, but we can live with them.” -}} See No need for draconian measures

    So the markets are not going to get any joy from the government – it is now probably a matter of when they punish the government, than if they will do so.

  3. I’ve just come across this from the Czech republic:

    “Macroeconomic indicators from the Czech Statistical Office (ČS?) could provide new ammunition for euroskepticism in the country.”

    “The ČS? reported in its annual analysis of macroeconomic development dated May 30 that the Czech drive last year to meet the Maastricht criteria for adopting the single European currency, the euro, cost the country faster growth.”

    “In particular, the ČS? analysis of macroeconomic development highlighted slashing the state budget deficit to 93.5 billion Kč ($3.8 billion) making the Czech Republic the first country in the region to fulfill all the single-currency criteria as a factor that put the brake on growth. “The fast drive to reach the Maastricht criteria did not contribute to economic growth in this country,” the ČS? report tactfully said.”

    The whole article is worth a read. I’m just about to try and chase up what Paul de Grauwe has been saying.

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