Fidesz vs. Hungarian National Bank: A three-month skirmish or a three-year war?

Key Findings

• Hungarian Prime Minister-in-waiting Viktor Orbán, whose Fidesz party won an unprecedented 68% of seats in Parliament in elections that ended April 25, urgently wants to replace Hungarian central bank Governor András Simor. “I would like to be proud of the institution and its managers. It is not a place for offshore jousters,” Orbán told journalists April 26, taking a slap at Simor’s extraterritorial business affairs. Fidesz also wants to merge the central bank with PSZÁF, Hungary’s financial regulatory agency. Political Capital forecast this scenario in June 2009 and March 2010.
• Getting rid of Simor will be harder than it looks, even though Fidesz has a two-thirds majority. The Hungarian National Bank (MNB)’s independence is guaranteed by the EU’s Lisbon Treaty, and Simor’s six-year term does not end until 2013. Orbán’s salvo probably signals the beginning of a long struggle between the bank and the government.
• The Orbán-Simor conflict represents the incoming government’s first major power struggle. Even if Orbán wins on the domestic level, he may pay a price in terms of lost confidence among international investors and opinion leaders.
• Fidesz’s attitude toward Simor clearly has political roots, but there are also strategic considerations. Party leaders want a new approach to economic and monetary policy that emphasizes government-supported economic stimulus – for example, lowering the forint exchange rate in order to boost exports. Fidesz would put less emphasis on low inflation and fulfilling the EU’s Maastricht criteria, which were among Simor’s top priorities.

 

Opposition Attacks

 

Both Fidesz and Orbán himself have been attacking Simor regularly since the outset of the financial crisis. The criticism has come from three directions:

 

1. Policy errors: Fidesz slammed the central bank’s decision to radically raise interest rates when the crisis struck at the end of 2008, claiming that the high rates were strangling Hungary’s economy. Other critics include former MNB Governor György Surányi, who penned an article in January saying the recession’s impact on Hungary had been exacerbated by the low level of foreign-currency reserves and the lack of direct market intervention – in other words, the central bank’s decisions. Surányi’s piece is on Orbán’s “recommended reading” list.

 

 

1. Offshore companies: Simor was personally condemned for keeping part of his fortune in offshore companies based in Cyprus. The purpose of these attacks was to discredit Simor personally, portraying him as a wealth monger with no interest in the welfare of the nation.
2. Government Ties: Over the past two years Fidesz has been trying to link both Simor and the entire MNB leadership to the outgoing Socialist government. This effort became easier after former Prime Minister Ferenc Gyurcsány resigned in 2009: The new premier, Gordon Bajnai and his finance minister, Péter Oszkó, both used to work for Simor before they entered government.

 

The Future of the Conflict

 

The struggle between the incoming government and the MNB may be a long one. Despite its two-thirds majority, Fidesz may find it impossible to give Simor the boot. The post of central bank governor is one of the most highly protected positions under both domestic and EU law. The war may have started, but the weapons and the battlefield remain undetermined.

• Dismissal. Under the current, constitutionally defined rules, a central bank governor can only be recalled for serious transgressions, not because of policy disagreements. The only other way to get rid of a central bank chief is if he resigns. It is conceivable that Fidesz will try to make Simor’s life unbearable through constant attacks. These would not be related to his performance as governor, but would focus on his offshore investments and his ties to the Socialists. Just before the elections, Simor reinforced his communications team with several new people – perhaps signalling that he does not intend to go down without a fight.
• Reorganization. Fidesz will probably try to reorganize the central bank. Party leaders have frequently talked about merging the bank with the national financial regulatory agency, PSZAF, either in part or in whole. According to unconfirmed reports, Simor once supported such a plan; the International Monetary Fund also supported something similar. The quasi-new central bank would present an opportunity to elect a new governor – in 1991, the Hungarian Democratic Forum (MDF)-led government used similar means to get rid of the then-central bank chief, Surányi. However, the Lisbon Treaty stipulates that institutional restructuring is not a reason to replace a central bank governor, so this method would likely generate conflict with the EU.
• Packing the Monetary Council. The government can strengthen its influence over monetary policy even if it fails to oust Simor: When Gyurcsány’s relationship with Simor’s immediate predecessor, Zsigmond Járai went sour, he simply increased the number of government delegates to the Monetary Council. Fidesz will have the same option; however, doing so might damage the country’s reputation among foreign investors.

 

Counteracting the Conflict

 

The Hungarian National Bank is the institution that represented “common sense” to foreign investors during the calamitous budgetary policy of the past few years. Meddling with the MNB’s independence on any level could therefore send a negative message to investors and quickly alter their perception of Fidesz’s two-thirds majority from “opportunity” to “risk.” For this reason, Fidesz will probably take steps to tone down its row with Simor.

 

1. Quick action. The worst scenario for Fidesz would be a drawn-out fight. At the same time, Orbán’s firm stance indicates that he has a concrete plan to get new leadership at the bank.
2. Compensating with investor-friendly measures. The government will probably initiate numerous reforms that foreign investors support, such as modifying the tax system and cutting Hungary’s hugely expensive system of municipalities. These would act as a counterweight to any negative fallout from its spat with Simor.
3. Strengthening the MNB. While Fidesz wants to oust Simor, the party does not oppose the bank as an institution. It is possible that Fidesz will strengthen the MNB when the administration installs its own people, thereby giving a boost to independent monetary policy.
4. Adopting the “French Model.” French President Nicolas Sarkozy nominated his political rival Dominique Strauss-Kahn to become head of the IMF, proving that personnel decisions do not depend solely on party political considerations. It is therefore possible that Fidesz will nominate Surányi to resume the leadership of the MNB, despite the fact that he is widely viewed as a close to Hungary’s political left.

 

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No economic policy shift expected in Hungary following the election. 2009.07.27.

http://www.riskandforecast.com/post/flash-report/no-economic-policy-shift-expected-in-hungary-following-the-election_82.html

Fidesz Prepares for Governance with a Market-Friendly Program. 2010.03.23. http://www.riskandforecast.com/post/flash-report/fidesz-prepares-for-governance-with-a-market-friendly-program_456.html