What is going on in Hungary?

The Hungarian people are out on the streets in force, protesting a new constitution which has been introduced by the government. This has been covered in the press here and the main thrust is serious concern about an attack on democracy in that country by the ruling party. Much of what has been passed, as it has been reported here, is worrying, and there seems to be some justification for seeing this as a return to an authoritarian regime not seen since the fall of the soviet bloc. Generally the people are not wrong on such matters and so I find the protests persuasive in themselves. However I have no access to what the protestors are actually objecting to and there are a number of possibilities.

I first came across this through an article by Mr Krugman: who is an american economist. That seemed odd to me since it is not obviously within his remit and I would have expected it to be the focus of political commentators, rather. Maybe it was and I missed it. There is an economic dimension to it, though, so it is not out of his field and his interest makes sense. His piece was elaborated by someone called Mr Scheppele, also an american academic who appears to have a lot of knowledge of Hungary, though I do not know his field of expertise

What has been reported by these people is that a "centre right" party called Fidesz won a landslide victory in elections last year. This is said to have been due to dissatisfaction with corruption in the previous "socialist" government: I do not know the details of that but the upshot was that Fidesz got a huge majority in a unicameral parliament. It is not claimed the election was not fair: and while 53% of the vote translated to 68% of the seats, that is not all that unusual in representative democracies: it happens all the time. It is claimed that Fidesz have used that majority to make major changes, culminating in a new constitution which came into force on 1/1/12. That constitution is the focus of the concern and it seems it dismantles many of the safeguards which are necessary to democracy. That is the issue.

According to Krugman and Scheppele, the governing party has done a number of things which together effectively make Fidesz policies a permanent part of Hungarian political life. Their views are set out here:

http://krugman.blogs.nytimes.com/2011/12/1...nal-revolution/

In summary they allege that a list of changes, all tending to a one party state, are the essence of the matter. In particular they say:

1.The new constitution (and laws passed prior to its introduction) destroys the independence of the judiciary.

2. The oversight of elections, previously done by a commission appointed from a politically diverse pool in consultation with opposition parties, has been passed to a new body which is wholly comprised of membes of the ruling party

3. Constituency boundaries have been changed (gerrymandered) so that the ruling party is very likely to win future elections. If the boundaries had been like this in the past Fidesz would have won the last 3 elections: they lost two of them on the old boundaries

4. The new constitution destroys the independence of the press

5. The new constitution destroys the independence of the central bank

6. The new constitution establishes Hungary as a Christian state: and this has a concomitant that a foetus is protected from the moment of conception. Many churches have been "deregistered" though it is not clear what the implications of that may be, because the importance for a church of being "state recognised" is not spelled out

7. Under the new arrangements a great deal of public and fiscal policy is enshrined in the constitution and needs a 2/3 majority in parliament to overturn them. This is said to be particularly true of budget arrangements and it ties any future government to a particular fiscal and economic policy. It creates a "budget council" with the power to veto any proposed budget: at the same time requiring parliament to pass a budget by March each year. If they fail to do that the president can dissolve parliament and call new elections

8. There are concerns that the main opposition parties can be eliminated under existing or new laws: though that is not certain and is perhaps overstated

Put like this it all sounds very scary indeed. And the fact that the people are out on the streets tends to confirm that this is very bad, certainly. But before we reach any conclusions we have to have a think about all this: because it still seems odd to me that this information was first drawn to my attention by an economist: and that is strange. It is certainly true that I have been reading a lot about economics recently: so that may be the only reason for that and it is bias of source on my part. But I do read the headlines in the mainstream press, at least: and if this were as portrayed I would have thought it would make news. Hungary is at the heart of europe and it is a member of the EU.

That fact is part of this. Hungary is in desperate economic straits and it needs a bail out. Enter the IMF. Apparently the IMF and the EU were in negotiations about a bail out: and these have now been broken off. But so far as I can tell they have not been broken off because of concern about a move to an anti-democratic constitution: the argument is about economic policy, as one might expect.

