The first fifty days of the new Hungarian government

Public relations are not a strong suit of left-liberal governments in Hungary. In fact, some MSZP voters just moan and say that the government’s communication is outright dreadful. The opposition on the other hand is excellent in this department. For example, some of the relatively minor accomplishments of the Orbán government, like the Széchenyi Plan, were magnified beyond recognition in government communications. A couple of billion forints of investment in this plan was sold to the public as the cornerstone of the country’s bright economic future. This kind of strategy might be successful for a while but it has its obvious pitfalls in the long run. What if the promises are not fulfilled? What if claims are contradicted by facts? Ever since 2002 Fidesz’s strategy has been to repeat ad nauseum that everything is terrible. They built a whole election campaign in 2006 on the slogan that Hungarians’ “lives are worse now than four years before.” The only problem was that everybody knew this was simply not true. The problem was just the opposite: people lived too well. To my mind, Fidesz has been making the same mistake of late. I know people will counter: How can you say that when all opinion polls predict a smashing Fidesz victory? Yes, that’s true, but how long can Fidesz keep saying, for example, as Péter Szijjártó did today, that the fifty days that have elapsed since Gordon Bajnai formed his government “have been fifty days of hopelessness”?  Not for long when the facts contradict this assertion.


Today Gordon Bajnai made sure that Hungarians understand some of the accomplishments of his first fifty days as prime minister. He and his closest co-workers made several appearances starting with Magyar Rádió in the early morning and continuing with a press conference while his finance minister had a long interview in the afternoon with György Bolgár on KlubRádió. As for his style, Bajnai was modest: “We don’t have reason to celebrate but we should certainly give an account.” He emphasized that the steps he and his government have taken will ensure long-term economic growth and will allow the country to extricate itself from the economic crisis. Bajnai, I think correctly, talked about the international community’s positive opinion of his government’s activities to date. He emphasized that his government doesn’t really care about the election results of this weekend or next year; rather, he wants to ensure the economic well being of the country for decades to come. He mentioned the strengthening of the forint against the euro and the U.S. dollar and claimed that people who took out loans in foreign currencies decreased their payments by 400 billion forints. He mentioned that in the last fifty days the swap rate decreased by half. The IMF renewed its loan agreement with Hungary, and during the day there were half sentences uttered to the effect that perhaps the country might not even need the next installment. Sooner or later people will have to realize that there are improvements, especially if one can believe that globally the second half of 2009 will begin to show signs of recovery.


The solid majority (MSZP and SZDSZ) behind the government facilitated legislation. A legislative marathon began a few days after Bajnai took office. A few numbers from the last fifty days: 21 pieces of legislation, 26 executive decrees, and 32 government regulations were voted on or acted upon. The legislative activity didn’t stop for a minute. The decision was made to invest 1,800 billion forints (EU money) into the building industry, and the government established a fund of 1,400 billion forints to provide credit to middle-sized and small enterprises. Another 30 billion was put aside for a program for companies in financial trouble. Their employees worked for only four days and received wages accordingly while the fifth day was spent improving their skills at the government’s expense.


The less popular legislative activity involved saving money on welfare programs, like thirteenth month pensions to 3.5 million pensioners or not giving an extra month’s wages to 700,000 public employees. They reduced the salaries of ministers and managers of state-owned companies. Changes in the tax system are aimed at stimulating employment by reducing payroll taxes and boosting personal consumption by lowering the income tax.


And finally I would like to show two charts that appeared in today’s Népszabadság. The left column of the first chart shows the expected budget deficit of EU countries for 2009. The worst are Ireland, the United Kingdom, Latvia, Spain, and France. Hungary’s -3.9% is not bad, especially if we compare it to countries in the region: Poland (-6.6), Slovenia (-5.5), Lithuania (-5.4), Romania (-5.1), the Czech Republic (-4.3), or Austria (-4.2). The right-hand column shows the year over year drop in industrial orders as of March 2009. Again, although the situation is not rosy in Hungary it is better than in most European countries.50nap1 As I said earlier, it will be difficult to maintain for another year that Hungary is in ruins and is a country of hopelessness. If I were an advisor to Fidesz I would suggest a change in strategy. Although a few polls indicated further erosion in the MSZP voter base, the declines are not substantial in spite of the severe cutbacks introduced by the Bajnai government. The European parliamentary elections will most likely bring a huge Fidesz victory, but if the MSZP doesn’t lose its nerve the successful government activities should bring more positive political results. And the socialist party shouldn’t lose its nerve because from their point of view it would be moronic to hold elections now when everybody claims that MSZP’s popularity is at its lowest.


