Hungarian National Compact

Ferenc Gyurcsány seems to have learned something from the government's first attempt at reforms that failed miserably, in part because the government didn't prepare adequately, in part because people didn't believe the reforms were necessary. Moreover, the reforms were not structural in nature; they merely tried to make the population contribute financially to services until then considered to be "free": education and healthcare. The referendum that rendered both tuition at universities and co-payment in hospitals and doctors' office null and void had a devastating effect on the government's resolve to introduce reforms. After all, two years had been wasted and only two years remained until the next election. Every savvy politician knows that reforms that may adversely affect the population must be introduced at the beginning of the four-year cycle. So it looked as if experimentation with reforms was over. The government would concentrate on the convergence program and would do its best to reduce the deficit. But then came the crisis.

Necessity is the mother not only of invention but also of courage. It didn't matter how the government counted, the numbers just didn't add up. Because of the recession fewer forints were arriving in the treasury while normal operating expenses remained more or less constant. Moreover, as the forint became weaker by the day the country's substantial foreign debt payments became increasingly expensive. Something had to be done. Fear or no fear, winning an election or not, they had to act. First the government talked about finetuning the structure of taxation: they would take away a bit here, add a bit there. However, in the last two or three days one could hear more and more about "deep structural reforms." The prime minister mysteriously said several times that these "reforms would be the most penetrating and far reaching" of the last twenty years. That is, they will surpass the "package" of Lajos Bokros in 1995. Of course it is possible that Gyurcsány, in the flip side to the good CEO who underpromises and overachieves, is preparing people for the worst and will offer something much less dire. However, there are signs that he may be telling the truth.

Today the Országos Érdekegyeztető Tanács (OÉT) convened. The OÉT is a tripartite forum in which representatives of the government, the employers' associations, and the coalition of trade unions sit down and hammer out agreements to balance out the economic interests of the different groups. The most important discussions are normally about wages. They usually try to set a maximum figure that would be acceptable to all three factions. There are nine organizations representing employers (from farmers to factory owners) and seven trade union associations. Every year both the trade unions and the employers' association elect a president. This year the trade unions chose János Borsik, head of the Autonomous Alliance of Trade Unions (Autonóm Szakszervezetek Szövetsége), while the employers elected Tamás Nagy, head of MOSZ, the association of agricultural cooperatives.

Last year the OÉT agreed on a modest salary increase. Today they had a more critical agenda: to accept ground rules for a national compact (nemzeti megállapodás). In plain English, the trade unions would not go against the reform plans and the employers would also be satisfied with perhaps less than they originally demanded. From the immediate reports it seems that the prime minister managed to convince these very influential groups to support him and his government in the introduction of some hitherto unacceptable changes. From one of the interviews with Tamás Nagy I got the distinct feeling that Gyurcsány was quite specific about the government's plans, but the participants are sworn to secrecy. It will be the prime minister who will reveal all the details on February 16, the first day of this year's parliamentary session.

What did Gyurcsány, with János Borsik and Tamás Nagy standing by his side, say to the Hungarian people? He reiterated that "political warfare must come to an end" and instead "there must be a national compact among all representatives of society." The goal is to create a social and economic program for the next three or four years. They want to work out a clear road to the introduction of the euro in such a way that at the same time the number of active workers would rise and thus the country's economic development would be assured. Tamás Nagy reiterated that all three sides recognized that for the country's healthy development new ideas are necessary. They all are ready to abandon the strategy followed up until now. They are ready act together. János Borsik emphasized that the trade unions are ready to support the plan of the national compact because they cannot risk the loss of jobs and they consider the government's plan the only assurance to save the workers from a very uncertain future.

This development is fascinating, especially in light of what Tibor Navracsics said a week ago. According to Navracsics, Fidesz is willing to cooperate to solve the problems of the country. But their partner is not Gyurcsány and his government but the Hungarian people. It seems that Gyurcsány was a bit quicker again. In fact, József Orosz, anchor of Kontra at KlubRádió, asked Borsik whether they didn't think that it was necessary to talk to the "largest opposition party"; the answer was that it was not their job to initiate such a discussion.

In addition to the national compact a decision was made to set up an office to target political corruption, especially egregious on the local level.

