Economic Cacophony in Hungary?

At least according to Tibor Erdős that's what's going on right now in Hungary. One doesn't hear as much from Tibor Erdős as, let's say, from Lajos Bokros or László Békesi. Most likely one reason is his age. He was born in 1928. But the few times he speaks or writes it is worth listening to him.

Uncharacteristically, he wrote two articles that appeared in quick succession in Népszava. The first on February 19 with the telling title "Cacophony" (Hangzavar) and the second on February 26 ("Four serious problems"). In both Erdős tries to shed light on the complexity of Hungary's economic situation. Without pointing fingers he makes it clear that the reform economists don't realize that some of their remedies would actually deepen the economic crisis. Such as major cuts in spending. He also discards major tax cuts because the resultant growth in demand would only add to the country's dependence on imports.

So what should the government do? They should stimulate segments of the economy that would provide jobs and would not rely on exports. For example, investments in infrastructure. Moreover, such investment would be useful in later years once the country's economy rebounds. Investments in small and middle-sized Hungarian companies that target the domestic market would also make sense. Such investments are well suited for projects financed by the European Union. Let me add that it seems that this is exactly what Gordon Bajnai, minister in charge of economics and transport, is trying to do.

As for cutting back on spending, Erdős is cautious. He recommends restructuring expenses rather than decreasing the size of the total package. For example, he, like many others, suggests reducing the number of institutions of higher learning. I don't think he would go as far as Lajos Bokros, who would shutter over 60% of these institutions, leaving only 25 of the current 70+ institutions standing. But he would close those institutions that are not worthy of support. It might even help standards, which are fairly low at the moment. Practically anyone who finishes high school can enter some kind of college.

As for reforms. Yes, Erdős says, reforms are necessary but "reform economists and politicians, attention! Be cautious when it comes to reforms in the middle of an economic crisis. Introduce them after the crisis is over." Basically, if I read Erdős right, he endorses the government's program and warns politicians not to get too enamored with the radical suggestions of the reform economists. And this piece was written before the Reform Alliance gurus came out with their plans. Of course, it is possible that Erdős already knew what was brewing. After all, he is an academician, and in Budapest everybody knows everybody, especially within the same discipline.

Although Erdős's ideas are close to the government's proposals (and I wouldn't be surprised if he were one of the advisors the government consulted with) in one aspect he goes against the common wisdom. He suggests that the budget deficit requirement be loosened. A slightly higher deficit would help the country's recovery. That is most likely true, but what about the highly desirable Eurozone membership? Everybody thinks that Hungary should join as quickly as possible, and the government seems to be making some efforts to shorten the waiting period for countries that achieve the requisite inflation rate and budget deficit. The waiting period at the moment is two years. From what Hungarian politicians drop here and there one has the distinct feeling that for the moment at least the introduction of the euro is uppermost on the Hungarian government's mind. They are especially anxious about joining as soon as possible because the weakening forint is a real threat given the high percentage of outstanding loans payable in foreign currencies.

Well, Erdős's warnings didn't make an impression on certain Hungarian politicians. The cuts recommended by the economists of the Reform Alliance are embraced by SZDSZ and MDF. Both parties adopted the plan as their own, and parliament will vote on the question of whether the plan should be an agenda item, subject to the vote of the full parliament. I would wager to say that it will be dead on arrival. MSZP won't vote for it, and Fidesz is adamantly against any cuts in benefits and entitlements. Yet in order for the government's bill to go through they need some votes from either MDF or SZDSZ. So I'm almost sure that certain parts of the reform proposals will be incorporated into the final package to appease the enthusiasts of the Reform Alliance. I do hope that, in the give and take, they won't forget Tibor Erdős's warnings.

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Mark
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“As for reforms. Yes, Erdős says, reforms are necessary but “reform economists and politicians, attention! Be cautious when it comes to reforms in the middle of an economic crisis. Introduce them after the crisis is over …… He suggests that the budget deficit requirement be loosened.”
At last – some sanity from someone. I do think the government should listen to these warnings – it is fairly clear that early Eurozone membership as a solution to currency instability is an illusion (and membership of ERM II as open and clear an invitation to the currency markets to attack the Forint as one could imagine, unless the rate was much lower than now). And at least – unlike the Reform Alliance’s suggestions, or the government’s more confused stance – this approach has some chance of success.

