Playing Chicken and Rooster with Hungary
Tension surrounding the application of a series of so-called “unorthodox policies” by Hungary’s Fidesz government has certainly been rising in recent days. While Washington has been reasonably quiet as govenment emissary Tamas Fellegi meets with top IMF officials, Brussels has seen a veritable avalanche of official statements and policy initiatives. Despite constant rumours that an agreement with the IMF is near, I find it pretty implausible that any deal can be reached without some kind of EU assent. At the present time this assent is unlikely to be forthcoming, and indeed the ”ante” has been pushed up and up. The latest example here is the fact that Brussels has given the Hungarian administration till next Tuesday to do something about altering the country’s new constitution or face the prospect of legal action, and possible suspension from the EU under article 7 of the EU Treaty. Budapest on the other hand has been full of conciliating words, but the key point is we have yet to see anything meaningful in terms of action.
Brussels now has issues pending with Budapest on a number of fronts. In the first place Hungary has been tried and found wanting in relation to its compliance with the conditions of the EU excess deficit procedure to which it has been submitted for some time now. This issue is important in its own right, since it was with the ballooning of the fiscal deficit in 2006 that all the recent political problems really began. The current deadlock with Budapest on the deficit front has added importance in the present context since the EU is in the process of formulating a new treaty whereby states using the Euro will be compelled to bring their debt and deficits into line with EU regulations or face sanctions.
All of this will sound very hollow if Hungary, which is not in the Euro but is bound by the excess deficit agreements already in the Treaty, cannot be brought to heel. The issue is a complex one in the Hungarian case, where many of the underlying issues are interconnected (like the decision to change the constitution and the appropriation of assets worth about 9.75% of GDP from the private pension fund, since without the constitutional change those having their assets effectively expropriated would have had recourse to law on the issue). What the EU are concerned about is the credibility of their policy, and in this case the key question is the sustainability of the Hungarian debt and deficit, since one-off measures (like money from the sale of private pension fund assets) do not reduce the underlying structural deficit the country has. As the EU statement says:
“Hungary has not made sufficient progress towards a timely and sustainable correction of its excessive deficit.” The EU executive proposes to “move to the next stage of the Excessive Deficit Procedure (EDP) and recommends that the Council of Ministers decides that no effective action has been taken to bring the deficit below 3% of GDP in a sustainable manner.”
This is a bit of bureaucrat-speak, but what it effectively means is that the European disciplinary procedure is being put to work on the country, and that one of the consequences may be the application of a sanction involving the withholding of EU structural funds (estimated to be equivalent to 1.7% of GDP):
“Subject to this Council decision (under Article 126(8) of the EU Treaty), the Commission will then propose to the Council new recommendations addressed to Hungary (under Article 126(7) of the Treaty) with a view to bringing to an end its excessive government deficit,”
Prime Minister Orban is very proud of the fact that the deficit came in at under 3% of GDP in 2011 for the first time since the country joined the EU in 2004. In fact the country had a budget surplus, estimated to be between 2% and 3% of GDP, but this surplus is entirely due to juggling with revenues that come frsom appropriating the private pension funds. As the EU Commission put it in their autumn forecast.
“Following a deficit of 4.2% of GDP in 2010, the general government balance is expected to turn to surplus thanks to one-off revenues linked to the elimination of the obligatory private pension scheme. The official estimate for this year’s surplus has been revised up from 2% of GDP (contained in the April 2011 Convergence Programme update (CP)) to 3.9% of GDP in the autumn notification. The larger surplus is mainly due to: (i) higher one-off revenue stemming from the elimination of the obligatory private pension scheme (now amounting to 9¾% of GDP, i.e. ½% of GDP higher than previously assumed); (ii) an intention not to assume the debt of the public transport companies (1.4% of GDP) and not to buy out selected PPP projects (0.7% of GDP), contrary to earlier plans; and (iii) additional measures of 0.4% of GDP adopted in September 2011″.
The EU Commission calculates that the underlying deficit in 2011 (that is the deficit stripping out the one-off cash injections) was around 6% of GDP, and while the budget promise for 2012 is under 3% of GDP there are lots of factors (like lower GDP growth, higher interest costs, and higher expenditure from automatic stabilisers) that could easily mean the real number continues to be over 3%.
So, enough is enough with “unorthodox fiscal policies” is what the country is now being told.
