The Orbán government and reality

I have the feeling that Viktor Orbán and his team didn't realize that in certain areas the government's competence is not unbounded. For example, when it comes to deciding the salary of the chairman of the Hungarian National Bank. Or when weighty economic decisions are made which must be approved by the International Monetary Fund whose financial help is essential for the country's financial survival. They became drunk with the power that the government party's incredible majority provides in parliament and somehow forgot that there is life outside of Hungary. Now within two days came two blows. The first was from the European Central Bank yesterday, and today it leaked out that the negotiations are not going at all well between the IMF and the Hungarian government.

Today Péter Szijjártó, Orbán's personal spokesman, announced that the cabinet will discuss the situation created by the European Central Bank's position that interference with the salaries of the employees of the Hungarian National Bank threatens the institution's independence. Szijjártó indicated that the Hungarian government will obey all the laws but at the same time insists on reducing the salaries of of bank employees which are, admittedly, very high. How they will do that is a mystery to me.

So, what did the European Central Bank's chairman, Jean-Claude Trichet, say about the case? He pretty well told the Hungarian government to drop plans to cut András Simor's salary by 75%. Capping the chairman's monthly salary at the proposed 2 million forints ($8,993) can be applied only to future chairmen, not the current one. According to the document sent to the Hungarian government, "the draft law should be amended to comply with the principle of the independence of the central bank."

So, that was the first blow and I see no easy way out of the situation. To withdraw the proposal cannot be done without losing face at home. The other possibility is to sit down with András Simor and negotiate.

The second blow seems to be that negotiations with the representatives of the IMF and the European Union are not going well at all. Here we are talking about leaked pieces of information that to my mind got a bit confused. First, Népszabadság reported today that according to rumors Viktor Orbán decided to remove György Matolcsy from the head of the team which was negotiating with the Hungarian Banking Association. In his place Orbán asked Mihály Varga and Tamás Fellegi, minister in charge of national development, to continue the work. The journalist who wrote the article admitted that this news wasn't confirmed but that such a change wouldn't be surprising because last week Matolcsy got nowhere with the bankers and the negotiations had stalled. A few hours later Péter Szijjártó denied that there would be any personnel change at the head of the negotiating team. Yet, a few hours earlier Mihály Varga assured the media that "there would be no delay in the negotiations with the IMF." He added that the negotiations are conducted with the representatives of the IMF, the European Union, and the European Central Bank.

Trying to unravel this confused story, I came to the conclusion that Matolcsy was withdrawn not from negotiations with the Hungarian banking association but from the negotiations with the IMF, the EU, and the European Central Bank. According to Index, which is usually well informed, the Hungarian negotiators managed to arouse the ire of the other side's representatives on the very first day of the official negotiations. Apparently, the main problem was that the Hungarians refused to talk about the contents of this year's budget or about the tax package that will be voted on imminently by parliament. They also refused to talk about the amount of the bank tax.

Apparently the IMF warned the Hungarian goverment at the beginning of June that the organization doesn't like to be confronted with a fait accompli. The Hungarian government, most likely Matolcsy, didn't listen to the IMF and the Hungarians announced last week that the tax package would be voted on by parliament as is, and therefore the enormous 200 billion forint bank tax is also non-negotiable. Because of "this inflexible attitude" the representatives of IMF made their displeasure clear.

According to unnamed sources, the IMF actually suggested the postponement of the legislation concerning changes in taxation because they are not at all satisfied with some of the details. For example, lowering business taxes instead of payroll taxes that would be more conducive to economic growth. My feeling is that, seeing that György Matolcsy is getting nowhere with the foreign lenders and the ECB, Orbán decided to send Mihály Varga and Tamás Fellegi to the negotiating table. Whether they will be more successful at convincing the IMF and the EU I'm not at all sure. After all, the IMF and the EU hold all the cards.

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Öcsi
Guest

“After all, the IMF and the EU hold all the cards.”
Yeah, and that makes me feel really ambivalent. On the one hand, it’s troubling that nations like Hungary have lost so much power over their internal, mainly economic affairs. On the other hand, I don’t see the forces behind European integration as negative. But I’m also unsettled by the power of the IMF. How did they/it get all that power?

nwo
Guest

Öcsi
The IMF got the power because they were the lender of last resort for Hungary in 2008. Without the IMF and EU, Hungary would have gone bankrupt.
I think the IMF/EU will stand relatively firm, but will try and find a way to give Orban a face saving way to back down. I could imagine the bank tax will be amended (or delayed in its implementation), but the IMF/EU will allow a little more slippage on the deficit this year (4.5%??).

Eva S. Balogh
Guest

Öcsi: “On the one hand, it’s troubling that nations like Hungary have lost so much power over their internal, mainly economic affairs.”
I’m actually grateful to the IMF at the moment. Matolcsy & Co., on their own, would ruin the Hungarian economy even further.

Mark
Guest
Öcsi: “But I’m also unsettled by the power of the IMF. How did they/it get all that power?” As you may know many people internationally are. There are two dimensions to this. The first is the central and changing role of the IMF in the international economic system. The IMF has this useful working paper on its own changing nature and role: http://www.imf.org/external/pubs/ft/wp/2004/wp0475.pdf The second dimension is that Hungary suffers from a long-term problem of debt dependence. You will note the reference to Hungary in the section on the international debt crisis of 1982 on page 12 of the working paper. This, however, is a much more long-term problem. Back in the early 1950s the Communist regime sought to finance investment from domestic saving, i.e. at the expense of living standards and consumption. The political consequences of this should be well known, i.e. falls in living standards and generalized revolt. After 1956 the regime decided it could not finance investment at the expense of consumption for political reasons and decided instead to finance future growth from external sources – initially Soviet ones, and progressively from the 1960s onwards western ones. These would be paid off from the proceeds of economic… Read more »
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