Some good news for the Orbán government, but there are still many questions

Viktor Orbán received a couple of nice presents today for his fiftieth birthday. One was from the Hungarian Central Statistical Office (KSH) and the other from Olli Rehn, European Commissioner for Economic and Monetary Affairs and the Euro.

According to the Statistical Office, the unemployment rate ticked lower to 11.0% in the three months ending in April from 11.8% in the first quarter of 2013. On the surface this improvement seems both rapid and substantial. But, as Portfolio.hu points out, “The change in the number of employed shows the same strong fluctuating pattern as in the previous years. The main cause of the fluctuation is the year-end stoppage of public work schemes.”

Hungarian unemployment Another possible reason for the improving unemployment numbers (although this does not address the issue of seasonality and would take more time to be borne out) is that unemployment benefits run out quickly in Hungary. The Orbán government reduced eligibility for benefits to three months, the lowest perhaps in all of Europe. Whether these people simply drop out of the officially tracked work force after their benefits run out or find a job is hard to say, but we do know that the number of employed workers grew by 61,000 over the same period last year. Some of these people may have found part-time work paying below the minimum wage as employees of the public works program that began full-scale under the Orbán administration. Only a month ago, one of the undersecretaries of the Ministry of National Economy boasted about the very high number of people in the program: 300,000 this year as opposed to 261,000 last year. If his figures are correct, almost 65% of the recent job gains come from the public works program. These people don’t produce any real profit. In fact, they are a drag on the central budget–this year a projected 153.7 billion forints. So I think we should wait before passing final judgment on the employment figures.

The other piece of news came from Brussels in the early afternoon, and it was not much of a surprise to anyone. It has been clear for at least a week that it would be very difficult not to recommend lifting the excessive deficit procedure in Hungary’s case. Due to a series of tax hikes, mostly levies on businesses and banks that affected the population only indirectly, the government managed to decrease the deficit to under 3.0%. Naturally, the government considers this a major victory that vindicates Budapest’s economic policy.

Viktor Orbán had single-mindedly pursued the goal of getting out from under the excessive deficit procedure. Some people argue that he was acting out of fear of a cutoff of EU development funds. But there was never any serious threat of the country’s being deprived of funds because of its deficit, which pales in comparison to the deficits of some other European countries. I suspect that what Viktor Orbán really wanted was to stop the EU monitoring that went hand in hand with being under the excessive deficit procedure. After all, he backed away from IMF funding because they would have closely monitored the Hungarian economy. But, I fear, Viktor Orbán is mistaken. The number crunchers in Brussels will continue to monitor Hungarian economic data closely. Viktor Orbán won’t have a free hand. Hungary, being part of the EU, is expected to follow its advice. If it doesn’t, Hungary may find itself under the excessive deficit procedure once again. Such a possibility is not unheard of. After all, this is most likely what will happen to Malta.

Hungarian deficit between 2001 and 2014 / Ecostat, Népszava, graphics by Szilvia Kőszegi

Hungarian deficit between 2001 and 2014 / Ecostat, Népszava, graphics by Szilvia Kőszegi

Unfortunately, Hungary’s unorthodox economic policies aimed at lowering the budget deficit were costly to both the population and the economy. Trying to hide economic austerity from the general population, the government taxed businesses and banks to death and was unable to stave off an economic recession. Yes, the deficit is low at the moment, but how long can the government continue an economic policy that does not produce growth?

The Orbán government was also fixated on reducing the national debt, which was not higher than in most European countries. They confiscated 95% of all private pension funds, in part to lower the debt. Since then that enormous sum of money has evaporated. Some of it was absorbed into general funds and more than half of it went to the bottomless pit of the national debt burden. Because Viktor Orbán was unwilling to accept the terms of a low interest rate IMF loan, the country was forced to borrow at market rates. The sad result is that the Hungarian national debt is higher today than it was in 2010.

Yes, Hungary is off the hook for the time being, but Brussels made several recommendations and suggested specific steps the country should take to achieve sustainable economic growth.

The European Commission was critical of the Hungarian government for concentrating on the revenue side of the ledger.  They suggested restoring the former competence of the Fiscal Council and advocated a return to normal lending by decreasing the bank levies. They criticized the newly introduced flat tax which favors the rich and over-taxes the poor. They maintained that Hungary should concentrate on employment. Hungary has one of the lowest rates of labor market participation in the Union. They called the attention to the social situation that continues to worsen with 31% of the population at risk of poverty.

