An optimistic prediction: The Orbán regime’s inevitable demise

I would like to report on a lengthy article that appeared on 444.hu on September 18, 2014, written by someone who calls himself “Nolite Timere,” “don’t be afraid” in Latin. The piece has the upbeat title “The NER’s coming demise.” An optimistic title, that is, for those who are opponents of the Orbán regime. It is a prediction few people believe today in Hungary. In fact, an increasing number of editorial and op/ed pages forecast exactly the opposite. So, let’s see on what basis Nolite Timere makes his prediction.

Before I attempt to summarize his argument, let me remind everybody that NER is the abbreviation of Nemzeti Együttműködés Rendszere or, in English, the System of National Cooperation. In the first few months of the Orbán administration one could hear a lot about NER, but by early July I wrote that, despite Péter Szijjártó’s best efforts, the designation had disappeared from usage. Well, the name may have disappeared, but Viktor Orbán’s proclamation of NER signaled the beginning of a new era and a new political system. The text of the proclamation can be found in the above cited post.

Nolite Timere begins his argument by saying that NER rests on shaky foundations. Its support comes exclusively from Fidesz voters. The graph below shows the tight correlation between those Hungarians who support Fidesz and those who are satisfied with the performance of the government.

Therefore, opposition to the government automatically means opposition to the regime. Once this government loses power, the new government will most likely try to dismantle the NER. A lot of economic and political players may even find themselves in legal trouble. Therefore, maintenance of the Orbán system is of vital importance to those in power today.

Blue: the country is moving in the right direction. Orange: voters’ support for Fidesz
Source: 444.hu

The graph shows how the population reacts to financial fluctuations. At the beginning of 2012 only about 17-18 percent of the population was satisfied with the government’s performance, but as soon as utility prices were lowered and the impoverished population got a few thousand extra forints a month, they were once again ready to support Fidesz and its government. Conclusion? Viktor Orbán must make sure that he can reduce the number of dissatisfied voters for twenty or thirty years by increasing the well-being of the population. Nolite Timere’s prediction is that he will not be able to pull this off. At least this is what earlier efforts tell us.

All regimes since 1919 attempted to do two things simultaneously: continuously raise living standards and at the same time satisfy the expectations of their own base. The Horthy regime failed because it was unwilling to break up the large aristocratic and church estates; Mátyás Rákosi favored those who came from the working class and the peasantry to such an extent that by 1952 there was widespread hunger in the country; János Kádár refused to give up the primacy of the communist party in economic matters and therefore could maintain the modest but steady rise in living standards only as the result of  cheap Soviet energy and foreign loans. Once there were no more loans and no cheap oil the regime collapsed. The slow economic growth that began in 1995-96 lasted only as long as there were state-owned companies to be sold. After 2002 the economic growth could once again be maintained only through indebtedness. In 2008 that came to an end.

Hungary’s perennial problem ever since modern capitalism arrived in the region is a lack of capital. Since 1990 almost all capital came from abroad, and this has at least two serious drawbacks: it is expensive and it can be moved at any time. However, a country without its own capital must first rely on foreign sources. This was the case in Hungary between 1867 and 1914. Originally 60% of all investment came from Austria and Germany, but over the next 35 years a new generation of Hungarian capitalists grew up who learned from their foreign colleagues and amassed capital of their own. By 1914 only 25% of investment came from outside of the country. (Note that Viktor Orbán wants to achieve the same shift in the source of investment in a few years. Failure is guaranteed.)

Nolite Timere is convinced that in a country short on capital it is dangerous to build a regime that has only shaky legitimacy, as NER does. “The trick can be achieved only with foreign help … the regime survives only as long as foreign capital is coming in.” There was no appreciable economic growth in Hungary, yet the government lowered taxes, raised pensions, built stadiums. Where did they get the money? In part from foreign companies, in the form of extra levies, the lowering of utility prices, and many other tricks that took away large chunks of these companies’ profits. In some cases the companies even had to dip into their own capital to satisfy the Orbán regime’s appetite.

