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

Innes, Abby

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LSE Research Online

blogs.lse.ac.ukHungarian Prime Minister Viktor Orban, CreativeCommons: BY NC NDhttp://blogs.lse.ac.uk/europpblog/2012/04/05/hungary-viktor-orban/In Hungary Viktor Orban adds the EU to his lengtheninglist of ‘enemies of the state’Hungarian Prime Minister, Viktor Orban recently denounced the EU’s policies towardsHungary as ‘colonialism’, after the EU suspended nearly half a billion Euro in fundingover its massive budget deficit. Abby Innes takes a close look at Hungary’s recentdecline from a country known for its reform policies to one which is now mired ineconomic crisis and increasingly extreme political strategies.Contemporary Hungary is offering an abject lesson in how quickly democracy can go tohell 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 moreausterity’ and it has been selling a fantasy of national renewal on the top of increasingly authoritariangovernment practice and deteriorating financial conditions ever since. To make good on its electoralpromises one of Fidesz’s first measures was to pay for tax cuts by expropriating private pension fundsback into the public budget: an act that put the budget into a one-off surplus for 2011 but whichdamaged Hungary’s international financial credibility which worsened thereafter – government debt hashad ‘junk bond’ status for many months now. By March 2011 the government announced its economicstrategy 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 andhigher education but promised the creation of a million jobs within ten years.At the root of Hungary’s sluggish growth andextreme political remedies is the lowestemployment rate in the region – barely one in two ofthose of working age – and an exceptionally hightax wedge on labour, second only to Belgium’swithin the OECD in recent years. By 2006 Hungaryhad Swedish/French levels of public spending atPolish levels of per capita income. When coupledwith a post-2007 crisis in privately held foreign debtthe former Socialist government was left withnowhere to go but to unprecedented economicretrenchment: something they were no longertrusted to manage after revelations they had alreadylied about the real condition of Hungary’s publicfinances back in 2006 in order to win that election,and subsequent corruption scandals. Enter Fideszand party leader Viktor Orban in a coalition with theHungarian Christian Democrats, with aconstitutional supermajority and the temptation, given the unrewarding economic situation, to embarkon the most almighty recasting of the rules of the Hungarian political game: what has ensued is abacchanalia of populist-nationalist elite self-indulgence and hatred-mongering that has taken Hungary’sinternational reputation from a regional reform leader to pariah status in two years, and its politicaleconomy 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 emergingmarket 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 onwelfare and skills formation. The result was relatively low inequality for this region but an increasinglycrippling tax burden on employers, inducing what Esping Andersen has elsewhere dubbed the ‘deathspiral’ scenario of low employment and lowered tax contributions requiring high payroll contributions tosupport the remaining welfare system, which further lowers employment, stunting growth, increasingpressures on welfare…Even after entitlements were reduced the spiralling costs of cash transfers in Hungary increasinglycrowded out resources the economy needed to retain its competitive edge, as their low wageadvantage ebbed away and the relatively portable FDI which Hungary primarily attracted movedeastward. 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 fiscalmake-believe of 2006. (In fact the leaked 2006 speech of the Socialist Prime Minister, FerencGyurcsany is most striking for its honesty regarding the brutal character of Hungary’s realistic economicchoices – along with prodigious levels of swearing.)Orban’s solution was to insist that the emerging market dilemmas that are structural to a populationwith European expectations of social cohesion are solely the product of ‘communist’ corruption andnetworking. 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 foreigninvestors, steeply rising welfare and employment insecurity for twenty years and steadily risingunemployment for the most recent ten. But the belt-tightening has come anyway – as, short of asimultaneous reconfiguration of global capitalism – it had to.In government Fidesz adopted an incoherent ‘growth’ strategy that liberalised on the one hand, slashingemployment and unemployment protections, for example, even as it politicised the Central Bank, theState Audit Office and the Fiscal Council, and by now their programme is reduced to chaotic acts offire-fighting. Orban favoured those on a higher income with a flat-rate personal income tax of 16% in2011 even as welfare cuts flattened demand among those on lower incomes (with a higher propensityto consume) but his government reacted to the subsequent decline in tax revenues with an increase inthe 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 financialmarkets or from the IMF or the EU, with which the government is at loggerheads, even as Hungaryteeters 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 nobetter than Hungary’s old Soviet oppressor: ‘We will not be a colony’ he declared and not for the firsttime he drew direct analogies between Moscow and Brussels, rejecting the ‘unsolicited comradelyassistance’ of the EU – a fabulously disingenuous reference to the Union’s attempts to get Hungary tohonour its voluntary commitments. The EU’s finance ministers have duly resolved to withhold half abillion 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 fightas one of the few remaining proofs of government virility. As such he is dragging Hungary into adiplomatic game of chicken, and so long as Orban doesn’t blink he offers himself as the hero of aprojected national martyrdom.He is offering the fellowship of misfortune to that sizeable population that feels marginalised by therapid liberalisation of the economy; that is overcome with anxiety about the future and resentful of theentanglement of figures, information and exhortations to ‘discipline’ coming from the wealthier countriesto the west. If Orban backtracks now he is ‘selling Hungary out’, but as things stand, with hispersecution manias, his resurrection of communism’s ‘combat tasks’ in nationalist form, with hispurging 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 acatastrophic 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 andracial inferiors at home. Orban’s ministers are too afraid to calm the hubris which is increasing evidentin Orban’s actions and this can only end badly: the political economic contradictions will mount andordinary Hungarians are already paying the price with a deepening of the stresses that brought Orbanto power in the first place. For a democracy scarcely twenty years old this is a tragedy which shouldgive all Europeans pause. In particular the EU’s economists need to think hard on the politics ofausterity, because Hungary is not the only member state with an illiberal tradition on which its moreambitious 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 Politicsand Policy, nor of the London School of Economics._________________________________________About the AuthorAbby Innes – LSE European InstituteAbby Innes is a Lecturer in the Political Economy of Central and Eastern Europe at theLSE’s European Institute.No related posts.

In Hungary Viktor Orban adds the EU to his lengthening list of ‘enemies of the state’

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