Dark economic clouds over Hungary

Today was not a good day. The Budapest Stock Exchange (BUX) went down 4.39%. Országos Takarékpénztár (OTP), the only Hungarian-owned bank, lost 8.87%. (Of course, it could have been Citi--which I now call "Village"--with an intraday low under $1.00.) At one point OTP's loss was more than 10% and trading was temporarily halted. The Hungarian forint is steadily weakening. A few days ago when it reached the "psychological barrier" of 300 Ft to 1 euro people couldn't believe their eyes. A few minutes ago when I checked 316.04 Ft had to be handed over if one wanted to buy one measly euro. All those thousands who borrowed in euros or in Swiss francs must be moaning, not without reason. Meanwhile everybody has an opinion about why the Hungarian forint is faring so badly.

The most popular explanation is that Ferenc Gyurcsány himself caused the forint's downfall and the ever increasing crisis when he went to Brussels and tried to sell a program that would have helped the whole East European region. According to his critics he didn't share his ideas with anyone, not even Mirek Topolánek, the current European Union president. However, according to the latest news, that was not the case. Gyurcsány presented his four-point proposal to Topolánek on February 26 (or according to another source on February 24) and surely he must have had Topolánek's okay. However, at the end the Czech prime minister sided with those "proud" countries of Eastern Europe that didn't want to be associated with Hungary and Ukraine, surely the losers of the region. It didn't matter that Gyurcsány kept repeating that Hungary is doing all right and he was asking the money for the whole region--the label stuck. Gyurcsány is described as a pushy guy who always demands something from the European Union and the western politicians are sick and tired of him. It seems that the neighbors condemn him even when he was trying to ease their situation. See a Slovak cartoon. Others also blame Barack Obama who after meeting with Gordon Brown, prime minister of the Great Britain, said the following: "One of the things that Prime Minister Brown and I talked about is how can we coordinate so that all the G20 countries, all the major countries around the world, in a coordinated fashion, are stimulating their economies; how can we make sure that there are a common set of principles, in terms of how we're approaching banking, so that problems that exist in emerging markets like Hungary or the Ukraine don't have these enormous ripple effects that wash back onto our shores, and we're providing them with some help in a coordinated international fashion, as well."

Well, that did it in Hungary. How does Obama dare to compare Hungary to Ukraine! No wonder that the forint started to fall even more rapidly after that speech. Moreover, it takes gall, these people say, to talk about problems that "will wash back to our shores." After all, where did this whole mess start? Not in Hungary. Hungary is the victim of irresponsibility in the American banking system.

Those who defend Gyurcsány claim that the forint's fall is not unique. The Polish zloty and the Czech koruna have also been trending down. I calculated the loss of these three currencies since October 1, 2008, after the collapse of Lehman Brothers, and found that during that period the zloty fell by 28%, the koruna by 12%, and the forint by 23%. In the last couple of weeks the forint has weakened against the euro while the koruna has strengthened, both by about 4%; the zloty has remained largely unchanged.

According to the latest Eurostat figures Hungarian quarter over quarter GDP decreased by 1%. This is actually better than the European Union's average of -1.5%. The greatest decrease was in Estonia with -4.2%, in Germany -2.1%, in France -1.2% and in Italy -1.8%. But there are still countries in the European Union that are doing relatively well: Slovakia (2.1%), Greece (2.6%), Cyprus (3.0%), Austria (0.5%). Hungary may not be at the head of the pack, but in terms of GDP Ukraine is way behind the pack. (Ukraine is just adopting the Western reporting system, so it's hard to make a clean comparison, but its GDP declined 20% in January year-on-year and, looking at a chart that tries to calculate monthly movements in Ukraine's GDP, it looks as if growth was positive through September 2008 and then fell off a cliff.)

Meanwhile SZDSZ and MDF are standing by the recommendations of the Reform Alliance. According to the reform economists and the politicians who support them the recent unfavorable economic trends could be immediately reversed if the world saw that Hungary is ready to tighten its belt much more than Gyurcsány recommended. Because the government without the SZDSZ and/or MDF cannot pass its own program, negotiations behind closed doors are taking place between the government and the framers of the Reform Alliance.

This morning Viktor Orbán made it clear that the program of the Reform Alliance is totally unacceptable to him and his party. According to Orbán, the Reform Alliance is trying "to fix an economic system that failed. The Alliance's remedy I find wanting. History passed judgment on this economic system. The system itself is defective. There is no use of trying to patch it up. An entirely new system must be built." Although he didn't divulge what this new (post-capitalist? post-global?) system would be, he did say that he would insist that half of banking system be in Hungarian hands. He neglected to tell us where the capital outlays would come from.

It is very possible that MSZP, SZDSZ, MDF, and the members of the Reform Alliance will hammer out some kind of compromise and that a new amalgam bill will pass easily with three-party support. Some people think that Fidesz made a mistake in categorically refusing to talk with the Reform Alliance.

Comments

[Mark]

"According to the latest Eurostat figures Hungarian quarter over quarter GDP decreased by 1%"

Beware of making comparisons between countries on the basis of these statistics at this stage. Eurostat compiles its figures based on the returns from individual national statistical offices. There is quite a lot of difference in the quality of the statistics produced. Hungary's statistical office is highly regarded - and its statistics are very good. Secondly they don't quite measure the same thing. Hungary has reported a quarterly contraction of -1.0%. If you look at the Eurostat tables Slovakia has reported no quarterly contraction figure and its return is left blank on the Eurostat table. Your +2.1% figure for Slovakia is an annualized figure (the actual annualized figure the Slovak statistical office is reporting is +2.5%) - not the quarterly one. This suggests a very sharp slowdown in Slovakia indeed in the fourth quarter, and I would suggest when we have fully comparable statistics, we will see that what is happening there is not disimilar to what is happening in Poland and the Czech Republic. Plus, these early figures are nearly always revised because they don't reflect all of the data.

