I think the comparison Kopits makes is an important and useful one, even if he doesn’t ‘get’ the demographic background.

He is also right that Hungary is even more volatile than Italy, but I don’t think we should underestimate the difficulties that the Prodi government will face in 2007. Also I don’t think - as my posts are indicating - that changing the productivity path in Italy will be as easy as he seems to think.

Also, I am much more optimistic than he is about Turkey. This is one of the *big* issues I have with Nouriel Roubini.

The times they are certainly a-changin.

There are, however, differences in the approaches adopted by Budapest and Rome. The new Italian government is composed of a loose coalition of divergent political parties holding only a razor-thin majority. Any initiative to reduce the budget gap through spending cuts (as the government is rightly committed not to raise taxes but even to trim payroll taxes) requires painstaking consultations and negotiations with individual coalition partners. To strengthen his hand, Prime Minister Romano Prodi appointed internationally respected Tommaso Padoa-Schioppa, a former member of the European Central Bank’s executive board, as finance minister. Mr. Prodi also named an independent commission headed by a respected civil servant, Riccardo Faini, to shed light on the public sector accounts. In addition, the government quickly passed a supplementary budget to contain this year’s deficit and started to deregulate some domestic services. Laudable as they might be, these initiatives are only the beginning of a genuine adjustment effort. It remains to be seen whether the structural reforms the government announced in July will in fact be implemented. The immediate challenge for Rome is to resist calls to water down spending-cut plans for next year, given that revenues are expected to surge due to higher economic growth than previously anticipated.

The re-elected Hungarian government, on the other hand, enjoys a commanding legislative majority. But it needs to overcome an enormous credibility gap, having missed its budget targets by a long stretch five years in a row. Whether the prime minister’s leaked confession will boost his credibility or further undermine it remains to be seen. Having contributed significantly to the budget imbalance with a large dosage of creative accounting, the government has yet to persuade financial markets and EU institutions that it will undertake the necessary fiscal reforms. The medium-term budget plan that Budapest submitted two weeks ago to Brussels is frontloaded with a number of apparently improvised measures, mainly tax hikes and one-off spending cuts. And yet, it could provide the starting ground for restoring fiscal sustainability — if it is beefed up with far-reaching reforms, including an overhaul of generous entitlement schemes.

Clearly, in both countries, the budget programs need to be subject to close outside surveillance. In Hungary, the recently appointed independent “convergence council” should not only issue a candid assessment of the budget program but also play an active role in monitoring its execution. In addition, the European Commission and EU finance ministers should exercise effective peer review of each country’s performance. The strict enforcement of the Stability and Growth Pact’s fiscal criteria would serve the long-term welfare of these member countries, as well as the interest of the entire EU.

Failure to bring the budgets of these countries under control could have dire consequences. Italy’s economy would experience a lengthy period of stagnation, bogged down by a further erosion of its competitiveness. That’s because large public deficits tend to crowd out private investments, while distortions from generous welfare payments and high taxes dampen labor force participation and productivity. Prolonged stagnation in Italy would weaken the entire euro zone just when economic growth in the U.S. is about to slow down.

In Hungary, the immediate stakes are far higher. The country could lose EU cohesion funds and its euro accession could be postponed indefinitely. More importantly, Hungary ranks among the countries most vulnerable to a financial crisis if investors decided to pull out en masse. Contagion from a crisis in Hungary to other emerging-market economies (notably Poland and Turkey) would, in turn, be difficult to avoid.

Ultimately, the fiscal drinking habit can be kicked only if the political elites show conviction and manage to garner public support for unpopular measures.

In Italy, fiscal reforms, accompanied by the liberalization of the labor and commodity markets, would help jump-start productivity growth and competitiveness and reduce unemployment. Similarly, in Hungary, strong commitment to fiscal discipline would confer multiple benefits, including entry into the euro zone. Above all, restoring credibility would encourage investment and accelerate real convergence in income levels toward the rest of Europe.

I absolutely agree. The underlying stability at the present time is, in its way, impressive.

“and that it was only lying to the public that prevented this from being clear in the election?”

Well I suppose the implication is that he allowed the debts to be accumulated before the election (10% pa fiscal deficit) and didn’t go to the public with the cut-backs that were always going to be needed.

So he did win the election on a lie.

