Monday, July 19, 2010

So, what is wrong with Hungary?

The coming week is likely to be a highly turbulent one in the European markets, following the withdrawal of an IMF mission to Hungary. The failure of the mission means that implied IMF and wider international support for Hungary will not be put into place. Essentially it means that the supra-national bodies do not believe that the Hungarian government has the policies or even the will to tackle the widening deficits and increasing debt burden that it faces.

It is a pretty serious slap on the wrist for Hungary.

However it is not just an expression of no confidence in the new government of Viktor Orban. It also reflects the fact that Hungarian politics generally has become increasingly disconnected from economic reality over the course of the last decade. Famously the previous Hungarian Prime Minister, Ferenc Gyurcsany, admitted that his Socialist government had lied completely about the economic position of the country, however such candour was not refreshing: it only underlined the profound moral corruption of the leaders of the political system.

The battles over economic policy continue to be framed by the personal clashes between the incoming Prime Minister, Viktor Orban; the governor of the Central Bank, Andras Simor; his predecessor, Gyorgy Suranyi; and yet another previous governor of the Hungarian National Bank, and former Minister of Finance, Zsigmond Jarai. The policy disputes, both public and private, in Hungary need to be understood within the context of these shifting personal animosities. Meanwhile public confidence in the political system as a whole has been seriously eroded. Allegations of personal corruption swirl around key figures: and the long serving Mayor of Budapest, the Liberal Gabor Demszky, now seems set to face a dramatic defeat in the local elections as these allegations relate to him. The Socialist party is loathed by the right wing, the Liberal SZDSZ seems on the brink of oblivion, while the formerly Liberal FIDESZ has now moved sharply to the right.

Indeed extreme right politics has been the only thing to prosper in the country of late. The Movement for a better Hungary, usually known simply as the Movement- Jobbik- which has been accused of anti-Semitism- is now the third largest political party after the governing FIDESZ and the opposition Socialists. When I first travelled to Hungary in the early 1990s people would have a car sticker of the map of Hungary on the back of their Trabants. The Trabants, amazingly, are still there, but the stickers have changed to show the map of Hungary before 1918: a Hungary that includes virtually all of Croatia and Slovakia and nearly a third of Romania. as well as parts of Austria, Ukraine, Serbia and Slovenia. Nor is this increasingly nationalist irredentism limited to the passions of car stickers. The slogan adopted in the 1920s, opposing the harsh territorial settlement imposed on Hungary after the First World War: "Nem, Nem, Soha" - "No, No, Never" is not just a subject for graffiti, but an active topic of conversation in the salons and dining tables of Budapest.

Thus the Orban government has proposed giving Hungarian passports to all Hungarian speakers- a move which in Slovakia looks like a direct threat to incorporate the southern third of the country into Hungary. Relations between Bratislava and Budapest are increasingly fractious as allegations of Hungarian or Slovak chauvinism have filled the air. Orban talks of being the Prime Minister of 15 million Hungarian speakers- not just the 10 million Hungarian citizens. Hungary now has increasingly bad relationships with all its neighbours, which is not a particularly helpful position when one considers the state of the Hungarian economy.

Ah yes, the Hungarian economy... the elephant in the living room.

The Communist regime in Hungary - while still maintaining the usual panoply of Communist terror, was still- compared to its neighbours- by far the "happiest barracks in the camp". However the regime of Janos Kadar was only able to buy off its opponents by using huge levels of government debt in order to increase living standards. The result was that the Hungarians entered the democratic era with an unsustainably high level of public debt. Despite repeated attempts, most notably with the so-called Bokros plan of 1994, the Hungarians have not been able to create a balance sheet which they can afford. In the 1990s, that mattered less, because the country was able to attract by far the most direct investment into the Central European region. However as Warsaw has caught up and overtaken Budapest as the regional centre, it has become clear that Hungary needs to undergo swinging changes in order to attract investment capital. Once Budapest Airport was the most developed in the region: now it is cramped and appallingly inefficient- particularly compared to the brand new terminals on offer in other regional hubs, such as Riga, Prague or Warsaw. Hungary has been coasting, but now the chickens have come home to roost.

Hungary has high levels of debt, dysfunctional and increasingly extreme politics, a small and fractious technocratic elite which is out of touch with the increasingly ugly mood on the streets. The infrastructure of the country- aside from a good quality network of motorways- is visibly in need of substantial investment. Corruption and incompetence flourishes, particularly in local government, but in large areas of Hungarian society, bribe taking has become a necessary part of the economic or even social process.

The incoming government has offered warm words about tackling the growing crisis, but the fact is that Viktor Orban has form as a highly divisive leader, more interested in the politics of Hungarian nationalism than the practical problems of the failing economy. The failure of the IMF mission is simply the latest economic misstep that FIDESZ has made while in office. There is little confidence that FIDESZ has the skills or even the will to take on the hugely unpopular task of reducing the size of the Hungarian national balance sheet to a level that is sustainable over the long term. The opposition MSZP has a similar track record of failure- while the third party- Jobbik- would leave Hungary completely isolated internationally, and possibly facing sanctions if their more extreme nationalist- even fascist- policies are enacted.

Under the circumstances, the failure of the IMF mission looks, with hindsight, to have been doomed from the start. The Hungarian political system is so dysfunctional that it seems impossible to create a political consensus that would enact genuine reform. Any political party that opted for real reform policies could end up like the King's Party in Bulgaria: a party of Kamikaze reformers determined to do the right thing, but ultimately knowing that this would lead to political oblivion, irrespective of the need for change. I see no such brave souls amongst the time serving and occasionally corrupt placemen who form the bulk of the Hungarian political class. The failure of the IMF mission is not a disaster- yet. However it is likely to mark another melancholy milestone in the gradual descent of Hungary into a deep economic and political crisis.

It may take a new generation before Hungarian politics can be reformed in order to tackle the deep seated economic problems of the Hungarian state. Until such a generation emerges, the country faces a hard journey between the Scylla of economic meltdown and the Charybdis of political extremism.

It is not just the coming week of turmoil in the markets as traders reprice Hungary and watch for regional contamination that will be difficult.

The next years and even decades ahead will also be extremely difficult for the country, unless and until its leaders can learn to be straight with the Hungarian people and enact the painful but essential economic medicine that is required to move the country forward.

PS: Someone needs to tell the Daily Mail that Hungary is not in the Euro zone: it has a free floating currency, like the UK. Such a basic slip is typical of the abysmally low quality of reporting by journalists who are not only biased and ignorant but incompetent. If your blood pressure can stand it I can recommend the Tabloid Watch site. There you can see in all its glory the low quality and generally nasty journalism that these crooked and cancerous people continue to try to sell to us.

4 comments:

ScouseHouse said...

fantastic blogpost!

fabien said...

brilliant blog, everything is said really! Including the bit on the Mail

Anonymous said...

I wonder where you come from, 'cause you certainly don't know any real history and you don't know the present either. I wish you no harm but please try to gather more information before you speak.

Cicero said...

Well Anonymous: You make two assertions: "that I do not know any real history" and "I do not know the present either"- both are unsupported by any other comment. The second "I do not wish you any harm" is pure bluster.

So a more detailed critique, please. Or you will deserve to be ignored