" Meanwhile everybody has an opinion about why the Hungarian forint is faring so badly."

I think we can go round and round talking about short-term factors, which may affect a day, or a half-day's trading. The progressive fall in the Forint is a product of a rational market judgement about Hungary's economic imbalances, the depth of its recession, and the risk of political instability. It is painful, but there is nothing very surprising about it. The only thing that is strange is that up until now the zloty has performed as badly. This decline still has quite a way to go, and although Hungarian National Bank intervention might temporarily shore up the currency, there is nothing they can do to reverse the trend until the underlying circumstances change. Once you accept this it become clear that Gyurcsány's package offers a route to stabilizing the situation; probably the only route - if public and private debts can be restructured and rescheduled (and this will only happen with outside help) the shocks caused by currency depreciation can be minimized and it will actually become part of the solution.

"According to the reform economists and the politicians who support them the recent unfavorable economic trends could be immediately reversed if the world saw that Hungary is ready to tighten its belt much more than Gyurcsány recommended."

I think such people are frankly crazy, and I can't see any rational reason for accepting this argument at any level.

[nwo]

American banks did not cause the crisis in Hungary. Foreign (mainly Italian and Austria) banks irresponsibly lent too much money at cheap rates in non-HUF currencies. But where does the real fault lie? With the Hungarian Government. The reason banks lent in currencies other than the HUF was because HUF interest rates were too high (the same problem dd not occur in the Cz Republic for instance). And why were rates high? Because the NBH to control inflation and manage the currency (at least until mid last year) had to keep rates high because of the Government's amazingly profligate fiscal policy.
As to today's situation, the main problem with Gyurcsany's trial ballon at the EU summit, is that the markets want to first see some sacrifice at home. It is believed that Gyurcsany is trying to internationalize the crisis, so he does not need to admit that the fault lies primarily at home, and the short term cure for the currency problem also rests at home. Everyone has been disappointed as to how the Govt. has managed its commitments post the IMF package. It did the minimum required, and the market is saying this is not enough. With GDP likely now to come in at -4/-5% for 09 and with the debt burden exploding as a % of GDP (due to lower GDP and a declining HUF), to achieve a deficit of no more than -3% of GDP (much less the goal of -2.6%)is now going to require another amended budget. In addition, interest rates are likely to increase to increase the cost of shorting the HUF. This will further impinge on the GDP, but there is now no choice. The Country has absolutely no flexibility to "prime the economy". As of this morning, it seems there is increasing fear among the public about the safety of their bank accounts. If this is not contained (and a letter from PSZAF is unlikely to do the trick) then the crisis will turn into a full fledged panic and a collapse. If there is a chance of this happening, the PM's days may well be numbered. Time for Bokros to come back from the Uklraine. He can stay at home and deal with the same problems.

[Mark]

NWO: "The reason banks lent in currencies other than the HUF was because HUF interest rates were too high"

You make some very important points, but what I think is more important was the way in which in 2003-4 Hungary lost effective control of its monetary policy. I'm not sure about controlling inflation - but high HUF rates were needed to fund the exploding debt incurred as the costs of the Medgyessy measures, and the price for stablizing the polarized situation that followed the 2002 elections. I think this was exacerbated by the political split between the MSZP-SZDSZ government and Járai in charge of the MNB. Hungary's EU entry meant that the markets were optimistic about Hungary's prospects of joining the Euro, and therefore prepared to invest in its housing market. Furthermore, Hungary had a number of Austrian-owned banks who had used the offer of CHF-denominated mortgages to raise their market shares in Austria already in the 1990s, who saw the opportunity to use the technique on a larger scale to raise their market share in CEE. This combination of factors created a unique situation in which HUF interest rates lost all real relevance for controlling the supply of money - but they did make investing in the public debt attractive, thus ensuring that if the MNB's intention was to curb government excess, as a policy it failed spectacularly. Because private sector lending was funded in this way, Hungary avoided the normal effects of "crowding out" associated with a high government debt, creating a situation in which exceptional market circumstances allowed Hungary to develop some truly extraordinary imbalances without incurring the normal penalties. I agree that it is hard to see what any of this had to do with American banks, except to the extent that they responded in similarly irrational ways to the unusual market circumstances that followed the collapse of the stock market bubble in 2001.

[Gábor]

NWO, it's a pretty good narrative and even a coherent one, but a bit onesided and short sighted, as if it had been written by someone from the so-called "markets" so clearly forecasting the economy and so truely assessing the reality through their prices. I'm a bit suspicious of those opinions putting the responsibility solely on Gyurcsány's shoulder.

