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Hungary and the eurozone crisis: a comedy of errors?



The spill-over of the global fi nancial crisis has uncovered the weaknesses in the governance of the EMU. As one of the most open economies in Europe, Hungary has suff ered from the ups and downs of the global and European crisis and its mismanagement. Domestic policy blunders have complicated the situation. This paper examines how Hungary has withstood the ups and downs of the eurozone crisis. It also addresses the questions of whether the country has converged with or diverged from the EMU membership, whether joining the EMU is still a good idea for Hungary, and whether the measures to ward off the crisis have actually helped to face the challenge of growth.
/forthcoming in: VISVIZI,A.- STEPANIEWSKI,T.eds: Yearbook of the Institute for
East-Central Europe, Lublin, Poland, 2012/
BY László CSABA1
ABSTRACT: The spillover of the global financial crisis has uncovered the
weaknesses in the governance of the EMU. Being one of the most open economies in
Europe Hungary has suffered from the ups and downs of the global and European
crisis and its mismanagement. Domestic policy blunders complicated the situation.
The relative deterioration of the position of other countries has paradixically
improved the relative position of Hungary by 2012. Still, a cooling to new EU
initiatives on banking an fiscal union is likely.
* * * * *
The crisis of the management of the European Monetary system has become one of
the hottest topics in the aftermath of the global financial crisis. While in the pre-
crisis period conventional wisdom held the EU to be a safe haven, well equiped to
protect its memebrs from external shocks, the procrastination of both national crisis
and EU level crisis management has raised doubts against this insight. Skeptical
voices conventionally associated with the Anglo-American mainstream of the
economics profession has spread into continetal Europe and policy-making alike.
In this short essay we investigate how Hungary has withstood the ups and downs of
eurozone crisis. We posit the question if the country converged or diverged to EMU
membership, which was taken upon as a contractual obligation in the accession
agreement o December, 2002. We may also ask if joining in is still a good idea,
furthe rif the measures to ward off the crisis have actually helped overcome the
challenge of growth.
1.Caught in the Storm, Longer than Ever Thought
In 2008 Hungary has just been over a period of external adjustment triggered by
the fast growth of external debt and the need to curtail the explosion of fiscal
deficit. On tits own, Hungary’s debt/GDP ratio at the end of 2007 has not been
exorbitant – 67.0 pc of GDP, just above the average of the eurozone of 66.3 pc – but
the trend was clearly unsistainable and showed no convergence to the Maastricht
criterion of 60 pc. It was all the more disquieting as the starting point in 2001 was
slightly below 52 pc, thus the msot important criterion was missed just at the time
when GDP growth was over 4.5 per cent in the entire decade2.
1 Professor of international political economy/Central European University and Corvinus University of
Budapest/ and member of the Hungarian Academy of Sciences. Personal web:
2 Source/unless otherwise indicated/: ECB Statistis Pocket Book,June, 2012.Frankfurt am Main.
Having managed the external adjustment in 2006-2007 the overall expectation was
that of recovery, which was seen as quasi-automatic under the favorable global
settings/on the contemporary debates and disenchanting outcomes3. But the writing
already appeared on the wall. Following the collapse of the British investment bank,
Northern Rock in June, 2007 basically all informed analysts knew, that we were
sitting on a volcano. It was to erupt, the question being not if, but when. However,
decision-makers of the period4 considered the subprime crisis as a basically intra-US
affair. As they put it, the tornado marches on a different root, and Europe is
touched only by its rim.
Furthermore the Socialist government was intent to show, bot to the domestic and
external audiences, that the crisi is over. Therefore the fiscal plan for 2009 was
formulated in an extremely optimistic manner, in terms of growth and financing.
