An optimistic prediction: The Orbán regime’s inevitable demise

I would like to report on a lengthy article that appeared on 444.hu on September 18, 2014, written by someone who calls himself “Nolite Timere,” “don’t be afraid” in Latin. The piece has the upbeat title “The NER’s coming demise.” An optimistic title, that is, for those who are opponents of the Orbán regime. It is a prediction few people believe today in Hungary. In fact, an increasing number of editorial and op/ed pages forecast exactly the opposite. So, let’s see on what basis Nolite Timere makes his prediction.

Before I attempt to summarize his argument, let me remind everybody that NER is the abbreviation of Nemzeti Együttműködés Rendszere or, in English, the System of National Cooperation. In the first few months of the Orbán administration one could hear a lot about NER, but by early July I wrote that, despite Péter Szijjártó’s best efforts, the designation had disappeared from usage. Well, the name may have disappeared, but Viktor Orbán’s proclamation of NER signaled the beginning of a new era and a new political system. The text of the proclamation can be found in the above cited post.

Nolite Timere begins his argument by saying that NER rests on shaky foundations. Its support comes exclusively from Fidesz voters. The graph below shows the tight correlation between those Hungarians who support Fidesz and those who are satisfied with the performance of the government.

Therefore, opposition to the government automatically means opposition to the regime. Once this government loses power, the new government will most likely try to dismantle the NER. A lot of economic and political players may even find themselves in legal trouble. Therefore, maintenance of the Orbán system is of vital importance to those in power today.

Blue: the country is moving in the right direction. Orange: voters' support of Fidesz Source: 444.hu

Blue: the country is moving in the right direction. Orange: voters’ support for Fidesz
Source: 444.hu

The graph shows how the population reacts to financial fluctuations. At the beginning of 2012 only about 17-18 percent of the population was satisfied with the government’s performance, but as soon as utility prices were lowered and the impoverished population got a few thousand extra forints a month, they were once again ready to support Fidesz and its government. Conclusion? Viktor Orbán must make sure that he can reduce the number of dissatisfied voters for twenty or thirty years by increasing the well-being of the population. Nolite Timere’s prediction is that he will not be able to pull this off. At least this is what earlier efforts tell us.

All regimes since 1919 attempted to do two things simultaneously: continuously raise living standards and at the same time satisfy the expectations of their own base. The Horthy regime failed because it was unwilling to break up the large aristocratic and church estates; Mátyás Rákosi favored those who came from the working class and the peasantry to such an extent that by 1952 there was widespread hunger in the country; János Kádár refused to give up the primacy of the communist party in economic matters and therefore could maintain the modest but steady rise in living standards only as the result of  cheap Soviet energy and foreign loans. Once there were no more loans and no cheap oil the regime collapsed. The slow economic growth that began in 1995-96 lasted only as long as there were state-owned companies to be sold. After 2002 the economic growth could once again be maintained only through indebtedness. In 2008 that came to an end.

Hungary’s perennial problem ever since modern capitalism arrived in the region is a lack of capital. Since 1990 almost all capital came from abroad, and this has at least two serious drawbacks: it is expensive and it can be moved at any time. However, a country without its own capital must first rely on foreign sources. This was the case in Hungary between 1867 and 1914. Originally 60% of all investment came from Austria and Germany, but over the next 35 years a new generation of Hungarian capitalists grew up who learned from their foreign colleagues and amassed capital of their own. By 1914 only 25% of investment came from outside of the country. (Note that Viktor Orbán wants to achieve the same shift in the source of investment in a few years. Failure is guaranteed.)

Nolite Timere is convinced that in a country short on capital it is dangerous to build a regime that has only shaky legitimacy, as NER does. “The trick can be achieved only with foreign help … the regime survives only as long as foreign capital is coming in.” There was no appreciable economic growth in Hungary, yet the government lowered taxes, raised pensions, built stadiums. Where did they get the money? In part from foreign companies, in the form of extra levies, the lowering of utility prices, and many other tricks that took away large chunks of these companies’ profits. In some cases the companies even had to dip into their own capital to satisfy the Orbán regime’s appetite.