If we try to order the events rapidly following each other chronologically just to make a difference between effects of the crisis and effects of the governemnts economic policy maybe we will have a slightly different picture. Data from the last year consequently showed that the governments austerity measureas and the tax-hikes produced a budget deficit well under the Maastricht requirement (Although in the last moment the government made some easing, it was a mistake.)Even the public debt - expected to rise in the last year - would have been remained at its level in 2007, had the financial crisis not hit Hungary and force the country to borrow from the IMF and the EU. So far it is no blame to put on the governemnt, even if some interest groups (please, don't tell me that the organizations of the employers and economists employed by them are not representing their sepcial interest even if they try to camouflage it as the sole public interest) were not really satisfied with the measures. (There was certainly the problem of weak credibility after the events of 2006, not primarily because of the Öszöd speech, but because many actors at the "markets" expected the government to realize the program outlined in articles written by Bokros- Csillag and Mihályi, and becoming very disappointed after those proposals turned out to be only private ideas or at least this is the prime minister's version. But the government, although many "analysts" were sceptical regarding the possibility of reaching a deficit lower than 4,5% of the GDP achieved its targets, so the remaining of this credibility weakness can even be a factor not even stregthening the faith in the rationality of markets...) The Hungarian economy in the last months of 2008 were heavily hit by the recession in its export markets and this is the primary cause of the recession at home, quite the same as in the Czech Republic, in Poland, in Slovakia, and partially in Romania, internal elements were only to join later. (For example, as the avarge industrial labor cost calculated in euro is now at about 30% less than in Slovakia Hungarian export has to be soaring and not decline if there weren't any outside factors in the recession.)

I know that it is nothing to do with the reaction of the "markets", as they are at the moment acting seemingly independent from facts, relying on emotion, false informations, misinterpretations or temporarily are moved simply by speculative tricks. (But even in this case it is not an asset for the credibility of "analysts" to prophesize, sometimes to diegnose the dissulution of the forint from the region based on the events of ten minutes, if it is quite clear even for a non-expert from the respective charts that those currencies are moveing together at the moment. Should I have any confidence in those guys in the future?) Or if I'm a bit more fair with financial markets I can conclude that at the moment, according to the judgemnet of those there is no real difference between countries in the region (oh, yes, I know that such fantastic instruments as CDSs show it otherwise, but as the toxic assets were based on the assumption, that CDS shows the possibility of default better than thorough historical analysis of the facts, implying again the extreme rationality of markets having every information for their decisions, please allow me to be a bit sceptical again) and not Gyurcsány tries to spread out responsibility for the crisis, but others tried to escape from a dire situatuion at the expense of Hungary. But it is quite obvious, that the financial crisis was sparked by events in America and not in Hungary and the real economy is directly affected by the recession in Europe and that way indirectly by the financial crisis. But in either case it is not the primary fault of a Hungarian government neither its leader's.

As for the prospects, they are certainly not bright, but I don't see that any country in the region would be able to get out of this mess without some recovery at the export markets of the region. It is perhaps even a bit problematic to assume that internal demand will considerably ease the situation in larger countries as the wages are relatively low (not necessarily in terms of productivity but compared to the prices of consumer goods) and will remain during the crisis and even up to this moment cunsumption was mainly driven by credit, in part because of the low wages. I'm convinced that there is no way out for Hungary without severe measures regarding even budget expenses, as unfortunately markets will have the last word over the fate of the country (and the EU is seemingly not capable to come up with the necessary measures) but I'm far from being convinced by "experts" and "markets" that sacrifices has to be made only by the not-well-to-do. And I'm even less convinced that we should fuse the handling of the crisis with lasting measures regading our economic model. (And in this assumpton at least I'm not alone, a good and not leftist economist has the same opinion. http://mancs.hu/index.php?gcPage=/public/hirek/hir.php&id=18448 )The first one is a question of temporary action either with cuts or with acquiring money for this year (for example a nice one-time levy on the large properties) the last one should be the subject of a thorough consideration taking into account the lessons from the crisis as well.

[nwo]

The short term problem is credibility of the Government and a sign of commitment to long term fiscal reform. This is the only thing Hungary-along- can do to try and prevent a full fledged currency meltdown and a collapse of the banking system. It still may not be enough to work.
The long term problem is a huge level of debt to GDP (primarily at the State level) that has funded the welfare state since the 1980s. This needs to be managed. The only way to manage that is outright default (Latin American style) or growth. Even leaving aside the crisis, there is little one can point to that can make one believe there is a strong catalyst for growth in Hungary. Given the strucutral problems in the economy, the long term potential grwoth rate in Hugnary (probably in the 3-4%) is far too low to work off the debt reasonably.

[Mark]

NWO: "The long term problem is a huge level of debt to GDP (primarily at the State level) that has funded the welfare state since the 1980s."

This I think takes us to the root of the problem, and the issue here is moral, political and economic - and unless it is directly addressed will shake the political system (an the post-1989 settlement) right down to its foundations.

The economic issue is that of the long-term debt trap which has acted as weight on Hungary's economy since 1989. It played a considerable role in deepening the crisis of the economy between 1989 and 1996, and has limited Hungary's growth since. As you concede it plays a considerable role in Hungary's current problems - for whatever reasons all of Hungary's governments and most established economic opinion has insisted that the precise payment of a debt, that everyone knows Hungary can only pay at substantial long-term cost has been a sacred cow. Why?

The political problem is that of the implicit (and in some cases explicit) promise made at the end of the 1980s, that the transition to a market economy would lead to a rapid increase in the standard of living, convergence with Hungary's western neighbours, and it finally "joining Europe". It has been the failure of the market to deliver relative to those expectations which is behind the crisis of trust, and the anger which has led to the rejection of market-based reform (and the level of that rejection - as last year's referenda results reveal is pretty comprehensive - and of an intensity that any democratically elected politician should ignore at their peril). If enough of the population during this crisis decide that the promise that the market route to joining Europe was a confidence trick (and there are lots of people who do think this) then the explosion of anger that results will be directed against everyone - as much those who are seen to have enriched themselves buying up large bits of the Tokaji-Hegyalja as others who built up their own business empires. And who knows what would happen next .... (you may say that these expectations in 1989 were unrealistic, but this is in part precisely the point!)

