Tamas Fellegi, Hungary’s chief negotiator with the International Monetary Fund, has a tough task this week. Fellegi, a minister without portfolio in Viktor Orban’s right-wing government, is in Washington for preliminary talks with the IMF, in the hopes of setting the foundations for a new package of financial support that will prevent the country’s descent into the Hades of default. This new package, which Orban had previously stated would not be needed, was made necessary in part because of the dramatic deterioration in the economic outlook of the whole of Europe as a result of the eurozone debt crisis and the inept way it has been handled. But the Hungarian government shares responsibility for its predicament: Through its policies in the last year and a half, it has made investors particularly jittery. Critics, whose ranks are rapidly swelling and which include the U.S. administration, argue that the problem is not just one of economic policy. In their view, Orban’s reforms, culminating in a new constitution that went into effect January 1, undermine the rule of law and increase the power of the executive branch to a dangerous degree.
A little recent history: After sprinting ahead of the Eastern European pack in transitioning its economy from communism to capitalism in the 1990s, Hungary went on a borrowing binge, both private and public, in the decade that followed. As a result, when the global financial crisis erupted, it was hit especially hard and had to be bailed out by the IMF and the EU, with additional funds from the World Bank. Orban, as leader of the right-wing Fidesz Party, capitalized on the discontent of the public at the austerity that accompanied the rescue and won more than two-thirds of the seats in the April 2010 parliamentary elections.
Since then, acting on the mistaken assumption that it no longer needed outside financial assistance, the government has attempted to fix the country’s public finances through a string of measures that often greatly antagonized foreign investors. Among others, it imposed a large extraordinary tax increases on the energy, telecommunications, and retail sectors, and it forced the banks (the majority of which are foreign-owned) to take losses on home loans denominated in Swiss francs, a currency whose value had hugely appreciated against the Hungarian forint. The government also nationalized the compulsory private pension system that complements the Hungarian version of Social Security.
Perhaps these policies can be defended as attempts to improve Hungary’s fiscal condition without bringing the population to its knees, but others indicate that Orban seems to have stepped over the line that separates benign populism from incipient autocracy. Concern was first raised in the EU in late 2010 about a new media law that brings the media regulator under central-government control and allows it to impose heavy fines for vague offenses, like coverage that is “unbalanced” or “offensive to human dignity.” Since then, government supporters argue, the press has lost none of its critical vitality. Yet, recently a popular anti-government radio station lost its frequency, while the publicly owned media are showing worrying signs of obsequiousness to government policy.
In addition, Orban has placed party loyalists in charge of most independent institutions meant to hold the power of the executive in check, like the audit and state prosecutor’s offices, the courts’ authority and, more recently, the central bank. The governor of the central bank, Andras Simor, was already complaining of “blatant political pressure” from the government in an early 2011 interview with the Financial Times. The attempt, through a number of new laws, to directly control central-bank decision-making was a main reason for the breakdown of talks about a new loan package between Budapest, the EU, and the IMF in November. The governing party has even changed the electoral rules to favor its candidates in the next election.
As Dimitar Bechev, a senior fellow at the European Council on Foreign Relations, puts it: “Measures such as the reduction of the number of MPs and the concentration of power in the hands of the government are indeed jeopardizing democratic achievements in Hungary. The balance of power between the judiciary and the government is also disrupted in favor of the former. The fact that the constitution was adopted unilaterally by Orban’s Fidesz rather than through broad consultations is also concerning.”
The takeover of the state apparatus by Fidesz apparatchiks and the constitutional changes, which limit the jurisdiction of the constitutional court, have led to widespread public opposition, including large demonstrations in Budapest in the first days of the new year. EU leaders are already discussing ways in which they can persuade Hungary to change course, aided by its renewed need for external financial support. Certainly, both the country and its European allies would benefit from a cooperative resolution of the current tension. If the Hungarian economy continues on its downward spiral (the forint has lost 70 percent of its value against the euro since last summer), Austrian and Italian banks with major stakes in the country’s banking system will be badly exposed—as if they didn’t have enough problems.
There is another reason to fear a Hungarian slide into default and depression. In the 2010 elections, economic woes catapulted Jobbik, a far-right, anti-Semitic, anti-Roma outfit, to third place with almost 17 percent of the vote. The party, which includes paramilitary-style Hungarian Guard units, is polling strongly. “Jobbik’s rise is conditioned equally by the current economic hardships and unyielding historic grudges testifying to the staying power of Hungarian nationalism,” notes Bechev. Though he has clearly separated his party from the extreme positions of Jobbik, Orban has consistently cultivated these deep-rooted nationalistic tendencies in his audience. Because of them, if the economy gets out of hand, he—and Europe—may reap a whirlwind.
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