Unstability Follows EP Elections in Hungary

Forecast

 

Stability of the government and chances of early elections

 

• Major conflicts will develop both in MSZP and SZDSZ and splits within the parties cannot be ruled out.
• The “moment of truth” comes on June 23 when the tax bill goes before Parliament. If the majority rejects the proposal, the government will fall. In turn, the fall of the government will lead to early elections. In other words, interim elections could come about offering no benefits either to the Socialists or the Free Democrats in the present situation (it would lead to a catastrophic defeat for socialists and the elimination of SZDSZ as a parliamentary party).
• After the resignation of Gábor Fodor from SZDSZ presidency, the liberal party will decide on the next president on the 4th of July. Note that this date is after the crucial vote on tax reform in the Parliament. Currently, early elections are against the interest of SZDSZ and presumably only some faction members (maximum 8) would vote against the government, which is not enough for the dissolution of Parliament in itself.
• However, conditions related to an early election have changed from the point of Fidesz as well. Since it would clearly benefit Jobbik, the largest opposition party may decide to play for time in the hope of weakening Jobbik until the 2010 election.
• On the other hand, by some calculation Fidesz may benefit from an early election: failure to force an election now may bolster radical rhetoric describing Fidesz as soft and ineffective, and a strongly anti-government Jobbik may also reap political benefit from a protracted and instable period of governance.

Impact on government policies

 

• Prime Minister Bajnai under pressure to shift his program in a more popular direction. On the other hand, Gordon Bajnai has his own “blackmail potential” as well, as he can threaten the socialists with his resignation in case of uncertain support. Bajnai may have two more arguments to persuade the socialists to support the government:

1. According to most of the economists and the IMF, some signs of economic growth can appear at the first quarter of 2010 (or even in the last quarter of 2009) which can make a better environment for the socialists for the 2010 spring elections.
2. The loosening of the fiscal target with the cooperation of the EU and IMF can make room for manoeuvre for the construction of the 2010 budget, provided the recession is not deeper in 2009 than expected (6.7%, according to the latest governmental prognosis). Even so, the debates over the 2010 budget between the government, the socialists and SZDSZ at the end of the year can pose a further threat to the stability of the government.

• If the government completes the current term, it is expected to meet the deficit figures stipulated in revised agreements with IMF and the EU (2009: 3.9%, 2010: 3.8%).
• The outcome of the recent election has also intensified speculation over Fidesz’ expected policy measures. Based on the latest statements of the Fidesz president following the EP election, the following major conclusions can be drawn concerning the policies of a future Fidesz government:
  1. after the elections, Fidesz also plans to renegotiate the IMF agreement,
  2. Fidesz plans to introduce the euro in 2014, at the earliest
  3. with the exception of the real estate/property tax, once in power Fidesz will not abolish other major policy measures introduced by the Bajnai-Cabinet. Narrow scope for action and strong external pressures will force Fidesz to follow an economic course similar to the current one.

Impact of the EP election on the political system

 

1. Results of the recent election will also restructure the party system in the long-term, as 1. the model characterized by the balance of two large parties, one on the right and one on the left, and two small parties is on its last legs and the entire political system appears to take a radical turn to the right. This is demonstrated by the fact that combined, Fidesz and Jobbik won 71% of the votes nationwide, while MSZP became a medium-sized party and SZDSZ lost its seats in the European Parliament, a strong indication that it will cease to be a parliamentary party as well. SZDSZ voters may be absorbed by MDF and ‘Lehet Más a Politika’ (Politics Can Be Different), a new green-left political formation that received more votes than SZDSZ (2.6%, compared to 2,2% of the latter).
2. The results have established starting positions for parties and upset the political balance of 2. power in the run-up to the next parliamentary election. For instance, currently SZDSZ has a faction in Parliament but it failed to make it to the European Parliament; MDF can send a delegate, but has no faction in Parliament, and Jobbik had a strong showing, but currently it is a party without a seat in Parliament.

The options and chances of the far right

 

• Jobbik’s strong showing represents a defeat for Fidesz, despite the fact that the largest opposition party beat the field by a wide margin. In the last phase of the campaign Fidesz made a strong but eventually unsuccessful attempt to prevent the fracturing of the right and block Jobbik from sending delegates to the EP. The Fidesz tactic of adopting Jobbik’s major political topics also proved to be a failure, as it only strengthened the far-right party.
• As a result, currently Fidesz is powerless against Jobbik, which represents a serious threat to its electoral base. Clearly, Fidesz has been embarrassed by Jobbik’s surge and at this point Fidesz apparently has no strategy to take up the challenge. In all likelihood, it will put more emphasis on specific topics promoted by Jobbik (e.g., the Roma issue and public security) than in the past, although, based on past experience, it is far from guaranteed the strategy can take the wind out of Jobbik’s sail.

