October 13, 2008
After major banks and insurance corporations were bailed out by European government, Hungary has become the first member state of the EU the receive a bailout offer from IMF with the support of EU’s Ecofin. Hungary looks to be the most fragile member of the Union in the global financial crisis.
Mr. Dominique Strauss-Kahn, Managing Director of the International Monetary Fund (IMF), issued a statement today on Hungary, promising technical and financial assistance for the Hungary. “The Ecofin (EU finance ministers) welcomes the readiness of the IMF to consider providing technical and financial assistance as needed to Hungary,” the executive European Commission and the EU’s French presidency said in a joint statement. It looks that Hungary is the first EU member state that need a bailout, too. Although Iceland is also a sovereign country which is in trouble, it is a tiny country compared to Hungary, which has a membership in both EU and NATO, making its destabilization much more risky. (Iceland is in NATO, too, but it has no army, and no vote in the EU as an EEA-member).
As the Reuters news rightly claims, ‘Hungary has been hit hard by the global financial crisis because it has one of the most fragile economies in Europe due to high budget and current account deficits and heavy reliance on external financing’. How could this happen?
Hungary in many ways have been a forerunner of economic and social transition after the Cold War. After a massive privatization taking place between 1989-1996 a bigger portion of the economy is in private hands than in most EU states. Hungary was one of the first European countries to partly privatize and reform its pay-as-you-go pension system in the 1990s. Democracy was restored in 1989, and the first elections in 1990 have brought a very stable political institution. Out of the six parties that made it to the Parliament in 1990, only the agriculture-based Smallholder’s Party dropped out, partly reflecting the fact that Hungary is a succesfuly industrialized country with a marginal agricultural sector within the national economy. The far-right made a short-term showing in the Parliament in 1998, but before and after Hungarians have voted out far-right and far-left parties from the National Assembly.
I think that the current economic situation is a result of a political crisis. Hungary, once a regional leader in competitiveness, still has a considerably strong private economy. If we disagregate the competitiveness scores of the World Economic Forum, we find that Hungary performs better than most of the new member states, with one great exception: public finances. In the 2002 election campaign, both the than-ruling centre-right and the centre-left campaigned with the promise to give back more to the people from Hungary’s economic success between 1989 and 2002. The two major parties, right-wing Fidesz and the Socialist Party have outbid each other with spending promises and tax-cut promises. Given that their parties and leaders are strongly established (Fidesz has been running with the same front-runner, Mr Orban, since 1990, winning in 1998) the promises have become a matter of credibility. The Socialist Party has kept much of its incredible promises, driving up budget deficit to a 10% record. Sadly, a similar bidding came in the 2006 elections that the Socialists won narrowly. The Socialist Partly leader, Mr. Gyurcsány has admitted afterwards that his party lied to the voters, which made his later austerity measures rather unwelcome by the Hungarian people.
Despite the current sad state of my country I believe that the Hungarian economy and the Hungarian democracy is strong enough to deal with this crisis. Hungary is probably the first country in the new democracies where people have to learn that their economic and political decisions are very strongly interconnected: you can subsidize the price of natural gas for heating only from taxpayer money. Although voters tend to be incoherent in such issues all over the world, with the very well-established political institutions Hungarians are forced to realize these connections. In many new member states, exit and entry is much easier into politics, parties come and go, and there are also a lot of protest parties to let the steam out. Not in Hungary.
I think the bailout will have to come from Hungarian voters who will have to force their major parties into more rational public finance promises and policies.
Update: The government tries to turn the tables against the banks.