Sandor
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While at least some people decide what to make of all this uncertainty, I propose the only certainty: cacophany is misspelled, cacophony is the correct form.
In Hungary it seems, there is hardly any recognition of the two schools of economic thought usually associated with influencing the macro economy: Keynsianism, and monetarism. (The latter being inovated by the late Milton Friedman, also one of those ingenious Hungarians who made good in Amerika.)
The helter-skelter proposals flooding in from all directions are not showing any sign of being systematic. They are a hodge-podge of random caprices. To make matters worse, applying just some of them, for political expediency is just plain stupid.
Obama is clearly dedicated to the Keynsian school and does what is suggested by it.
The monetarist method I don’t see applied anywhere, perhaps because it doesn’t have as many examples to rely on as does the other.
However, none of the proposed solutions in Hungary shows any disciplined design, therefore my feeling so far is that the results will be just as chaotic as the proposals were.

NWO
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Erdos’ ideas would make sense if Hungary were not 100% at the mercy of the international capital markets for financing, the household sector was not burdened with Fx loans that become more crippiling each day the HUF sinks, and the banking sector was not insolvent and could be aneffective conduit to put more capital into the economy to help raise economic activity. None of these are the case. Infrastrucutre spending would normally make sense, but the record of effective investment in infrastrucutre in Hungary is dubious, and the multiplier effect from such investment is much less than it should be. In the end, Erdos assumes Hungary is similarly situated as the U.S. and Germany and can with relative ease go out and finance larger beudget deficits on the cheap. Nothing could be further from the truth. This is the particulalr crisis that Hungary facs today. The Country’s wasteful spending and bad economic choices over the past decade make it impossible for it to run a counter-cyclical policy today. Even countries far more responsible than Hungary like Poland have been punished wildly for promoting pro-growth policies. Hungary is screwed. It must suffer through a massive downturn and restrucutring today for its… Read more »
Odin's lost eye
Guest
Professor you say *** “He also discards major tax cuts because the resultant growth in demand would only add to the country’s dependence on exports.” *** Do you mean imports? In the present situation exports would support the forint whilst imports –goods brought into the country- tend to put pressure on the value of the currency or am I missing something here. Mr Erdős’s warnings about reform are timely. Reforms tend to make people both at home and abroad uncertain about their effect. The ‘jitters’ is the last thing you in a crisis of the type the world is going through at present. There is a general ‘damping down’ of all forms of manufacturing activity, partly because of the lack of liquidity in the banking system which supported the interim financing of companies between obtaining orders and receiving payment for the goods shipped, and partly due to the reluctance (or inability) of people to buy items. Mark you say that *** “it is fairly clear that early Eurozone membership as a solution to currency instability is an illusion (and membership of ERM II as open and clear an invitation to the currency markets to attack the Forint as one could… Read more »
Mark
Guest
NWO: “Hungary is screwed” You may be right. But what Hungary will go through if you are is much more than a savage downturn. The idea that the market and political democracy offer the route to economic salvation will surely be discredited, and this will end not in everyone accepting reform, but in the creation of a kind of economic state socialism presided over by a regime most likely of the far right rather than the far left (the parallels with the 1930s are not encouraging). Anyone who can leave for better jobs elsewhere will have left leaving an ageing and sick population. I hope I’m wrong about this future, but the best guarantee of avoiding it is to attempt to do something about it. NWO: “It must suffer through a massive downturn and restrucutring today for its sins of the past” Though versions of this argument have been repeated from Andrew Mellon right to the present day, I have the feeling that it owes more to the influence of the concept of original sin derived from our dominant religion, than any rational analysis of the situation. What you are saying is Hungary has lived a life of excess for… Read more »
Mark
Guest
NWO: “In the end, Erdos assumes Hungary is similarly situated as the U.S. and Germany and can with relative ease go out and finance larger beudget deficits on the cheap.” While the issue is relatively easy for the US, given Germany’s debt ratio to GDP (larger, not smaller than Hungary’s) it is not an easy choice for Berlin. Just as the close to 10% deficit to the UK will run is not an easy choice for London. He recognizes two things – firstly that the employment consequences of a downturn will serious impair the long-term growth prospects of the Hungarian economy, by exacerbating its labour supply problems. Secondly, that a deep downturn will depress tax receipts and boost demand for public spending, actually ultimately increasing the recession. Over the medium term even quite a large stimulus will be cheaper financially for the state than a deep downturn. The problem is that because of collosal market failure last September-October, Hungary cannot even borrow rationally to spread the cost of its economic adjustment. We know the the Maastricht Treaty (I think, article 119 – but I’ll have to look it up) in these cases allows the European Union to provide the financing… Read more »
Mark
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“actually ultimately increasing the recession.”
I’m going mad too “actally ultimately increasing the deficit” is what that should read.