They suggested that the country “create a supportive business environment, in particular restore an attractive environment for foreign direct investors, by making the regulatory framework more stable and by fostering market competition. Ensure the prompt implementation of measures envisaged to reduce the administrative burden, improve competition in public procurement and take adequate measures to tackle corruption.”  They criticized the measures introduced in the field of education. As opposed to earlier years when fewer people were dropping out of school, this trend was reversed in 2011. They are concerned about the “ongoing education reform” in higher education. And finally they criticized the regulation of energy prices. In their opinion these regulations should be gradually phased out while “protecting the economically vulnerable.” Public transport should also be more cost efficient.

These are precisely the steps that the Orbán government doesn’t want to take. But if they do not follow this sound advice, it is unlikely that considerable economic growth can be achieved in the long run.

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35 comments

  1. I think if the deficit is lower than 3%, the EU would be breaking the law if it didn’t allow a country out of the EDP.
    Also, 5 member-states now leaving the procedure is a powerful message to the world about the Eu economy “stabilizing”. It is good news.

    But you are right, Eva, Hungary will still be monitored. This is the link to the press conference where a Hungarian journalist (HVG, I think) asks Rehn about what it is that a country can do now, once out of the EDP.

    Rehn answers at 14.00-17.40
    http://ec.europa.eu/avservices/video/player.cfm?ref=I078808

    In short, the country will be in the “preventive arm of the stability and growth pact”, it has to show that the medium-term fiscal sustainability is achieved. If it isn’t, the country gets back into the EDP (see Malta). But I think he explains is better than me.

    This hasn’t got much to do with Orban’s political style, but this way Orban’s argument about the EU being unfair and using double standards against Hungary will not be justified. At least not in this context.

  2. Orban scored a huge victory politically, even if the long term economic benefits to the Country are AT BEST modest. First, he can boast that he “won”, and he got the EU off of the country’s back and has restored some level of sovereignty for Hu. Second, he can claim that all the pain he has inflicted on the public and business was for a good long term cause. Third, he will have marginally more budget flexibility (and is assured of the flow of EU money) up through the election next year. BTW, to top off the good news for the PM, the OECD revised their projections for Hungary and see the country now growing modestly in 2013. Whatever one judged his chances of getting relected the day before yesterday, they increased considerably yesterday.

    Long term of course, the changes in the politics he has implemented and the increased role of the State in the economy will continue to have a disasterous affect on the Country. But as all that matters is winning elections, the PM seems for a change to have outsmarted his adversaries in Europe and to greatly improved his chances for being around to celebrate his 55th birthday in power as well.

  3. NWO: ” to have outsmarted his adversaries in Europe and to greatly improved his chances for being around to celebrate his 55th birthday in power as well.”

    I think there is some misunderstanding here about the interests of the EU. I know already that “Hungarian cleverness” and “outsmarting” has some particular place in the Hungarian self-image. But perhaps people could be reminded of that Ceausescu also was able to repay Romanian debt and build huge palaces – while the rest of the world looked amazed how average people had to live in Romania. So I wonder who is outsmarting whom. The EU made perhaps a political move, but most likely not to please Hungary (this is still not relevant enough in current circumstances) but because of other considerations related to the euro area and too strict austerity in some countries there. To judge everything from the standpoint of who is the most “clever (Hungarian style)” and who is being “outsmarted” can prevent people from grasping the essence of a matter. In the end the average Hungarian will have to emigrate or live in poverty, but of course knowing that OV “outsmarted” the EU in particular will be a huge consolation.

    When do people realise that it is THEM in the first place who by being willing to believe in OV’s cleverness and wit, cannot see that he is thereby “outsmarting” them – although I think he is just laughing at them.

  4. The Orban government outsources the selling of residence permits to offshore companies.
    These companies will gain more than 24% profit.

    Applicant —> [unknown sum for an offshore company voucher] —–> Offshore company

    Hungary —-> [ 275,000 euros for a 221,000 euro investment in a nominally 250,000 euro bond, i.e. 24.4% guaranteed profit] —–> offshore company

    http://index.hu/kulfold/2013/05/30/nem_is_allamkotvenyt_kap_a_letelepedo_kulfoldi/
    http://atlatszo.blog.hu/2013/05/24/megkaptuk_a_letelepedesi_allamkotveny_szerzodeset
    http://zsiday.hu/blog/70-leped%C5%91-leteleped%C5%91

  5. @Ron

    Do not give them ideas! You can buy ice cream in non-Fidesz stores too, but you will have to go to Fidesz stores to buy cigarettes & alcohol.