Submitting a fiscal pln based on 3 pc growth forcast for 2009 in October, weeks
after the collapse of Lehman Brothers, was asking for trouble. And external
markets did react swiftly, attacking the exchange rate in an agressive manner. The
collapse could only be averted by a blitz standby loan, orchestrated together by the
IMF, the EU and the World Bank. Both its size – 20 bn euros – and the involvement
of the Washington Twins in managing affairs of a respectable EU memebr, were
major innovations for the period.
In other words, economic policies from the minute of agreeing to the bailout were
subordinated to meeting quantitative targets of debt servicing, irrespective of any
other broader considerations. The caretaker Bajnai government was eminently fit to
manage this task. While cultivating the image of technocratic managers – not
unfamiliar for the post-transition Left – they were supported by the Socialists only,
and two centrist parties, rightly fearing early elections. All in all, the
administration did not have to care about socio-political concerns, while the center-
right opposition Fidesz did not have to care much about economic exigiencies and
could put the entire blame for suffering on the Left.
The price to be paid in the second half of the electoral cycle, when governing parties
refused to step down, despite their loss of legitimacy5, was heavy. GDP dropped by
6.9 pc in 2009, the debt ratio jumped to 72.9 pc, unemployment jumped to 10 pc
against barely over 7 pc in the preceding priod. Oddly enough for a contracting
3 For details cf L.Csaba: Hungary: the Janus-faced succes story of transition, In: A.Fosu(ed.):
Developmental Success: Historical Accounts from More Advanced Countries.Oxford-New York: Oxford
University Press, pp252-277.
4 Király,J.: A tornádó és a hurrikán – a 2007.év válságos hatásai/The tornado and the hurricane- the crisis-
ridden year of 2007/. In: L.Muraközy,(ed.): A jelen a jövő múltja/Present is the past of future/. Budapest:
Akadémiai Kiadó, pp295-332.
5 The unfamous ’lie speech’ of the then Premier in May, 2006- leaked to the press in September only –
triggered 6 weeks of violent street protests, calmed down by the opposition by calling for referenda on
social matters. The latter was won, by a majority of 85 pc on 9 March, 2008. This would, in theory, have
called for a resignation of the government. But they weere sticking to power, irrespective of the
consequences – including their devastating defeat two years later/and the annihilation of the two centrist
formation, the heroes of early transion years, MDF and SZDSZ/:
economy, inflation remained 4 pc/HICP, y/y/, when the euro area barely escaped
deflation- with 0.3 pc annual inflation in 2009.
Let us underscore, which can be documented by a broad survey of sources:
Hungary has not eneterd a crisis because of th spillover of the global financial crisis
in the last quarter of 2008. The country was already on a slowing track from 2004,
and growth in 2004-2006 could only be sustained owing to the accumulation of
external debt. In 2006-2008 adjustment did happen, but structural and institutional
weaknesses have not been remedied. The government produced a large number of
reform projects, but implementation was in reverse order to the breadth of the
initiatives, covering all walks of life. By contrast, the caretaking Bajnai government
did address some of the overdue issues. These included the increase of retirement
age, cutting disability and early retirement schemes, cutting central administration
and severing tax collection. These measures have, for a variety of reasons, survived
the change of government and have been intesified by the Széll Kálmán Plans – no 1
and no 2 – of the center-right government in 2010-2012.
2. Inflated Expectations – Improvised Solutions
As follows from the sketchy overview produced above, the center-right attained a
landslide victory in 2010. In au unprecedented manner, they won both the national
and municipal elections with a convenient margin, allowing the new coalition in
theory to do whatever they wish in terms of change, reform, restructuring.
’Life is not as it is in books’. First, a double majority implies that the most difficult
items of public finance, relating to municipalities, welfare provision, public firms
and the like could not be easily touched upon, as fellow party-members were
running those too. Second, the external environment turned quite sour, already by
June, 2010, i.e upon the formation of the new government. Allies of the country, who
were funding it under the still ongoing IMF/EU standby made no secret of judging
the government on its fiscal conservatism. While one may wonder the theoretic
rationale of the insistance, the evolving Greek crisis and the new rescue package and
related items6 have clearly dominated over countrí-specific considerations or
considerations of the business cycle. European governance gradually learned new
forms of tight coordination, as the European semester and many others.