Let me reproduce here another chart of the year-to-date movement of the Hungarian forint against the euro. That is, how many forints does it take to buy one euro? The forint is still not as strong as it was at the beginning of the year, but it has gained strength in the last fifty days. And if we compare it to the high of the year, in the neighborhood of 316 forints to the euro, it has done remarkably well. A very strong forint has its pitfalls, as we all know. A weaker currency is good for Hungarian exporters. Admittedly, it is not so good for people who want to travel to other countries or for those who took out loans in foreign currencies. The lower bar chart shows the rates of unemployment in select European countries in addition to the EU average. The blue indicates the situation in March 2008 and the magenta a year later. Yes, Hungarian unemployment went up but not as dramatically as in some other countries. The European average in March 2008 was 6.7% ; today it is 8.3%. In Hungary it was 7.4% and now is 9.2%.50nap2 Admittedly, the Hungarian rate is artificially depressed because the percentage of active workers in the population between the ages of 16 and 60 is very low by European standards. The new tax code may help to increase the size of the work force. Another government program is directed at welfare policy. People who are able bodied will no longer receive welfare payments gratis. They will either be employed by local governments in public projects or, if they haven’t finished grade eight and are under the age of 35, they will have to go back to school.


One rarely has the opportunity to read in one place all the changes that have been made in the last fifty days. The sporadic news of positive steps is drowned out by the daily noise that predicts the total collapse of the country. Viktor Orbán, for example, doesn’t say that his government’s first job will be to lead the country out of the recession. Its “first task will be the removal of the rubble.” I really doubt that this strategy will be as effective as it appears at the moment.

Sort by:   newest | oldest | most voted
whoever
Guest

I think you’re missing something here.
Not only that, as I’ve written before, the crisis in Hungary is a social and an economic crisis.
Also that the long-term sustainability of the existing growth model is under question for many EU states.
The attempts by the government to somehow “put the economy back on track” ignores the fact that the existing policies – in 2004, 2006 or 2008 were actually going nowhere but to a slow, creeping crisis of pensions, commodity prices and wages.
Back on track in this situation actually means short-term deferment of this crisis. This doesn’t mean that everything Bajnai does is bad, although I dispute his claim to make decisions technocratically. There is no such thing in politics, priorities always come to the fore, in recessions or prosperity.
The main problem I have is that neither political force in Hungary has a long-term plan or strategy to build up the country, make the necessary social reforms, and inject energy into its failing and decrepit institutions. In the absence of this, there is no brighter future – just endless firefighting.

Mark
Guest
One of the most worrying moment in last night’s BBC report (the link of which I posted in the comments section of the previous post) was their interview with Kinga Göncz. She argues that Hungary is protected from the rising tide of extremism because people are aware of the lessons of the 1930s and how to avoid them. She neglects to mention that the government she supports is utterly ignorant of these lessons, and is making exactly the same policy mistakes as governments like those of Germany in the early phases of the depression. But, that aside. The record is not as good as you present it. Firstly, the expected budget deficit figures don’t mean very much at this point in the year. They are as dependent on expected tax revenues which will be in large part determined by the size of the GDP decline as much as by the scale of any fiscal measures the government itself takes. When we know the real figures for 2009 (which we might not know until this time next year), they may be very different. Secondly, yes, the fall off in industrial orders is good news. But two points need to be made… Read more »
NWO
Guest