  6. I’ve noticed that there are suddenly CBA shops everywhere (as good as a Fidesz store, no?). On one side of Madach Ter in Budapest, there used to be a Rothschild supermarket until one or two years ago. On the other side there use to be a Match supermarket until earlier this year. Now they are both CBAs, within about 100 metres of each other.

  7. @Bowen

    Thanks to the preferential tax treatment, CBA, proud supporter of both Fidesz and Goy Motorcyclists, became an almost monopolistic grocery chain in some neighborhoods. The French chains Match and Profi left Hungary last year and sold to CBA.

  8. I am very curious if Fidesz would loose the next election, how the incoming government would be able to undo the preferential treatment received by Fidesz opportunists? Will they lease back the land to those who it belongs to? I just read yesterday that a farmer must sell his cows as he lost the land lease deal. He was sure he would get it as he lived and farmed in the region forever, but someone with no ties to the community got it, and since the land is just left unused. Clearly someone was speculating with no intention to farm but most likely to sublease. In the farmers market (piac) where my parents are shopping is a traffic. The man is there for twenty years with no complain and he lost the tender, even though he lives a block away. At the same time Orban’s friend is keep sweeping all the tenders supported with EU money.
    I think the next government (if not Fidesz) will have to spend years and enormous money on legal experts to figure out how to undue the damage, and how to get the money, lands, stores, contracts, and positions back from the “under qualified”.

  9. tappanch :
    @Bowen
    Thanks to the preferential tax treatment, CBA, proud supporter of both Fidesz and Goy Motorcyclists, became an almost monopolistic grocery chain in some neighborhoods. The French chains Match and Profi left Hungary last year and sold to CBA.

    I believe Match is Belgium owned but yeah, they were forced out last year. Tesco pays the piper so….

  10. “CBA, proud supporter of both Fidesz and Goy Motorcyclists, became an almost monopolistic grocery chain”

    Well, at least they are Hungarian. All others (those who are being sold to CBA) are foreigners.
    I wonder how many countries would allow the basic goods stores to be in foreign hands.
    (Not speaking of how many “Hungarians” prefer foreigners to natives – they accumulate here on this blog.)

  11. Johnny Boy “I wonder how many countries would allow the basic goods stores to be in foreign hands.”

    How little you know, Johnny boy. The supermarket I frequent is Stop and Shop which is owned by a Dutch company, Ahold.

    Details: “Ahold USA is part of Ahold, a Dutch-based international retailing group that operates quality supermarkets in the United States and Europe. Ahold USA supports four regional divisions in the northeast United States – Stop & Shop New England, Stop & Shop New York Metro, Giant Landover, and Giant Carlisle. Together they operate nearly 750 supermarkets with more than 100,000 associates in 13 states and the District of Columbia along with Peapod, its online grocery shopping/delivery service.”

  12. Johnny Boy :
    “CBA, proud supporter of both Fidesz and Goy Motorcyclists, became an almost monopolistic grocery chain”
    Well, at least they are Hungarian. All others (those who are being sold to CBA) are foreigners.
    I wonder how many countries would allow the basic goods stores to be in foreign hands.
    (Not speaking of how many “Hungarians” prefer foreigners to natives – they accumulate here on this blog.)

    A free market allows competition. Competition minimizes prices. The Hungarian consumers will pay dearly for the anti-competition policy of the Orban government.

  13. Johnny Boy :Well, at least they are Hungarian. All others (those who are being sold to CBA) are foreigners.I wonder how many countries would allow the basic goods stores to be in foreign hands.(Not speaking of how many “Hungarians” prefer foreigners to natives – they accumulate here on this blog.)

    I avoid CBA if possible. Grim customer service and a lousy range of products (unless you just want to buy alcohol and tinned stuff).

  14. Maybe is some other Hungarians received the preferential treatment (taxes, location, competition removal) from Fidesz, there would be other Hungarians could compete.
    It is more likely that Orban thinks “at least CBA is Fidesz supporter”. When a government wants to allow competition it would create equal playground.

