The python and its victim: The European Union/IMF and Hungary

In last Sunday’s Népszabadság Gábor Horváth, the associate editor who spent years as a foreign correspondent in Washington, wrote a piece entitled “Being Squeezed” (Szorításban). In it he describes how a python can squeeze the living daylights out of its victim. Slowly, methodically, without breaking bones.

In this metaphor the European Union is the python and its victim is the regime of Viktor Orbán. At first, the European Union thought that they could “handle this unpleasant fellow,” but it turned out that the EU politicians were wrong. So, remained the systematic squeezing, one time here, another time there. The number of illegalities continues to grow and they continue to be uncovered. Almost every day there is a new surprise coming from Brussels. Mind you, the Hungarian government makes sure that there will always be something that the European Union finds indigestible.

For instance, take the case of yesterday’s news about a new tax on telephone calls. The Hungarian government approved the new tax, 2 forints per minute up to 700 forints a month, in spite of early warnings that this new tax might have the same fate as the surtax on telecom companies. In response to this earlier levy, the European Commission is suing Hungary before the European Court of Justice.

György Matolcsy stressed that it will be the telecom companies and not the consumers who will pay the tax. Naturally, the government wants people to believe that they will not bear the tax burden. The reaction from Christopher Mattheisen, CEO of Hungarian Telekom, was immediate. He pointed out that this is not a sales tax (VAT) but an additional tax on telecom companies that is forbidden in the European Union. There is a good chance of a second infringement case that might end up in the European Court of Justice.

The financial transaction tax might also be problematic, especially in the estimation of the economists at the IMF. But first let’s talk about the possibly devastating effect of this tax on the Hungarian banking system. Matolcsy in yesterday’s press conference emphasized–again for home consumption–that for bank customers the new tax will not mean an additional financial burden. He explained that if someone transfers 100,000 forints from his bank account, it will cost the bank 100 forints. Matolcsy practically admitted that this new tax will fall mainly on banks that are mostly foreign owned. There was an agreement between the government and the Association of Bankers, however, signed and sealed last December, about the size and duration of the special levy on banks. It was promised that by 2014 the size of the bank tax will not be higher in Hungary than in other members of the European Union. So, goes the argument of the Association, the government went back on its word.

And indeed. Since the new transaction tax will be introduced on January 1, 2013, when the banks will still have to pay 50 percent of the original extra levy, it could easily happen that the taxes on banks in 2013 will exceed the current very high tax burden. Given the presence of foreign banks in Hungary, this problem will not remain inside of the country.

But even if the European Union or the IMF finds nothing wrong with the transaction tax, its introduction may paralyze the Hungarian economy, which is already very short on capital and credit. In the original Kálmán Széll Plan there was a cap of 30,000 forints per transaction. But in the final version no cap is mentioned, which might lead to the total seizing up of the Hungarian banking system. Every day financial institutions transfer large sums of money back and forth in order to remain liquid. We are talking about billions of forints changing hands daily. Maybe several times a day. It is likely that the International Monetary Fund, if Hungary ever gets around to sitting down to negotiate, will seriously object, arguing that such a tax could retard economic growth and ruin the banking system.

There is also an indication that the IMF will insist on removing the law on flat tax from the Hungarian Constitution since such a provision would tie the hands of future governments.

In addition, rumor has it that the IMF is not too keen on making tobacco products a state monopoly and establishing state stores for their sale. Those nasty economists in Washington also think that the so-called “plaza stop” that was passed by parliament is discriminatory. According to the law, special permissions have to be obtained in order to build a store large than 300 m2. Apparently, the “Erzsébet kártya” (Elizabeth card), a kind of food stamp program, might also be problematic because it can be redeemed only in a Hungarian chain favored by the current government. Another card called “Szép-kártya” is also flawed. The card enables employees to receive extra non-taxable cafeteria services. But foreign companies cannot use this card. New infringement procedures have already been launched or are being contemplated against Hungary.

The python is busy.

May 10, 2012