Hungarian Prime Minister, Viktor Orban recently denounced the EU’s policies towards Hungary as ‘colonialism’, after the EU suspended nearly half a billion Euro in funding over its massive budget deficit. Abby Innes takes a close look at Hungary’s recent decline from a country known for its reform policies to one which is now mired in economic crisis and increasingly extreme political strategies.
Contemporary Hungary is offering an abject lesson in how quickly democracy can go to hell when politicians confront thankless options and take the low road. The Fidesz-dominated coalition government came to power in 2010 on the high stakes promise of ‘no more austerity’ and it has been selling a fantasy of national renewal on the top of increasingly authoritarian government practice and deteriorating financial conditions ever since. To make good on its electoral promises one of Fidesz’s first measures was to pay for tax cuts by expropriating private pension funds back into the public budget: an act that put the budget into a one-off surplus for 2011 but which damaged Hungary’s international financial credibility which worsened thereafter – government debt has had ‘junk bond’ status for many months now. By March 2011 the government announced its economic strategy in the form of the Széll Kálmán Plan: a programme, so it turned out, of severe austerity, particularly for lower income groups. It presaged significant cuts in health, welfare entitlements and higher education but promised the creation of a million jobs within ten years.
At the root of Hungary’s sluggish growth and extreme political remedies is the lowest employment rate in the region – barely one in two of those of working age – and an exceptionally high tax wedge on labour, second only to Belgium’s within the OECD in recent years. By 2006 Hungary had Swedish/French levels of public spending at Polish levels of per capita income. When coupled with a post-2007 crisis in privately held foreign debt the former Socialist government was left with nowhere to go but to unprecedented economic retrenchment: something they were no longer trusted to manage after revelations they had already lied about the real condition of Hungary’s public finances back in 2006 in order to win that election, and subsequent corruption scandals. Enter Fidesz and party leader Viktor Orban in a coalition with the Hungarian Christian Democrats, with a constitutional supermajority and the temptation, given the unrewarding economic situation, to embark on the most almighty recasting of the rules of the Hungarian political game: what has ensued is a bacchanalia of populist-nationalist elite self-indulgence and hatred-mongering that has taken Hungary’s international reputation from a regional reform leader to pariah status in two years, and its political economy deeper into the mire.
How did it come to this? Coming out of the gradually reforming system of ‘goulash communism’ Hungarian governments tried the longest of the EU10’s frontrunners to hedge the region’s emerging market pressures after 1989, and so administrations of all stripes (including Fidesz) ran competitive (i.e. low) personal income and corporate tax rates to attract FDI while trying to maintain spending on welfare and skills formation. The result was relatively low inequality for this region but an increasingly crippling tax burden on employers, inducing what Esping Andersen has elsewhere dubbed the ‘death spiral’ scenario of low employment and lowered tax contributions requiring high payroll contributions to support the remaining welfare system, which further lowers employment, stunting growth, increasing pressures on welfare…
Even after entitlements were reduced the spiralling costs of cash transfers in Hungary increasingly crowded out resources the economy needed to retain its competitive edge, as their low wage advantage ebbed away and the relatively portable FDI which Hungary primarily attracted moved eastward. This developmental bind duly put the country’s main free marketers, the born-again Blairite (reform communist) Hungarian Socialist Party into a near impossible electoral position: hence the fiscal make-believe of 2006. (In fact the leaked 2006 speech of the Socialist Prime Minister, Ferenc Gyurcsany is most striking for its honesty regarding the brutal character of Hungary’s realistic economic choices – along with prodigious levels of swearing.)
Orban’s solution was to insist that the emerging market dilemmas that are structural to a population with European expectations of social cohesion are solely the product of ‘communist’ corruption and networking. This accusation duly proved more electorally successful than promises of further belt-tightening in a country that had already endured the complete opening of the economy to foreign investors, steeply rising welfare and employment insecurity for twenty years and steadily rising unemployment for the most recent ten. But the belt-tightening has come anyway – as, short of a simultaneous reconfiguration of global capitalism – it had to.
