Orbán government’s U-turn: Is it for real?

This afternoon foreign correspondents sent enthusiastic reports to London and New York: at last the Hungarian government realized that they have reached the end of the road. György Matolcsy announced this afternoon that the Hungarian government will no longer try to get a "better deal" from the European Union. It will bow to the European Commission's demand and will keep the budget deficit under 3% in 2011. Reuter's correspondent called Matolcsy's announcement a complete U-turn. But is it?

Last night after we learned about the unyielding position the European Commission took toward Hungary's deficit, I said that I would have liked to have been a fly on the wall during the meeting of the foreign ministers when Matolcsy suddenly realized that there was no more leeway. The members must meet the centrally prescribed numbers or "there will be severe sanctions." All the sanctions contemplated are serious indeed. According to Matolcsy, Germany wants to suspend the voting rights of those countries that don't meet the target, while others suggested stopping payments to them altogether, including agricultural subsidies. If Hungary doesn't oblige, the new Széchenyi Plan may be down the drain; the government's stimulus program may be stillborn.

I also said that I would like to have listened in on the telephone conversation that must have taken place between Matolcsy and Viktor Orbán. How accurately did Matolcsy report the contents of the conversation between himself and the commission officials and fellow finance ministers? What did Orbán say? He is most likely still madly trying to figure out how to administer the bitter medicine to "the Hungarian people." How can he tell them that Hungary's financial independence is not for real, that it is no more than a pipedream? I'm not sure whether he has come up yet with the right answer.

If I were the correspondent for either Bloomberg or Reuters I would be more cautious in assessing how positive Matolcsy's announcement actually is. A careful reading of the summary MTI gave of Matolcsy's press conference shows that conditions are attached to the promise to keep the budget deficit under 3% in 2011. The first condition is that this year the deficit will be no more than 3.8%. But we know from Ollie Rhen's letter to Edit Herzog (mentioned a day before yesterday) that at the moment the deficit hovers around 4.2% and the commissioner doesn't know how Hungary is going to reduce that number.

The second condition is the extension of the bank levy into 2011. Again, we know that the European Commission is rather leery about the very high tax levied on Hungarian financial institutions. Elli Rehn was worried about its negative effects on the banks as well as on economic growth. At the end of his press conference Matolcsy did mention that the finance ministers talked about the "introduction of a common bank levy but there is no agreement yet." Well, if there ever is a common bank levy it is very unlikely that the Union as a whole will agree to Hungary's rate (0.7% of the GDP). And it's possible that the Union will follow Germany's lead in setting aside the collected tax for a rainy day in case the banks have to be rescued again by the government. If the bank taxes are standardized, I wonder whether Hungary can use 200 billion forints (or some reduced sum) to help fill the gap in the country's budget.

The third condition is a 2.5-3% economic growth in 2011 that would bring into the state's coffers an additional 150-200 billion forints. Considering that at the moment financial experts predict an economic growth of 0.8% for 2010, it's not baked into the cake that such a fairly hefty growth is attainable for 2011. And what happens if "the third condition" cannot be achieved? Will the Hungarians just say: "Sorry, but our economic growth is not as robust as we expected. We can't hold to the less than 3% budget deficit"?

The fourth condition is a cheaper state. Well, that does depend on the government, but for the time being I don't see any signs of decreasing the bureaucracy or the expenses of running the government.

The fifth condition is "making order around the state enterprises." I assume that means the reorganization of some of those state-owned firms that year after year gobble up incredible amounts of money. Of course, that may add to unemployment, which might not be a very popular move. The most logical place for the Hungarian government to start would be the Hungarian Railways. But in the last few months the government was almost forcing MÁV to spend more of its nonexistent money. For instance, the Bajnai government closed certain lines where there were practically no passengers for years on end. The Orbán government has already reopened a few of them and has promised further openings. The Post Office under the old management was actually profitable, mostly because in small villages with very little traffic post offices were closed and services were provided by mobile post offices. The Orbán government promised to reopen them. I'm just hoping that the streamlining of state expenses will also involve stopping all that nonsense.