In particular: in the past the president of the Hungarian central bank used to appoint his own vice presidents, of which there were two. Under the new arrangements there will be three and they will be appointed by the prime minister. It means the prime minister can appoint one immediately: and the rest later. This has caused such concern that the EU president has written to the Hungarian leader urging that be altered. It is not even slightly obvious to me why that is a concern. That politicians should have the right to control the central bank seems utterly in line with democracy to me: not a threat to it. It is a completely separate question from that of a "one party state". It is obvious that the EU has great faith in bankers, given they are prepared to countenance handing over the government of countries to those people, in Italy and in Greece. But I don't. I do not see any great threat to democracy from handing control of economic policy to democratically elected politicians rather than unaccountable bankers. On this issue at least it does not seem obvious to me that the Hungarians are the problem...

According to Scheppele the "stern warnings" from the EU have led the Hungarian government to make some concessions about this, because an independent central bank is part of the conditions for membership of the EU ( I did not know this before). But they are not sufficient because of some other provisions. There is a Monetary Council in Hungary and it sets interest rates and monetary policy: it existed before. The new government has expanded the numbers who sit on it and appointed the new members: so 6 out of 9 are now government appointees. So the government will set monetary policy, shock!. I can't see a thing wrong with that, myself. It is how it should be, to my way of thinking.

In addition the government has changed the status of the central bank: it has merged it with the regulator. The new agency's head will also be appointed by the government and so the president of the central bank will no longer be the top banana. So what? Once again control of monetary and fiscal policy by elected governments seems right to me: if you have to do that by the back door because the EU has the vapours if there is democratic control, so be it. These measures, as described, do not touch on the question of the one party state: there are entirely to do with who is actually in power: politicians or bankers. To me that is a no-brainer. Even where those politicians are not properly democratically accountable they are (at least for now) subject to the ballot: neither the "holier than thou" EU president nor the bankers can say the same. If Fidesz has made it necessary to get a 2/3 majority to change any of this that is still better than the " no amount of votes at all can change the EU or the banks" situation that their critics are in.

Fidesz is a centre right party. It is not suprise that they have implemented policies which I find abhorrent. And it is nasty that they have, for example, passed a tax law which permanently lays down flat rate tax for individuals now; and for corporations in the future. But that proposition is part of mainstream right wing thinking in many countries (not yet implemented anywhere else, but hardly unheard of). Unsuprisingly Fidesz is funded by rich folk and this will suit them very well. The fact that changing that requires a 2/3 majority is horrible: but it is not out of line with the EU proposal that anything which tends to increase the "structural budget deficit" anywhere in Europe will be illegal in future: and that is meant to be permanent too. I hate both policies: but I couldn't slip a sheet of paper between them in terms of their attack on democracy. So why the outrage? Well according to Scheppele it is because the EU thinks that this provision will make it impossible for Hungary to balance its books. Not about democracy, then...

Hungary has economic problems, as mentioned before. It borrows in foreign currency: but it is not part of the eurozone and so its currency has been devaluing. That means that its debt goes up. It was in trouble, as so many countries are. The previous government sought assistance from the IMF and the EU. Fidesz decided it did not like the terms and followed its own policies instead: it did terrible things. It nationalised private pensions; it imposed higher taxes on foreign businesses; it forced banks to take losses on the repayment of private loans. These are described as "unconventional" measure. The IMF walked out of talks about assistance when the government refused to budge on the flat rate tax and the independence of the central bank. Since then the international financiers have done what you would expect: they won't buy Hungarian bonds and their credit rating has been reduced to "junk" status by Moody's and Standard and Poor. The way I see it, any government which seeks to govern is subject to that kind of action: it is not clear to me that it is the Hungarians who are undemocratic, though.

I am in a curious position here: I am defending a government which is political anathema to me on grounds of democracy: but that is the way it turns out if you happen to be a democrat. It is clear to me that the IMF and the EU are not democrats: and this makes strange bed fellows indeed.

There are things which are concerning: and the Hungarian people are concerned. I do not wish to underplay the parts which should be challenged. It is just that they are not very clear to me.

It is not good if the judiciary are appointed by the government: you only have to look at the US Supreme court to see what is wrong with that. Do I hear an attack on the democratic credentials of the US on those grounds?: the silence is deafening.