The second source is naturally the European Union. Between 2007 and 2012 Hungary received subsidies equivalent to 21% of the country’s GDP. In 2013 monies coming Brussels amounted to 5% of the GDP. In 2014 it will most likely be higher. In brief, “the future of the regime depends on the availability of foreign capital.”

The author is convinced that the end is nigh. All the money taken from foreign firms and received from the European Union was only enough to raise real wages modestly in the second half of 2013 and early 2014 in preparation for the coming election. As a result of the large amount of capital pumped into the economy, GDP growth in 2014 is expected to be substantial. Government propaganda points to this as a great success that will continue into the future. This is unlikely, claims our author.

Banks and other foreign companies are at a breaking point; they can absorb no additional levies. Bayern LB, owner of MKB, is a case in point; it threw in the towel and sold its Hungarian holding to the state rather than pay all the debts it accrued as a result of the government’s interference in its business activities. It is very possible that others will follow. If the state then sells these banks and other concerns to its supporters, it will be difficult to extract more taxes from them or even to maintain the low utility prices. After all, there will be no foreign money coming in to replenish the losses.

The leaders of the regime might try to attract foreign companies, especially German and Austrian businesses, to Hungary, but such recruiting has its limits. After all, the government wants to strengthen those Hungarian capitalists who are friends of the regime. That’s why the government makes a distinction between “good” and “bad” foreign investors, thereby limiting their number. Of course, the question is how long a foreign company can remain a “good company” and when Viktor Orbán will decide that, after all, he made a mistake. Moreover, Nolite Timere thinks that unless some kind of miracle happens, the amount of money coming from Brussels in 2016-2017 will decrease sharply as a result of the very nature of the system of disbursement.

And so Viktor Orbán needs capital from outside the European Union and the United States. Hence the “Eastern Opening,” which up to this point has not brought real results. That’s why Orbán turned to Vladimir Putin last year and signed a 10-billion euro secret agreement for a Russian company to construct a new atomic reactor in Paks. Most of that money will not add to Hungary’s GDP because once construction actually begins on the reactor the lion’s share of the work will be done by the Russian company that “won” the contract. In comparison to the EU subsidies, this Russian money is small potatoes, 120 billion euros a year as opposed to the 30,000 billion coming from Brussels. Of course, it is possible that Orbán is hoping for very inexpensive gas from Russia, which would add another 50 billion euros worth of capital a year.

The maintenance of the Orbán regime in the long run needs all three sources of financing: the EU, Moscow, and Western capital via government bond purchases. If any one of these three falters, the regime itself might be in danger. Brussels must pay without delay. Withholding money might upset the delicate financial balancing act of the Orbán government. As far as Paks is concerned, the Russian-Ukrainian crisis came at the worst possible time from Orbán’s point of view. Even before the crisis Brussels was not exactly happy either with the building of the Southern Stream or with the secret Russian-Hungarian agreement to have Russia build a nuclear reactor inside of the European Union. In addition, one never knows what may happen in the internal financial markets that might weaken the forint further. Hungarian bonds might be less attractive to foreign investors if the United States raises its interest rates in the future. All this could have disastrous effects on the Hungarian economy. This is especially so because the capital that is coming into the country is not being used to lay the groundwork for further economic growth. Instead it is being used to artificially raise living standards, lower utility prices, hand out higher pensions, maintain the flat tax, buy companies to be passed on to friends of Fidesz, and erect state-financed projects like stadiums and renovate state-owned buildings. With such a strategy no country ever became highly developed.

Hungary managed to lock itself into a position of total economic dependence. At this stage the regime no longer cares from whom the money comes or how much it costs in the long run; what counts is that comes and that it comes fast. When foreign capital dries up, this regime will inevitably fail.