econom
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Catastrophe Eastern von Raivo Pommer-Eesti-raimo1@hot.ee Eastern Europe’s woes are not unmanageable. But they are not being managed. The result could be catastrophe AMID the wreckage of Latvia’s retailing industry, which has declined 17% year on year according to the latest figures, one item is selling well: T-shirts with seemingly mysterious slogans such as “Nasing spesal”. Latvians are glad to have something to laugh about, even if it is only their finance minister, Atis Slakteris. In an ill-judged foreign television interview, using heavily accented and idiosyncratic English worthy of the film character Borat, he described his country’s economic problems as “nothing special”. Put mildly, that was an original interpretation. Fuelled by reckless bank lending, particularly in construction and consumer loans, Latvia had enjoyed a colossal boom, with double-digit economic growth and a current-account deficit that peaked at over 20% of GDP. Conventional wisdom would have suggested applying the brakes hard, by tightening the budget and curbing borrowing. But the country’s rulers, a lightweight lot with close ties to business, rejected that. Fast economic growth made voters feel that European Union membership was at last producing practical benefits, after a disappointing start when tens of thousands of Latvians went abroad in search… Read more »
Andras
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Article 100.2

Mark
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Andras: “Article 100.2”
Thanks

NWO
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Mark- You misunderstand me. I am sorry that I am obtuse. My point on Hungary’s situation is not that some form of counter-cyclical stimulus would not “in theory” be helpful to ameliorating the current tensions, but that Hungary actually has no ability to do so (unlike the US, UK and even Germany)and part of the reason it is stuck is becuase of the massive pro-cyclical stimulus offered in the early part of this decade. The reason Hungary cannot carry out a stimulus is literally there is no money. How will the Govt finance such a stimulus? HGB market? Closed. Fx bond market? Closed. The only choice would be to print money and spend it. The problem is (and I think this is where we disagree) to do so would (1) speed up the bankruptcy of the household sector, (2) bankrupt the local banking system, (3) infuriate the EU so as to basically close the door to any serious help from the EU, (4) certainly brake the terms of the Oct agreement with the IMF, (5) destroy the value of foreign capital invested in Hungary which is the basis of any future growth. This is why I believe Hungary is stuck… Read more »
Sophist
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NWO,
“(5) destroy the value of foreign capital invested in Hungary which is the basis of any future growth.”
It’s been interesting following your debate with Mark. But I don’t understand this bit. “Foreign Capital” is this financial capital denominated in forints, or is this physical capital in plant and equipment?
If it’s Forint denominated financial capital then it will obviously be destroyed by printing money, but I don’t see how it is the basis of future growth.
If it’s plant and equipment, then it is obviously the basis of future growth, but it’s value won’t be destoyed by inflation.
What am I missing?