 

Key points to watch

 

Economic events and data releases

 

 

Political events

 

 

 

Analyst consensus

 

Political Capital analyst consensus: one-month, short term forecast (with change over to the previous month in parenthesis):

 

 

Methodology: Each month analysts of Political Capital provide estimations on the political events of the upcoming month in a 10-grade scale.

 

 

Leading trends

 

EP-election results

 

Domestic election results reflect a number of trends seen across Europe (allowing that their emergence is tied mainly to domestic policy issues):

 

• The consolidation of central right parties and the decline of social democratic parties
• Slight surge of extremist parties
• Lower voter turnout

 

The crisis of social democratic parties in Europe has been observed for years and the result of the recent European Parliamentary election is but the logical conclusion of this phenomenon. In contrast to past experience, instead of governing parties losing ground to the opposition, this time right-wing parties defeated social democratic parties.

 

The results of the Hungarian EP election fit the formula: the domestic party structure took a sharp turn to the right. Fidesz won three times more votes than MSZP. In respect to the territorial distribution of votes, support for Fidesz shows a relatively large deviation: it is the weakest in the capital (48.12%) and the strongest in Vas County (68.37%). However, Fidesz swept all Budapest districts, with District XIII showing the smallest margin of difference between Fidesz and MSZP: (38.9%-29.6%). Outside Budapest, Fidesz came in below 50% only in Borsod-Abaúj-Zemplén County (49.11%) where Jobbik won 22.88%.

 

In counties and cities once considered socialist strongholds turnout was usually lower than the national average, an indication of the passivity of former left-wing voters and a sign that some former socialist voters this time cast their ballot for other parties. MSZP continues to be the strongest in Budapest (22.3%) and the weakest in Hajdú-Bihar County (12.58%). Outside Budapest, the party received over 20% support only in Komárom-Esztergom County (21.02%).

 

 

The consolidation of Jobbik

 

In respect to Jobbik, at a turnout of around 40% or lower, the radical party was expected to win the number of seats, but its 14.77 showing, representing 427,000 votes, make Jobbik the clear winner of the EP election. (The far right has not received that many votes since 1990.) Jobbik finished second in 7 Counties, and in Szabolcs-Szatmár-Bereg, Borsod-Abaúj-Zemplén and Hajdú-Bihar Counties by a large, 4-7 percent margin ahead of MSZP.

 

The rise of Jobbik raises the question which party’s former supporters swell the ranks of Jobbik’s voter base. However, the question is more complex; most likely, Jobbik’s current camp is made up of voters coming from a number of parties. By all indications, Jobbik attracted voters from both Fidesz and MSZP, although the balance is likely tipped in the direction of Fidesz. This suggests that Jobbik was the most successful in counties where Fidesz received the lowest support.

 

2009 EP election results of the 3 biggest parties in different counties

 

 

Main reasons for the success of Jobbik:

 

• The party successfully integrated former radical supporters for MIÉP, a party that disintegrated between 2002 and 2006.
• Jobbik managed to bolster its electoral base mainly by its appeal to anti-Roma prejudice. This proved to be successful as Jobbik received the largest share of votes in counties (especially in the North East) with the highest Roma populations, and this correlation is strongly confirmed by statistics as well[1].
• Of all political parties, Jobbik is the most successful in addressing young voters.
• While MIÉP was fundamentally an urban party focusing on anti-Semitism, Jobbik has a strong base in rural areas and small towns and, thanks to the Hungarian Guard, it has a strong organizational structure outside major urban centres.

Fight for the political centre

 

SZDSZ is clearly the biggest loser of the European Parliamentary election: in contrast to the Socialists, the party’s performance belied even the most pessimistic forecasts. The Liberals did not cross the 5% threshold in any county, and even in Budapest they only managed to receive 4.4% of the votes cast. Nationwide they were defeated by Lehet Más a Politika (LMP), a party formed only a few months ago with a much smaller campaign budget. Today the party obviously experiences the largest crisis in its history. Survival is the only issue remaining until the next election and, under the current circumstances, the chances for that are slim.

Support for SZDSZ at the current election was so low that at the next parliamentary election, as to avoid losing their vote, a majority of its former supporters may decide to cast their votes for another party. Moreover, former SZDSZ voters did not necessarily stay home last Sunday; presumably, the majority migrated to LMP and MDF. In other words, the party not only has to address its former supporters, but it also has to win them back from other parties, apparently an all but impossible task.

Following the collapse of SZDSZ, the fundamental question is whether the party will continue to line up behind the Bajnai-cabinet. Although after the election the party’s two major politicians, Gábor Fodor and János Kóka, both confirmed their support for the government, future developments are unpredictable at this point. Gábor Fodor resigned as party president, unlikely to be replaced by János Kóka. Currently early elections are against the interest of SZDSZ and presumably only some faction members (approximately 8) would support the dissolution of Parliament, guaranteeing continued government majority.

