Júlia Király: The not surprising economic slowdown

Júlia Király’s distinguished career began in the 1980s in the Hungarian Statistical Office as a young graduate of the Karl Marx University of Economics (today Corvinus University) and continued all the way to the position of deputy chairman of the Hungarian National Bank. In between she taught at her alma mater, was an adviser to György Surányi, chairman of the National Bank (1990-1991), and even an adviser to Fidesz on economic matters, especially on pension policies (1990-1992). She was on the board on several banks, and in 2002 and 2003 she was CEO of Postabank and as such was in charge of the bank’s privatization.

Kiraly JuliaIt was in 2007 that Király was appointed one of the two deputy chairmen of the Hungarian National Bank for a six-year term. Her term would have expired on July 4, 2013, but after the appointment of György Matolcsy as central bank chairman in March, she decided not to wait and quit on April 8. In her opinion, under Matolcsy’s leadership, the Hungarian National Bank was heading in the wrong direction and, as she said, his policies “endanger the central bank’s prestige acquired over many years at home and abroad.” Her decision became international news. The very day of the announcement The Economist published an article on the subject with the title “Julia Király quits with a j’accuse.” Currrently, Király is a professor in the Department of Finance at Corvinus University.

* * *

When the Hungarian economy started to “soar” a year and a half ago, most investors and analysts applauded. Only a few warned of the temporary nature of the upswing, of a one-off recovery after the crisis. “Orbanomics” seemed to be performing well  – at least for a short while.

Orbanomics in my view is much more than the so-called and never clearly explained “unorthodox economic policy.” Rather, it is a political economic framework. The main drivers of Orbanomics (most of them discussed earlier on Hungarian Spectrum and in the famous paper of Mr. Kornai about the U-turn in Hungary) are:

  1. legal uncertainty (legislative bursts of activity and ex post facto legislation);
  2. a lack of transparency (laws and actions without any supporting explanations, secret government decisions, in Europe the least transparent budgetary system);
  3. a complete lack of checks and balances (lack of institutions or lack of real independence of institutions, such as the Constitutional Court, the AntiTrust Agency, the State Audit Office, the Central Bank, and the Fiscal Council, which are formally independent but run by government-controlled management);
  4. the lack of a level playing field (preferring public ownership to private, preferring national ownership to multinationals); and
  5. state intervention in everyday business affairs, i.e. preferring non-market solutions to market solutions.

The past two years seemed to showcase the great success of Orbanomics: 2013 was the first year when investment started to grow after shrinking for six years, and 2014 saw double-digit growth. But 40% of total investment occurred in the public sector, mainly supported by EU funds, which annually summed to 3.5% of the country’s GDP. The other major sources of investment were the new Mercedes and Audi factories, investments that had been in the pipeline since 2008.

As far as the other segments of the private sector are concerned, according to business surveys the planned investments of the top export-oriented entrepreneurs were significantly below their pre-crisis level. In the energy sector, hard hit by the so-called “rezsicsökkentés” (drastic, state controlled utility fee cut), investment collapsed. The total amount was  below the amortization level.

And it is not only the locals who are reluctant to invest. Hungary is the only country in the CEE region where foreign direct investment did not recover and the net capital flow is negative (except for the forced increase in bank capital provided by the mother banks). This year the investment horizon has become really gloomy: the expected growth rate of investment will be below 2 percent, and for 2016 a slight decrease is forecast, so the investment/GDP ratio will fall again. A recent analysis by Portfolio.hu forecast that the construction sector will be frozen and that no significant construction is expected in the new year. Quite a bleak prognosis – not far from the recent forecast of the Central Bank of Hungary. (The excellent staff of the Central Bank has not forgotten professionalism, and if you can read the charts and “between the lines,” like in those good old days, you can get the real picture from the publications of the Central Bank.) The low investment rate means that soon there will no longer be the means to support the country’s long-term sustainable growth.

On the labor front, in the past two years even better news seemed to arrive for Hungary. In 2013 the unemployment rate was still above 10%, and the expectation was for only a modest decline. The reality was astonishing: 7.7% in 2014 and 6.9% in 2015. What a great success! While the periphery of Europe cannot cope with its stubbornly high unemployment, the unorthodox Orbanomics found a solution. When you look closely, however, into the nature of the gained jobs, you realize that some 25-30% of the increase is due to employment abroad (the way Hungarian employment statistics are calculated, as long as you have a permanent local address you are a local employee even if you work abroad) and more than 50% is due to the so-called “forced public work.”