It is not good if the press are not independent: but a constitutional requirement for "balance" is not quite the same thing. That is what the new constitution says: it is what the BBC charter says too: do I hear an attack on the democratic credentials of the UK on those grounds? I do not.

Constraints on what an elected government can do wrt the national budget are not good: but they are precisely what, in another part of the forest, is touted as the solution to the sovereign debt crisis proposed by the EU: and in that case the sanctions will be a take over of the national policy by EU appointees: in Hungary they will be fresh elections. Not sure the former is more democratic, myself. I don't hear much outcry about that particular democratic deficit in the EU proposals, either

In short I am not convinced about this faux moral outrage about Hungary. The situation is not simple, but it seems to me that there is at least a case to be made that all of this is down to a rejection of the hegemony and a re-assertion of economic control by politiicians. Heaven forfend !

Many people seem to be buying into a cause/effect story for Hungary which suggests that the country's economic woes are due to the current government's "unorthodox" financial decisions, and as noted above this is being tied to alleged authoritarianism and a new constitution said to herald the rise of right wing nationalism at best: totalitarianism at worst. People like Krugman imply that the protests on the streets in Hungary are in response to that, and so different in kind and character from those seen in Greece. Obviously I do not know what the people are protesting about: I have seen some Hungarians deny it is about the poltiics but on the boards I have been on where that has happened they have been suspected of being themselves right wingers who are trying to deny the real situation. Since they are so accused by people in the UK and America I have no reason to believe they know much more than I do. Even if they do the conflation of issues I outline above is not addressed: and that is significant to my way of thinking.

Most recently the ratings agency Fitch followed the other two big ones and downgraded Hungarian bonds to "junk status". Hungary badly needs money and I gather that their leader, Mr Orban, is now making appeasing noises, saying he will be prepared to modify any law which breaches the terms of EU membership. What appears to me to be happening is that the power of the financial orthodoxy is being demonstrated very clearly: the elected politician can no longer govern unless he toes the financial party line. That is profoundly undemocratic but it is no surprise.

It is important to separate out the two main issues. The slide to totalitarianism is being presented as the problem by such as Krugman and Scheppele. That may or may not be happening: as the laws which purport to demonstrate it have been relayed in their papers I do not see the case has been made. As I noted, much of the legilsation is abhorrent to me: but it is not obviously fascist in character, unless you also characterise at least some of the provisions (in place or actively being promoted) in the US and UK as similarly totalitarian. I am not averse to that: but it is a hard case to sustain. We have already discussed the problems of recognising incipient totalitarianism on another thread. It is not easy, and I do not believe we have an analysis which allows of it. What I am absolutely certain of is that the real issue here is nothing to do with that. That is not to say that I have no fear of a growth of totalitarianism in face of yet another great depression: as I have made clear elsewhere I am very fearful indeed of that. But the cause and effect runs the opposite way to what is being asserted here, so far as I can tell: neoclassical economics produces totalitarianism: it is not the cure for such a trend.

Whether you accept that or not the fact remains that what the EU and the IMF and the economic press cheer leaders are actually concerned with is not the social legislation at all: you can tell because they make a lot of that in the background part of their explanations: and nothing at all of it when it comes to stating what they want

As an example, in one paper I read today Hungary is blamed for walking out of the talks with the IMF: and so they did. But they did so because the IMF demands control of what are properly political decisions. By what right can the IMF justify such interference? It might be ok if they had a good track record, but as we see time and again, they don't. Their theories don't work and their intervention leads to poverty. Them's the facts. It is possible to argue that a lender can demand certain things in return for their help: but few of us would accept that they can demand anything at all, whether relevant to repayment prospects or not; whether likelyt to enhance the ability to repay, or hurt it. . But that is what the IMF and EU go for: and they undermine democracy while they do, both directly and, I would argue, indirectly.

It is telling what the discussions with Hungary are about. According to a report I saw today there is a summary of a document prepared by the IMF outlining conditions for assistance. It says that it will insist on re-establishing the independence of the Hungarian central bank: reduction of "crisis" taxes which have been imposed (on foreign businesses at least in part as noted in the previous post); "restructuring of the social welfare system"; and "restructuring" of public transport. So far so much the same as they demand for every country: with generally bad results. There is nothing here which addresses those aspects of Hungarian government policy which are said to represent authoritarianism: it is just the familiar litany of prescriptions and completely divorced from that kind of concern.

