The Reform Alliance’s program is dead

Although parliament is just beginning discussion of the government's planned economic reforms, according to information that leaked out earlier the cabinet, on the advice of its economic experts, has rejected the program of the Reform Alliance. The government is pretty certain that there will be enough votes to defeat the program put forth for discussion by SZDSZ and MDF. Of course, the government is right. Fidesz in no way supports the program. Thus a very small minority will vote for its acceptance: at most about 25-30 people. But, of course, then comes the second round: the government's own proposal.

The government rejected the Reform Alliance program because its economists, after studying the proposals, came to the conclusion that if the program were introduced economic growth would slow by an additional 0.5% in both 2009 and 2010. By 2011 the problem would be even greater: 1.0%. They claim further that the program would take a deficit currently under 3.0% and increase it to 3.4%. The other problem is that inflation under the Reform Alliance program would be higher than that anticipated by the government. In the next three years inflation would be 0.7-0.8% higher than current projections. In addition, although the number of jobs would increase in the private sector the overall number of actively employed people would be lower than today due to cuts of about 8-10% in the public sector.

Péter Róna, an American trained banker and economist currently residing in Hungary, projects even worse results. According to him the Reform Alliance program would give rise to a serious decrease in the population's purchasing power. As opposed to the Ecostat/Hungarian government projection of a 3.5% decrease in GDP Róna thinks that the Hungarian economy will shrink by 5%. But, he continues, if the plans of the Reform Alliance become a reality that number might be as large as 7 to 9%.

In addition to these opinions there is an article by an economist who in the last few years has supported SZDSZ's reform zeal. Yet the very title of Károly Attila Soós's piece tells his opinion of introducing "reforms" that are basically nothing more than a series of severe austerity moves: "Wrong refoms at wrong time!" (Népszabadság, March 16, 2009). He goes so far as to say that even the government's very mild reforms will be counterproductive in the midst of an economic crisis. He considers raising the value added tax (VAT) harmful, hurting the poorer strata of society and lowering consumption. The cartoon that accompanies the article tells a lot. The caption reads: Rosszkor, rossz reform "It was neglected a bit but perhaps the therapy will help!" János Kóka, head of the SZDSZ caucus, seemed to like the boxer metaphor because today in parliament he talked about László Papp, the famous Hungarian boxer, who won gold medals in 1948, 1952, and 1956. What would have happened to him, asked Kóka, if someone had tied Papp's hands and put a stocking on his head? This is obviously what is happening to Hungary thanks to a government that is too afraid to jump into the middle. Kóka also compared the Hungarian economy to an overweight athlete who smokes and carries a forty-pound sandbag on his back.

Once he finished with the athletes, he moved on to medicine. Hungary is sick. At first, people thought that the country had a mild cold, but then it turned out that it had the flu, and by now it is clear that it has pneumonia! The government has been doing nothing for six solid months. Kóka announced that if the Reform Alliance's austerity program is accepted "it will hurt much and many," but these drastic reforms are necessary to win the game or get well again. He did admit that perhaps SZDSZ had a hand in Hungary's economic woes, but only insofar as they didn't insist on greater reform plans while in a coalition with the socialists. He seemed to have forgotten the botched healthcare reform (in SZDSZ hands) and the Fidesz inspired referendum that put an end to even that.

I'm inclined to side with those who say that in the middle of an economic crisis one doesn't venture into unknown territory with possibly grave consequences. One doesn't even know the extent to which Hungary will be affected by the global financial crisis. It has problems of its own making, of course, which the government is working to remedy. But the hit to the Hungarian economy will also depend on the depth of the crisis in the countries that are Hungary's trading partners. No deep reforms in Hungary will address that issue.