The initial Fidesz reaction to the news was rather clumsy. András Cser-Palkovics, associate spokesman of the party, issued a communiqué according to which "nobody can take seriously the anti-corruption promises of a politician whose company received electricity for some unknown reason cheaper than others and in whose enrichment public money paid a serious role." The electricity story is most likely bogus. As for Gyurcsány's road to riches: he was a talented, well-connected entrepreneur who took advantage of business opportunities. No more, no less. István Balsai, whose brainchild it was that the government offered the Holy Crown as collateral for the European Union's loan, returned to his usual strategy: let's say a few things that might spook the whole country. Whether true or not doesn't really matter. He held a press conference and announced that "in the material prepared by experts for the so-called reforms" there are plans to scrap the thirteenth-month pension, freeze child support, and shorten the length of the "new mother's" stipend. Gyurcsány assured everybody that these suggestions didn't even come up. However, Balsai insisted that these plans were for real. He claims that experts presented these plans for consideration. Of course they did. After all, the government solicited opinions from all quarters, and we have heard these ideas before. The question is what recommendations the government considered in its deliberations. That we don't yet know. In any case, employers and employees are behind Ferenc Gyurcsány and his government, and that is a real plus. 

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HH
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Clever manouvering, for sure, and who knows it works. But I’m afraid that support of OET and such platforms is not enough. If Fidesz goes flat out against the governments reform plans, a few minor and like minded trade unions (say at the railways) start strikes, small farmers take their tractors and block some roads, and some ‘individuals’ start a referendum, before you know it the whole reform goes up in smoke again. There is no way around some sort of agreement with the opposition, but I’m pretty sure that the man calling the shots there will never do this and prefers to hold the government and Hungarian society hostage. I’m sure there are also those within Fidesz, even high-up, with whom reasonable cooperation is possible, but they’re not at the helm.
There are tough times ahead, even if major parties join forces. It will be much tougher if Fidesz persists in its uncooperative attitude.

NWO
Guest

I also remain skeptical that the Government can pull this off, but as they say about drug abuse “acknowledging the problem is the first step to recovery.” Anyway, I think the PM is playing a bigger game with the IMF. I suspect the IMF is pushing Hungary to undertake substantial reforms because (1) the depth of the crisis and GDP contraction is going to be much larger than to date acknowledgeda and (2) having the HUF for a sustained period above 300 to the euro presents a real threat to massive household bankruptcies and in turn the bankruptcy of the banking system. The carrot the IMF, ECB et. al. will offer Hungary is (1) further support for the banking system and in particular some way to help households restrucutre the FX denominated mortgages and (2) the possibility of early entry in ERM-II by end of this year or next year.