If Hungary's current political elites want the population to pay for its indebtedness they have to give a convincing answer to the question of why they should be asked to pay it. The problem, as you say, goes back to the 1970s and 1980s when a state socialist regime was in power. The current political elite (including all three MSZP Prime Ministers, their connections to that previous system notwithstanding) have defined the third republic against the "illegitimate" standard of state socialism. If that regime was "illegitimate" because it was not based on the consent of the people, surely the debt too is "illegitimate". Whatever your opinion of this issue, there is no way out of this as a moral problem (unless people want to start to try and argue that state socialism was, in some way, legitimate, which poses in turn, huge problems for how the Third Republic has legitimized itself!)

[nwo]

Mark
The history is what it is. Hungary, in hindsight, should have rescheuled like Poland in or around 1990. If they had done so and behaved prudently, the country could be far more prosperous than it is today or will be in the future. The problem was that they did not reschedule (out of a mistaken sense of pride and a foolish belief that they would be treated better by the West for honoring their commitments) and the post-1990 Governments never acted prudently. In the end, Hungary is left with an insurmountable debt burden with no reasonable way to escape. Whose fault was this? I think it is really a chicken and an egg question. Obviously, politicians of all stripes-but especially the MSZP circa 2002-2006-are responsible, but the public is responsible as well. Hungarians have asked their politicians for a free lunch. They have wanted the freebies of the welfare state but are unwilling to pay for it. What is terrible is that the run-up to EU accession and in the early years post-accession, the international markets were all to happy to finance the "have your cake and eat it too" strategy. And the MSZP won re-election in 2006 solely because they benefitted from this strategy.
I do not agree this is a failure of the market economy (other than obviously a failure on the part of bankers to act prudently) or a failure of the Western nations supporting Hungary. The level of FDI into Hugnary was substantial. Hungary gained admittance into the EU (like the Poles and Slovaks) not because they were ready-in a political institutional sense or an economic one-in 2004 but because of politics, history and a sense of responsibility in the West. The fact is that Hungary and Hungarians screwed this up. They believed EU membership was the proverbial free lunch. Lots of credit, increased consumption but no more work than before. Gyurcsany acknowledged the fallacy of this in 2006 Fall, but the public still does not understand it(despite acknowledging the problem, Gyurcsany has not been willing or able to address the fundamental problems facing the economy). Hungarians do not want to be responsible or act responsibly. For a long time, Hungarians were permitted to be profligate. That time is over. The consequences will be painful and long lasting, generations in fact. Any sensible Hungarian parent will make sure his/her children will be able to speak foreign languages. The opportunities are unlikely to be in Hungary.

[Mark]

NWO: "Hungarians have asked their politicians for a free lunch. They have wanted the freebies of the welfare state but are unwilling to pay for it."

My first reaction is to say that this could be said with equal justice about almost any other country - including the UK, the US, Spain, Ireland - that became indebted and faces some kind of adjustment. Have you ever met anyone who enjoys paying taxes?

My second reaction is that this isn't the real problem. The real problems are the continued legacy of the extreme job destruction in the 1990s on health, employability and thus labour market participation. They are also related to a "weak" Hungarian state, and a polarized country, where the transition has failed to deliver the material security and standard-of-living that was expected.

My third point back is that politicians of all sides have treated the public like children, and have consistently over-promised. I remember back in the mid-1990s, Imre Dunai, Horn's Minister of Industry and Commerce on MTV's Híradó announcing the construction of what is now Duna Pláza, arguing that it represented the first sign of the state of generalized consumer plenty that would be delivered as a reward for Hungary's implementation of the Bokros package. This is just one example of the politics of lies that has been fairly consistently pursued, whereby the earth was promised in the future to assuage doubts about sacrifices today. Martonyi's comments about the cake Brussels would bake for Hungary if it was invited into the EU is another example from the other political side of irresponsible promises. After 2006 it has become clear this approach to political communication - if it is continued - risks provoking social explosion.

NWO: "I do not agree this is a failure of the market economy"

It all depends what you mean, and I did qualify my original comment with "relative to expectations". But in an important sense it is. Since 1945 a number of states have caught-up through using an export-led growth strategy to seize an increasing share of world trade and thus raise their standard of living substantially. Core western Europe and Japan in the 1950s, southern Europe and South Korea in the 1970s and 1980s, China and India more recently. But due to increased international competition, as states like China joined the game, for Hungary it has failed. If we discount the past nine years, when the policies that boosted the standard-of-living were based on debt, then the average standard-of-living they produced was no higher than that in the 1980s in the dog years of state socialism. And that with much higher inequality, insecurity, and contrary to what many economists would have us believed, a welfare system that was less functional. That wasn't what was promised in 1989, and it is that gap between the promise and the results that matters here.