As for another IMF loan, Matolcsy announced that Hungary has no plans to take out a precautionary loan. It will go it alone. I assume this is meant to be Hungary's declaration of financial independence. But it is costly rhetoric. At the moment bond issuances are very expensive due to high interest rates and often the auctions are undersubscribed. Hungary could receive better terms from the IMF. Moreover, investor confidence could be boosted by such a safety net. If Hungary has agreed to meet the IMF's terms, why not take its money?

The Hungarian forint did better against the euro after Matolcsy's press conference. Before the announcement it was 290 to 1 while right now it is 287. But the question is: for how long?

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Pásztor Szilárd
Guest

There is no U-turn. Since the talks wit the IMF they never said they wouldn’t keep budget deficit under 3%.
And no matter how much you’d like to, they won’t make Hungary a more defencelessness slave for the strictly profit-oriented financial markets represented by the IMF.

Karl Pfeifer
Guest

@Pásztor Szilárd@ Fidesz will according to you abolish in Hungary “the strictly profit-oriented financial markets” and probably join Hugo Chavez’ model of “socialism of the 21st”century”?

Passing Stranger
Guest

This is about the EU, not the IMF. the EU is not strictly profit oriented. Hungary is a net recipient of EU money in the form of structural funds and agricultural subsidies. Why should Western European tax payers fund Hungarian corruption, sloth, and wastefulness? The basic solidarity underpinning the transfer of wealth from rich to poor countries is undermined by new member states who think they can get a free lunch.
Can you name any single business that is not strictly profit oriented?

Passing Stranger
Guest

” There is no U-turn.” Reminds me of an Orwell quote.
” Oceania is at war with Eurasia, Oceania has always been at war with Eurasia”
The Economist thinks there is a U-turn: http://www.economist.com/blogs/easternapproaches/2010/09/hungary

Pásztor Szilárd
Guest

@Passing Stranger: where have I said that the EU should fund Hungarian corruption? Voters have decided the way they did in part in hope of significantly reducing corruption which has always been the primary goal of the socialist governments’ existence.
Your comments are starting to annoy me as you repeatedly picture Hungarians as incapable, lazy and corrupt people. I know it completely conforms the content of this blog to express disdain towards Hungarians but few people tolerate that, and I’m not among them.

Mark
Guest
I would be very cautious until we see some concrete measures. After all Hungary would have to take quite a lot of money out of the state budget and of the economy to hit this target. And though the mood music suggests that FIDESZ’s Bokros moment may not be that far away, we can’t be too sure. I think the first thing to say is that the government was under pressure on both the currency and the bond markets. The situation seems to be better this morning. We’ve seen the selective deployment of “dual communication” before, and although the government is digging itself into a long-term hole, this may just be more short-term manipulation of the markets. “The third condition is a 2.5-3% economic growth in 2011 that would bring into the state’s coffers an additional 150-200 billion forints.” This is an important point because if this growth does not materialize the EU and the markets will still demand the deficit be under 3%. If we leave aside the forecasts and concentrate on the data Hungary’s economy neither grew nor contracted in the second quarter. I see no reason to believe that the situation will be substantially different next year… Read more »
Karl Pfeifer
Guest

@Pásztor Szilárd@ Patriotism can’t be measured, but achievements of the economy of a country can be measured, we’ll see, if V.O. and Fidesz’ economic policy will be good for Hungary.
So lets wait for the winter and then compare the results of the Bajnai government with the Orbán government.

John T
Guest

“Your comments are starting to annoy me as you repeatedly picture Hungarians as incapable, lazy and corrupt people.” Szilard – not lazy or incapable, but certainly drifting at the moment and not showing much ambition. To me this is so frustrating, as I know the people are capable of better.

NWO
Guest

I completely agree with Mark’s last comment. I am not at all convinced that the Government is now committed to the 3% target, and I know for sure they have no idea on how to achieve such a target.
Matolcsy was forced to make the commitment due to the HUF bond auctions where demand was going down and yields increasing over the past weeks. The Govt and the market sensed that the country was on the huge of another huge crisis (forcing the NBH to raise rates radically to try to protect the HUF). Now that the last auction went off well (http://www.portfolio.hu/en/cikkek.tdp?k=3&i=20827), the Government may start easing off their latest commitment. In the end, this is a game of chicken being played between the Hu Govt, EU and the bond/currency markets. We know how this will end. CLUE: Hungary will not win. All Orban et. al. are doing are playing for time and hoping for a miracle.