Forced public work is the “magic card” of Orbanomics. Instead of reforming the labor market, providing more flexible structures and feasible educational plans, hundreds of thousands of poor people are pushed into what is effectively a trap. As the empirically convincing study of the Institute of Economics reveals, public work is a counterproductive and very expensive program, the cost of which exceeds by 50% all the other government expenditures aimed at the labor market. It is counterproductive because those who are forced to take part in it have a diminished chance of finding a job in the competitive labor market. Less than 10% of former public employees can find permanent jobs later, and this percentage is declining. Though in the short run it may increase the number of employed Hungarians and boost the short-term growth rate, in the longer run it undermines the potential growth of the country. The system of public work does not promote flexibility in the labor market but absorbs, and ensnares, the under-educated labor force. The re-centralization of the Hungarian educational system, which introduces all the requirements of the nineteenth-century school and where the main virtue is humility to your boss, will never spur a startup mentality. Innovation and creativity, so frequently cited by Hungarian politicians as outstanding Hungarian virtues, will slowly disappear from the Hungarian labor market.

It seemed that the Matolcsy-launched Funding for Growth Scheme would be a great success. In the first two months of the program more than 2 B € in new loans was advanced to small and medium-sized enterprises at a very low interest rate. The demand for these loans, however, slowly died out, though the scheme provided increasingly relaxed terms for borrowers. According to the latest report, in the second phase of the program, since October 2013, only 2.2 B € credit has been advanced, just a bit more than in the first two months.  The government scheme could not turn around the declining trend of lending.

In Hungary during and after the crisis deleveraging was widespread. Both households and corporations attempted to decrease their debt burden. So, demand for credit was quite weak. On the supply side, a special feature of Orbanomics is squeezing out foreign banks and recentralizing and nationalizing the financial system. In order to achieve its target, the government imposed heavy burdens on banks—a special banking tax, the redenomination of FX loans, the introduction of so-called fair banking, forcing banks to reimburse their customers for all fees and interest they charged that proved not to be fair according to the new law.  All in all, the banking sector lost two-thirds of its capital buffer, and mother banks were forced to increase the capital of their subsidiaries. As a consequence, the availability of credit was weak as well. In all the countries of the region (CEE countries), total private loans are far above their pre- crisis level and are increasing—with the exception of Hungary, where lending activity continues to stagnate. A credit-less economy will be much more sluggish than one with efficient banking intermediation.

Based on the current state of capital (investment), labor, and finance in Hungary, it is quite clear that the long-term, sustainable potential growth rate of the country will not improve significantly. It will be much lower than that of its peer group (the non-EuroZone but EU-member CEE countries: Poland, Czech Republic, Romania, Bulgaria, Croatia). All in all, we are awaiting the future with some anxiety. The latest figures published by the Central Statistical Office justify our fears.  The Hungarian economy started to slow down and in the second quarter of 2015 was again among the slowest economies in the region.

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To exTor – Re: “statue for the anti-Semite” post.
“I am sorry to learn that my 4-day-old post has now come to bother you, Melanie.”

It takes time to go through the process of EXORCISM. My guardian angel just gave me the go ahead, hence the delay. 🙂


No rebound for the HUF against USD or GBP in store, then, if Dr Király’s analysis is correct.

Wrong. The economic state of a given country is only one factor. Currencies go up and down against one another due to all sorts of factors, most of them temporary in nature or brief in their effects. If the dollar were to fall against the forint, would you say that this was more likely because of policies taken in Budapest, or Washington? Or, perhaps, decisions made in Beijing? Or the state of the Middle East? Or the price of oil? Or the war in Ukraine? Or some ultra-rich currency speculator? Or none of these factors? (any answer could be right – or wrong – at any given moment, depending on conditions at that moment) Obviously decisions made in Budapest matter, but they are not the only factor in the forint’s position against any other currency. In other words, the forint is likely to bobble up and down as all sorts of factors change. If Dr. Kiraly’s analysis is correct, then perhaps the forint is more likely to tend downwards. But then, if the forint goes down far enough against the dollar and euro, one would think that this would lead to a rise in exports of Hungarian goods along with… Read more »

Don’t forget that many emerging currencies lost a lot lately against the USD and the Euro. Soon Hungarian exports may not remain competitive at this level. And yes rates fluctuate but it may take 10 years to reach the same level again.