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Mark
Guest

“But, he continues, if the plans of the Reform Alliance become a reality that number might be as large as 7 to 9%.”
This is exactly what I think would happen if it was implemented – I also agree with Károly Attila Soós’s assessement that the so-called “half-hearted” government measures will accelerate GDP decline beyond what is necessary.
The Reform Alliance’s proposals extend a logic of short-term financial stabilizations that do long-term economic harm that is very familiar to anyone who has looked at Hungary’s recent economic history. It is fairly clear that this can’t really go on any more. It is time for some fairly fundamental shifts in economic strategy on Hungary’s part, and a parallel change in the stance of international organizations.

nwo
Guest
You are both correct,of course. During such a severe downturn a country should be implementing stimulative policies (in Hungary, this should be focused on eliminating the tax wedge on employment and in encouraging investment). There is just a small problem, however. The country has been running a “stimulative” fiscal policy for 20 odd years, and as such is deeply over indebted. In times of financial crisis, this brings on the spector of State bankruptcy. Because Hungary-and particularly the MSZP- mortgaged its future so long ago, it MUST rely on the IMF and other international institutions to continue to finance its existence, and because the Govt/National Bank allowed banks to provide recklessly dangerous mortgages to households in foreign currencies, Hungary cannot even rely on the age old solution to its problem-inflating its way out of the problem through a currency devaluation. So, instead, Hungary now has a tantilizing choice on its menu. It dies slowly via recession or it dies fast through a currency crisis and a State bankruptcy. The Government is trying to thread the needle and go down the middle barely surviving between the two fatal choices. It is unlikely to work, but to remain in the near term… Read more »
Hank
Guest

So what we have here, if I understand all of this correctly, is a classical Catch-22.
Hungary cannot do what would be needed (stimulus) because it doesn’t have the money and cannot get new credits as it is already too indebted.
Hungary can – at this moment in time, during this crisis – also not implement the structural reforms needed to diminish indebtedness on the longer run, because that would kill GDP even further, pushing us into even deeper sh**.
Ergo: all Hungary can do is sit still while it is being shaven, use EU and IMF moneys as best as possible, and hope that we get out of this crisis by 2010 more or less alive. Right?
Hank

NWO
Guest

Hank
You are right. However, even if things go really well, come 2010 the country will still be so indebted that the burden of the debt will serve as a long term tax on the future, necessary growth for the economy.
I am really starting to wonder if maybe some kind of sovereign debt restructuring is not the best long term course of action.

Mark
Guest

NWO: “I am really starting to wonder if maybe some kind of sovereign debt restructuring is not the best long term course of action.”
This has been pretty clear to me for some time – there is also going to have to be some restructuring of the household debt too (don’t underestimate the pressure that those indebted in CHF, Euro or Yen, are under at the current exchange rate – which I suspect is some way from the bottom!). Whatever happens some of what Hungary owes is never going to repaid. Either this will become apparent through the catastrophe of default, which will be painful for all concerned, or there will some kind of solution negotiated between Hungary and its creditors, preferably brokered by the EU. It seems to me that such a deal needs to create the space to get Hungary over the immediate shock, but it also needs to be based on a long-term programme of reform, so this mess doesn’t occurr again. If we can get this, the next five years may be difficult, but we can start to think about a more secure future.

NWO
Guest

Mark
I believe you are correct. I have also long believed there needs to be some grand deal done to get households out from under their foreign currency borrowings. If such was done, then a devaluation of the HUF could occur (maybe another 10% from today’s values). However, while this mkes sense (assuming it is accompanied by some serious reforms), I do not see the political will for this either in Hungary or outside of Hungary. It is obvious that the “important” leaders in the EU are still to muopic to see what needs to be done and to follow through and do it. It is also the case that there is no reputable counter party in Hungary with whom the EU can engage. Too bad, the two of us can’t manage the problem for these guys.

Mark
Guest

NWO: “It is obvious that the “important” leaders in the EU are still to muopic to see what needs to be done and to follow through and do it.”
I completely agree. Possibly fortunately, I suspect that events will eventually force their hand – we can hope that in the meantime the situation in Hungary (or in its neighbours – the Ukraine seems to be to be the worrying weak point that could precipitate a region-wide crisis) doesn’t get significantly worse.

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