Withdrawal of EU funds from fiscal trespassers were mandated.
The second Orbán government was taken by surprise as the above events
unfolded. Their original platform included major restructuring, even at the cost of
temporay fiscal deterioration, in line with international experience. While the was
supposed to run to 7 pc, which would have been in line with the 6.6 pc actually
achieved in the EU-27 in 2010, this idea was considered to be a dangerous de-
railment, a drift into popiulism by the EU Commission. Therefore – also by virtue of
6 J.Featherstone: The Greek sovereign debt crisis and EMU: a failing state in a skewed regime.Journal of
Common Market Studies,,.pp 193-217. cf also A.Visvizi: The crisis in Greece and the
EU/IMF rescue package: dterminants and pitfalls.Acta Oeconomica,, pp15-40.
the terms of the inherited stand-by agreement – the room for manoeuvre has been
The surprise component is perhaps the strongest single explanatory factor of what
was later termed ’unorthodox policy measures’. The government resorted to a series
of poorly prepared, improvized measures in order to meet the stringent deficit
criterion of 3.8 pc.7 These included raising the value added tax during the calendar
year, cutting expenditure items, and not least nationalizing the previously
compulsory private pillar in the pension system. The latter generated sizable
revenues for 2010, and even more for 2011, allowing the country to register a
headline surplus/sic!/ of 4.3 per cent. The ratio of public debt to GDP grew only
slightly, to 81.3 pc by 2010 and started to decline in 2011 to 79.3 pc, further
declining somewhat in 2012.8 Sectoral taxes were imposed, both in 2010 and 2011
on banks, retail chains, the pharmaceutical industry and telecommunications. These
though did generate revenues, however they were distortive and one-shot measures,
heavily ctitcized not only by the EU Commission, but also by top politicians from
France, Austria and Germany, intervening in favor of their respective banks and
corporations, both directly and at EU fora.
While these measures did suffice to make both ends meet, broader restructuring –
such as re-tailoring public administration or of public firms, especially in the
transport sector – fell victim to the pressure of daily fiscal improvements. As global
and European upswing gave way to stagnation and uncertainty, especially on the
financial markets, conditions for growth and the ensuing improvement of the
employment situation failed to materialize. Especially the latter proved painful, with
Hungarian unemployment rates – traditionally way below EU standards – reached
the EU average of 11 pc and stuck in. This happened at a time when the center-right
government was elected on a ballot promising to create 1 mn new jobs in a decade.
In the first two years, only 80 thousand was created, a mere four per cent. This of
course creates serious social strains and disenchantment, especially among the
young, the better qualified and more mobile. The comprehensive coutry report of
the OECD9 has rightly stressed lack of employment and employability as one of the
major structural weaknesses in the Hungarian economy, which is to be seen at the
root of the fragility of fiscal improvements for the medium run and beyond.
3. The Return of the IMF/EU Tandem in Shadow Boxing
It could be seen from the sketchy overview above that the relatioship of the center-
right government and the international organizations has been strained from the
very outset. The idea to disregard fiscal targets angered the IMF. In return, the
7 The actual final number was 4.2 pc, an innocent slip against the major deviations in Greece, Portugal and
Spain, but also in France and the UK in 2010-1
8 These numbers are extremely sensitive to exchange rate volatility, which has indeed been a problem for
Hungary during the entire period of scutiny.