Thank you.

Five paragraphs into your contribution, one encounters “If Dr Király’s analysis is correct, then perhaps the forint is more likely to tend downwards”, a re-statement of what I wrote.

The rest, with how-clever-I-am! passementerie trimmed away — “Other things matter too, and other things may happen; they usually do”. Yes. Quite so.


Well, if you knew all that already I can’t help wondering why you asked in the first place? (as you noticed, the key to what I replied was “perhaps”, which I might have phrased “perhaps not” – there’s no telling).


Wondercat did not ask anything at all in this thread.


Thank you, buddy.


Okay – no question, but a questionable statement.
I think the dull details are important because I have heard Fideszites crow about a (temporarily) rising forint as if it were proof of the wisdom of govt. policies, or of the folly of the left.
I’m not saying you, personally, would do that. I’m saying I have heard others do it.


Oh, dear. That big little word — “if”. So easy to overlook. Let me capitalise it this time: “No rebound for the HUF against USD or GBP in store, then, IF Dr Király’s analysis is correct”.


Any statement that hinges on an “if” is meant to be questioned. The “if” is there to show that doubt inheres.


Nope. Dr. Kiraly’s analysis could be be perfectly accurate, her predictions could prove to be true, and yet the forint still might rebound against the dollar or euro.


Again, thanks. I’ve learnt my lesson.


About four weeks ago I saw a new ad. from the government boasting that the Hungarian economy was not only in growth mode but doing better than the EU average. If one looks at Portfolio.hu one starts to find how much of a half-truth this is. France is in recession currently and the graphs show that only in one year has the Orban government achieved the growth that was a regular part of the MSzP governments’ performances.

Prof. Kiraly also lays bare the truth behind the marvellous employment statistics “A million jobs in 4 1/2 years”. The country has a “minimum wage” and very large numbers are paid significantly less than that. “Minimum” has been given a new meaning by the Orban word manipulators. On the economic and statistical front has this government and its collection of thieves any credibility left?

All-in-all, the policy seems to be, Why tell the truth when half-truths and lies will do?


The crazy thing is that when you talk to people they are all complaining:
They don’t get enough pay, they don’t like all those crazy laws, they know about the large scale corruption – but they still vote for Fidesz …



If the opposition is full of idiots then people feel they don’t have a choice but to vote for Fidesz.

Orban isn’t a genius — only his opposition consists of deeply corrupt (in a sense that they would give up their non-existent strategic goals; fideszniks would never do that) retards.

Orban can’t believe his luck with this opposition and the infinite dilettantism of the leftists strengthen his views that the leftists, liberals are totally hopeless and are a dying breed. He feels that the future belongs to him and to the strong, the relentless, to the people who stand united and dare to act when it’s needed.

The European as well as the global economies are in deep sh*t and people are fed up with the usual grey, technocratic politically correct elites (look at the Donald’s popularity, by the way Hillary will soon be out due to her email problem) and want action. Can they feel that they could get decisive action from the Left? I don’t think so.


Is this left impotency again an example why Hungarians are something special?
In other European countries we find strong left parties, often in government and we shouldn’t forget:

Hungary had socialist prime ministers too – why can’t it happen again?
Fidesz is travelling a one way street (or a Sackgasse to be more exact) – where will it end?



I have no idea what the shadowy Finkelstein actually peddles to politicians, but one of his winning “principles” is clearly: Repeat a lie often enough and people will believe it.

The turul trolls — such as our latest petroselinous pest — have certainly been well-trained in this con-man canon. Ignore Fidesz’s unprecedented heights of corruption in post-Soviet Hungary and just keep repeating relentlessly that the “left” is corrupt and weak and Fidesz is strong and… strong.

(Pardon the barbarism, but we live in barbaric times: If the right root had not already been coopted it would have been “pseudolalia.” But the barbarism does sound more mellifluous, doesn’t it?)


“Repeat a lie often enough and people will believe it.”

But this is the whole essence of Orbanism, isn’t it?

Create a virtual empire out of thin air and talk about it continuously – people pretty soon start to see themselves too, or embarrassed enough not to admit if doesn’t.
‘The new clothes’ effect all over again.