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Minusio
Guest
We all know trees don’t grow into the sky. And the Orbán regime won’t last forever, and Hungary won’t be a pretty sight when he is finally gone, I’m afraid. But everybody seems to make the same mistake: As long as Orbán is not run over by a tram or he begins to attack the export industry or Juncker turns off the tap, he’ll stay in power of a country that is losing its capable citizens by the droves – the loss probably being made up of Ukrainian refugees or other poor people – as long as he likes. Except for a few points, all those economic arguments why “the end is nigh” are unreflected, unsupported hogwash. First the courageous author would have to understand what a dual economy is. And he should have a look at the map of Europe’s average salaries. (It was recently on FB, but I could find it again, if necessary.) It shows that Hungary remains the extended workbench for foreign companies. And that is what is keeping the economy sufficiently afloat. The only thing that remains true is that the demise of Orbán’s regime is inevitable. But before that happens we will see a… Read more »
Kirsten
Guest
“This is especially so because the capital that is coming into the country is not being used to lay the groundwork for further economic growth.” Perhaps it might be interesting to find out why this appears to have been a constant for some time in Hungarian economic “policies”. I am specifically fascinated by the idea that in Hungary there is no capital (and has never been) and that this why it is in constant need of foreign capital to survive economically and politically. 150 years after the start of industrialisation and with quite some capital stock installed in the country, including the huge buildings in the capital, and with domestically owned banks, this idea appears not too convincing to me. I read in it that it was impossible to create an economy that would be able to live mainly on own resources (which can be of course traded against those of other countries, without creating “dependencies” of the sort described by Nolite). But that is probably due to political reasons and/or ideas about the economy and society, and also very likely ideas that make Orban now so compelling for many people. I will not get started on equations such as… Read more »
sunyilo12
Member

Eva,

Actually, I like the analysis and especially would recommend it to the EU leadership for reading. I believe they are tiptoeing around the NER’s delinquency while at the end of the day their approach just puts off what is inevitable: the Hungarian population suffering through another revolutionary crisis. They should take a more businesslike approach dealing with Orban. Keeping the cash flowing they just drag out the slow and painful death of Orbanistan without really helping anybody: the rest of the EU the least as the unpredictability of Orban’s Hungary is far more likely to lead to unwanted complications than to easy sailing through the next couple of decades. Hopefully your paraphrasing the original article will open some eyes in Brussels.

Balint Suranyi
Guest

Megint DEMISZ lesz? Stumpffal? 🙂

Bon
Guest

50bn forints, not euros re the natural gas contract.

D7 Democrat
Guest

The economic collapse of Orban’s dictatorship is not the same as the exit of the dictator- he will hold on power to the bitter end no matter what the cost. The bovine-like acceptance of his actions from almost all of his victims demonstrates how firmly embedded he is now. Until that changes, then nothing changes- the average Hungarian voter seems content to eat dirt as long as the regime informs them that it is good for them.

OTT Obama has included just Orbanistan in quite an elite group of *illiberal democracies*- Russia, China, Venezuala, Egypt and Azerbaijsan (sp?). Our Chief Shepherd will be most gratified:
http://index.hu/kulfold/2014/09/24/obama_is_kiallt_a_magyar_civilek_mellett/

tappanch
Guest

Obama’s speech yesterday:

“From Russia to China to Venezuela, you are seeing relentless crackdowns, vilifying legitimate dissent as subversive. In places like Azerbaijan, laws make it incredibly difficult for NGOs even to operate. From Hungary to Egypt, endless regulations and overt intimidation increasingly target civil society. And around the world, brave men and women who dare raise their voices are harassed and attacked and even killed.”

http://www.whitehouse.gov/the-press-office/2014/09/23/remarks-president-clinton-global-initiative