I like the PM and by in large support the policies of the current Governemt (in as much as I think there are no good choices and they are largely choosing the least worst ones). I also think just changing the PM has been beneficial for the Country and its collective psychology.
Having said this, I have to agree with Mark on the issue of the HUF. The primary driver of the HUF appreciation has been improved global sentiment. Just look at the drop in the USD and the rise in oil prices over the past weeks for confirmation. When sentiment turns as it did again yesterday with the spectre of a depreciation of the Latvian currency, then the HUF is among those most vulnerable (roughly 3% drop vs. euro). The real test for Hungary and region will be in the coming days. What happens after Latvia devalues? Will this cause systemic risk or at a minimum panic? If so (and I fear so), then the HUF will be among the most vulnerable and could easily test the March lows.

Mark
Guest

NWO: “The real test for Hungary and region will be in the coming days.”
Given the situation in Hungary is nowhere near as dire as the Latvian, I would hope that Hungary could be insulated from the turbulence. I suspect the really dangerous point is in the autumn. At the moment, Hungary and the region is through the initial shock of the credit crunch and its impact, and the relief that it was not any worse is creating a kind of artificial optimism. The true impact of the crash is not immediately clear, and when the price becomes fully visible to financial markets (probably once everyone is back from their summer holidays – silly as it sounds, there is an important psychological dimension to this)there will be another wave of crises. This is when things are likely to get uncomfortable.

NWO
Guest

Mark
I agree with you. The coming days are not the “ultimate test”, but will be important to see the scale of contagion in the region. Already, dealers are suggesting to buy Hungarian CDS to “hedge” the Latvian risk. They see the correlation even if there should not be one. The results of today’s Government auction should also give a clue on the contagion impact.
Other commentators also believe that come September, one will see a substantial further deterioration of the bank portfolios and increased stress on the banking system. If this is combined with the realization that even the 3.9% deficit level will not be achievable, then things could get really bad again. Having said that, I suspect there was begining in May an ever so slight revival on the industrial production due solely to a normal bounce back and some inventory restocking in Western Europe. This is probably not long lasting but it may help the country avoid the worst GDP results of 7% down and instead “achieve” something closer to a 5.5-6% decline (which would be seen now as a good result!)

Mark
Guest

Éva: “As for Kinga Göncz. What do you expect her to say?”
When people cite the lessons of the 1930s, I expect them and those who they represent to demonstrate through their actions that they have learned their lessons. Those versed in economic history know that when a country is faced with economic recession, if they seek to remain artificial currency parities and try to balance their budgets they will deepen the problem. If they are European, they know that the pursuit of such policies created the circumstances that led to the rise of Nazism in Germany, and the political polarization across the continent that led to the rise of the far right in a number of other states in the 1930s. She says that there is no risk of extremism because other have learned the lessons of the 1930s. If this is true, why is the MSZP supporting the Bajnai government’s economic policies?

NWO
Guest

One thing is for sure. One should never say anything positive prematurely about the Hungarian economy. Yesterday, I mentioned the country may avoid the worst of recession. Today’s report of Hungary’s April Industrial Production numbers which were considerably far worse than was expected. This seems to suggest that one should always assume the worst for the country.

Odin's lost eye
Guest
There are several very worrying aspects to the Hungarian situation. Firstly the artificially high value of the Forint caused by a very high interest rate. This allows the so called ‘carry trade’ to flourish. As Mark rightly points out this only works if those speculators continue to invest. It also aids the steady haemorrhage of funds out of Hungary in the form of a reverse ‘carry trade’ where Hungarians are trying to secure their funds elsewhere in anticipation of the Forint bubble bursting. When this will happen I do not know. Much will depend on the way in which the results of the elections to the European Parliament are interpreted, but the bursting of the Forint Bubble is made more likely by the isolationist pronouncements made by Fidesz and echoed by their erstwhile companions Jobbic. These seem to be to the effect that money should be allowed into Hungary but not out again. The over valuation of the Forint is pricing Hungarian exports out of the market. This means that Hungary is not getting a proper share of the small surge in activity caused by the need to ‘restock’. In a depressed market these little surges come along about once… Read more »
wpDiscuz