Hungary: Breaking up with the region?
The beginning of this decoupling process can be attributed to many factors:
- The speech of the American President. Barack Obama has referred to Hungary and Ukraine as the economies in the worst-condition, whose decline hopefully would not deepen the economic crisis in America.
- The common statement of the countries in the region. Thursday morning, the financial supervisory boards of some countries of the region (Poland, Czech Republic, Romania and Bulgaria) issued a joint statement declaring that the regions’ countries could not be treated equally. Eventually it turned out that the Hungarian financial supervisory body was among the signatories. It is yet unknown that excluding Hungary from this document was accidental or deliberate. Regardless, it could have set off an irreversible process.
- The Hungarian PM’s failed initiative in Brussels this weekend in demanding common European financial support for the region. It generated widespread criticism in Western Europe, the international media and even in the region, leaving Hungary completely isolated in the question.
- The lack of reform steps. The main problem with Hungary in the eye of the markets is that the financial actors don’t regard the steps of the Hungarian government sufficient for putting the Hungarian economy on a sustainable path.
Source: National Bank of Hungary
The economic and financial consequences of the decoupling
- The decoupling process can lead to a further devaluation of the Hungarian currency, thus imposing severe risks on those indebted in foreign currency, including households, companies, and even the Hungarian government.
- The possible default on the loans would seriously wound the Hungarian banking system, and raise the probability of rising budget deficit and further recession of the Hungarian economy.
The political consequences of the decoupling
- The Hungarian PM’s position is weakening further, and the possibility of his replacement is increasing. His possible successor is unseen at the moment, but should his replacement come forth, it is very likely that an economic expert, a „technocrat” would assume the premiership. The chance of an early election has also increased, but still low at least until the EP election due in June.
- Smaller opposition parties could force the government to approve their proposals (similar to that of the non-governmental Refomszövetség – Reform Alliance). Since there is no majority behind any crisis management plan in the Parliament, SZDSZ and MDF – acting together – can be able to initiate the forming of a new majority for their more radical reform plans.
- The government can move towards a more pro-reform position. As a serious austerity and reform programme seems indispensable to avoid the collapse, there is a possibility that the government and the MSZP faction will take more serious measures than it has been expected before. However, the socialist MPs still try to resist the most unpopular policies in order to “protect” their voter base in which the pensioners and lower income classes are over-represented.
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