Bejó
Guest
The resilience of existing structures, especially those of the dictatorial kind are usually underestimated. The EU and ECB can’t ever stop printing money. Hungary just have to offer a couple of basis points higher interest (we can offer even more) and the mindless investors will flock. This is how things work. Not foreign direct investments, I think the stock has been even decreasing for the last couple of years if we deduct the ‘investments’ of the banks which have been willing to pour billions of euros into their subsidiaries, but this is about survival, not about long term strategies. The many short term survivals add up to a long age of Orban’s. The EU will keep sending the dough to Hungary, because this is how things work in the Europe. It’s inconceivable, absolutely unheard of that money flows could stop. The EU has never even threatened with it as they know that this won’t work politically and so it would immediately turn out this weapon is meaningless (but Orban knows this well too). Meanwhile Russia’s contribution although great for Orban and his fellow oligarchs (and important in terms of Russia’s regional influence) is not substantial from the point of view… Read more »
chandlerozconsultants
Guest

Reblogged this on hungarywolf.

cui
Guest

Another pig picture analysis. Food for thought. Hungary vs. Latin-America.

http://tldr.444.hu/2014/09/24/igy-lesz-magyarorszagbol-latin-amerika/

tappanch
Guest

@cui
My summary of the long article above:

The minions of the government can steal as much as they wish, but woe to a civilian organization that cannot account for a bottle of beer.

The rulers of the system know that they are criminals, that is why they try to frame their opponents as lawbreakers.

Para mis amigos todo, para mis enemigos la ley.

Guest

Not too much OT re foreign capital:

I’ve heard or read that many famous Hungarian companies and their brands and trademarks are now in foreign hands, whether it’s brewing beer, making Pálinka, food stuff and sweets – names like Dreher, Zwack, Györi sweets, etc come to mind.

And then we have all the big chains of stores: Auchan, Interspar, Tesco, Obi, Praktiker, Euronics (?), the drugstore chains:DM, Drogerie Müller, Rossmann – also in clothing: C&A, Voegele, …

Are there any well known brands at all still in Hungarian hands?

I’m not sure about Pick or Gyulai/Csabai (our favourite kolbasz …).

Guest

Minusio: “Except for a few points, all those economic arguments why “the end is nigh” are unreflected, unsupported hogwash.”

Tell all of us “who make the same mistake” why the arguments – unlike yours – are unreflected and unsupported. Not to speak of hogwash.

LwiiH
Guest

@Minusio, even if OV were to leave today the damage and entrenchment is already so deep that it will take decades to untangle the mess. Unfortunately the EU must feed this beast because the alternative is unthinkable…

Karl Pfeifer
Guest

How to make Hungarian Forint a strong currency?
a) Hungary could declare to accept money at banks without questions. Budapest could become an important city for laundering of money.
b) They could drill two holes in the pieces of 20 Forint and sell them at 40 Forint as buttons. This is not my idea. A polish economist proposed that to save the Zloty when Jaruzelski ruled.

petofi
Guest

@Karl Pfeifer

I have another idea: drill a hole in the head of each government member and lead bureaucrat and set them up as goalposts…

Istvan
Guest
Eva that was really a very good summary of the article by Nolite Timere, you are very skilled at reducing longer commentaries to their essence. I think one problem with the article is as others have indicated in their posts that a dictatorship can have lasting power. A good example is the dictatorship of Francisco Franco who was the dictator of Spain from 1939 to his death in 1975. The first decade of Franco’s rule in the 1940s following the end of the Civil War in 1939 saw continued oppression and the killing of a massive number of political opponents. The best guess that the number of people killed probably lies somewhere between 15,000 and 50,000. Student revolts, at universities in the late 1960s and early 1970s, were violently repressed by the heavily armed Policía Armada (Armed Police). Plainclothes secret police worked inside Spanish universities. The enforcement by public authorities of traditional Catholic values was a stated intent of the regime, mainly by using laws. In 1954, homosexuality was made a criminal offense with the support of the Catholic Church. Does that sound familiar? On the economic level Spain attracted foreign capital by crushing the working class. During the 1960s,… Read more »
Paulito
Guest

Istvan, what is important to bear in mind is that development in the 1950-1970’s and in the 1980’s again after the oil crisis was different from development in the 2010’s. There was no competition from Asia, given the then state of the art a developing country/company could successfully compete with relatively unsophisticated and easily reproducable products, energy (until the oil crisis at least) was cheap, debt levels were low so it could be increases easily to mention a few important conditions which aren’t present any more. Currently it seems to me Hungary’s future is that of Argentina’s, only Argentine has a growing population while Hungary’s is decreasing and is getting older very rapidly (as the 600,000 emigrants are all working age younger people).