9 OECD Economic Surveys: Hungary- March,2012.-Paris, a publication of the Secretariat.
Hungarian government launched what it called a „freedom fight” and terminated
the standby of 2008, as one of the first of its measures in June, 2010. Parallely to it
the conflictual relationship to the EU Commission has intensified. In part owing to
disagreements over economic strategy, but in larger part due to dissimilar
approaches to a series of non-economic issues, including retroactive legislation,
media laws and changes in the judiciary system. Adoption of the new Basic Law of
Hungary, making references to the Christian roots of the nation, supporting
explicitly tthe concept of marriage as a liason between man and woman only, as well
as making historic and emotional references, have stirred heated debates in the
European Parliament, whose co-decision powers have considerably increased by
the Lisbon Treaty of 2009. Also the Commission saw crisis management as a
window of opportunity to enhance its own influence at the expense of national
With reference to the Lisbon Treaty calling the Commission the wardian of all
European values, Brussels tended to interpret its own prerogatives in an extensive
manner. While severing of fiscal and banking regulations have gradually reinforced
the role of federalist elements10 the debate over who is compelled to do what and
when is anything but settled. For instance, the Commission initiative of January,
2012 to withold cohesion funds from Hungary was seen as legitimate in terms of the
Six Pack package on fiscal stringency, adopted only two months earlier. However,
the subject of the controversy was not an actual statistical figure, but a forecast for
2013, i.e an event yet to be materialized. The Commission considered Hungarian
measures not sufficiently sustainable, while the government disagreed. The solution
came by May, 2012 when the new medium term fiscal plan, integrated in the more
general Széll Kálmán 2.0 Plan, convinced the experts of the plausibility of
sustainable improvements.
The government was forced to ask an IMF/EU rescue package in mid-November,
2011. It happened as the Greek crisis escalated, once again, triggering tremors from
Spain to Romania all across the European periphery. The exchange rate of the
forint plummeted- from 280 Ft/euro to 323 Ft/euro, spready, bond yields and CDS
all skyrocketed. Hungarian government bonds were sold at close to 11 pc yield in a
country which grew by 1.1 per cent only on a year-on-year basis.11 Under the panic
generally ruling in Europe an IMF/EU rescue package, whose nature was
unspecified, was asked for.
Oddly enough, while the IMF was quick to fix the real crisis cases, as in Bosnia,
Belarus, Egypt and even Spain negotiations with Hungary tiptoed until 17 July,
2012, when the delegation of the creditors arrived to Budapest. One may wonder
why did it take 7 months to get down to business. The answer lays in the changing
role of the European Union.
10 H.Berger et al, Euro Area Policies – Selected Issues. Washington,D.C, IMF Country Report no12/182-
July 3, 2012 offers an analytical overview of major issues.
11 Even if we consider that the rate of forint inflation was close to 5 pc, the real rate of interest far exceeded
the rate of growth, which is clearly unsistainable in the long run.
The EU as it stands today is far more than a free trade area with a single currency,
as portrayed in the British press. The EU has developed into a truly political
institution with wide ranging prerogatives in a number of areas, from social policy
to environmental protection, deciding over legal claims and sustaining peace in
Macedonia. It is far from settled in legal and political terms, how far the EU can go
in using the community method,i.e supranational prerogatives – some considered it
too far reaching even before adoption of the fiscal compact of March, 2012 and the
European Stability Mechanism in June, 2012.12 Just because of the unsettled nature
of affairs the Commission does have a leeway, much greater than conventionally, in
re-interpreting its own prerogatives and deciding over competences. In this case the
Commission clearly wished to signal its eagerness to exhaust in full the potentials
vested in it by the European Semester, by the Six Pack package and the Fiscal
Compact, as well as the cross-border banking regulations. These constitute the fiscal
discipline component, against which net contributors, from Germany to Finland,
agreed to softeing the stance on the mutualization of debts, issuing eurobonds and
targeted bailout of Spanish banks, originally prohibited by the statutes of the ECB.
Given that the Greek drama was far from over, furthermore it was complemeted
by the Spanish and Romanian cases, with Italy suffering continuously of distrust by
the markets due to its exorbitant – close to 123 pc – debt/GDP ratio, by May, 2012
the time has come to discontinue the play for the general audience. While question
marks on Hungarian fiscal sustainability have not been fully adressed, the
Commission agreed- following a visit by the Hungarian Premier to Brussels in May
– to launch negotiations in substance. It happened later – the 8 weeks reflecting the
remaining discontent.
