I too am doubtful about a ‘triple whammy’, at least in the immediate term, but I am nervous about Hungary. This nervousness is added to since the ratings agencies have been warning that a large quantity of the private debt that has been incurred since 2003 has been denominated in non-forint currencies. If the forint continues to decline with continuing government deficits, or a fiscal tightening recession this could create a more or less classic Dornbusch/Krugman balance sheet negative feedback process.

You say Hungary is pretty industrialised, is this recent investment or ageing industry, do you know?

I do think that Hungary is potentially in trouble, but a triple crisis in Hungary, Romania and Bulgaria seems very unlikely to me… the three economies are not particularly integrated with each other, and have little in common other than “transition” status.

Note that if you look closely at their economies, there are some significant differences. For instance, while successive Hungarian governments have been wildly spendthrift, Bulgaria has been running large government _surpluses_ for several years now. On the other hand, Bulgaria’s trade deficit is (relatively) larger than Hungary’s. Meanwhile, while both Hungary and Bulgaria have pegged currencies, the Romanian leu floats free (albeit with regular intervention from the Romanian central bank). So we’re looking at very different sorts of vulnerability to speculative attack.

One generalization: Hungary has had the worst policy management of the three, both fiscal and monetary. (The Hungarian Central Bank was so incompetent that the forint came under serious attack back in 2003. Nobody seemed to pay much attention at the time, but it resulted in real interest rates briefly surging to around 20% as the HCB moved desperately to defend.) But Hungary also has by far the strongest economy — most industrialized, most productive, most diverse. So, while I could see a short-term crisis in Hungary, in the medium and long terms it should continue to be an attractive destination for investment.

Bulgaria and Romania are the obverse. Their economies are much weaker and less developed. For instance, 42% of the Romanian population is still on the farm, by far the highest of any EU member. Bulgaria, meanwhile, is running something close to an extraction economy, with exports dominated by raw maaterials and primary products.

But… both these countries have been showing impressively competent management at the macro level. I’ve already mentioned Bulgaria’s surpluses. Romania has been managing the leu brilliantly. Both countries have established surprisingly high levels of credibility, and both their sovereign bond ratings have been creeping steadily upwards.

To simplify, you have a strong economy (for a transition country) that’s being managed badly, next to two weakish economies that are being managed relatively well.

So, while this could go in a variety of ways, I think a “Balkan economic crisis” is unlikely.

Doug M.

Edward, I think you’re right that Hungary is already in de facto crisis. But they are clinging to the exchange rate peg. Something has to give. The demography does look bleak. In fact with the EU increasing assertive about the right of EU residents to receive healthcare in any country, which must be reimbursed by the home country, the healthcare costs now have a component driven by costs in the most expensive country.

“But consider that as late as 1989, the eminent economist Rudi Dornbusch (R.I.P.) could publish an article titled Ireland’s Failed Stabilization (link may require subs.) — reflecting what was then a growing consensus that the Republic was on the brink of chronic basket case status”

And strangely enough isn’t that just what Dornbusch’s would-be heir - Nouriel Roubini - has been doing with Turkey. Of course for all his mistakes Dornbusch was a giant of his class. Turkey will, evidently, be the Bosphorus Tiger.

My fears about Hungary are of course compounded by the state of its demography, fertility of 1.3tfr, natural rate of population decline of -0.3% per annum, and zero net migration. This situation is made even more complicated by the life expectancy one.

Average life expectancy is currently 73. This is - like in the case of many new former easten bloc members - low by EU standards. What we have seen from the East Germany case is that the availability of modern medical care for the elderly can see this rise significantly, and in a short time. Most of this leg of the extension in life expectancy is driven by just that: the availability of intensive medical care at the older ages.

This is obviously good news, but for state finances it isn’t. These countries have very little in the way of conserved pension funds, and most of the elderly will not be homeowners so they can’t leverage money there. It is hard to see how they can square the circle. Saying Hungary will get its deficit straight by 2010 is poppycock since that is around the time when the problem will begin to get very serious in terms of governemnt spending (between 2010 and 2015 in any event). So the clock is ticking and the sands of time are running out.

If there were dominoes to fall I would then watch Italy. Very closely.