Mark
Guest
NWO: “Anyway, I think the PM is playing a bigger game with the IMF.” I hope you are right, and would regard it as a very encouraging sign if international organizations were prepared to help Hungary restructure some of its debt, in return for a sustainable plan from the government that would bring about a long-term shift to greater fiscal responsibility than has been seen for most of the past decade. As far as the ERM-II issue is concerned, I’m a little sceptical. This is because the decline in Hungary’s competitiveness is very deep rooted – and that decline relative to Germany and Austria has been a long-term trend (going back to 1999, if you look at the figures). And also, because of the damage done to the real economy consistently since 1989 by attempting to ensure that the Forint was stronger against the D-Mark prior to 1999, and then the Euro thereafter than the economic fundamentals justified. That I think means that the value of the Forint needs to decline further for ERM-II to become a sustainable option (which means that FX mortgage restructuring package needs to be sizeable, and offer very extensive protection to households). My third doubt… Read more »
NWO
Guest
Mark- I agree with you that a key to the success of any real, sustainable reform lies in a grand political compromise, and the country and the politicians are not yet ready to enter into such a compromise. Hence, I also doubt the success of the “deal” I outlined in an earlier post. As far as the question of monetary union, regardless of what you think, the near 100% concensus in Hungary and in the halls of Brussels, Frankfurt and Vienna (home to the key banks in this story) is that a small, open economy like Hungary is better off inside the common currency than outside. Yes, the country loses the flexibility of monetary policy freedom and yes-as the Greeks are deomstrating now-even being inside the common currency group does not mean smooth sailing, but the feeling is than on balance it is a better course for the country and will help attract FDI. To address some concerns on competitiveness, the right FX entry point needs to be established, and I suspect Hungarian entry will be closer to 275/280 than the 250 that was assumed just a couple of long months ago. Longer term, the country needs to invest in… Read more »
Mark
Guest
NWO: “A small, open economy like Hungary is better off inside the common currency than outside.” In principle, I absolutely agree with you. And all other things being equal I think the same is true for the UK, Sweden, Denmark, and those countries that have chosen to remain outside. But, there is another side to this problem, that those in Brussels and Frankfurt have not resolved, and have not even addressed. The economic history of post-war development in western Europe has been one of the management of uneven development. Since the end of the 1950s, western European growth has been led by (West) Germany which has been (and still is) a very competitive, export-led economy, which has been committed to maintaining large trade surpluses with its major trading partners. Other countries (France, and Italy – the UK’s relationship is a bit exceptional – in the 60s and 70s; Spain and Ireland in the 80s and 90s) have been engaged in catch-up growth with the German core, which has meant that from time-to-time they have had to run large balance-of-payment deficits. What made this process viable was the ability of the catch-up states to devalue to restore their competitiveness and maintain… Read more »
Op
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Reform? I tell you what real reform is. Here’s my program: 1. Cut the number of representatives in the Parliament to 190. Every one of them elected by and represents their constituents not the party (if any) they belong to. Independents are welcomed. One step closer to democracy. 2. Government waste and corruption investigated and prosecuted. Save a few billions of the taxpayers’ money and get rid of the criminal element In other words, introduce responsibility and accountability, and restore credibility (if that’s still possible). 3. Hemp and marijuana. Let’s make them completely legal to grow, buy and sell (except for minors). This could not only revitalize our textil industry but also provide a cash crop for farmers and jobs for the unskilled and unemployed. The decriminalization of pot would make Hungary a favorite tourist destination. Our police force could spend some of their free time chasing real criminals. It’s a win-win situation, increased revenues and lowered costs for the state. 4. Lower income taxes at least 5% below of the neighboring countries. Make Huingary a tax haven instead of the current Gyurcsany policy of chasing SMEs into tax exile. 5. Now that we’re out ot the EU (the above… Read more »
Mark
Guest
NOW: “I suspect Hungarian entry will be closer to 275/280 than the 250 that was assumed just a couple of long months ago” Looking at what is happening to the currencies of states around Hungary, and the trends within it, I think you might want to consider replacing the 2s on the front of those figures with 3s! And, thinking about what debt restructuring package allows Hungary to cope at that level of devaluation. “Hungary cannot (and would not be allowed to) to consistently depreciate its currency in order to maintai export competitiveness. I would not work and would not be permitted.” Currency depreciations have positive effects on exports and growth if inflationary pressures can be contained (I don’t think this is an issue at the moment). Since the early 1960s European institutions have been trying to prevent currency devaluations – currency snakes, the ERM etc. Generally, events have forced them to accept these devaluations, and events will play a similar role here – the events of May 1968 forced a revaluation of the Franc against the DMark, and famously the financial markets forced the currency realignments in 1992-3. When an economic logic has supported a revaluation of European currencies,… Read more »
Odin's lost eye
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NWO I do not think that as you say *** “.” Anyway, I think the PM is playing a bigger game with the IMF!” The IMF boys are real smart cookies. The IMF will however help the local politicos to institute even the deepest and most fundamental reforms. Fidesz wants none of it unless they are in power. Some months ago there was speculation in this blog site on Fidesz’s need for funds – I say no more. Fidesz is again playing at ‘dog in a manger’ politics. Therein lies the danger for Fidesz. If the crisis deepens which I think it will the speculators will start to attack and sell short currencies like the Forint, the Pound Sterling and the Rupee. The government can lay the blame on Fidesz for the negative attitudes towards solving the country’s problems. One of the problems about the present crisis is that there seems to have been a near collapse of the banking system, why? I do not think any one knows of the underlying causes. One thing that is for sure is that ‘trust’ has vanished from the world’s banking system. One of the many problems that Hungary has is the large… Read more »
New World Order
