Political risk in Hungary increased by the referendum


The Constitution, the laws in force or the self-control of the political elite usually prevent such referenda in other countries. The mere fact that such a referendum could take place in Hungary came as a surprise to foreign observers, while the high turnout indicates serious consequences. 


After analyzing these consequences the Risk Forecast Division of Political Capital, the leading Hungarian political consultancy, has issued its most recent risk warning for foreign investors and financial institutions. The warning emphasizes that political risks in the country have significantly increased after the referendum. These risks stem from the following factors.



Short-term risks

  1. The position of the Prime Minister is stable, but weakening. The outcome of the referendum has spectacularly weakened the position of Prime Minister Gyurcsány, though not to the point that would lead to his resignation or replacement. Unless the PM changes his policies and style and manages to boost the Socialist Party’s public support, his post will be challenged not only by party heavyweights and the parliamentary faction, but by the party rank-and-file, as well. In this case his replacement will become inevitable. The speculative attacks against the Hungarian currency in January, prompted by the circulation of rumours in London regarding the resignation of the Prime Minister and the Minister of Finance, proved that a strong correlation exists between the political stability of the Prime Minister and the forint’s volatility. News items regarding the possible fall of Mr Gyurcsány immediately provoke speculative or panic reaction in the markets. This correlation is now further amplified by the abolition of the Hungarian forint’s trading band against the euro on 26 February. Nevertheless, in the case of a continued weakening of the Prime Minister and low public support for the Socialist Party by the end of this year, the markets will gradually price in the risk of his replacement, rewarding the prospect of a candidate who can guarantee the continuation of the reform policies and the strict budget discipline, and punishing the alternative.
  2. Rising tensions within the coalition. Gábor Horn, state secretary for coalition affairs, made scandalous comments regarding the people’s message to the PM through the referendum (“They said, go f*ck off”). His remarks, caught on camera by an opposition TV channel and broadcast over YouTube, sparked furor within the Socialist Party. Beside an immediate call for Mr Horn’s resignation – which he refused, having already apologized – Socialist politicians started to blame the liberals for the referendum failure and accused their coalition partner for managing the health care reform in an uncompromising fashion and an aggressive style that alienated the voters. Political Capital expects that the coalition partners will blame each other for the debacle, and the relationship between the two parties may deteriorate to the extent where their ability to govern and pass legislation becomes limited. This may slow down the necessary reforms. Although unlikely, a scenario has now become imaginable in which the coalition’s short-term internal conflicts lead to a botched crisis response to the referendum, which in turn precipitates the fall of government, early elections, and the sweeping victory of the right-wing opposition. This would have both mid- and long-term economic consequences that are impossible to guess at this time.
  3. Fidesz’ political strategy remains unchanged. The obvious winner of the referendum is Viktor Orbán, president of Fidesz. His position as party leader, and the prominence of his policies, will not be challenged in the near future. Fidesz will continue its anti-capitalist policies, the party’s strategy will be based on spending promises, and the moderate, conservative, pro-market line inside the party will continue to be pushed aside for a long time.



Mid-term political risks

  1. Governability questioned. If the law on referenda remains unchanged, the governability of the country will become tenuous. Following the precedent created by this referendum, almost any austerity measure taken by any future government can be overturned through demagoguery.
  2. Stop-and-go. The “election year spending trap”, a unique characteristic of the fiscal policies of Hungarian governments since 1990, may re-emerge by 2010, the next general elections. The efforts of the current government to bolster its popularity can lead to a softening of fiscal discipline. A reversal in fiscal policy and a return to high public spending will bring instability to the currency exchange rate, the inflation outlook, and furthermore the resulting risk and uncertainty will puzzle and deter foreign investors and international financial markets.
  3. Demagogic election campaigns. The Hungarian political elite concluded from the referendum that voters are only interested in state-provided wealth, and elections can only be won with spending promises. This will bring extremely demagogic election campaigns, to the detriment of economic growth and vital structural adjustments.




  1. The Constitutional Court as a source of uncertainty. The Constitutional Court, which despite serious concerns approved the referendum, has thereby become a new source of uncertainty. Private companies that operate in sectors with strong state control or influence, such as health, education, pension or energy, now face higher political and legal risks as a result of this legal precedent.


Long-term political risks

  1. The backlash of public sentiment against capitalism and the free market. Another lesson learnt from the referendum is that Hungarian society is still receptive to etatist demagogy and its political culture has not fundamentally changed over the last two decades. This stubbornly ongoing attitude is kept alive by the vote-maximizing logic of electoral politics. Parties intent on winning elections exploit this attitude by coining political messages that potential voters want to hear. This is a Catch-22 situation, since social attitudes will not change spontaneously, and the political elite, which could generate change, is not interested in doing so. 
  2. State dependence versus self-reliance. Moving against a deep-rooted principle of Western market economies, we expect the share of self-directed, autonomous choices to remain at a relatively low level in Hungary for a protracted period. The figures describing individual and household saving and investment habits are a particular cause for concern. The outcome of the referendum signals that patriarchal etatism is expected and welcomed by a wide range of voting groups.
  3. Lack of trust in parliamentary democracy. If non-representative, direct democratic instruments, such as mass demonstrations and referenda, become overused features of political practice, then in addition to the problem of actual governability, the basic legitimacy of Hungary’s representative democracy will also be affected.