As the Hungarian government is edging toward a Putin-style nationalized energy business, one cannot help thinking that Viktor Orbán is a born gambler. He is spending billions of euros to purchase businesses with money he doesn’t have because he is betting on a spectacular economic growth in the near future that will fill the state’s coffers.
However, Hungary’s economic well being is almost entirely dependent on the state of the world economy. And as we look around, whether in Europe or in North America, there are mighty few signs of a rapid turnaround and robust economic growth any time soon. And without such growth Hungary is in deep trouble. Some of the moves that the government made lately might in fact be impediments to recovery. I’m specifically thinking of the extra levies on the banking sector which the Orbán government is planning to continue even after 2012.
The austerity program leaves fewer forints in people’s pockets and as a result domestic consumption has fallen. The Swiss franc, in which most Hungarian families took out mortgages, has been steadily strengthening against the forint. While in the early 2000s 1 Swiss franc could be purchased for about 160 forints, by now a Hungarian borrower has to pay 233 forints for 1 franc. Thus Hungarian borrowers’ monthly mortgage payment have skyrocketed and there are thousands and thousands of families who are unable to meet their obligations.
The government’s promised help is merely a temporary band-aid: for borrowers who participate in the plan the exchange rate will be fixed at 180 forints to 1 Swiss franc for two or three years, after which the borrower will have to pay back the difference with interest. So only who are absolutely desperate take advantage of the assistance. The rest–and there are well over 100,000 families who are in trouble–struggle to make the ballooning mortgage payments. They certainly cannot assist in boosting domestic spending.
As for the rumored purchase of E.ON’s gas business, I have learned a few interesting details since yesterday. E.ON bought the company from MOL when, during tenure of Viktor Orbán (1998-2002), the government set the price of gas so low that MOL suffered considerable losses. MOL therefore sold the business to E.ON. For the past ten years E.ON managed to make the business profitable, but last year it suffered a blow when the second Orbán government froze the price of gas. As a result, E.ON lost money. Thus, it is not at all surprising that the Germans want to sell. After all, the Hungarian government can squeeze them as hard as it wants. It is better to bail.
Surely, the Hungarian gas business can be profitable only if gas prices are brought up to a reasonable level. That means that the price of gas to the consumer will be much higher than it is now. If prices are kept artificially low, not even the Hungarian government can survive in this business. And I’m not even talking about the tons of money János Lázár and his friends want to make in the energy sector. But if the price of gas is considerably higher than it is now, the purchasing power of Hungarians will be further reduced. All in all, it’s hard to imagine a robust recovery in domestic consumption.
The Orbán government puts a lot of emphasis on developing domestic small- and middle-sized businesses with the money provided by the European Union for that purpose (Széchenyi Plan). Yet there are relatively few people who are applying for these grants. The reason: the applicant must put a sizable amount of his own money into the future business venture. Hungarian small business people have little capital and the banks are reluctant to lend because they are also losing money thanks to the government’s extra levies.
A few days ago GKI Gazdaságkutató Zrt. came out with their predictions for 2011-2013, which are quite gloomy. The recovery in the European Union is slow (1.8% growth in 2010 and in 2011). Even Germany, the engine of the European economy, which had a spectacular growth of 3.7% in 2010, by now is experiencing only a 2.6% growth. And that adversely affects Hungary’s economy because Hungarian exports in large part end up in Germany.
Here is a telling graph showing the economic growth of six East-Central European countries between 2000 and 2013. As you can see, Hungary is languishing. Slovakia is the clear winner; Poland (Lengyelország) is second. Note, by the way, that Poland was the only country to survive the financial crisis without a pullback in growth.
Although as a result of the nationalization of private pension funds the deficit will most likely be low, under 3%, at the same time government expenses will grow. For example, 400 billion forints will have to be spent on MÁV (Hungarian Railways) and BKV (Budapest Transit System) to save them from bankruptcy. Because of these additional expenses the actual deficit (without the extra money from the pension funds) is 7%.
As for economic growth after 2011 GKI predicts a yearly growth of 3%, mostly as a result of industrial exports. In plain language the cars Audi, Mercedes, and Suzuki will produce. Unemployment, thanks to the modest economic growth, should ease somewhat.
Standing in the way of growth in domestic consumption is the economic policy hammered out by György Matolcsy, who is a firm believer in tax relief as the solution to the ills of the Hungarian economy. The flat tax that was introduced this January benefits only the top one-third of Hungarians. The great majority of actively employed people actually lost a few thousands forints on the deal, which now the Hungarian government is trying to remedy by forcing employers to raise salaries. Not surprisingly, employers loudly object to state interference in salary negotiations that are not the business of government. Those days are over, they insist. The sparring continues, and I have no idea who will win this round.
Parliament also passed some legislation that makes strikes by public employees almost impossible, and the government is eliminating several rights that employees currently have. Thus social tensions are growing with unpredictable results.
GKI’s conclusion is that there will not be another economic crisis in Hungary, but there will be no spectacular recovery either. As they described the state of affairs: “Hungary will flounder” in the next few years. A year was wasted. The Hungarian economy is no better off today than it was when Viktor Orbán became prime minister.