In short, we called the wrestling of the 7 months shadow boxing insofar as no
substantive issue that ever relates to a credit deal was even put on the agenda. While
jabs were big, pain was next to nil, with Hungary remaining ony the international
capital markets/while Cyprus, quite unexpectedly, has collapsed in June, 2012/.
4. Assessment and Outlook for the Future
As we have seen, the evolving crisis of the EMU –especially in terms of governance –
has implied an external shock par excellence for Hungarian economy and policy-
making all across the years 2008-2012. The spillover of the global financial crisis
triggered the bailout package, later indecisiveness in managing the Greek debt
created animosities with the EU, finally the return to the umbrella of the IMF/EU
twins have proven more style than substance. The evolving new governace
structures in the European Union pose new challenges to managing economic
matters in Hungary as well. The idea of a fiscal and banking union, to be finalized
by December, 2012 is a tall order, both on its own, and in terms of implications for
the country proper.
12 For an extensive review of those doubts cf F.Scharpf, Monetary union, fiscal crisis and the pre-emption
of democracy, „Zeitschrift für Staats- und Europawissenschaften”,,pp163-198.
We do not share the wiev of doomsdayers, phatasizing about the breakup of the
euro-zone. If we consider that ever since the launch of the EMS – with very few
exceptions- fixed exchanged rate regimes survived over three decades, we do not see
any reason to expect a major reversal. A peg sustaining decades – as was the case
of the Belgian Franc or the Dutch guilder against the D-Mark – makes the
difference across currencies purely notional. Outsourcing monetary policy to a
supranational authority, shielded from political interventions – be that from Oskar
Lafontaine or Silvio Berlusconi – has proven to be a major success, contributing to
the broadening of the scope of the single market. Those with good macroeconomic
indicators – as Finland or Slovakia – profit from being part of a big market, and are
freed of the labors of sustaining price stability. Those with major problems – as the
southern cone or Ireland – would follow suicidical policies if they were to opt for re-
introducing their former weak currencies, which would depreciate, sending asset
prices to the cellar. Selling out the country in response to changed price signals is
though a textbookish example, but watching news coming from the Mediterranean
would advise anybody from buying this pale wisdom as a policy relevant
consideration. Furthermore it is quite evident that it is trespassers, not those
playing by the rules which ran into trouble.
Under this angle we may well ask if Hungary should still strive for joining the
single currency as long as its architecture seems to be in crisis. Recent analyses13
unanimously favor meting the criteria. Not primarily for obtaining the advantges
of the single currency, but because of the obvious benefits accruing from the
macroeconomic framework which is conducive to sustainable public finances and
price stability. The latter may serve as a major pre-condition for reviving growth.
Let us note, that Hungary has never been so close to meeting the Maastricht criteria
than at the time of writing. The committment to keep deficits below three per cent of
GDP as well as the continuous fall of debt/GDP ratio are anchored in the new Basic
Law of 2011. This arrangement is being enforced by a new Fiscal Council,
composed of the governor of the central bank, the chair of the State Audit Office
and a respectable university professor, who served 9 years as vice chair and 9 years
as chair of the state audit office.14 Moreover the strategy of the government is
explicitly built on reducing the debt rate, in order to render public finaces
sustainable. Current account has been in surplus for the fourth consecutive year.
Under peace times the rate of exchange is relatively stable between 290 and 270 Fts
per euro. Real rates of interest are historically not high, roughly 1.5 per cent in
forint terms. The weak point is inflation, running close to 6 per cent in 2012,
reflecting the costs of delayed price adjustments in administered prices and also
increases in indirect taxes to raise fiscal intakes. The convegence plan, if its targets
were delivered, would allow for meeting all Maastricht criteria by the end of 2014,
13 J.Neményi and G.Oblath, Az euró bevezetésének újragondolása/Rethinking adoption of the
euro/,Közgazdasági Szemle,,pp 569-684 with 13 comments by experts.