The second source is naturally the European Union. Between 2007 and 2012 Hungary received subsidies equivalent to 21% of the country’s GDP. In 2013 monies coming Brussels amounted to 5% of the GDP. In 2014 it will most likely be higher. In brief, “the future of the regime depends on the availability of foreign capital.”

The author is convinced that the end is nigh. All the money taken from foreign firms and received from the European Union was only enough to raise real wages modestly in the second half of 2013 and early 2014 in preparation for the coming election. As a result of the large amount of capital pumped into the economy, GDP growth in 2014 is expected to be substantial. Government propaganda points to this as a great success that will continue into the future. This is unlikely, claims our author.

Banks and other foreign companies are at a breaking point; they can absorb no additional levies. Bayern LB, owner of MKB, is a case in point; it threw in the towel and sold its Hungarian holding to the state rather than pay all the debts it accrued as a result of the government’s interference in its business activities. It is very possible that others will follow. If the state then sells these banks and other concerns to its supporters, it will be difficult to extract more taxes from them or even to maintain the low utility prices. After all, there will be no foreign money coming in to replenish the losses.

The leaders of the regime might try to attract foreign companies, especially German and Austrian businesses, to Hungary, but such recruiting has its limits. After all, the government wants to strengthen those Hungarian capitalists who are friends of the regime. That’s why the government makes a distinction between “good” and “bad” foreign investors, thereby limiting their number. Of course, the question is how long a foreign company can remain a “good company” and when Viktor Orbán will decide that, after all, he made a mistake. Moreover, Nolite Timere thinks that unless some kind of miracle happens, the amount of money coming from Brussels in 2016-2017 will decrease sharply as a result of the very nature of the system of disbursement.

And so Viktor Orbán needs capital from outside the European Union and the United States. Hence the “Eastern Opening,” which up to this point has not brought real results. That’s why Orbán turned to Vladimir Putin last year and signed a 10-billion euro secret agreement for a Russian company to construct a new atomic reactor in Paks. Most of that money will not add to Hungary’s GDP because once construction actually begins on the reactor the lion’s share of the work will be done by the Russian company that “won” the contract. In comparison to the EU subsidies, this Russian money is small potatoes, 120 billion euros a year as opposed to the 30,000 billion coming from Brussels. Of course, it is possible that Orbán is hoping for very inexpensive gas from Russia, which would add another 50 billion euros worth of capital a year.

The maintenance of the Orbán regime in the long run needs all three sources of financing: the EU, Moscow, and Western capital via government bond purchases. If any one of these three falters, the regime itself might be in danger. Brussels must pay without delay. Withholding money might upset the delicate financial balancing act of the Orbán government. As far as Paks is concerned, the Russian-Ukrainian crisis came at the worst possible time from Orbán’s point of view. Even before the crisis Brussels was not exactly happy either with the building of the Southern Stream or with the secret Russian-Hungarian agreement to have Russia build a nuclear reactor inside of the European Union. In addition, one never knows what may happen in the internal financial markets that might weaken the forint further. Hungarian bonds might be less attractive to foreign investors if the United States raises its interest rates in the future. All this could have disastrous effects on the Hungarian economy. This is especially so because the capital that is coming into the country is not being used to lay the groundwork for further economic growth. Instead it is being used to artificially raise living standards, lower utility prices, hand out higher pensions, maintain the flat tax, buy companies to be passed on to friends of Fidesz, and erect state-financed projects like stadiums and renovate state-owned buildings. With such a strategy no country ever became highly developed.

Hungary managed to lock itself into a position of total economic dependence. At this stage the regime no longer cares from whom the money comes or how much it costs in the long run; what counts is that comes and that it comes fast. When foreign capital dries up, this regime will inevitably fail.

The tenth anniversary: Hungary and the European Union

It was ten years ago that ten new countries were admitted to the family of the European Union: Lithuania, Poland, Slovakia, Latvia, Estonia, Czech Republic, Malta, Hungary, Slovenia, and Cyprus. The Hungarians were somewhat disappointed because they felt that Hungary was better prepared for membership than some of the others and had hoped that the admission would not be wholesale, that Hungary would be handled differently from the rest.