[Odin's lost eye]

NWO
As you say when Hungary was accepted and entered the Hungarian people behaved like a children given a free run a candy store. They did so with out really understanding how the capitalist system works or the rules. My late wife wanted to borrow a large sum in Swiss Francs. I said no. She could not understand this nor could she (and never did) understand about ‘servicing the loan’. You also say *** “Any sensible Hungarian parent will make sure his/her children will be able to speak foreign languages. The opportunities are unlikely to be in Hungary” ***
I will agree with you about your first point. Very few Hungarians know anything about the outside world. This makes them very lonely which in turn tends to lead them into xenophobia. On your second point about opportunities there are always some form of opportunity where ever you look. It is just a question of finding it and knowing how to exploit it.
Mark
In your last paragraph you talk about ‘illegitimate governments’ and ‘illegitimate loans’. You say ***.”If Hungary's current political elites want the population to pay for its indebtedness they have to give a convincing answer to the question of why they should be asked to pay it” ***. The problem is that within a state only people have money, governments don’t. They get their money from taxes. Where earlier regimes (be they de-jure or de-facto) borrow money from within or from outside the state then their successors have to pay off these debts. Where a state refuses to do so saying “that the people refuse to do so saying that the loan was illegal quoting any moral judgement you want to name”. Then the state and its government become a ‘pariah state’ with whom no one (except the black marketers) will trade. Their currency becomes worthless in the outside world and their population are reduced to an existence similar to that of North Korea. I believe that Lenin did this and used the same spurious arguments about the Tsarist Government bonds. This meant that his successor Stalin had to starve the peoples of the Ukraine by selling their food to raise capital to finance the various 5 year plans. It is the old question of trust!
On the Beeb this morning there was an Austrian banker talking about foreign currency loans. One thing he said, if I understood him correctly, was that much of the money lent were in funds that had originated from the country to which the loan was made.

[Mark]

Odin "Where earlier regimes (be they de-jure or de-facto) borrow money from within or from outside the state then their successors have to pay off these debts."

Of course, they do (unless, of course, like Poland they re-schedule and re-structure them in an agreed way). But, with all due respect, you have missed the point. My argument is that it is now politically impossible for any government made up any of the present parliamentary parties to demand sacrifices in the name of paying off the debt, and secure any acceptance of this position from the population. In part this is due to the way they have justified their rule in relation to the regime that took on the debt, and in part because people believe that others have profited disproportionately from their positions in that system as the market was introduced(including political elites) and that they should be expected to pay first. Of course, this position is impossible, and it suggests that a systemic political crisis is not that far away.

[NWO]

Mark-

As gloomy as I can be, I do not believe a systemic political crisis is likely. I also do not see this as politicians v. people (Of course, the populists amongst us (including, sadly FIDESZ) will argue for this. There are still enough Hungarians who understand there are freedoms afforded by the new system and by eing part of the EU that there is no real turning back from this). I continue to believe that while the population was complicit in the pact with the debt devil. As some point individuals need to take some responsibility. In addition, as for the development of the economy, at least until a year or so ago, the most developed parts of the Hungarian economy were more productive and efficient that in other parts of the CEE. This is still the case I believe, as one who spends a lot of time in most of these CEE countries. The problem was that there has never developed a real, thriving SME sector. The reasons are manifold: cost of credit, dependence on export markets (as compared to Poland), tax disincentives, and, subjectively, I believe Hungarians are more risk adverse than people in the neighbouring countries. Finally, it seems to me that Government and bueracracy has suffocated so much economic activity in this country. This is true in most of the countries of the CEE, but Hungary seems not to be able to escape the deadening effect of the State. Sweden or Denmark this country will never be. Instead, Hungary emulates Italy. An omnipresent State sector that burdens the economy and the society without bringing any positive income redistribution or valuable social services.

[Mark]

NWO: "I do not believe a systemic political crisis is likely."

Let's come back in five years and see who was right! Domestically a political crisis has been mounting since 2002 (long before the onset of the economic crisis), and I find it difficult to see how it can be avoided without - at the very least - the disappearance from the political stage of the current leaderships of both FIDESZ and MSZP. Of course, no-one can say how it will happen, and how it will be resolved. The EU could be a factor for stability, but it is either going to be very much strengthened or very much weakened by how it responds to the broader economic crisis.

NWO: "Hungary seems not to be able to escape the deadening effect of the State. Sweden or Denmark this country will never be. Instead, Hungary emulates Italy."

I've lived in both Hungary and Italy, and I agree absolutely with the parallel. The culture of the state, the patterns of clientelism and paternalism, and behaviour of citizens in the face of that state closely resemble each other in both countries. Th comparison also suggests that changing this will be a very long-term project. Commenting on this blog is my break from the laborious task of going through archival copies made of the documents of some of Hungary's district level public administrations in the 1930s and 1940s - these state practices were present then. In fact, to take the comparison with Italy still further, I suspect that in both countries they are the product of the fact that the bureaucratic infrastructure of the nation-state in both countries was built by very similar oligarchic liberalisms in the last third of the nineteenth century.

[Odin's lost eye]

Mark you mention that *** "a systemic political crisis is likely.*** "
When an opposition, which is totally out of its depth, but just wants power or the trappings of power behaves in a nihilistic fashion what is left? Any new party or grouping would have to be totally untainted by the past. So I ask again what is to be done?

[Mark]

Odin: "So I ask again what is to be done?"

This is a very complicated question, and I don't really think it is as simple as anyone putting together a "plan". The basic political problem is:

1. Discontent and frustration with the economic situation, and with inequality.
2. Discontent with the incompetence/dishonesty of politicians.
3. A loss of systemic trust in current economic policies/political institutions to get the country where it needs to go.
4. An economic situation - where even in the best case scenario - the standard-of-living has to fall before it can rise.
5. The political system is blocked because both parties are too compromised and lack the authority - in part for the reasons above - to deal with the crisis. Therefore, the problems cannot be resolved through the normal democratic mechanism of kicking the MSZP out and replacing it with FIDESZ.