Passing Stranger
Guest

‘Your comments are starting to annoy me as you repeatedly picture Hungarians as incapable, lazy and corrupt people.’
Not lazy and incapable, but unwilling to pay taxes and simultaneously expecting a high level of social security and public services. This may be Kadarist heritage, but political parties are also to blame.
The only party to advocate cuts in public spending (MDF) was annihilated last April. All the other parties promise the world, FIDESZ most of all. This then, has to be funded by loans, and, strangely, people then get angry that such loans have strings attached.
As you could see in the case of Greece, Western European taxpayers will greatly resent it if they themselves have to deal with deep cuts in social security, health care, education, a rising pensionable age, only to see Orban basically demand that they will then have prop up free Hungarian childcare, almost 10 years of childcare leave for women, free rail travel for pensioners an utterly abused system of disability pensions, not to mention the corrupt health care system.

Mark
Guest

NWO: “I know for sure they have no idea on how to achieve such a target.”
Certainly when the Economics Minister spouts incoherent nonsense like this it is difficult to have very much confidence in them:
http://www.portfolio.hu/cikkek.tdp?k=3&i=138346
NWO: “In the end, this is a game of chicken being played between the Hu Govt, EU and the bond/currency markets. We know how this will end. CLUE: Hungary will not win.”
Experience suggests too that when this happens it will end very messily and in humiliating circumstances for the government. I don’t think we are there yet, though.

Eva S. Balogh
Guest

Mark quoting NWO: “NWO: “In the end, this is a game of chicken being played between the Hu Govt, EU and the bond/currency markets. We know how this will end. CLUE: Hungary will not win.” Experience suggests too that when this happens it will end very messily and in humiliating circumstances for the government. I don’t think we are there yet, though.”
In a “normal” country Matolcsy would have already lost his job. This is the easiest way to deal with something like that. It might not be fair but that’s politics. Matolcsy didn’t work out, could Orbán say, Matolcsy must go. Get a new man and start anew. Such a move would help the situation greatly.

Pásztor Szilárd
Guest

@Passing Stranger: there is a truth to what you say but this is mainly Kadarist heritage.
This attitude, as a problem, is one of the most important ones to solve.
This is why Orban should be supported in his endeavour to let middle-class emerge – the class that wants to work and get better on their own, instead of waiting for the state to help them out without giving anything of real value into the common in return.
The ones waiting for the state constitute the primary group of MSZP’s voters. This is what most people who do not live in Hungary usually fail to recognize.
And, additionally, Hungarians pay a lot more tax than what they get back from public services. Tax levels are lower in most EU countries than in Hungary, yet they have considerably better public services. This is in part to the inefficient public systems (that are under reconstruction right now by Navracsics) and the omnipotent corruption of the Socialist governments’ people in public services.

Mark
Guest

Éva: “Matolcsy didn’t work out, could Orbán say, Matolcsy must go. Get a new man and start anew. Such a move would help the situation greatly.”
That depends where you think the problem is. There is a bizarre government structure, in which there is a government under the Ministry of Justice and Public Administration, and an entire parallel structure of power under the Prime Minister. I’m not altogether sure that the problems are due to communication difficulties as the paralysis caused by a government structure where the responsibility for economics is located in one part of the machinery, and it is constantly being counter-mandered by another part. I suspect that it will be the Prime Minister that will have to go, before any sense is restored.

Eva S. Balogh
Guest

Mark: “I suspect that it will be the Prime Minister that will have to go, before any sense is restored.”
You’re not the only one who thinks so. László Lengyel in ATV said the same thing a few days ago.
I also wonder whether there might be dissention within the party after these 100 days of horror show.