In government Fidesz adopted an incoherent ‘growth’ strategy that liberalised on the one hand, slashing employment and unemployment protections, for example, even as it politicised the Central Bank, the State Audit Office and the Fiscal Council, and by now their programme is reduced to chaotic acts of fire-fighting. Orban favoured those on a higher income with a flat-rate personal income tax of 16% in 2011 even as welfare cuts flattened demand among those on lower incomes (with a higher propensity to consume) but his government reacted to the subsequent decline in tax revenues with an increase in the employer social security contributions they had pledged to cut, a raise in VAT to a massive 27% and a hike in the minimum wage by 19%, none of which will improve demand or increase employment. These measures come in the context of an increasing inability to raise finance either from financial markets or from the IMF or the EU, with which the government is at loggerheads, even as Hungary teeters on the brink of a sovereign debt default.
In his speech to large crowds attending national day celebrations last week Orban vilified the EU as no better than Hungary’s old Soviet oppressor: ‘We will not be a colony’ he declared and not for the first time he drew direct analogies between Moscow and Brussels, rejecting the ‘unsolicited comradely assistance’ of the EU – a fabulously disingenuous reference to the Union’s attempts to get Hungary to honour its voluntary commitments. The EU’s finance ministers have duly resolved to withhold half a billion Euros in cohesion funding. All of which leaves the regime with increasingly polarised choices. Though playing for time in EU/IMF negotiations, in public Orban continues to spoil for a rhetorical fight as one of the few remaining proofs of government virility. As such he is dragging Hungary into a diplomatic game of chicken, and so long as Orban doesn’t blink he offers himself as the hero of a projected national martyrdom.
He is offering the fellowship of misfortune to that sizeable population that feels marginalised by the rapid liberalisation of the economy; that is overcome with anxiety about the future and resentful of the entanglement of figures, information and exhortations to ‘discipline’ coming from the wealthier countries to the west. If Orban backtracks now he is ‘selling Hungary out’, but as things stand, with his persecution manias, his resurrection of communism’s ‘combat tasks’ in nationalist form, with his purging of the non-faithful from the public sector, the judiciary, the media, culture and education, allusions to Greater Hungary and promises of ‘economic autonomy’, Orban is selling his people a catastrophic lie.
The lie is that Hungary can flourish as a paranoid, racist, xenophobic one-party state with a patronage-based economy: with a reversion to those calls for self-determination that require enemies abroad and racial inferiors at home. Orban’s ministers are too afraid to calm the hubris which is increasing evident in Orban’s actions and this can only end badly: the political economic contradictions will mount and ordinary Hungarians are already paying the price with a deepening of the stresses that brought Orban to power in the first place. For a democracy scarcely twenty years old this is a tragedy which should give all Europeans pause. In particular the EU’s economists need to think hard on the politics of austerity, because Hungary is not the only member state with an illiberal tradition on which its more ambitious politicians may call, when cornered.
Please read our comments policy before commenting.
Note: This article gives the views of the author, and not the position of EUROPP – European Politics and Policy, nor of the London School of Economics.
_________________________________________
About the Author
Abby Innes – LSE European Institute
Abby Innes is a Lecturer in the Political Economy of Central and Eastern Europe at the LSE’s European Institute.
I very much enjoyed this blog – but I think the EU needs to think about some other aspects of how it handled Hungary besides the austerity measures. I was a foreign correspondent in Hungary for four-and-a-half years from January 1999 and so saw Orban’s first government in action during the EU accession process. Orban displayed nearly all the characteristics he’s displayed in the present government during his first one – a neuralgia about the media, fiscal irresponsibility, populist anti-capitalism and hostility to the national bank. But the EU seemed to need Hungary to remain a “model pupil” in the accession process so refrained from critcising it. It now finds itself with Hungary as a member pursuing all those policies to a far greater degree. Any future accession process has to be more realistic, I think.
Hungary’s economic problems have always, I feel, been mainly political. As the Gyurcsany election lies incident illustrated, no-one has felt able to explain to the Hungarian people why cuts in public spending and economic liberalisation are required. Even the Socialists, who introduced a wildly successful programme of this kind in 1995, have run away from defending it since. The country will recover when someone works out how to sell such a message in opposition to Orban’s sloganeering – and works out a way round the advantages to Fidesz that it has built into the electoral system.