What isn’t clear at this moment is how much of the protest is from people who don’t want to make the ‘adjustment’ and how much is from those who want it but want a different government to admister it.

They are definitely between a rock and a hard place, since any ground they give to the protesters who don’t want cutbacks will only be reflected in more attacks on the forint.

P O’Neill didn’t know just how quickly all he was saying might become relevant. We are definitely entering a ‘times they are changing’ period.

The implication is that Gyurcsany has been lying to the Hungarian people, specifically that he misrepresented the state of the economy so as to be re-elected. However the quotation provided by Edward implies to me that such lying as was going on was to keep a leaking ship afloat and to keep the various foreigners who were providing money happy, and was not something engaged in for kicks (”I don’t want to do this anymore”).

So what’s the anger here? Are there additional details not revealed in the quote that refute this interpretation? Or is the claim that Gyurcsany is, through his incompetence, corruption, folly, whatever, rather than the general state of Hungary at this point in time given the Soviet and post-Soviet history, responsible for this same looming disaster he claims to have worked so hard to avoid, and that it was only lying to the public that prevented this from being clear in the election?

Well this theory is certainly going the rounds, and it might of course have some validity (see below), but he has the slight inconvenience that he was running the ship at the time, and therefore if anyone should have been putting a stop to things it was him. In some people’s minds resignation would be the normal way of handling such an admission.

Certainly the overnight news suggests he is in for a bumpy ride.

At least 50 hurt in Hungary protests

BUDAPEST, Hungary - Protesters clashed with police and stormed the headquarters of state television early Tuesday, responding with violence to a leaked recording that caught Hungary’s prime minister admitting the government “lied morning, evening and night” about the economy.

Rescue services said at least 50 people were injured as police fired tear gas and water cannon at rock-throwing protesters, who have been demanding the government resign.

As the crowd grew by Monday night to more than 10,000, according to an estimate by MTI, several hundred broke away and marched over to the nearby headquarters of state television, demanding to deliver a statement in a live broadcast.

While most of demonstrators watched, a few dozen broke through police lines and into the TV headquarters.

Police tried to disperse them with water cannon sprays but the truck was quickly disabled by the rioters, some of whom escorted the police officers operating the vehicle to safety. Several cars near the TV building were set on fire, their flames scorching the building.

The rioters appeared to control some areas on the ground floor of the block-square television building. Police said they were preparing to drive them out and were ordering several thousand police reinforcements to the capital.

Confronted with initial excerpts of the 25-minute recording, which Hungarian state radio posted on its Web site Sunday, Gyurcsany not only acknowledged their authenticity but seemed relieved they had been made public — leading to speculation that the leak came from sources close to him.

“It deflates pent-up tensions regarding the reforms and … can be used to support the government’s position that they are urgent and inevitable,” said political analyst Zoltan Kiszelly.

Others said the leak was an attempt — which may have misfired — by Gyurcsany’s Socialist rivals to block his aspirations to become party chairman.

“In the long term, I think Gyurcsany’s words will have a stabilizing, cathartic effect, both politically and economically,” said political commentator Laszlo Seres. “At least to his own voters, Gyurcsany can argue that he shouldn’t be punished for his sincerity — that he said these things to stop the lies.”

Gyurcsany appeared on two live television shows Sunday night, trying to turn the focus of the debate away from his government and into a wider discussion about the failings of Hungary’s political elite since the 1990 end of communism.

He also defended his foul language, saying it had been used in the context of a meeting of friends and colleagues and that he was proud of his “passionate speech.”

“The real issue in Hungarian politics today is not who lied and when, but who is able to put an end to this … who can face up to the lies and half-truths of the past 16 years,” Gyurcsany wrote in a Sunday night entry of his blog, introducing a lengthy transcript of his May speech.

“The lies are the sins of the whole Hungarian political elite.”

Well if they aren’t convinced about the need for these after what just happened to the forint then there really is cause for concern.

“that the leak was orchestrated by the PM himself to change the debate towards…..”

towards calls for his resignation perhaps. We all know Churchill said that there are lies, damn lies and statistics, but there are also lies, damn lies, and lies that are just too big to ignore.

This guy just won an election on one in the latter category. This makes a farce of democracy, which I suppose is nothing new in recent Hungarian history.