NWO
Guest

I completely agree with comment by Pásztor Szilárd that one should support efforts to allow a middle class to emerge. In fact, a great tragedy of this era has been that due to a combination of factors (I think including the massive sell off of state owned industries to foreign strategic investors) the emergence of a strong middle class has been retarded in this country. Instead, there is a (i) huge class of people dependent on the State (unemployed, mothers, retired, etc…) and (ii) a business elite whose success is also very much tied to connections with the State and “playing” politics. Given this, and unlike Poland and the Cz Republic, there is almost no constituency for real reform.

Pásztor Szilárd
Guest

“You’re not the only one who thinks so. László Lengyel in ATV said the same thing a few days ago.”
Yes – a small minority, expressing their concerns for losing the power they think they inherently deserve, is lamenting on that. This minority, luckily for us, is on the verge of becoming completely insignificant and I just hope they continue their respectable journey.
The ATV is like a reserve of the totalitarian past, I think someone should collect entry fees for such a museum.

Eva S. Balogh
Guest

Szilard: “The ATV is like a reserve of the totalitarian past, I think someone should collect entry fees for such a museum.”
I can hardly find words when I read such nonsense. You are one of the most brainwashed person who has shown up here for the longest time.

Pásztor Szilárd
Guest

Eva: and I consider you and the small minority that is posting on this forum, to be brainwashed.
Oh wait – no. It’s worse than that. I think you perfectly know what you’re doing. You are very manipulative with all of your articles. I sincerely hope that people outside of Hungary don’t get their “information” from your writings – that would spell disaster on Hungary.

Öcsi
Guest

Eva’s writings will spell disaster for Hungary?
Thanks for the chuckle. I needed that!

Pásztor Szilárd
Guest

“Eva’s writings will spell disaster for Hungary?
Thanks for the chuckle. I needed that!”
You’re welcome, and you could be even more welcome if you managed to understand what my point was.
But, obviously, Eva knows very well how big of an influence press can have. That’s why she is doing her best to misinform foreign readers about Hungary.
And it is extremely important to prevent that by providing views other than anti-Hungarian manipulation. Press and media are something the right-wing is lagging far behind in. We have an awful lot to learn from the “left-liberal” side in handling media and contacts.

Eva S. Balogh
Guest

Szilárd: “That’s why she is doing her best to misinform foreign readers about Hungary. And it is extremely important to prevent that by providing views other than anti-Hungarian manipulation.”
How are you going to prevent me from expressing my opinions? So typical of your side of the political spectrum. If you think that you can provide more accurate, unbiased and truthful information about the country, go ahead and start a blog.

Pásztor Szilárd
Guest

@Eva: you misunderstood it again, I think intentionally, apart from the fact that you accuse me of the very thing that your side is committing usually (e.g. preventing expressing different opinions).
Does the communist dictatorship ring a bell?
Good.
If you manage to read the second half of the sentence you are responding to, you immediately find this: “by providing views other than anti-Hungarian manipulation.”
How on earth do you interpret this as an attempt to prevent you from expressing your opinion? It is most probably a fine example of a Freudian slip: this is the way of your own thoughts and it perfectly conforms with the usual aspirations of your political side; to exclude from any discussion those who you label as ‘inappropriate’, be it a label of fascist, nationalist, populist, or anti-democrat.

Eva S. Balogh
Guest

Szilárd: “you misunderstood it again, I think intentionally, apart from the fact that you accuse me of the very thing that your side is committing usually (e.g. preventing expressing different opinions). Does the communist dictatorship ring a bell?”
Maybe you shouldn’t have used the word “prevent.” I assume you know what the word means. You can write a different blog reflecting different opinions, but you cannot prevent me from expressing mine.

Pásztor Szilárd
Guest

@Eva: it seems that we’re stuck in an endless loop, so I’m out of the discussion here.

Karl Pfeifer
Guest

@Pásztor Szilárd@
“We have an awful lot to learn from the “left-liberal” side in handling media and contacts.”
So if foreign media is holding up a mirror and showing Jobbik and the Hungarian Guard and other Hungarian nazis, your side is not happy. By the way why did you put left-liberal between quotation marks? What do you want to imply?

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