I also read that the stability law is a cause for concern such that the president of the EU wrote to the Hungarian government demanding it be withdrawn: that is the measure which imposes flat rate tax as I noted in an earlier post: what I did not know till today is that it also ties the pace of debt repayment to economic growth: that is what they are worried about, I suspect. I don't think it is the regressive nature of the tax which bothers the EU.

This seems to me what this is all about: Hungary challenged the financial hegemony: and Hungary will be forced into line for that sin. Concern for democracy is nowhere in sight: it is a fig leaf to cover the real democratic deficit which arises because of the transfer of sovereignt from governments to banks

Edited by FionaK - 8/1/2012, 22:15

I also had a wee look at the recent history of Hungary. This was because the story we are being told is that the previous government was defeated in a free and fair election because of corruption and fiscal mismanagement. It occurred to me that this was much the same tale told wrt Greece, and I thought that was quite a coincidence.

I am not in a position to know what really happened in either country. But the above is not the only narrative available. Here is another:

The previous government was led a man called Gyurcsany: who was the head of the socialist party. It seems that this party lied about the state of the Hungarian economy in order to secure re-election and this became known because there were tapes confirming it. So let us accept that is true. The tapes, we are told, led to widespread popular anger and there were riots in 2006. That may be true as well: but it is possible it is not entirely unrelated to the austerity measures which were adopted after the revelation, rather than a response to "corruption" as generally understood. However that may, be Gyurcsany's government introduced austerity measures including fees for visiting the doctor and for hospital stays: and student tuition fees, for example. The aim of that was to reduce the budget deficit so as to allow Hungary to join the EU and to adopt the euro as its currency. The timing is different but this is not very different from what we are told happened in Greece: though it is not clear that it is true in that case I see it has become "true" by dint of repetition, by now. Astonishingly the people do not seem to have approved this programme (and note that this was a socialist government - a word that by now has no referent in europe) and they rejected adoption of the euro in a referendum in 2008. The governing coalition broke down and the Gyurcsany's government became a minority in the parliament: but stayed in power. The economy took a downturn. This is sometimes stated as if it was related to the events just outlined; but in 2008 ALL economies in europe took a hammering: as did the US economy. I see no necessary relationship with internal affairs. But whatever the cause Hungary turned to the IMF, they EU and the World Bank: and got a loan of $25 billion

The socialist party held on (by dint of a "constructive" vote of no confidence in Gyurcsany which he engineered and which had the effect of a change of leadership of the party) until the scheduled elections of 2010: when Fidesz won a landslide in seats (though not in votes).

On one reading the socialists were the authors of their own misfortune, by misstating the state of the economy: on another it was the demands of the EU conditions for membership which led to both the lies and the austerity: and in turn they led to the fall of that government. I do not know why governments in Greece and in Hungary were so keen to join the eurozone that they would deceive the people about the situation (if, in the case of Greece, they did that) but it seems to me there has to be some big advantage in membership to lead to that outcome. I wonder if it is because trade with the EU is difficult from outside? Don't know.

Hungary did not adopt the euro. It has its own currency and it is able to devalue. That should mean it is in a better position than Greece and Spain and Portugal, which cannot do that. However the problem for Hungary is that much of its debt is denominated in foreign currency. What that means is that if the currency falls the cost of servicing debt rises. (As an aside, this was the position of Germany after WW1. It had to pay reparations in foreign currency: so nothing it could do domestically could raise the money. That is the origin of hyperinflation so far as I can see: it is little or nothing to do with government's printing money per se: it is printing money to buy foreign currency to pay debt that causes the catastrophe. That is at least a partial answer to a question Vninect raised some time ago on another thread about why private sector creation of money did not lead to hyper inflation as one would expect if one believed neoclassical economic fairy stories).

In July of this year Hungarian sovereign debt stood at 80% of GDP. That is very far from being a crisis. It is not the 60% figure demanded by EU rules: but nobody much is meeting those and in the scheme of things it is not so bad. But once again the private debt is included in this so called "sovereign debt crisis", and when that is factored in the total foreign debt was 135% of GDP.