Since then an incredible amount of money has arrived in Hungary from Brussels, but unlike some other countries in the region Hungary has not made good use of this largesse. To make the size of the contribution easier to grasp, 16 Metro4s could have been built from the EU monies. Or, between 2004 and 2013 the money Hungary received amounted to a gift of half a million forints for every citizen of the country. Or, as someone put it, Hungary received 2 billion forints every day for the last ten years from the Union. In forints, Hungary received 6.2 trillion forints that went straight into the budget while another 2.1 trillion came in some other form of financial assistance. In the last four years 90% of all government investment came from the European Union. Yet there is little to show for it.

The results are especially disappointing if we compare Hungary to other countries in the region. In 2004 Hungary’s economic advancement measured in GDP per capita was 63% of the EU average. Today that figure is 67%, only 4% higher. Slovakia, on the other hand, during the same period managed to gain 20% and now stands at 77% of the EU average. The very low Hungarian wages have also been slow to rise. Ten years ago the average wage was 93,000 forints. It is now 151,000. But in terms of real wages that is only a 12% rise. The number of jobs has grown by 38,000–only 1% more jobs than in 2004.

According to The Economist there are four clear winners among the new member states: Lithuania, Latvia, Poland, and Slovakia. One has only to look at the IMF chart below to see how badly the Hungarian economy has done in the last ten years despite EU subsidies that were the highest, given the size of the population, of any country in the region:

The Bruegel Institute, a European think tank specializing in economics, published a study yesterday entitled “10 years EU enlargement anniversary: Waltzing past Vienna.” According to the study, measured in terms of purchasing power Warsaw, Bratislava and Prague now have a higher GDP per capita than Vienna. Budapest failed to surpass Vienna, although it is not too far behind.

Enikő Győri, the person responsible for Hungary’s dealings with the European Union (I don’t envy the woman), naturally puts a better spin on the state of affairs. She emphasizes that Hungary’s EU membership is “an unqualified success.” I guess she is right if we look at the inflows, but the story is different when we look at the meager results. She claims that in the last ten years Hungary managed to increase its GDP by at least 10% and its economic growth by 1.2% . These figures apparently come from an unnamed Belgian research institute. She had to admit, however, that on the basis of purchasing power Hungary in 2004 was in second place, just behind the Czech Republic, whereas by 2014 both Slovakia and Poland managed to surpass Hungary. The Washington Post described the last ten years in countries such as Poland as a period of “galloping growth.” That was certainly not the case in Hungary.

The tenth anniversary came and went, but there was no commemoration of Hungary’s ten years in the European Union. Magyar Narancs published a very, very short article. It had only a headline and a “picture.” The headline read: “A telling picture of the celebrations of the tenth anniversary.” And underneath was an empty picture frame. ATV collected a list of comments by politicians from both camps. Those from Viktor Orbán’s side were uniformly negative. We must keep in mind, however, that the prime minister said in his victory speech that the election results showed that Hungarians want to stay in the European Union, albeit with a strong national government. There is no alternative to the European Union.

The Orbán faithful try to follow his lead, although it is clear that they find it difficult to be enthusiastic. Gábor Stier in an opinion piece in Magyar Nemzet does write that “we are on the right path,” but he bemoans the lack of “solidarity” in the Union. I don’t know how many more billions of euros would be enough for Stier to feel true solidarity coming from the richer members of the Union. And naturally, he is uncomfortable with the “crisis of values” the Union allegedly suffers from. But in the end, he even risks saying that the “rules of the club are a disciplinary force that keeps Hungary on the straight and narrow.”

Before we get too optimistic about future relations between the Orbán government and the European Union we might want to take a look at a headline in today’s Magyar Nemzet: “The European Union wants to shove dangerous honey down our throat.” Here we go again!

No good players, no spectators but more and more stadiums

There was great excitement in government circles yesterday in the wake of the news that the third quarter Hungarian GDP grew by 1.8%. Observers who look around the country couldn’t quite believe that number and skeptics immediately questioned the figures of the Central Statistical Office.