I completely agree that the EU underplayed its hand during the first Fidesz government and consequently is now in the difficult position of needing to show that Orbanism is a dangerous road on every front whilst at the same time not wanting to provoke a more anti-European backlash in Hungary than already exists by, for example, invoking Article 7 of the TEU. Hence the ‘chicken game’ analogy…
On the point that you make about Hungarian politicians not making the case for austerity, what strikes me, looking at the region as a whole is how incredibly difficult/thankless the politics of austerity has been: Polish governments of left and right have arguably been more brutally honest about the emerging market realities of cuts and retrenchment and the country has endured two decades of restructuring…. But as the fastest growing economy in the region, on average, even Poland hasn’t grown fast enough (i.e. above an average of about 5% per annum) to really significantly improve the employment rate, i.e. to do more than create catch-up growth. After 2004 unemployment went down in Poland but emigration was the main source of adjustment and the economy has remained chronically short of business credit: having dutifully internationalised the banking sector it is apparent that foreign banks love the Polish retail and mortgage sectors but are pretty chronically risk averse to domestic business lending, particularly in the SME sector, where you might hope for significant growth, not least in employment. Poland has survived relatively well in the financial crisis for various reasons, including the sheer size of its economy, but also because if you’re credit starved you cope with an international credit bust relatively well… My point is that even in those economies where politicians enacted phenomenal levels of liberalisation and have been very honest about austerity (nearly terminally so for the Polish Social Democrats) the road has remained phenomenally hard. There has been a European tendency to assume that Central European democracies can consolidate as night follows day but their global political economic context has had scant resemblance to the post-war conditions of Western Europe, with Keynesian inflected embedded liberalism across the board enabling the resolution of social conflict and the consolidation of political parties and hence, of democracies. One of the reasons I want to emphasise the socio-economic situation is that there is a real risk, particularly in Western Europe, that the situation in Hungary is viewed, as the Czechoslovak split was in 1992, as some kind of recidivist Central European nationalist bent: the massive domestic socio-economic stresses, in other words, are not taken sufficiently seriously. But why would we expect European countries to have no expectations of European levels of social cohesion? My sense is that in the region as a whole the creation of credible electoral choices by non-neo-liberal parties is increasingly difficult, for the liberal left in particular. But without substantive electoral choices, particularly in increasingly dualised labour markets, why would we imagine these populations – any populations – should feel that democracy is working well? The timing of the financial crisis is pretty tragic for Central Europe: decades of communism, then they endure twenty years of radical uncertainty and retrenchment on the promise of a brighter tomorrow and then this! In effect the region suffers a strongly magnified version of the political economic predicaments seen in the western member states but without the inertia of formerly strong and deeply socially embedded political parties to help them through the situation… Sorry: that’s really cheerful isn’t it! 😉
HELPING HUNGARY FROM THE OUTSIDE
First, congratulations to Dr. Innes for an excellent overview and analysis of Hungary’s declining situation.
The remedy can only come from inside Hungary, but ever more intense global scrutiny and constraints will help the progressive forces in Hungary to prevail in the face of the defensive demonization of all opposition and critique by the present autocratic regime and mentality of the prime minister, Viktor Orban.
A two-thirds electoral majority, and the self-servingly revised Constitution, self-servingly rejiggered electoral zoning, long-term appointments of cronies, media controls and other abuses that this ill-starred majority has visited upon hapless Hungary will be hard to repair. But if there is any hope at all, it is with robust and relentless external support for the nation’s honest, decent, tolerant and democratically minded reformers who are fighting an uphill battle to try to halt Hungary’s downward spiral.
Stevan Harnad
Canadian Hungarian Democratic Charter
“Hungarian President, Viktor Orban …” I almost stopped reading right there. I am no sympathizer of Orban, however if such a shoddy factual error appears within the first four words of an article or blogpost, even in the introduction, I have to worry about the content of the rest of the article, which I shall now read.Viktor Orban is the Prime Minister of Hungary, not the President yet.
Thanks for pointing that out MC – it’s now been corrected.
Chris
This type of mistake by the way is one of the reasons why I will never become a fan of edited blogging. Having a factual mistake in one’s own blog post can happen and should be corrected, but having mistakes edited in by others can make the author, whose name is put on top of the article, look bad without her/him being responsible.