  15. Kirsten

    “The EU made perhaps a political move, but most likely not to please Hungary (this is still not relevant enough in current circumstances) but because of other considerations related to the euro area and too strict austerity in some countries there. To judge everything from the standpoint of who is the most “clever (Hungarian style)” and who is being “outsmarted” can prevent people from grasping the essence of a matter. ”

    Very true.
    The EU have become more lenient re fiscal deficit and are allowing more time to achieve deficit targets because growth in the eurozone is still negative, and unemployment is catastrophically high.

    Apart from loving to “outsmart” in the short-term, Hungarians usually fail to see the whole picture and tend to misinterpret things. They think it’s only about them – if you watch the whole press conference, you can see the Poles are also saying how come the Commission is so “generous” with Poland. It is not about generosity or outsmarting, it’s about laws and rationally thought through policies.

  16. In Hungary, thousands of companies go bankrupt every year. Their creditors may go away empty-handed.

    But now the Orban government will compensate the creditors of Hajdu-Bet Inc. that went bankrupt 9 years ago.

    The reason? The bankruptcy had something to do with Wallis Inc, where now opposition leader Bajnai was one of the bosses at that time.

    The message? Bajnai was heartless nine years ago, but Orban feels for you.

    What about the creditors of the thousands of other bankrupt companies, Mr Orban?

    http://www.kormany.hu/hu/videkfejlesztesi-miniszterium/agrargazdasagert-felelos-allamtitkarsag/hirek/valodi-gyors-es-hatekony-megoldas-a-hajdu-bet-karosult-gazdainak-megsegitesere

    http://magyarnarancs.hu/belpol/a_hajdu-bet_rt_felszamolasa_testkozelbotildel_egy-egy_szarnyat_combot-54525

  17. Being removed from the deficit procedure is hailed as a great victory for the Victator, according to Magyar Nemzet. Stories to the effect that ‘our Victor’ has outsmarted Brussels abound. But I think Orban is celebrating with a sour taste in his mouth: in actual fact, he has lost…he’s lost his greatest weapon–EU instransigence and unfairness to Hungary–in his fight
    to remove the country from the EU.

    He’s been ‘wrong-footed’ by the boys from Brussels and Victor knows it.

  18. Johnny Boy :
    I wonder how many countries would allow the basic goods stores to be in foreign hands

    If you want bad service and high prices for your own, kill off all the competition. Great idea! But do it right: ban all of them so there will be no comparision (yours will be the best).

  19. Re CBA:

    I can second Bowen, we never go there! Their prices are much too high, the selection and quality are no good (says my Hungarian wife …).

    Aldi, Interspar, Tesco and Lidl are our favourites – and of course we buy as much as possible in the local market and from our neighbours – eggs, hens (make a wonderful soup), honey ((tomorrow we’ll buy the new Akác honey …), pumpkin seed oil, potatoes – other vegetables and fruits we often get as presents from our neighbours.

    Yesterday (the one day when it wasn’t raining) we plucked all the cherries from our neighbour’s tree – he said we should take as many as possible before the birds eat them …

    Without foreign capital and effort(!) Hungarians would live like in Kadar`s time – anyone remember the Magyar Narancs from “A Tanú” ?

  20. I forgot:

    Aldi is also very successful in the USA (and the UK ?) while the English Safeways is retreating there.

    Walmart tried in Germany but cut its losses and disappeared again many years ago.

    So of course we need international competition – anyone remember the car industry from years ago, when US cars were years behind in technology but changed design every year, Germans believed the Beetle was the best car in the world – and Hungarians could choose between the Trabant and the Wartburg ??

  21. In the civilized world–almost anywhere but Hungary–I’ve seen laws that favor a particular industry but never laws that favor a particular chain or a segment of an industry. Of course there may be preferential tax breaks for chains that hire handicapped or ex convicts but that’s not the same thing. Certainly, in the modern world, I’ve never seen government involvement in reducing the competition the way it’s been done in Hungary with the grocery chains.

    Another great novelty from Victor and the brilliant Hungarians who support him!

  22. What happened today ?

    The Forint has weakened alarmingly: now it’s 294.9 HUF/€

    Two days ago it was 286.7 ????