MDF can be seen as one of the winners of the European Parliament election. The party again crossed the 5% threshold, i.e. the appointment of Lajos Bokros proved to be the right decision. The election results effectively ended the party’s struggle with SZDSZ for a central position continuing since the formation of the minority government. With its performance MDF demonstrated that it has a realistic chance of gaining Parliamentary seats at the next general election. Coincidentally, the result also means that party president Ibolya Dávid managed to consolidate her position against internal rivals.

 

Renegotiation of IMF-loan terms

 

The IMF negotiating team arrived in Hungary in the middle of May for a quarterly consultation. As a result of these talks, both the IMF and the European Union agreed to a budget deficit of 3.9 percent for the current year and 3.8 percent in 2010. As following consultations in February, the decision was motivated by a significantly larger-than-expected recession: as opposed to 3 percent three months ago, currently the economy is projected to contract by 6.7 percent. In short, the goal was to avoid the recessionary spiral as after a while austerity measures themselves tend to generate a substantial decline. While the government’s scope for action has not been substantially increased with this concession, it is assumed (provided the recently outlined macro path will not change significantly) that further restrictions will not be necessary.

Aside from Hungary, in recent weeks the IMF has also eased terms for Latvia and Ukraine. Since the signing of loan agreements, economic outlook has deteriorated in all countries and the IMF attempts to keep abreast of developments by making dynamic adjustments. At the same time, the concession is also a clear recognition of the Bajnai cabinet’s achievements: the IMF has not set new conditions, which shows its satisfaction with current crisis-management policies.

 

 

Following the election, in an interview given to Reuters Viktor Orbán made it clear: in all likelihood, the next government will have to renegotiate the agreement signed with the International Monetary Fund; as the current administration is expected to spend all the funds received from IMF before the next election, the new government will find itself and the country in a very difficult position. At the same time, the statement (in line with Fidesz’ eight-point demand submitted to the government that only mentions the planned abolition of the property tax) also suggests the government’s scope for action will remain extremely limited even after the change of the guard and, on the whole, Fidesz will follow a policy not unlike that of the present administration.

 

 

András Simor – target of political sniping

 

In the last phase of the campaign Fidesz sharply attacked the chairman of the National Bank of Hungary. The largest opposition party charges that, to avoid taxes, András Simor has hidden his personal assets in off-shore companies registered in Cyprus. Following the first charges, the chairman of the Central Bank initially denied the claim in an open letter addressed to Viktor Orbán and later stated that, as to eliminate grounds for further attacks, he would repatriate some HUF 800 million from Cyprus. Based on information made public so far, while András Simor has indeed not violated any laws, the affair may leave him open to political attacks over the long term.

Fidesz may have two objectives with going after the NBH chairman. On the one hand, Fidesz tries to create a strong bond between the three former colleagues, András Simor, Gordon Bajnai and Péter Oszkó, and attack them as a team. Presumably, the chairman of the Central Bank was not the main target during the EP campaign, but Fidesz may calculate that attacks against him may tarnish the reputation of the prime minister and the finance minister. On the other hand, András Simor’s mandate runs well into the next term and, if it wins, Fidesz may prefer to work with a chairman of its own choice. As it can be assumed that Bajnai, on good terms with Simor, will stand up for the Central Bank chairman until the next election, the current attacks may be aimed at preparing the ground for Simor’s removal at a later date.

 

Stabilising the forint exchange rate

 

In the days prior to the election, the forint exchange rate declined somewhat, explained primarily by the ailing Latvian economy. A larger-than-expected recession in the Baltic State may have required further restrictions and/or the depreciation of the local currency, but during the weekend the IMF again eased its terms and, despite an expected deficit of 9% (2% higher than approved just a few weeks ago), it will continue its loan disbursement. On the whole, the forint is expected to improve in the coming period: in addition to the easing crisis in Latvia, Hungary’s foreign trade surplus may also help its currency.

 

In the past two months the forint’s exchange rate stabilized at a level below that seen recently, and the euro remained steadily inside the 270 - 290 range. Even so, the reduction of the base rate is not on the agenda: at a recent Budget and Finance Committee meeting András Simor said that the forint continues to be highly vulnerable and Hungary’s risk premium is still the highest in the region, which means that a rate cut at this point would be extremely dangerous. At the same time, a series of rate cuts is expected to get underway in a few months.

 

 

 

 

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[1] The Pearson correlation coefficient value of the two variables analyzed at the County level ( percentage of the Roma population in 2001 and Jobbik’s current share of the votes) is: R=0.76