Mark
Guest
NWO: “How will the Govt finance such a stimulus? HGB market? Closed. Fx bond market? Closed.” I think you may have misunderstood me too. My argument is that Hungary is a member of the EU, which is a highly integrated market of 27 member states, each one of which has different means of supporting themselves. Hungary cannot finance itself because of collosal market failure. In this situation it is for all of 27 states to stick together and support each other – if Hungary’s mortage market collapses it affects Austria and Italy. The MNB needed to argue for an orderly relaxation of the convergence criteria, and the creation of a safety net for states that met their obligations to the EU in October. Hungary has assumed during the last 20 years that if it is “good”, this will be recognized and it will be helped. This is an illusion – western European states will not agree to assist unless CEE states demand it. Why didn’t the Hungarian demand some form of underwriting of its convergence programme, given that it had fulfilled its objectives since 2006? I would expect Hungarian economists to explore solutions that are in the interests of ordinary… Read more »
NWO
Guest
Mark: So we are closer to each other’s view than maybe we thought. However, as yesterday’s EU Summit showed clearly, there is NO appetite in the greater EU and the Euro zone to find a collective decision. There is no other EU country yet ready to help in a meaningful way the working through of the debt overhang in Hungary or to support stimulative measures for the region. As Hungary cannot do this itself, it is at the mercy of the capital markets which will not be merciful. On one point I disagree. I don’t think Hungary is being some singled out for blame than the U.S., or Ireland or Spain. It is true that as compared to its “neighbours” (Slovakia, Cz. Republic, Poland and even to an extent Romania) it is being negatively compared. But you will surely acknowledge that its position is weaker than them and its prospects-except perhaps for Romania-are worse. The difference with Ireland and Spain is that Hungary is outside of the Euro zone. The difference with Poland is twofold: (1) Hungary’s problems are on a relative basis worse (look at Fx debt/GDP and economic growth) and (2) Poland with 40 million people and the… Read more »
Mark
Guest
NWO: “However, as yesterday’s EU Summit showed clearly, there is NO appetite in the greater EU and the Euro zone to find a collective decision.” It is really interesting, isn’t it, that what is unfolding in terms of CEE and the EU will determine the futures of all Europeans (west as well as east) far more profoundly than anything else in the news this weekend, and western Europe has not yet woken up to it. The Hungarian press thought their request for help was being turned down, the Austrian and German press said that CEE was being assisted, and the UK press (no surprises there) completely ignored it! I’m not so pessimistic, but all CEE countries have to spell out the economic and political dangers and have to press for such a package. I think Hungary undermined its position by offering up the pension and public sector wage cuts to the IMF last October, and by then wriggling out of them. This reinforces the impression which you’ve pointed to in a previous post – that I know is widespread in Brussels – that Hungary is an untrustworthy partner. But there is no doubt that the EU is – and has… Read more »
Mark
Guest
NWO: “I don’t think Hungary is being some singled out for blame than the U.S., or Ireland or Spain. It is true that as compared to its “neighbours” (Slovakia, Cz. Republic, Poland and even to an extent Romania) it is being negatively compared. But you will surely acknowledge that its position is weaker than them and its prospects-except perhaps for Romania-are worse.” I actually think that it is premature to come to this conclusion about the relative impact of the crisis, and we will have to wait until we are through it. I was always amused by those who talked of Hungary bringing up the rear economically, and being behind its neighbours, because in a strange sense it has been in the lead! It was the first country to meet with the problems of financing its imbalances in 2006, a year before the onset of the crisis globally. Since then its bubble has experienced slow deflation; its manufacturing sector went into recession maybe three to six months before Poland, ther Czech Republic and Slovakia. I suspect that Hungary is not in the worst position of the countries you identify and it only seems so, because its crisis is a precursor… Read more »
NWO
Guest

Mark:
On your last post. (1) It is clear already that the contagion risk is substantial for a place like Poland. Its currency has borne a greater brunt of devaluation than even Hungary. (2) Poland-unlike Hungary-actually has a decent domestic market, which-it turned out today-grew 3.6% in Q4. (3) In terms of export reliance, the Cz Republic, Slovakia and Hungary are in the worst positions. The advantage for the Cz Republic is that the economy has financed its growth with Crown loans largely not Fx loans and for Slovakia that they have no Fx risk, but as you have mentioned also don’t have the Fx flexibility of being outside the Eurozone.
Yesterday, again, Gyurcsany was seen as the little boy who cried wolf with his bailout package. He was left alone when even the other CEE countries did not support his proposal. The PM deserves credit for getting ahead of the curve in the Fall, but now Hungary’s problems have caused total “donor fatigue” in the EU.

