As I wrote earlier, the Hungarian government pretty well accepted what looked inevitable a week ago: the Council of Economic and Finance Ministers (Ecofin) at its next meeting on March 13 would most likely endorse the European Commission’s recommendation to suspend about the third of the so-called cohesion funds Hungary would receive for 2013. The original suggestion was that by September Hungary must show what concrete steps it would take to reduce the deficit to under 3% of GDP, as the country is obliged to do. If Ecofin is satisfied, the ban on the cohesion funds would be lifted.
Early yesterday morning the word still was that, although Hungary was trying to block the move, “the suspension decision is going to go ahead” without any serious and protracted discussion. As it turned out, the decision was not easily reached and eventually a compromise was found. Instead of September the review of Hungary’s deficit reducing efforts will take place on June 22.
This decision can be seen as favorable to Hungary, and naturally the Hungarian government interprets it that way. But there are others, especially the Hungarian opposition parties and some economists, who see the decision differently. After all, they argue, Hungary now has less time to offer “additional fiscal effort to meet a deficit target of 2.5% of gross domestic product already this year” and “additional structural measures” to ensure that the deficit in 2013 remains well below 3 percent. And that will not be easy.
As usual György Matolcsy, Hungarian minister of economics, is “100 percent” confident of meeting the June 22 deadline. But, let’s face it, Matolcsy has been 100 percent confident about many issues in the past year and a half and he was wrong every time. Talking to The New York Times, Attila Juhász, an analyst of Political Capital (a research organization in Budapest), said that there are serious problems in coming up with a viable program in such a short time. After all, Hungary at the moment has no such plan worked out. Economic plans in Matolcsy’s ministry are thrown together in a day or two and usually turn out to be unacceptable in Brussels.
The Organization for Economic Cooperation and Development, a group of developed countries, gave a downbeat assessment of the Hungarian economy yesterday. It predicted that the country will be in recession already in 2012. Since the Ecostat economists were working with a GDP of 1.5 percent, achieving the 2.5 percent deficit figure might be even more difficult than it seems on paper at the moment.
Although Viktor Orbán keeps repeating that Hungary doesn’t need the IMF/EU loan, OECD’s economists think otherwise. Their report says that “an agreement with multilateral organizations for new financial assistance is a necessary step toward restoring confidence.” A financial assistance package would support fiscal consolidation and lower Hungary’s debt burden by stabilizing the exchange rate. The Hungarian government should introduce structural reforms and permanent spending cuts. The OCED report criticized the flat tax introduced by the Orbán government and came out with suggestions to raise taxes on the better-off segments of society and restore some of tax cuts for those taking home only meager paychecks.
All in all, the OECD’s report is very critical of the economic policy of the current government. Kester Eddy, a journalist with the Financial Times reporting from Vienna, called the 150-page report “part wish-list, part gripe.” Among the criticisms is the recent 19 percent increase in minimum wage that “could hinder employment growth and reduce competitiveness.” The authors of the report were also critical of the public works program that concentrates on useless projects instead of “training and skill-upgrading services.”
Kester Eddy echoes the skeptics in saying that, “given Orbán’s stubbornness over IMF/EU negotiations, one wonders why the OECD bothers.”
Only time will tell what the Hungarian government’s answer will be to Brussels’s demands and the OECD’s criticism. If the reaction is the same as it was in the case of the infringement proceedings, I am sure that the June 22 decision will go against Hungary. Faking progress will not work.