  23. Wolfi, apparently it was the euro that has got stronger.

    OFF
    About Aldi & Lidl in UK: since the recession, their previous 3% market share has gone up to 10%, which is still far off the 50% these discount shops cover in Germany – but not bad!
    Often the tendency is that someone loses their job or gets into other financial difficulties, can’t afford shopping anywhere else, finds out Aldi is good, then sticks with it even after the financial situation stabilizes = challange for big supermarkets (said The Economist).
    Aldi was chosen “the best supermarket” last year by “Which”, a huge customer analyst group. They are opening new shops every month.

    The loser of the recession is Tesco at the moment, which is the biggest supermarket chain. They are constantly losing customers to Aldi / Lidl. Waitrose, the poshest, most expensive supermarket is also getting more popular.
    Where do you shop when you are in Germany, Wolfi, do you go to Aldi? I seem to remember in Germany, there is a Netto or Lidl everywhere in 5-minute-distance, and then posh supermarkets in the city centre. 🙂

    ON

    Orban has always been keen on interfering with the markets, even in 1998-2002. The Financial Times was tearing its hair out, I remember. It is always the customer who loses out if the competition is reduced, because prices go up and the quality goes down.

  24. @Cheshire Cat:

    To continue OT, our main shopping place is REAL (a chain owned by METRO) because they have the biggest selection – so usually we got to the ALDI first to look for special offers and then buy the rest at Real, they’re conveniently located on the same road …

    Lidl is rather crappy, especially with their “fresh” stuff (vegetables)is very and my wife is very touchy there so we only go there when they have something at a good price that we absolutely want …

    Back to the Forint:

    Portfolio.hu has a very good analysis of the Forint’s plunge – some people must have made good money by that short spike, I wonder who it was ?

  25. I remember that Rakosi’s policies, especially his economic policies were called “voluntaristic” under Kadar. What we see now are the economic results of Orban’s & Matolcsy’s voluntaristic policies. They really think that the Hungarian economy is a boat they can yank in one direction today, then in reverse tomorrow as they will.

  26. OFF Thanks Wolfi! I think there are some nice markets in Germany, too – unlike Britain, sadly. I miss that from Hungary, we used to do a piac + Tesco combo (we left before Aldi arrived in Hungary). Piac for fruits, vegetables and meat, I’m fussy, like your wife, about those. Here in England, we have a farmers’ market once a month, and that’s mainly muddy potatoes and ostrich burgers, in my experience.

    ON Having read around the media about the Commissions proposals about EDP. One thing that shocks me is that Hungarian media is only asking the question:
    “Who has won? Orban or Brussels?”
    Have all journalists been brainwashed into thinking it’s a war? And someone must have lost? Why can’t it be good news both for Hungary and the EU?
    I think there are three reasons why Hungary was allowed out of the EDP.

    1. Hungary has reached its target. Albeit with taxes that slow down economic growth in the medium term – but the EU has other means to monitor that, eg by the country-specific recommendations, which Eva has linked to.

    2. The general attitude of the EU is to loosen austerity, to focus on economic reform rather than strict fiscal consolidation.

    3. France. As soon as Moscovici, France’s finance minister saw France wouldn’t reach the target, he began talks with both Olli Rehn and Schauble, the German finance minister – and managed to convince them to give France two more years, while at the same time promising to do structural reforms. This decision of course has influenced the decision concerning other countries, therefore the ones who were to exit the EDP were all allowed to, others were given more time to achieve their targets, eg Italy.

    But to interpret this as “Brussels have given in to Orban” seems to be very shallow analysis.

  27. Johnny Boy :
    “CBA, proud supporter of both Fidesz and Goy Motorcyclists, became an almost monopolistic grocery chain”
    Well, at least they are Hungarian. All others (those who are being sold to CBA) are foreigners.
    I wonder how many countries would allow the basic goods stores to be in foreign hands.
    (Not speaking of how many “Hungarians” prefer foreigners to natives – they accumulate here on this blog.)

    The state of supermarkets in Hungary is dismal. Customer service is almost non-existant. CBA is at the bottom of the bunch. It would be depressing if CBA was the only option on the table. But then, you’d never know this unless you’d actually seen a good one.

    As for the competition thing… depressing to hear people not understand the importance of it.

  28. cheshire cat :
    But to interpret this as “Brussels have given in to Orban” seems to be very shallow analysis.

    Gee, did you really expect depth from these guys?

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