The same report notes that Hungary had a strong trade surplus. But like many other countries in this sorry saga it had "enjoyed" a consumer boom in the early part of the last decade. Driven by debt. Lent by foreigners. Do you recognise any of this?

From 1999 to 2002 there was a big increase in consumption: that then levelled off. What that means in another way of saying it is that demand stopped rising so quicky: and that means there is less economic activity; and less tax is paid.

In 2006 the boom came to an end: I am sure it is a coincidence that that coincided with the austerity measures introduced that same year: because austerity improves things, doesn't it? Only it doesn't. It makes government revenue fall, as we have seen again and again. Hungary already had a fiscal deficit because demand was not rising so fast: it got much bigger after 2006 when demand began to fall.

Having its own currency should have meant that was not a problem: devaluing means that your stuff is cheaper and so you sell more: and indeed Hungary has a big trade surplus, which has grown a lot since 2008. In theory that means that GDP should grow and all should be well. But 55% of Hungary's debt is in denominated in foreign currency: so that does not work, as already explained. (This is also relevant to another question Vninect raised about Greece: that was about inflation of the currency and the effect on exports: predicated on the notion that Greek left the eurozone. Hungary shows that the value of the currency doesn't make a guaranteed difference of the sort he had been discussing: because if the debt is in a different currency you can't necessarily outrun it even if you hold inflation down: and in greece's case the debt would be in euros, at best. Sorry, another digression). The boom in exports has not led to growth because the money goes to service debt which is more expensive because of the very same thing that allows the exports in the first place: devaluation of the currency. So despite its export success Hungary has not enjoyed good growth. This is compounded by the fact that private debt is also often in foreign currency (mainly swiss francs). Even mortgages on domestic houses are often denominated in that way.

It follows that Hungary has no way forward unless it reneges on the debt. The current government does not wish to do that any more than Ireland or Portugal or Spain or Italy want to. So they have raised interest rates twice since they came to power, and the base rate is now 7%. The aim is to support the currency. Go figure. Domestic demand falls when you do that: it is austerity by any other name and it means that revenues fall further: which in turn means the deficit grows and you need to borrow more by issuing bonds: which you can't sell.

Maybe the people are on the streets in defence of abortion rights or because they are concerned about civil liberties: or just maybe they are getting poorer and their children are emigrating and they don't like it any more than Greek people do. What is abundantly clear is that the economic powers that be are not worried about politics: they want their money. In getting it they might just bring about the totalitarian outcome they say they are concerned about. We have seen that before

A very interesting conflation in a discussion about Hungary on the radio this morning: a commentor said that the Hungarian government adopted a nationalist stance (which it did) and then illustrated it by the example of it nationalising pensions. Maybe it was just a mistake.

www.bbc.co.uk/news/business-16505618

I don't understand this: I did not think the sanctions regime had been agreed yet: but it will be applied to Hungary. Whatever the case (and it may be there were sanctions available before the deal which was agreed and which led to Cameron's walk out) it is now obvious that keeping within the deficit target is not enough: you have to do it the way the EU and IMF like or they will sanction you anyway, if this report is correct.


When the outline of the proposals was explained it was my assumption that if the country kept the deficit below the target there would not be an issue: only if they did not would the EU have a locus: and that was bad enough. It now seems that you do not have to breach the target to be sanctioned: you just have to exercise political sovreignty in a way they don't like. What price democracy? Remember that the proposed target is to be 0.5% of GDP when the measure is implemented.

There has not been a whole lot of information about Hungry in recent months: not in the press here, anyway. But I came across this article today and I found it interesting. Mr Orban has unfriended the IMF on Facebook, apparently

http://theautomaticearth.com/Finance/hunga...nd-the-imf.html

Today it seems the hungarian government has offered a passport to anyone who will buy government debt to the tune of £200,000. Doesn't seem that much different to what everyone else is prepared to do, but it is refreshingly honest. In other news, there are moves to reinforce anti immigration provisions in the uk in case greeks want to move due to poverty; and they are beating up foreigners on the streets of athens. Funny old world

http://www.telegraph.co.uk/finance/financi..._medium=twitter