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They are desperate to find some sort of accomodation/solution for the crisis of the FX mortgages. This problem is much bigger than Hungary, however, and also impacts other CEE countries (especially Poland, Romania, Bulgaria and the Baltics), Austria and Italy (as the home countries of the major foreign banks in the region), the IMF and the EU/ECB. There is no easy solution, but without a solution there is a possibility (a liklihood I would say) of substantial devesation in the household sector and likely bankruptcies of the banking sector. Any solution however will entail a massive amount of capital (which Hungary does not have)to recapitalze the banks or for the Governemt to acquire or insure the mortgages. My guess is that they will try and put forward an agreement whereby cash interest payment levels are capped, and additional amounts over a certain level owing due to adverse moves in the FX rate will be capitalized to the principal of the loan to be paid back later. Also, maturities will be extended. This will be financed in part by Hungary/IMF which which will provide funding to the local banks and probably provide some sort of government insurance over the loans and… Read more »
Odin's lost eye
Guest
NWO In the housing sector there are two quite distinct problems. The first is caused by borrower’s currency devaluing against the lender’s currency. The second is where the borrower defaults on the loan. In the first case the solution is quite simple. It is to extend the period of the loan without charging any more interest. When a loan is made the lender knows just how much interest he will accrue over the original period of the loan. My contention is that this sum of interest is all the lender is entitled to receive. The repayment period for the principle of the loan could be extended. Where the borrower defaults on payment this is a different matter. It was this case that I was referring to. If I were a Swiss Banker I would not want a load of empty Hungarian houses on my hands, which I probably could not sell, or if I did I would have to sell at a low price just to cut my losses. If the Hungarian Government took over the outstanding balance of the loan –minus interest yet to be paid by paying off the lender and then charged a rental to the occupants.… Read more »
Mark
Guest
NWO: “I suspect however the exisiting EU countires involved (Italy and AUstria among others) would be very much against such a depreciation and would argue against having that as part of a solution.” I’m not so sure. There are two ways in which Italian and Austrian banks incurr huge losses: (1) Recession, and widespread job losses cause a major problem of solvency in the household sector, leading to losses for the banks. (2) And a series of disorderly devaluations, without some form of debt restructuring in the countries concerned, has the same effect. These two things are happening now, and from what I read in the Austrian media there is a growing awareness of the risks and the large liabilities that the Austrian state might incur from an outright crisis (and indeed Austrian public television main evening news magazine ZIB2 considered the issues in mid-January). Furthermore, I think the banks involved are aware that the current situation is unsustainable. Clearly Vienna (and Unicredit – it is the Bank Austria subsidiary that carries some big liabilities), and Erste, and others – have an incentive to see a solution that Europeanizes, or internationalizes the problem. I don’t know which of the two… Read more »
Andras
Guest
The government again in the same self-made trap. Unfortunately, the country also. I just simply don’ understand how come that they did not see the magnitude of the crisis we have (I mean the whole world, and including Hungary). I saw what was coming in October simply based on reading newspapers, research papers and economic blogs. I already though that time that was coming a 30-50% collapse of industrial production, and the consequent collapse of budget. They should have known it having all statistics at hand and direct relationship with captains of finance and industries, and top-experts. Instead of having developing realistic prospects, the government, thought that the IMF deal saved Hungary. I guess, Gyurcsany game was that with the IMF deal securing the solvency of state budget until April 2010, only make soft, “velvet” if you like, measures, and dump everything on Orban, who after winning 2010 elections would face the grim reality and harsh measures. – and prepare the way for MSZP return in 2014. Unfortunately for all of us, reality does not allow such a fine tactical game. Industrial production shrunk by now some 20% and more to come, the forint crisis is here, and Hungary faces… Read more »
Mark
Guest
“The MSZP after preparing the package put together with IMF, should call early elections.” Would this really solve very much? The uncertainty generated by an election campaign – even a shirt one – would contribute to the instability out there already, and the general pressure on the Forint. But this in’t the biggest problem …. I can imagine what the MSZP would do in such an election campaign. They would want to make some of their opinion poll deficit up by running a negative campaign against FIDESZ, including accusing them of preparing all kinds of horrible things to core MSZP voters, like pensioners to get them to vote. FIDESZ would respond by denying these charges and making unfunded promises to deflect them. The MSZP would close some of its opinion poll deficit, and the result would be closer than the opinion polls suggest, but the government would still be clearly defeated. FIDESZ would have the crisis to deal with, and would face a rapid collapse in public trust. What both major parties are faced with if they continue with their current behaviour is a kind of political equivalent of mutually assured destruction. Both of them face the prospect of a… Read more »
Andras
Guest
Mark, juts for the sake of clarity. I did not want to say that todays Hungary is in the same situation as Germany was in, lets say 1931. I just wanted to highlight with invoking the Weimar example, that the biggest problem of the Hungarian democracy is that we lack the postwar compromise between moderate left and moderate right, which was the foundation of postwar European democratic experience. The moderate right does not recognise the moderate left as legitimate political force. The left – see the latest interview with Gyurcsany in the Mozgó Világ, published also in his blog – out of fear of the angry right does everything not to loose power, even including irresponsible government. Without change in the political culture, and without the mutual recognition as the other side is patriotic and democratic players there would not be possible to achieve any compromise on crucial economic issues. Without some basic common understanding, it is impossible to have responsible and democratic policy making within the framework of democratic institution. The lack of common understanding is the illnes of the Hungarian democracy, and was the illnes of pre-war Germany. I think we have the same social phenomena. Of course,… Read more »
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