This is an untenable position, and History tells us in these situation something gives - and when it gives, it doesn't look very pretty. Let's look at some plausible scenarios (these are not predictions; nothing ever happens quite like this).

1. Everything stays as it is. The economy continues to deteriorate, but outright crisis is avoided. The MSZP loses in 2010, and FIDESZ takes power, but immediately finds that it needs to make huge spending cuts to keep Hungary out of a crisis. It has two choices - (1) it tries to avoid the problem and faces a financial crash, or (2) it introduces the necessary austerity measures (and probably faces a financial crash anyway), in which it faces the fury of the electorate. Either way both big parties end up discredited, and an enormous political vacuum emerges. Who fills it? And how turbulent is the protest?
2. There is of course the possibility that the crash happens before 2010 (the balance of probabilities are against it, but it is getting more and more likely). It becomes difficult to see what government emerges from this (an experts' government? Until the elections? After early elections?) The measures necessary to recover from this will need some years, and this means, that if FIDESZ wants power it has to take some responsibility for them. These measures will not be popular, and will produce a serious meltdown of the existing parties (look at what happened in Argentina, Indonesia, or in a milder sense Thailand).
3. An outright social explosion through protest - again, it seems unlikely at the moment, but it would be foolish to rule it out. Again, the same problems apply as with (2), especially as it would precipitate the economic crash.
4. Let's suppose an MSZP-FIDESZ government, or an experts' government emerged (which would in itself be a highly significant modification to the current political model) and, it say, accepted fairly severe austerity measures that were deeply unpopular. My guess is this kind of government would strengthen the extremes - especially on the right. They would need to remove the opportunities for the use of the referendum to de-rail reform, and my guess is to limit the right to strike and to protest to drive their economic policies through. It would be (the term is from an Austrian friend referring to his own country's tradition of grand coalitions) a one-party state with more than one party.
5. And of course there is all the authoritarianism above with only one party in power. This is what FIDESZ wants - if you are polite you'd call it Gaullist, or if you're not you'd compare it to Salazar's Portugal. Of course, neither (4) and (5) are any guarantee against either (2) or (3) happening.

And I'm sure it is possible to imagine more scenarios. I find it difficult, however, to see how Hungary can come through this with its current party structure or other institutions intact as they exist now.

[NWO]

Mark:

There is a lot I agree with in your "game playing" the evolving political situation.

First, despite the fact that FIDESZ leadership is probably too dumb to realize it, the best thing they can hope for is a government of experts and a radical reform program pre-2010 elections. They should be working with MDF and SzDSz for this right now.
Second, if radical reforms or a financial crash exacerbates societal tensions and increases the prominence of radical elements in the society, I believe the financial and political elite in Hungary have too much vested in the current system and ties with the EU to allow the radicals to actually find a way to power. The middle would-despite the mutual hatreds on both sides of the political divide-come together in some compromise to keep the radicals marginalized. Not even the Hungarians would allow themselves to be forced out of the EU. It may be really unpleasant. There may be a lot of street activity. The anti-Roma and anti-Semitic rhetoric would increase substantially, but I believe the center would hold. Sadly, this may have to happen as a more gradual transition gets harder by theday.

[Mark]

NWO,

Your picture is a very plausible one, and you are right to suggest elements that still remain positive. You put stress on the attitude of the financial and political elite and this is of course important - there is another potential stabilizing factor which is the widespread dislike of all falls of extremism among the population - right-wingers, as well as left-wingers. To some extent already the political influence of the radicals has been limited by the opposition of the silent majority in Hungary, so that shouldn't be left out of the equation (though the greater the economic dislocation the more this will become strained).

However, there are two potential factors which would de-stabilize your scenario. One which is a potential one (who knows what might happen), and the other which already exists is very serious.

The potential one is that we don't know what will happen to the cohesion and unity of the EU, and, therefore, how much ability they have to prevent unwelcome political changes in any member state. Though, at present, it is possible to suspend a member from EU decision making(as with Austria in 2000), I'm pretty sure that outright expulsion would be virtually impossible. Even then, it is very possible to imagine the Eurosceptic scenario triumphing as a consequence of the economic strain, in which their ability to enforce all of the Copenhagen criteria is fatally compromised.

But the real problem is the role of FIDESZ, and of Orbán's personal political ambitions as a de-stabilizing role in the system. Large sections of that political centre support FIDESZ, but though they hate the far right, they detest the MSZP and what it represents as much (I'm not saying that is a good or bad thing, it is just a fact). FIDESZ as an organization, however, is clearly subordinate to Orbán's ambition which is to secure his own political role in the long-term. From his behaviour to date it is absolutely clear that sharing power with those he does not control forms no part of his agenda; that he is prepared to use state power to wage a kind of "cold civil war" against those he sees as his opponents; and he is unprepared to recognize that there is a broader, national interest beyond his own personal one. Because of these two factors it is very difficult to see how the centre can hold if it were attacked in a sustained way. Even if you had a government of MSZP, SZDSZ and MDF, you could not count on FIDESZ to tacitly back it if it were attacked on the streets. One of the lessons of 2006 is that it is just as likely to side with the radicals (I'm not by the way saying that FIDESZ or Orbán are in any way "far right", I think the problem is that they stand for nothing at all beyond the extension of their own power).