But the fiscal deficit is only one, small, part of the problem as far as the EU is concerned. Of much greater concern are the recent changes in the constitution and the independence of the countries institutions like the central bank. The EU is now studying whether parts of the constitution violate the fundamental EU Treaty, and Hungary has been given until Tuesday to present changes to the constitution which would comply with EU membership requirements. If the Commission decides the unchanged constitution does violate the Treaty, legal action against the country will surely follow, and it is not to be entirely ruled out that the country could be temporarily suspended from the EU under the terms of Article 7 of the Treaty (details of which can be found here). As Commission spokeswoman Pia Ahrenkilde Hansen told the press:
“A legally stable environment, based on the rule of law, including respect for media freedom, democratic principles and fundamental rights, is also the best guarantee for citizens’ trust and confidence of partners and investors,” Ahrenkilde Hansen told journalists. “This is particularly vital in times of economic crisis.”
So the question now posed is that someone here is going to have to back down, and to do so significantly. The question really is “is Orban ready and willing to do so”. Friends and acquaintances of mine in Hungary had been warning me for some time that this kind of confrontation would (almost inevitably) come. Orban had gone one bridge too far, and it would be hard for him to turn back. Over the last few days a close acquaintance, who has been becoming increasingly concerned about the situation, has sent me a number of e-mails on the topic. Below I reproduce a selection of extracts, just to give a feel for how some (perceptive and sensitive) people inside the country see the situation.
As far as finding a way out is concerned, I am very, very sceptical. Given the super-majority in parliament and the trenchwarfare between left and right, except for a full blown revolution or the landing of US paratroopers (both, evidently, extremely unlikely), the only way to topple Orban is to have a revolt within Parliamentary group of FIDESZ. This is also very unlikely, as Orban is a very charismatic and ruthless leader with an uncanny ability to get through to people and to preserve his leadership.
Moreover, all FIDESZ MPs are personally selected by Orban, and only God knows what kind of “documents” are existing in Orban’s hand with which he could blackmail them. There ought to be a good deal given the widespread corruption in the Hungarian political system. It seems that nobody either could or would be ready to challenge him. Even, I could safely say – reading the right wing press and speaking with supporters of Orban – that a decade of gradual shift towards a radical and anti-capitalist and anti EU (“Empire”) position has created a mindset which may even accept a break with EU in order to save “freedom”, “independence” and “national goals” and reduce “foreign capitalist exploitation”.
Thus, I don”t really see the internal force, which could stand up to the government. Those lonely voices, who criticised Orban on grounds of economics, have been successfully isolated and there was never any attempt to build up a formal institutionalised form for expressing different policy options within the broad right wing camp. We could even find that any measures on behalf of EU against Hungary only reinforce Orban’s stand-alone policy and rally behind him the ultra-nationalist camp, which could be easily as large as 30% of the population.
Given that he controls state administration and the armed forces, and taking into account the complete reorganisation of these branches of the state together with the wholesale nomination of new staff, he may have enough resources to sustain a populist autocratic order for a long period of time, like in Belorussia. Here comes to play also the aging population and the flight of young professionals into other EU states: older people typically are not those who are revolting, and those who would revolt may increasingly decide to try and escape in time before the new “iron-curtain” falls down.
Actually, to be precise: maybe a break with the EU is not an option at this point, but once the EU suspends Hungary, that option maybe more easy to sell. We are faced with a charismatic leader who may actually have an agenda, and not be only “surfing” on the current reality trying to get the best for himself.
Launching WWII was a huge misinterpreation of their own capacity on the part of Germany, especially when coupled with Barbarossa, and was not supported by much of the population and maybe even the army and the conservatives had their misgivings, but still, Hitler prevailed, and…. I don’t want to say that Orban is comparable with that truly evil person, but we are facing a similar charismatic leader with a strong will and with deeply internalised goals…
And maybe there is not a masterplan a la Mein Kampf or Hossbach notes. But the changes, the events, the steps he is taking, sometimes irrationally, sometimes rationally, are taking him towards this final irrational step. He may stop at the last moment, but it may happen that fear of losing power pushes him over the brink and he may choose the completely irrational step. I cannot say how the future will happen. But I can say that his speeches, acts, messages belong to a distinct political family of radical right wing views and these inevitably lead to a break with the current EU. And his personality traits also suggest a certain kind of personality, one who is able to carry out this radical step, if the circumstances arise, and he feels forced to do so. Lets just hope that this scenario will not be the real one…
I think we need to be clear at this point, nothing here is inevitable, but the usual kind of “band-aid” kick-the-can-a-little-bit-further-down-the-road solution is not going to be easily available. I think it is going to be very hard for Orban to back down significantly, and especially so in the case of having the constitution rewritten significantly. In many ways this is why I used the cryptic headline and final paragraph in my last Hungary post.