Guest

@Istvan:

Franco is a very good example of the way an undemocratic system can work for a long time!

I have to confess that I went on holiday to Spain regularly in the 70s (with my wife and our old Volkswagen van …) and we had a very good time – the oppression was not really visible to a tourist. People were friendly, prices were low, service was good – just like in Hungary today …

And also we went to the Canary Islands each winter (usually in November/early December in the low season – often returned the week before Xmas) and on one of our visits the bus driver who took us from the airport to the hotel turned up the radio’s volume which announced Franco’s death. Everybody was silent for a moment, but I don’t remember anything different about that holiday …

I’m not sure however that Hungary could develop in a similar way …

Istvan
Guest

Paulito I agree with your cautionary note on the differences in what can be called economic conjunctures from the 1950s to 1970s and now. But I still think reflecting on the sustainability of a very corrupt Franco regime is worth contemplating. In general Nolite Timere compares the potential collapse of support for Orban to the “Kádár system built just for cheap Soviet energy resources and growing indebtedness has been able to maintain the illusion of prosperity” that became a “house of cards.”

I think better historical analogies can be made, none are without question perfect. But I think the corporatist Franco government is a better comparison for future thinking than the Kádár system is.

Kirsten
Guest

Istvan: ” But I still think reflecting on the sustainability of a very corrupt Franco regime is worth contemplating.”

I would even more recommend to study the development of the Spanish opposition. It is their merit, nearly exclusively in my opinion, that Spain emerged as a country where parties, even opponents, learned to cooperate to the extent that democracy could take root in a country where many people had doubts before.

Reality Check
Guest

@Wolfi,

This summer in Budapest I struck up a conversation with a US academic and his son. They remarked about how wonderful Budapest was and they were curious about the political situation. When I described what had happened in Hungary since Fidesz 2.0 took control they were very surprised. Too them Hungary seemed like a very prosperous and democratic country.

They also asked why this regime was re-elected. I told them it was combination of fear, apathy, and unfair redistricting.

Minusio
Guest
@Jean P and @LwiiH I wonder if it is worth to follow your request. Nolite Timere made his (mostly weak) points and I made mine. If you read both carefully and do some factual checks you would save me time. But let’s try to look at some of his claims and compare them with facts anyway. Nolite Timere claims that the support for NER comes exclusively from Fidesz voters. This government is in power with a two thirds majority with the votes of 27% of those eligible to vote. So it would seem to me the NER support rests on the biggest “party” – that of the non-voters (who most likely are “dissatisfied”). That puts paid to the first argument. The Horthy regime didn’t fail because of the reasons he gives. Horthy started and lost a war together with Hitler. Everything else is secondary. Kádár’s and Grósz’ regime collapsed in line with the entire Eastern bloc. If there is a single figure who triggered the downfall, it was Gorbatchev. The Soviet Union was outspent by the USA. We noticed how totally bankrupt the whole Soviet system and its satellites were only after we saw the ruins. The time of the… Read more »
Guest

@Reality Check:

If you’re only a tourist who brings in money and not a member of one of those minorities like the LGBT, most countries are ok for a holiday …

I just remembered that there was a lot of police visible in those Franco years – though not as many as in Yugoslavia, Tunisia, Egypt or China …

PS:

I don’t know about Hungary in Kádár times because after one visit in East Germany we decided not to visit any country in the “Eastern Bloc” as long as “socialism” reigned there!

