Hungary

Hungary’s economy grew moderately between 2000 and 2006, and then began to decline sharply in 2007 – well before all other EU-10 countries. The economic crisis reached its peak when GDP growth dropped below zero to –6.8% in 2009. Although Hungary managed to achieve a very modest initial recovery in 2010-11, the country has not made the deeper reforms needed to re-launch sustainable economic growth.

Even Hungary’s minimal GDP growth of 1.3% in 2010 was the result of financial assistance from the EU and the IMF. Some partial austerity measures gave the government a temporary financial respite with a one-time lowering of the fiscal deficit from –4.6% of GDP in 2009 to –4.2% in 2010 and +4.3% in 2011. However, the budget surplus posted in 2011was a result of the government’s decision to nationalize private pension funds, which is not a sustainable way to manage the budget deficit. With 2012 GDP growth projected at –1%, it is clear that Hungary is far from achieving full recovery. Some increase is expected in 2013 however, as the IMF predicts GDP growth of 0.8%.

This poor economic performance runs in parallel with significantly worsened democracy ratings for Hungary. Freedom House democracy scores have been steadily declining from a highly respectable 1.96 in 2005 to a mediocre 2.86 in 2012. This puts Hungary on the brink of regressing to the status of a “semi-consolidated democracy” like Bulgaria and Romania.

Hungary’s poor economic performance and Prime Minister Orban’s authoritarian tendencies have had the effect of compounding each other and accelerating what has become a serious drift away from democracy. Orban has used his two-thirds Fidesz parliamentary majority to centralize power in his own hands and in the hands of party loyalists — allegedly in order to complete the post-communist transition to a full market economy and a more responsive democratic performance. However, the changes implemented so far have weakened Hungary’s independent institutions and greatly debilitated the checks on Orban’s authority, alarming the international community and leading the EU and the IMF to push back strongly.

After requesting an IMF loan in November 2011, Orban agreed in January 2012 to compromise on some of the key points of conflict with the EU on which Brussels had blocked a deal on aid. As the negotiations continued, Orban also demonstrated some willingness to try to iron out differences with the IMF. The IMF would only enter negotiations if the Central Bank was independent, and after vacillating for some time on his response, Orban eventually indicated that he would agree to the IMF’s conditions. The IMF visited Hungary in July 2012 to start discussions on an IMF/EU-supported program, but in September Orban rejected the IMF’s conditions for the loan because of its pension cuts and the withdrawal of a tax on banks, stating that his government would present an alternative proposal. The IMF declined to comment on this reaction, but since then negotiations have resumed.

A streak of Euro-skepticism in Hungary, plus Orban’s desire to protect his expanded authority makes it uncertain to what extent Orban will honor his offer to meet EU preconditions for supporting his request for financial help from the IMF. Although his discourse with the EU and IMF is civil and appeasing, his rhetoric within Hungary is more antagonistic – indicating that he believes Hungary and his own legitimacy are under attack from the “international left”. This duality is driven by the state of Hungary’s debt-to-GDP ratio, which is already over 80% and growing, and the country’s borrowing rates at an unsustainably high average of 8.77% per annum. It thus appears that the Hungarian economy can only be stabilized with major IMF and EU assistance.

The global economic crisis has served to amplify Hungary’s economic and political challenges. Many of Viktor Orban’s reforms raise doubts about whether Hungary will remain a liberal democracy.  But it is also important to note that the democratic backsliding dates back to former Prime Minister Gyurscany’s preceding two terms of office when corruption, lack of government transparency and irresponsible fiscal policies led the country towards both economic and political regression. However, the most recent two-plus years of Orban’s rule in Hungary have led to a sharp increase in EU and international criticism of the regime. Nonetheless, these international pressures have so far shown only limited ability to influence Hungary’s affairs. This is in part because of Orban’s affiliation with the dominant party caucus of the EU Parliament, which has tried to blunt criticism from Brussels as well as because of the strength of Orban’s electoral mandate. Orban was elected relatively fairly in 2010 and public opinion in Hungary remains largely in favor of him and his Fidesz Party.

Given Eurostat’s gloomy 2012 GDP projection, however, it is unlikely that Hungary will be able to work its way out of economic crisis without assistance from the EU and IMF, which will of course be contingent on Orban’s cooperation. Despite the international community’s continuing dissatisfaction with Hungarian political and economic performance, it is far from clear whether or when Hungary will regain the path of sustained economic recovery and renewed democratic consolidation.

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