PS: Correcting factual mistakes in blog posts after remarks in comments is ideally done by striking the
misstakmistake. If not, a comment like the one by mc is difficult to understand.Thank you for this article, a rather scathing – yet brutally honest – analysis.
I am grateful the author gave an overview covering the past twenty years, the sum of post-communist Hungary, including all the grab-assing that went on with Gyurcsány and the Socialists.
Currently, the biggest problem is the lack of a coherent political alternative.
There have been loosely-organized rallies (Milla group) and there’s one small green party LMP in the parliament, which is sadly a neither/nor proposition. All that’s left – for the democratically conscientious – are the burned-out, downtrodden Socialists, or Mr. Orbán and his bumbling technocrats. If you can’t stomach either of those, there’s hard-core right-wingers Jobbik with their swinging boots, or a splinter-group led by the ex-PM circus-freak Gyurcsány. Did I leave anybody out?
Needless to say, it is a glum political situation.
In a bizarre, ironic twist, parallel to all the vitriol between Orbán & Europe, the common thread in Fidesz-speak is how Europe will one day look back and see what great visionaries they actually were. That they in fact are leading the way forward, showing the rest of Europe how it’s done. Quite puzzling, indeed, all the back-patting you see and hear amongst Fidesz politicians. Not entirely sure what they think they’ve achieved…
We can at least comfort ourselves knowing that if Hungary comes crashing down it won’t be due to Viktor Orbán’s lack of self-confidence.
I have lived in Budapest for 17 years, and have been waiting with growing despair for someone somewhere with the apropriate academic credentials to convingly elucidate what’s wrong with the policies pursued by Orban. Yours is the best analysis concerning the tragic demise of Hungary that I have seen. So: congratulations. Now I would like to share it with some Hungarians – have you a translation of it? If not, and you can get one done, please send it to me. If you can’t get one done, I will see about having one done by one of my staff.
This has only been written in English but if you were to translate this into Hungarian/circulate it I would appreciate that very much. I would, of course, prefer the translator to be professional/very competent – as you can appreciate, on such a sensitive topic I would be concerned about accuracy!
With thanks and best wishes,
Abby
@Abby: my wife has an Hungarian trainee lawyer working for her; subject to her work load, I will get her to tx it, and then have both texts compared and let you know when it seems satisfactory. Please send me your email address.
Abby, I am afraid you are full of good will, but your piece lacks a close understanding of the country – so you end up like most political commentators, with a superficial analysis. While Orbán deserves all criticism, you disregard that the problem he raises are very real:
– The death spiral in the economy in the early nineties was created because of the extreme economic shock of the too rapid dismantling of the socialist internal market between the Warsaw pact countries. In a country of ten million, more than a million people lost their jobs or were sent to early retirement – this is a shock more serious then what Mediterranean Europe is going through now.
– The old EU member states hastened this process and their companies brought up struggling local companies for peanuts often just to close them down and thus create market for their products (look at the plight of the sugar refineries, canned food factories, dairy factories, shoemakers, cement factories, etc.) You can easily call this colonisation. And the list is very long. Yes, the country needed Western knowhow, but very often instead of knowhow Western comanies colonised the country to gain markets for their products.
So the problems Orbán is raising are right – only his answers are very dangerous. But it does not mean that there are no problems with Western companies in the region.
I could go on with my corrections, but it’s probably no point. I have a feeling you don’t speak Hungarian (correct me if I am wrong), so you would need to do a lot of research to get it right.
Best, Thomas
In his book “A People’s History of the United States” the late historian Howard Zinn wrote about the “coming revolt of the guards.” By guards he meant a stratum in the power hierarchy which includes not the hyperprivileged, but those to some extent privileged, and without whose contribution the Establishment can not survive. They are the buffer between the upper and lower classes. Academics are without a doubt such an example. They provide the ideological defense for the system and its excesses, usually cloaked in “facts”, “rationality” or “morality.” This article thows that the hope for the coming revolt of the guards may have been premature. Not only is this article a great example of the ideological homogeneity of Western academic elites, it also shows how “renegades” (like Hungary under Fidesz) are to be discredited at any cost. When there are no more arguments, just call them “racist, xenophobic, etc.”