You are right to point to a problem that FIDESZ will face if it comes to power. Whatever they do, and in whatever circumstances they take power, there will be a fairly prolonged period of economic difficulty- and this will involve asking the population to accept some very unpopular steps. I think Orbán is too compromised a political figure to survive this process for very long. Paradoxically, even if they win the next elections overwhelmingly, they will confront a political meltdown at least as spectacular as those of 2006, or of 1990 very quickly indeed.

[Mark]

Well, according to news agency Reuters: "Slovakia's industrial output fell by 27 percent year-on-year in January, the worst reading since the current data series began in 1999, compared with an 18 percent decline in December and worse than a market prediction of a 24.4 percent fall."

So much for the notion then that Hungary would have avoided the current crisis had it accepted the advice of Bokros et al. and copied its northern neighbour.

[Andras]

These are difficult time for any democratic system. The impact of the crisis is so deep, that in many countries, the democratic system would be under tremendous pressure. There is simply no easy and good solution. Every democratic governments would be under enormous pressure to deliver - and would not able to deliver for long time anything else than blood and tears.

In this situation, I think the best strategy is honesty. Only honesty could ensure realistic expectations on the long run from the electorate.

And there is no other solution, than try to trust the "wisdom" of voters. Provided we believe in democratic system, and we don't want to have a kind of enlightened reform dictatorship, or revolutions etc.

Gyurcsany government is under extreme pressure. It lost much of her credibility both at home and at for the outside world. It is still able to govern, but it is weak to implement any major restructuring program. It is weak not only because of FIDESZ, but because it is lacking the unity and the strength within the government, within MSZP.

It is under double pressure: the electorate do not want any major cuts, while the external world (those who are financing the debt) are want major cuts. The government is making constant avalanche of reform proposals, U-turns. These processes are day to day undermining the credibility and the ability to govern.

And of course, we have FIDESZ, and the policy line of FIDESZ makes impossible any co-agreed structural reform.

I dont see any other solution on behalf of the government, than:
1) approach FIDESZ and offer to work out a commonly agreed one year stabilisation program under the watch of a commonly agreed prime minister until April 2010 elections. If FIDESZ rejects this proposal or or within 3 months there is no agreement between the parties, than
2) the government shall to work out her economic restructuring program and with that program go to the Parliament, with the provision that only with 2/3 majority of votes will implement it (with practical approval of FIDESZ). If FIDESZ rejects that program,
3) the MSZP shall initiate the early elections, and the government shall try to wiin the elections based on the economic reform program, promising that in case of loosing the elections the reform program will be the guide for the party for being "responsible" opposition.

It is very likely that the elections will be lost by MSZP, and will be won be FIDESZ.

What happens after than? Life is long, and we will see.

But FIDESZ shall have a year to develop a responsible political and economic program, which ensures the political support of the EU and IMF and the financial support of lenders and makes possible to renewal of the IMF life-line (which is very likely that will be necessary, and even bigger than now).

It is unlikely that FIDESZ would enact policies, which would distance EU and IMF. That would be suicidal act. But, if that is the "secret" agenda of FIDESZ - which I dont think - than they would have anyway possibility to act accordingly in 2010 April.

But the earlier they get into power, the likelihood is bigger that there still space for "responsible" government within the common European framework.

So, my most important point is responsibility and honesty. The government shall be honest that under the current political circumstances cannot act responsibly. It shall seek the approval of major stakeholders of democratic system: parties, and ultimately voters for a responsibly policy. If unable to win support, it shall ensure that the "irresponsible" opposition shall have the responsibility to govern - provided it wins the next elections.

Without honest policy making democracy is a lost case. Gyurcsany lost his credibility for lying to the electorate. He only could restore the belief in democratic system by honest policy-making. It may seem suicidal, but we know from the Greek tragedies: once you made a moral sin, than you doomed. Whatever you do, Gods after you. If you try to circumvent the fate, your own tricks will facilitate the coming of the inevitable Fate.

[Odin's lost eye]

Mark you say *** “FIDESZ as an organization, however, is clearly subordinate to Orbán's ambition which is to secure his own political role in the long-term” ***.
This is only too true. Orbán's control over his party machine, as I see it, is total. He has tried to crush all who stand in his way, remember his attempts to destroy MDF and Fidesz’s involvement over the machinations of the security/intelligence company. My great fear is that neither Orbán nor any of his close supporters really understand the mess that Hungary is in. His latest ramblings reported above show this. They are all hot-air. I feel that his own personal aggrandisement is all that matters to him. As far as he is concerned Hungary can go to ‘hell in a handcart’ so long as he is the great and adored ‘All Highest’.
The only hope is for someone from another party to stand up and tell the Hungarians in words they can understand just how big a mess they are in and then say “Never mind whose fault it is. How do we fix it”. The problem with that is Orbán would crush that person. When he becomes the ‘All Highest’ he will blame everyone else Europe, the IMF, the Roma/Jews, the world etc.
Unfortunately ALL political parties are so tainted either by their actions or by the smear campaigns of others (mainly coming from Fidesz) that Hungary will go to ‘hell in a handcart’
Mr Andras I fear that Orbán’s grip on Fidesz is too firm for what you suggest, but they are themselves too tainted by their past to be anything else than ‘any port in a storm’ as far as the electorate is concerned.
What remains? The far right if they perform as I suspect they would this will lead to a head on collision with the rest of the EU.
In Horthy’s time Hungary was often called the land of a million beggars. In Orbán time I fear this will change to being the land of five million beggars.

[Mark]

András: "And of course, we have FIDESZ, and the policy line of FIDESZ makes impossible any co-agreed structural reform."