What I was getting at there is the thought that this is now Orban’s great opportunity to go down in the history books, possibly even as the man who opened up a chain of events which finally destroyed the Euro. This is his challenge, and his possibility to live eternally ( I doubt there is any other one). He is currently just three steps from heaven, so it is comparatively easy for him to get to his intended destination. But it’s also easy for him to get things wrong (from his point of view). I mean, he could do the “right thing”, be a gentleman and back off to make a deal with the EU under which he would have to retire from politics. I can just see José Barroso now, alighting from the plane and waving the critical piece of paper to the delighted press photographers. That way, of course, five years from now no one would even remember Orban’s name.
So the question of whether a deal is still possible is the billion dollar issue in all this. We have a chicken and rooster situation: who will blink first. Hungary may blink since the country’s leaders may not wish to find themselves outside the EU and forced into default. Or alternatively, some of Orban’s advisers may already accept this scenario as an inevitability, and welcome default as the only way of getting to grips with the forex debt problem. They may even already be thinking in terms of a post Euro scenario, and assuming that the Euro cannot hold together. On the other hand the IMF (under EU pressure) are unlikely to accept the forex default and debt restructuring that Hungary probably needs to achieve sustainability in the longer term while they are still in the EU.
The constitutional law is probably going to be the real sticking point, since if the government needed this to avoid letting the people who had their pension savings appropriated take recourse to the law, then unwinding it would probably mean the public finance issue would quickly get bigger, and quite possibly right out of control.
On the other hand while the EU may dig in for a time, they may ultimately fear contagion more than they do an unruly Hungarian government. Europe’s leaders have basically been motivated by fear of something or other throughout the whole Euro debt crisis, they have never really been out there in front of the curve. No pain today please seems to have been the rule. So with the second Greek bailout visibly wobbling, and much of the rest of Eastern Europe vulnerable to retrenchment by West European banks, fearing the inevitable contagion they may well finally go for a “peace in our time” deal.
Naturally, in this post I have dwelt on the political dynamics (and dangers) of the current situation (and indeed the post contains not one single chart), but we should never forget there is a real economic backdrop to what is happening in Hungary, one in which IMF programmes in Eastern and Southern Europe are not working out as planned, possibly due to a faulty diagnosis of the problem (see my earlier post for explanation). In addition, it is hard to say at this point whether what is happening in Hungary is unique (due to its 20th century history) or whether it is a harbinger of what is to come along the EU periphery as populations steadily get disillusioned with policy packages which simply don’t work. To answer this question we will need to see into the future, but to see into the future we will have to get there first.
Postscript Friday Morning
In the above post I argued that the IMF was very unlikely to open negotiations with Hungary before the Hungarian administration responded satisfactorily to the EU requests for compliance. Last night the IMF issued a press statement where Christine Lagarde made plain that this is indeed the stance they are taking.
“I met today with a Hungarian delegation led by Minister Tamas Fellegi. We had a useful exchange about the latest economic developments in Hungary and about how best the IMF can assist the country in addressing the current economic situation.
“I indicated that, before the Fund can determine when and whether to start negotiations for a Stand-By Arrangement, it will need to see tangible steps that show the authorities’ strong commitment to engage on all the policy issues that are relevant to macroeconomic stability. Support of the European authorities and institutions would also be critical for successful discussions of a new program.”
Thus Orban’s “divide and rule” strategy isn’t going to work. On the other hand Reading between the lines in his latest speech, I don’t think Orban is getting ready to eat humble pie, rather he is getting ready to play “now you see me, now you don’t” with Europe’s leaders.
“Our general approach is that we are open and flexible, we are ready to negotiate all the points, but what we need is not political opinion but arguments. And when the arguments on behalf of the European Union are convincing, then it’s better to accept and follow that line. There is no reason not to do that. We are absolutely open and flexible and waiting for the argument. But yesterday’s comments from the EU did not contain any argument, just opinion, saying that they don’t like it, it’s against the general legislation of the EU. But we would like to get more specific points on the points (where) they would like to see modifications or corrections. And we are ready to consider it.”
As far as I can see, he is simply stonewalling. He is saying a lot and saying nothing, which may well be his best strategy, effectively copying Merkel and Sarkozy on other issues. Continuing in this way he will force the EU’s bluff, either they have to act and try to see things through to the end, or they have to back down. They show no sign at present of having any inclination to back down, so we are now facing a very high risk situation.