The factual basis of the above article is actually meagre, but since it operates with half-truths rather than outright falsehoods, they are harder to detect for the casual reader. Hungary’s severe economic problems stretch back to the Medgyessy-Gyurcany years (2002-2010), before that the national debt, unemployment were significantly smaller, and the GDP growth was sizable. It certainly remains to be seen whether Fidesz can fix the economy, but this is not an easy task due to how the economy was left to rot between 2002 and 2010, and because how the EU/IMF tend to stand in the way of reforms in Hungary, that is, to some extent Fidesz’s hands are tied.
It is rather unfortunate that blind supporters of the, now defunct, Hungarian left still praise Gyurcsany for the leaked speech in which he admits to his fellow Socialists about lying to the electorate to win elections. The fact that academic spin-doctors sell this as revealing truth is an example of the moral insanity that accompanies die hard ideological bias, characteristic of the “guards”. The Gyurcsany regime’s use of police brutality to crackdown on subsequent pro-democracy demonstrations in many cases is, of course, omitted above, even though it was a profound example of authoritarian practice. The fact that the EU kept silent during all this raises the question to what extent the EU (or at least its potentates) recognise their voluntary commitments, to democracy, freedom, rule of law. Nowadays, there are no elected governments in Greece/Italy, referenda on questions crucial to the electorate are forbidden. No protests from the EU about any of this, but their efforts to try to undermine the government with the largest democratic mandate continue unabated.
The non-faithful have not been “purged” from the public sector, etc. There are no provisions about having to be faithful for any public/private office (priest, rabbi, imam being likely exceptions), only a reference to the historical role of Christianity in the new Constitution, which should not come as a surprise in a country founded by a King who converted to Roman Catholicism. What is likely worrying the political ilk to which the author of the above seems to belong may be more that in Hungary the “liberal-progressive” monopoly on cultural/intellectual life has been subsiding, and it is being replaced by a growing sense of balance. The Hungarian media entertains a much wider spectrum of opinions, in fact much of the typical Western spectrum is covered in Nepszava/Nepszabadsag and the center-right media outlets HirTV, Heti Valasz. But in fact most of Western Europe lacks an EchoTV, or Magyar Hirlap, which continually question the moral and rational consistency of the views of the pro-Western Establishment. To its credit, the USA has a wide spectrum of opinions in its media, but even there it is hard to find mainstream media outlets who question the establishment, this is usually done by alternative media.
Dear Sir or Madam,
I don’t agree with you about ‘racist and xenophobic’ – both of which strike me as being thoroughly apt. In fact, the whole article blows a welcome blast a fresh air into the debate about the ‘Viktator’s’ ideas and policies.
You post with anonymity; may we not know at least your identity, if not also your credentials?
Yours,
GBG.
I was living in Hungary for some months and I find yor statements very inaccurate. Of course Orban has made some serious mistakes, like nationalization of private pension funds of his attempt to control the Central Bank, but if you look at the figures, hungarian economic decline started 10 years ago, when the socialist government started to get the country indebted to finance it’s various social benefits programs.
In fact, if you look at the figures concerning unemployment, GDP growing, budgetary deficit, external debt, among others, of the last 10 years, you will see, Orban´s government has inproved almost all of theese indicators. If you write from the London School of Economics I think you should take this into account.
So, if the economic indicators are getting better, even when the whole Europe is in deep crisis, why so much criticism? why the EU Comission is treating Hungary harder than other countries with much worse economic figures? do you know that Hungary´s budgetary deficit is half the EU average?
The answer is politics, your are doing a political and missinformed analysis, close to defamatory, like when you call him “racist, xenophobic “, you just don´t like the man and his conservative thinking, neither does the european comission.
That´s what the government call “colonialism”, not the criticism about it´s controversial economic messures, wich in many cases have been cerrected, but the attempt to force Hungary to implement iberal policies wich should be decided completelly by hungarians.
I find it rather sad and not worthy of an LSE blog that the author only answers positive comments. Why write a blog post if you don’t bother to engage with comments?
– I find it rather sad and not worthy of an LSE blog that the author only answers positive comments. Why write a blog post if you don’t bother to engage with comments?
And I find it rather sad there are people who troll with obnoxious, impatient and thoroughly unpleasant replies.