14 The previous fiscal council, set up in 2009, was an independent researtch institute with a personnel of
about 60 highly qualified analysts, composed of three academics. This organ had no veto power and was
abolished by the new majority in 2010.
rendering the adoption of the single curency feasible by 2016, after a preparation of
two years.
It should be noted, however, that the government is less than enthusiastic. Having
burnt its fingers repeatedly – with the first euro target date being 2006, declared by
the first Orbán government in 2001 – caution rules. Following the examples of
Poland and the Czech Republic, the government does not intend to ’hasten in the
euro-zone’, and wishes to sit out the outcomes of the solution of the crisis.
Declarations of those responsible refer to 2020 and beyond as possible target date.
Let us note: the ’convegrence game’ by its nature is an exercise limited by time.
Governments and central banks may anchor expectations only if those are within
reach for the median players – households, firms, capital market participants,
investors, political parties and social partners alike. Given the decisive role of the
elctoral cycle, a deadline reaching beyond the mandate of the successor of the
current government, can not be taken seriously. Thus the possibility of anchoring
expectations and thereby launching virtuous circles is unlikely to materialize, due to
lack of credibility and lack of forseeable perspectives. Whenever convergence games
were played, be that the original D-Mark zone, or later acceeding countries of the
south and east, the precondition was the time constraint of 3-4 years at maximum.
Therefore we may come to a paradoxical conclusion. On the one hand, Hungary is
close to meting EMU criteria. Being a small, open, vulnerable country, with exports
and imports together accounting more than 160 pc of GDP, she would greatly
beenfit from joining in. All the more so, as 70 plus per cent of external trade is
transacted with EMU countries. On the other hand – not least owing to the
procrastination and ups and downs in crisis management in 2008-2012 – the
willingness as well as the credibility seem to be missing.
From this it also follows, that Hungary is most likely to follow a less enthusiastic
approach on fiscal and banking union, as the traditional alliance to Germany and
the warming up of relationship to France would suggest. While small countries, like
the Netherlands or Belgium, or Ireland have tended to be in favor of more
supranationalism and a strongest possible Commission to countervail threats
inherent in enhanced inter-governmentalism of the recent years, this situation is
gardually on the change. Not least because of the ever growing frequency of
decisions taken in narrow informal groups, small members – from Estonia to
Cyprus – tend to be more often caught in foot dragging. Ireland with her recurring
referenda on a variety of issues is a telling case in point.
Therefore it is both conceivable and probable that Hungary is to take a more
assertive stance than earlier, especially if forms of closer governance includes more
supervision without possibilities to ask for remedial actions. The recapitalization of
Spanish banks in July 2012 included re-structuring supervision, re-allocation of
competences to European organs and a loss of control by fiscal authorities – and by
implication, of elected MPs – over major expenditure elements and conditions for
their realization in favor of European technocratic organs. This is clearly a case
indicated in the earlier cited Frizt Scharpf on hollowing democracy, thus old issues
of accountability, transparency and burden sharing prop up, without however being
resolved. Therefore the reserved attitude looks justified. Hungarian banks did not
have to resort to public international funding, as their Irish, Portuguse, Spanish,
Italian, Greek and Estonian and Cypriot counterparts. Thus the country has limited
if any interest in transferring either regulatory or financial soveregnity to a banking
union. Also in terms of public debt, while according to Eurostat 2012 numbers for
public debt was 88.2 pc for the eurozone and 83.4 pc for the EU-27, Hungarian
indicators improved to 79 pc, as one of the six exceptional cases15. Attempts to
employ punishment for future misdeeds should be a warning sign to anyone.
15 As reported in:, 23 July, 2012/online financial daily, bilingual/.
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