It isn't the policy line of FIDESZ that is the problem. OK, at the moment they are trying to convince everyone they are a national-populist party (though this is more about stopping Jobbik winning votes in June, than anything else), but I suspect they could very easily declare once elected that they agree with every suggestion the Reform Alliance make!

The problem is really that FIDESZ has no coherent ideology, or value system (it can be only be identified as right-wing because of its anti-Communism and nationalism), because it is primarily a vehicle for advancing the personal power of its leader, and those immediately around him. Orbán's problem - as should have been obvious from his disastrous performance in the 2006 election campaign - is that he badly wants to rule Hungary, so badly, in fact, that he can no longer explain to the population clearly why they should allow him to, and probably he himself doesn't really have a clear answer to that question other than a belief in his mission as a leader. What FIDESZ wants is to be securely in power, and to ensure that all potential challengers are neutralised almost permanently. What they would do with this power is, I suspect, a secondary question.

Because the root of the political conflict is not a policy, nor an ideological difference it can't be resolved by negotiation. Orbán wants absolute power - negotiating would mean conceding that there are other legitimate contestants for power (and in contrast with almost any other major democratic politician in Europe who has lost an election, he has never publicly accepted the legitimacy of those who have defeated him - not Horn, not Medgyessy, not Gyurcsány). The only way the MSZP and others could satisfy him is by giving him it - in which case he wouldn't need to negotiate with them!

The only way around this is for right-wing voters to abandon him. And this might have happened in 2006, had it not been for Gyurcsány's turn to austerity after the elections and his notorious speech, which has created such anger on the right that it allowed Orbán to consolidate his position. The logic of polarization overcoming the logic of compromise again.

So, the other way around this is to allow Orbán his second moment in the sun. And he might even develop responsible policies, but if he does, he will be faced with the meltdown of public trust. Does he continue to behave responsibly? Everything I've seen of him suggests that the more under pressure he is, the more agressive he becomes. As Odin says "he will blame everyone else".

Certainly a compromise with conservative minded voters is necessary to stablize the system, but FIDESZ is a huge destabilizing factor, how ever one looks at it.

[Mark]

András: "I think the best strategy is honesty."

In general - of course it is. But, if someone has telling lies for a very long time, and then turns to the path of truth, one has to face the issue of why anyone should believe them. There is a silly little problem that is used to teach elementary logic. An Athenian runs past shouting "All Athenians are liars!" Can you believe him?

This is very obviously Gyurcsány's problem - but it is also the problem of the whole political elite post-1990 as well (that Gyurcsány made this point in a self-serrving way to avoid taking the individual responsibility for his own misdeeds, doesn't make it any less true). And the lies go very deep. The scale of the current political problem is imagining what the reaction would be if politicians started telling the truth about their past lies.

In one of my files I have a copy of an article published in the Financial Times on 23rd March 1990, two days before the first round of the first free elections. The article is interesting for it presents an assessment of Hungary's economic prospects after state socialism. A number of Hungarian economists are extensively quoted in article. Its conclusions about those prospects were that (1) the introduction of a market economy would lead to a major recession, accompanied by a substantial fall in the standard of living, and no real recovery in that living standard for the foreseeable future, (2) that as "inefficient" companies were eliminated mass unemployment would become a near-permanent feature of the social scene, (3) Hungary had no choice but to allow its economy to be colonized by foreign investors - it could seek to be colonized by many foreign investor - what it could not do was insist on Hungarian ownership of any, or most of the economy, and that (4) in order to attract foreign investment social and environmental regulations would need to be relaxed.

From what I remember of the 1990 election campaign, none of the major parties dared make this clear to voters, when a respected business newspaper could identify the likely future in a feature article, based upon conversation with locally-based economists. This clash illustrates the depth of the problem. The truth that would have to be told would be:

1. That the introduction of the market would be no guarantee of catch-up with western Europe, and that the fact that Hungary was under state socialist rule in the 1950s, and 1960s when western Europe closed the gap with the United States meant that Hungary would have to face the fact that for reasons beyond its control it had missed the opportunity to join in. And that there was real chance, that there would be no way of closing this gap.
2. That the introduction of the market to succeed would require a change in attitudes towards work, entrepreneurship, and government. People would have to learn to take more responsibility for themselves, and would have to accept less protection - rather than seeing their job as a right, they would have to earn it through their performance. Furthermore, that their access to jobs, and income would be affected not only by their own performance, but by economic forces absolutely beyond their control.
3. That as the economy was privatized some people, by virtue of them holding key managerial positions in the old economy, would quickly become very rich, because only they had the expertise to deliver profits for the new owners. Much richer than anyone else, and that there would be a much sharper division between rich and poor, that many people almost certainly would find unjust.
4. That the profits of economic activity would go to the new owners of enterprises, and not to the state budget, creating a situation in which taxation would become the primary means of raising funds. That the investment needs of the economy meant that there would be a limit to the taxation of capital, and that therefore wage earners would have to bear the lion's share of the costs of the state from taxation of their incomes, and that this would mean in turn, that the state would have to do less - and could therefore do less to protect the citizens.

If someone, say, Antall, had said this on his election in 1990, what would have been the reaction? (I can guess - we know what the popular reaction was to a half-hearted attempted to liberalize fuel prices that autumn). Indeed, if political leaders had consistently told the truth about Hungary's real economic prospects, how different would politics have been since 1990? I think if we are honest with ourselves, the answer would have been shockingly unstable. And, if politicians start telling the truth now, of one thing we can be sure - the reaction won't be good!