The political consequences of the financial crisis in Hungary

Summary

 

1. The financial rescue package granted for Hungary has restored the confidence in the Hungarian economy and currency in the short run.
2. Nevertheless, the financial help and steps of short-term crisis-management will not ease the chronic political-social risk factors, but rather make more visible the political problems that have brought Hungary near bankruptcy and raised concerns among investors.
3. Due to the inability of making political compromises, the temporary austerity measures are just enough to avoid bankruptcy, but the chance of making structural reforms rather diminished in the last few weeks.
4. There is a threat that the temporary cut of government expenses, expansion of the state control and demagogue reactions from the opposition will intensify the influence of the state – in a country where the major problems are: huge redistribution, over-regulation, state-dependence and paternalism of the citizens.

Ferenc Gyurcsány has strengthened politically in the short run

 

• Following the coalition break-up, replacement of the Prime Minister and rejection of the 2009 state budget was a real possibility. However, the crisis has changed the political and economic environment, and in this situation passing the 2009 budget and the remaining of the Prime Minister (even by 2010) have high chances.
• MDF and SZDSZ factions are more open to governmental plans than they were beforebecause of the crisis and their increasing opportunity to implement their own political agenda in exchange for supporting the minority government in some issues.
• Furthermore, taking the government in this political-economical context is against the interests of both MSZP and Fidesz politicians, which also strengthens the position of Gyurcsány.
• The instant crisis-managing steps of the government increase the support of MSZP and Gyurcsány in the short run, according to the polls.
• The negative consequences of the crisis (decreasing real wages, recession, growing unemployment) are expected to affect the government’s popularity in the longer run.The steps to handle the crisis can diminish the trust in government too. Cancelling the 13th month wage in the public sphere influences negatively the living standard of 700 thousand voters, while maximizing the level of the 13th month pension adversely affects 900 thousand voters.Thus, the government’s plan has direct negative effect on 1,6 million people, one-fifth of the total 8 million voters – furthermore, these groups (especially the pensioners) are extremely important for the MSZP.

 

Extremely worried, that income in old age will not be adequate to cover your later years
(Percent, compared to the rate of all respondents)

 

 

Source: European Social Survey, 2006, Political Capital

 

Lack of political compromise remained

 

• In the fact that in the last months Hungary became the target of speculations, the fundamental economic factors played secondary role. The highly unfavourable views on Hungarian economic policy in the 2000-2006 period, and on the political climate in Hungary played a significant role in the loss of confidence towards Hungary. The strongest worries regarding the Hungarian political situation are the periodically repeating populist acts when elections are approaching, the unwillingness to implement reforms; and – in connection with these factors – the extreme political dividedness.

• As fulfilling the conditions of the IMF-loans and implementing the steps of crisis-management don’t need a two-third majority in the Parliament, the political dividedness doesn’t have direct political risk, but indirectly, the lack of political compromises can have dangerous effects is several aspects:
  1. In the short run, the political dividedness can narrow the government’s room for manoeuvring. In the countries where the crisis had the most serious effect, the opposition parties are generally not reluctant to share the political responsibility (to different extent in different countries) for the unpopular measures, thus in these countries the governments’ opportunities are higher to reduce governmental expenses.
  2. Another short-term risk is that the investors over-estimate the significance of the political dividedness, which is able to undermine the trust towards the country in itself.
  3. In the short and middle-run, the highest risk is that political actors are not committed to reducing the state dependence and the need for an exaggerated state redistribution. The political rhetorics with the message that the crisis can be overcome without cutting social expenses just maintains this mentality, thus have adverse effects for both the political parties and the country.

The government’s changing macroeconomical prognoses for 2009 (percent)

 

 

Source: Ministry of Finance, Political Capital

 

• The fact that Fidesz rejects both austerity measures and IMF-loans reveals (“it’s not the people who should pay the price of the crisis”) their reluctance to get to governmental position in the near future. Instead, the politicians of Fidesz expect no early elections, passing budget and Ferenc Gyurcsány’s strengthening position and continuing governance.

 

• Fidesz’s confrontational strategy is based on blaming the PM as mainly responsible for the crisis, and offering highly popular tax-cutting programme instead of the austerity measures, which is to be covered by also popular, but not so significant measures (regarding their effect on budget) such as decreasing the number of representatives of parliament and municipalities.

 

The political strategy of Fidesz can be proven to be counterproductive in many aspects: 

 

1. In the present crisis situation, according to the opinion polls, the need for political compromises has increased. This change was not taken into consideration by the Fidesz, thus the party is endangered by the contradiction that while most of the people accept the party’s plans to handle the crisis, voters can turn away from Fidesz because its confrontational political rhetorics.
2. Fidesz made an intensive campaign in the last half year to strengthen its diplomatic support, and the confidence in the party among the key economic players. But its current economic policy that opposes the recommendations of economic experts, and the criticism toward the IMF and EU of some Fidesz politicians (eg. Mihály Varga, Fidesz’s vice president: “It’s a question for me whether it’s worth being a member of the EU or not”) can damage Fidesz’s international political relations and the credibility of the party in the eye of the business elite.

• The Fidesz’s messages that are focusing on the tax cut are to prepare for the next yearwhen stimulating the economy and increasing employment will be in the focus of political debates. Next year, the party that is consequently emphasizes tax rate decrease (without reducing the expenses) can have much more credibility than before. Fidesz thus sacri_ces the politically competent image with the popular messages, but it will try to re-build this in 2009-2010.

 

Changes in the price of national currencies (related to HUF)

 

 

Source: National Bank of Hungary

 

Austerity measures, without the perspective of structural changes

 

• While the financial aid saved the Hungarian financial system, currency and the state from the collapse, the higher volatility of HUF and the vulnerability of the economy remain to be a problem.
• The 2009 budget is stricter than in the previous plans, but the short-term fiscal discipline in itself will not solve the structural problems of the Hungarian economy and anomalies of the bureaucracy. The danger of explosion is over, but there is no real chance for reforming the state and re-thinking its redistribution and regulation role in the coming two years.Problems such as the extremely high tax burdens and social expenses will be choking the Hungarian economy.
• It’s favourable for the economy that the necessary extra budget income will come from cutting expenses rather than from higher revenues in 2009. But it’s conceivable that the currently suspended state expenses (13th month pension above 80 thousand HUF, 13th month wage in the public sector) will be put back in the 2010 budget, and the government – trying to get back its voters – will make more gestures in the direction of the inactive at the expense of the over-burdened slight economically active group. If this happens, the extremely fragile confidence in Hungarian socio-political system can be undermined once again.

 

Lack of mentality change

 

• Besides the reform deficiency, it’s an important factor that while the present crisis would need the re-thinking of the role of the state by the citizens, the possibility that the extreme expectations towards the state will decrease in the future has slight chance. Hungary survived all the crises in the last decades with “soft landing”: the inevitable austerity measures always helped avoid the bankruptcy (as it just happened in a similar manner) and the unpopular measures were calculably followed by welfare overspending in election years. If (as we expect) this crisis doesn’t overwrite this feature of Hungarian politics, the attitude (which was the basis of a lot of irrational _nancial consumer decisions in the past) that the government will always save households in crises – e.g. the ones who default in payment of their foreign currency denominated loans – can persist.

 

Changes in the total volume of household credits

 

 

Source: National Bank of Hungary