But it seems strange to try to compare a country in the 21st Century with those days …

Marcel Dé (@MarcelD10)
Guest
Minusio: And he should have a look at the map of Europe’s average salaries. (It was recently on FB, but I could find it again, if necessary.) It shows that Hungary remains the extended workbench for foreign companies. And that is what is keeping the economy sufficiently afloat. Well, if one was to believe in the explanatory power of this criteria alone, I’m afraid the conclusion would be that Romania and Bulgaria have a brighter future. In the mean time, the Czech Republic where wages (and labor costs) are higher, continues to export significantly more cars and electronics than Hungary … Now, OV’s plans for cheap energy made sense somehow: combined with relatively cheap labor, it could have formed the basis on which to build a serious competitive advantage. I’m afraid though that Putin’s actions seriously hinder the country’s capacity to achieve this goal. Furthermore, manufacturing in Europe is not only about costs: factors like workers’ skills, infrastructure (and no, I don’t mean stadiums), a stable legal, banking and business environment, good health services … As an informed reader of this blog, maybe you will agree that Hungary is hardly doing well in those areas. It will have consequences. Look… Read more »
spectator
Guest
Above all: please, forget the term ‘illiberal democracy” for heavens sake, for good. There is no such thing, it’s only wishful thinking in the best case. About the subject: Of course, the days of Orbán and his forty (thousand?) thieves are numbered, we all know that much. However, the real question is, just how high that number going to be, and how extensive damage they manage to inflict before their inevitable demise. To my taste its long overdue already, – sadly it doesn’t matter naught. Something worth to observe though, they tend to be more greedy and reckless recently – seems that nobody trusting really that it can go for long – grabbing everything in sight as long as they could. Not to mention the tendency that they started fighting within their own circles – its a sign as well, the resources about to run out. Unfortunately it may even come as bad news, believe me or not: who’s gonna take over, if the orbanism goes belly up? Since there is no viable democratic alternative in sight – whoever dreaming whatever about MSZP resurrection – the power what slinking up comes from the far right, simply put, the Nazis can… Read more »
Tamas
Guest

We are beginning the construction of Paks 2 in 2018. The negotiations are going ahead with full speed. Orban and Lazar are pushing the project as if there was no tomorrow.

Minusio
Guest
@Marcel Dé “…the Czech Republic where wages (and labor costs) are higher, continues to export significantly more cars and electronics than Hungary…” True. Indeed, Hungary is not doing well in the areas you mentioned. And it has consequences: FDI is decreasing. On the other hand, big industry doesn’t care about most of these things. Both Audi and Mercedes are enlarging their plants. That’s mostly due to the geographical position of Hungary, it’s relatively good infrastructure and the direct line to the government to cut red tape. In addition, tax holidays, enough land resources, no trade unions, less pollution regulations and all that other stuff industries try to avoid. There are enough semi-skilled workers who are rotated through the German factories to become skilled workers. Two other interesting facts: The labour content in a modern German car is a maximum of 17%. More than 70% of innovations are developed by subcontractors such as Bosch, Continental, ZF, etc. All of them are already also present in Hungary. But that’s a closed club. Although Daimler looked for more Hungarian suppliers, a new Mercedes will not contain more than 7% of truly Hungarian parts. I didn’t say that because of Foreign Direct Investment Hungary’s… Read more »
cheshire cat
Guest

Wolfi:

“I don’t know about Hungary in Kádár times because after one visit in East Germany we decided not to visit any country in the “Eastern Bloc” as long as “socialism” reigned there!”

Why? can I ask?

Hungary was actually not unpopular during socialism for West Germans (Austrians etc) because it was very cheap and not that bad, really. I seem to remember… But maybe they were a minority.

cheshire cat
Guest

I very much agree with Minusio at “3.02 pm”.

It was a very optimistic article that incidentally made a lot of waves in the Hungarian press. But it’s oversimplified and often plain wrong – he arrived at a conclusion and then built up the arguments.

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