Nosedive in Budapest: The Political Origins of Hungary’s Economic Crisis

(…) “Anyone who has cash at the moment can buy a lot of things for very little money in Hungary.” Signs that read “eladó” (For Sale) hang on houses, ruined buildings and cars all over the country. But there are no buyers.

This is a followup to my last post on Hungary based on the essays by Jakab Andor. Today Spiegel Online posted an informative analysis by Clemens Höges, who describes the process by which Hungarians lost their democracy. Lesson don’t elect a 2/3 majority who can rewrite the constitution to keep power. Excerpts:

Not Abiding by Deficit Rules

Hungary is running out of money — and the economy is faltering badly. Rating agencies have downgraded the country’s sovereign bonds to junk status, and creditors are now charging the government about 10 percent in interest on new loans. Last week, the European Commission even threatened to withhold funds in 2013, arguing that Budapest is not abiding by the deficit rules.

But the country’s real problem is Viktor Orbán. The German newspaper Die Welt has called the right-wing nationalist prime minister of European Union member state Hungary, whose Fidesz Party holds a two-thirds majority in parliament, a “Puszta Putin,” a reference to the plains of Hungary. A new constitution, which guarantees him a frightening amount of power, has been in effect since Jan. 1. Orbán has removed the word “Republic” from the country’s official name, which is now simply “Hungary.” His supporters are staunchly behind his “national revolution.”

A new media law intimidates critical journalists, and some have already been fired. Orbán has also enacted new laws that have forced the courts to bend to his will. He has reduced the powers of the country’s Constitutional Court, and judges are now appointed by an agency headed by the wife of a fellow party member. Orbán now wants to force older judges — in other words, those who were not appointed by his party — into early retirement.

The calamity began in May 2006. Gyurcsány, still a Socialist at the time, had just won the parliamentary elections in another coalition with the liberals. His government ran the country for four years “using the social democratic method,” he says, “raising taxes and spending money.” For example, civil servants received a 50-percent pay raise, and Hungarians were led to believe that this was how things would continue. It was also what Gyurcsány had promised during his election campaign. But he knew that, in fact, this was not a sustainable situation.

To address his concerns, he invited members of his parliamentary group and a few experts to a government retreat on Lake Balaton. He told them how things stood with the country’s finances. “But they didn’t understand me. They kept insisting and after three hours, I couldn’t take it anymore.” Then, he erupted. With the doors closed and no journalists in the room, Gyurcsány said that he and the party had lied to the people. “We lied in the morning, in the evening and at night.”

In the ensuing weeks, he forgot exactly what he had said at the retreat, but someone had brought along a recording device, and it all came out in September. It was a massive scandal, bringing protesters into the streets and giving Orbán numerous opportunities to humiliate the prime minister. But Gyurcsány had been elected, and he followed through with his austerity program. Then came the economic crisis, and Gyurcsány had to save even more money.

(…) If Gyurcsány had called for new elections earlier, at least Orbán would not have achieved the two-thirds majority that has allowed him to rewrite the constitution as if it were a piece of scrap paper, says András Vértes. “As a result, we now have more of a political than an economic problem.” Vértes, who is not aligned with any party, was considered as a transitional premier after Gyurcsány’s resignation. But he told the members of parliament that if he were appointed to the position, he would only bring experts into his government, not politicians. He also insisted that every member of his parliamentary group sign a pledge stating that they would not vote against these experts for an entire year.

It killed his prospects. Vértes laughs, as he sits between palm trees in the offices of GKI, the economic research institute he heads. The country’s largest, it works primarily for the European Union, with Vértes and his team keeping Brussels informed about what is happening in Hungary.

‘We’re at an Impasse’

Orbán is unpredictable, his policies are arbitrary, and he is playing around with the economy, of which he has little understanding, says Vértes. For example, Orbán imposed a special tax on banks that “practically eliminates their profitability.” The tax appeals to many Orbán supporters, because they already see bankers as gangsters. The premier is forcing a crisis tax on major companies mostly in the telecommunications and energy sector — also a popular idea, because it mainly affects foreign companies. Orbán has introduced a 16 percent flat income tax which, says Vértes, benefits high income earners and is disadvantageous to ordinary citizens.

The consequences, says economist Vértes, are that the banks no longer lend money, the telecommunications companies are hardly investing anymore, and consumer spending is taking a hit. “Now we’re at an impasse.”

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