And who can blame them, but really?
Any faux mirage could be better than their reality, after all..!

The greatest evil of public works, as the Orban government practices it, is not the starvation wages and the “permanently temporary” nature of the scheme, but its detrimental effect on the real labour market. Every time a public worker is employed, a real worker is denied a paying job. The two persons may be actually the same, but in the public work employment the person earns a fraction of what he, or she, should be paid if the employment were contracted on the “real” market. Instead he gets a starvation wage, mere welfare really, for his labours, while no benefits come to him, no pension contributions will accrue, and in three months he will be back at square one: unemployed again. This entire system is a gigantic ponzie scheme, whose main benefit is that it provides power and leverage to those Fidesz insiders making the decisions who will and who will not get a piece of the public work. As to the production of this system, it is absolute zero. One would be hard pressed to find any accomplishment that is the product of the public works. On the other hand its cost is enormous that under no circumstances will… Read more »

Looks as if Orban’s ‘opening to the East’ may not have been a wise move …


KIngfisher, FYI: The opening to the East never ever has been anything more than a show. It was a symbolic policy. But shows and symbols are fundamentally important in politics. Orban wanted to show to the people critical about the EU (and there are many believe me, ie many rural voters who blame the EU, free flow of goods etc. for the withering away of their communities and Hungarians entrepreneurs, SMEs, who also hate the competition as a consequence of the EU policies) that he understands their problems and that he is trying to do something (be friends with Asians etc. when actually also the French or the Germans or the British are openly courting any tyrant or dictator who could be a potential source of business). This bullsh*t is exactly like the border fence now or the utility rate cuts. It doesn’t matter that it will be futile or unsustainable or pointless, it still shows that “he cares”. See, one of the many dozen fundamental problems of the Hungarian left-wing is that they don’t seem to care about the interests of the “Hungarian people”, “Hungarian entrepreneurs” (practically all of them struggling SMEs unable to compete against established Western multinationals)… Read more »

Yes, your analysis is absolutely correct. Schäuble (the german Minister Of Finance)
said recently,before he started negotiations with Szyriza(the greek leftist party):Leftist
build castle in the air and the clash with the reality will be devastating.No more words needed….


Small correction: the parties in Hungary whose ideas about international affairs and finances most closely resemble those of Syriza are Jobbik and Fidesz.
Indeed, the nonsense spouted every week on Echo TV by the r-wing Messrs Bogár, Boros, and Bayer (a Fidesz party member) is identical to that of Syriza’s extreme left.
Just an example for you, in case you haven’t seen them in action:


FT#471 (Paulaner):
“Orban understands how to make people pick up that he cares. That’s all.
“See, one of the many dozen fundamental problems of the Hungarian left-wing is that they don’t seem to care about the interests of the “Hungarian people”, “Hungarian entrepreneurs” (practically all of them struggling SMEs unable to compete against established Western multinationals) and people feel that.
“Leftists are openly defending gays, gipsies, black migrants what have you — but would never go out and openly sympathize with white, middle class/working class people. It boggles the mind.
“The leftists are like automatons who seemingly have no feelings left for the average folks but will automatically turn on when they see anti-semitism or gay-bashing.”

Not to mention their neglect of our struggling countrymen in the Occupied Trianon-Territories… (No more words needed…)

http://users.ecs.soton.ac.uk/harnad/skywritings/index.php?/archives/325-LGBT-Rights-The-Canary-in-the-Mineshaft.htmlcomment image


Eva, thank you for sharing Dr. Kiraly’s excellent analysis.

About the public works system… I think it wasn’t established with any macroeconomic goal in mind. I don’t think the government ever had the intention to reintroduce these people to the labor market. Quite the contrary. It’s designed to keep these unfortunate workers in a bind so that they provide cheap (dirt cheap) labor to local Fidesz oligarchs (public workers are often ordered to work for Fidesz-friendly private businesses, especially in the countryside). It’s modern day slavery, and it’s absolutely shameful.

Also, there was enormous pressure on public workers to vote “the right way” during the last elections. In small towns, the local Fidesz leaders are practically omnipotent and can totally destroy one’s livelihood if one is not falling in line.

The public work system is designed to exploit labor and to strengthen Fidesz’s rule. It is part of the social order and power structure Fidesz is building… it serves a political goal.