Mark
Guest

NWO,
Though we differ on the relative strenghts and weaknesses of the region’s economies, contagion risk is something everyone should take very seriously. The financial press, and analysis generally in western Europe seems to treat CEE as a homogeneous zone. Therefore once the financial markets realize there is a problem somewhere in CEE, all the states are likely to come under pressure.
Though these is no doubt in my mind that the credibility of both Gyurcsány and Orbán is nil (the former because of his famous speech, the latter because he is regarded as a right-wing populist who will promise anybody anything), I don’t think the EU’s response is due to donor fatigue, I just don’t think they get it!

Mark
Guest

Ėva: “The more I think about it this whole fiasco is not really the fiasco of Ferenc Gyurcsány but that of the whole European Union.”
The two positions are not mutually exclusive.
The big story here is, of course, that the big western European governments have never really taken the needs of CEE seriously. Perhaps I’m being unfair, but they tried to continue in the 1990s as if what had happened in 1989 required no real adjustment on their part. After Kosovo they did expand the EU, but without ever realizing what that meant, and things are now unwinding, both for CEE and some western European states and they seem to be in a peculiar state of denial.
Gyurcsány deserves a lot of credit for arguing for the rescue package. He may have strong presentational skills, but he ain’t a great messenger. He has a credibility problem – most of the western European press and informed opinion know him as the person who “lied morning, noon and night”.
It is the tragic combination of these circumstances that is most marked.

NWO
Guest

It is not surprising the Euro is dropping. The Eurozone is in a shambles, defaults in the CEE banking system will wreck the Euro, and it is clear that the Euro cannot act as a true reserve currency. Likewise, the Krona’s drop is due to the Swedish banks’ exposure to the Baltics and the bail outs undertaken and to be undertaken.
The irony is the rally in the dollar. The USD and U.S. Treasuries in particular are the next big financial bubble on the horizon.

Sophist
Guest
Gyurcsany’s credibility issue. Feri made it on to Sky news – with still bad but improved English – and all the qualtiy UK press with his “New Iron Curtain” rhetoric – on the basis that there is no such thing as bad publicity this has to be something of a coup for him. I’m also wondering whether this makes sense of his recent pro-Roma comments; boycott the Magyar Hirlap, introduce Roma quotas in public sector. These comments are simply alienating for the racist 80% of the population, and do nothing for his electability. However, if his intended audience is Western Governments, who are increasily alarmed at the plight of the Roma: US State Dept, Council of Europe reports, then he is highlighting the potential political consequences of economic collapse in CEE, to quote the Economist leader: “…if the people of Eastern Europe felt they had bueen cut adrift by western Europe, they could fall for populists or nationalists of a kind who have come to power far too often in Europe’s history” Having been to “Cigány Bünezés” demo myself on the weekend – to convince myself that it is still a minority interest – this is not at present a… Read more »
Mark
Guest

Ėva: “The problem is not so much Gyurcsány as the lack of political and economic unity within the Union”.
I think the truth is worse than this. The leading Eurozone countries believe that they are the passive victims of the deficiencies of Anglo-American market fundamentalism (to some extent the UK does too, they just drop the Anglo from the beginning of the Anglo-American, and Gordon Brown talks alot about American sub-prime lending). They think there is no general problem in CEE, just individual country difficulty, and if those countries take their unpleasant IMF-prescribed medicine and quit complaining everything will be just fine. They are in denial about the depth and nature of their problems.
NWO: “The Eurozone is in a shambles, defaults in the CEE banking system will wreck the Euro, and it is clear that the Euro cannot act as a true reserve currency.”
The idea of the Euro as a reserve currency to rival the Dollar was always a bit of an illusion. But the EU is going to have to develop more robust structures of macro-economic policy co-ordination if the Euro is to survive intact. Let’s see if it suceeds – or even realizes before it’s too late.

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