Back in the summer of 2010 György Lázár wrote the following very perceptive lines:
“Orbán’s unusual high-wire act might work, but he must avoid Hungary’s debt downgrade to “junk”. This is easier said than done, because the debt is currently under review and the other shoe can drop at any moment. A sovereign debt downgrade, with a run on the forint or on the banks will probably finish his government”.
Of course, that’s just it, Hungary’s debt has now been downgraded to junk, and Orban’s government is now facing a “life or sudden death” situation.
6 Responses to “Playing Chicken and Rooster with Hungary”
I also think the situation is getting critical with the new weak link called Hungary.
If Europe had listened to the "voices of logic" a couple years back, Greece would have been given the chance to contain its debt-problem right there on the spot and the problem would be contained. But instead, the EU including the IMF, were too busy with other things and they let the fire get out of control. The fire spread to Italy and now Italy is borrowing at almost 7% and that will prolly rise in the unstable, recession-friendly 2012.
A year ago, we thought Greece was "the problem". But now all of a sudden we have 3 hot potatoes (Greece, Italy AND the very unstable Hungary). Greece’s problem (could) and still CAN be contained. The new PM Papademos (former ECB executive) has the know how to gradually bring order to the Greek balance sheet. It will take time and more recession, but it can be done (if the two political parties let him). So containing the fire in Greece, would give time to Italy and the EU to kick the can a bit further down the road, make reforms.
So Hungary is a problem that I have no-idea how Merkel is going to solve. If Orban doesn’t resign, they might “pull the plug” on them, to give a hard-message to Greece and Italy. Since Hungary is not in the Euro-currency, I don’t think Merkel can waste valuable resources for them. I don’t think Merkel wants a third hot potato in her hands right now. She has Italy and Greece to focus right now.
Containing the problem in Greece (and giving them the money they need) is of absolute importance. Also loosening-up the austerity measures on the country and boosting growth is of absolute importance. They have already been 3 years into hard recession. Pushing them even more to depression is like asking the rebellious Greeks to exit the Euro. And that would bring us to the “first domino” theory.
The world economy is not ready by any means for a decade of depression.
Things are already difficult as is. We are entering the era of deleveraging and recession will be the norm for a few years. Forget growth…America
We simply CANT AFFORD a disorderly break-up of the Euro-periphery. It will shake the foundations of the world economy. America’s recent growth numbers don’t fool anyone. Most chances are unemployment and very slow growth will be the norm for the next years. Neither America nor Europe can afford a disorderly break-up of the Euro-periphery.
Right when things were getting optimistic for southern Europe, Hungary had to pop up…
Hungary needs to be pressured to the max not to “pull the trigger” on the rest of the world.
Things are so tense right now around the world, that it only takes one “domino”…
But even with major reforms, there is no doubt in my mind that Italy IS the next Greece. But with one exception: "Italy is too big to save to big too fail".
What is happening in Greece (3 year hard recession due to austerity measures and taxes) is almost certain that it will happen in Italy. Copy paste scenario.
But if things were contained in Greece, Italy would just have to follow the “IMF recipe” with a few exceptions. Greece was unfortunalty the “IMF guine-pig” and many mistakes took place. So they won’t repeat them with Italy.
So in the past weeks I had been optimistic (seeing the recent steps into solving the Greek PSI) that the situation could be getting better for the Greek-Italian region. Greece was slowly making the right steps and the problem could be contained.
And then Hungary pops up in the equation!
Hungary –in contrast with Greece- doesn’t have much to loose by exiting the EU. They don’t use the Euro as currency, so it will prolly be a lot easier for their socialist politicians (Orban) to choose the “easy way out” and be anti-EU anti-IMF and anti-capitalism (what the masses want these days). So you realise what major consequences this could have. If one “domino” falls in Europe (Hungary), contagion could certainly start. If Hungary falls, the shocks can affect Greece.
the Greek leftist party will start a cheap socialistic propaganda that exiting the Euro is the “right thing to do” (since Hungary did it) and things could get very unstable there, shaking the Euro-foundation and getting Italian interests rates sky high fearing default and almost certain contagion. On the positive note, a possible Hungarian-default could push Merkel to take further steps and do whatever she can to save Greece and contain the virus before it jumps to Italy
[...] Playing Chicken and Rooster with Hungary Tension surrounding the application of a series of so-called “unorthodox policies” by Hungary’s Fidesz government has certainly been rising in recent days. While Washington has been … [...]