No, the numbers are not falsified, but if they are not put into context they are misleading. What the ordinary citizen, even the one who more or less follows the news, doesn’t realize is that a year ago during the same period there was a decrease in the GDP of 1.7% compared to 2011. Thus, this single figure simply indicates that we are where we were two years ago. Moreover, economic growth during the first three quarters of 2013 didn’t herald a robust recovery. It was a modest 0.5%.

Prospects for the future are not especially bright because investment is still very low and comes mostly in the form of large government projects financed by the European Union. Since the Orbán government stopped all convergence projects that were under way in 2010, only a fraction of the available subsidies was used as late as the summer of this year. Then János Lázár took over the office handling EU projects and promised to begin large and hitherto postponed projects in a great hurry. According to critics, the government has been spending money with very little thought for utility. I for one find it outrageous that billions of euros given to Hungary by the citizens of better-off countries in the European Union go for projects that have nothing to do with convergence.

Let’s focus on the most objectionable: football stadiums. As of August 2013 a total of 123 billion forints was set aside for stadiums whose construction was already under way. And announcements over the last few months indicated that the Hungarian government will spend an additional 110-130 billion forints refurbishing existing stadiums or building new ones. These new stadiums, taken together, will be able to seat about 110,000 football fans. In the fall of 2012 the average number of spectators at the matches of Division I was 2,807; this number decreased to 2,728 during the 2012/13 season. Attendance varied widely by club. Ferencváros averaged 6,174; Diósgyőr, 5,669; Debrecen, 4,400; and Szombathely, 3,433. Then there was Mezőkövesd with an average attendance of 800 and the famed Felcsút with a mere 300-500 spectators.

Some 80% of the population object to spending public money for building or refurbishing stadiums. As far as Felcsút is concerned, even the majority of Fidesz voters disapprove of Viktor Orbán’s pet project. Yet voter dislike of this stadium building frenzy didn’t dampen Viktor Orbán’s zeal. In the 2014 budget the government allocated an additional 82.8 billion forints for stadiums.

Two days ago Népszabadság learned that the cabinet had discussed refurbishing and/or expanding twenty-six existing stadiums. The cost will be 21 billion forints. Most of the money will go to Honvéd (Army) in Budapest. In addition, Pécs, Paks, Kaposvár, Nyíregyháza, Zalaegerszeg, Vasas, Cegléd, Gyimót, Kisvárda, Szigetszentmiklós and several others will all have stadiums. Soon there will scarcely be any larger than average size town in Hungary without a spanky new stadium. Someone wittily remarked that if sometime in the distant future archaeologists undertake extensive excavations in the Carpathian Basin they will wonder what all those oval-shaped foundations were used for by the people who lived here thousands of years before.

Bishop Kiss-Rigó plays football / MTI

It seems that the football stadium mania is infectious. The Szeged-Csanádi Diocese started a business venture, Szeged 2011 Labdarugó Sportszolgáltató Kft. The bishop, László Kiss-Rigó, is keenly interested in football. He put half a million forints of his own money into the Grosics Football Academy in Gyula. He also put money into Profi Futball Kft. Now Kiss-Rigó wants to rebuild one of the two abandoned football stadiums in Szeged. Never mind that Szeged doesn’t even have a team. The diocese’s company will build a stadium–and maybe “they will come.”

The reconstruction of the stadium will cost about 2-3 billion forints, and the Hungarian Football Association (MLSZ) already promised the diocese-owned company 700 million forints toward the cost. The company itself hasn’t been doing well. In fact, just last year it lost 95 million forints. However, the bishop is optimistic that his business venture will receive a few billions from private donations–donations that can be written off on the donors’ taxes. Just as Felcsút managed to get 4-5 billion, Kiss-Rigó, a great Fidesz supporter, will most likely get generous support thanks to his connection to Viktor Orbán. As far permission from the city of Szeged is concerned, one doesn’t have to worry. Although the mayor is a socialist, the majority of the city fathers are members of Fidesz. They already gave their blessing to the bishop’s project.

But not all is in order in the Szeged-Csanád Diocese. The Hungarian equivalent of the Internal Revenue Service (NAV) is investigating possible tax fraud and other unspecified felonious acts. And that leads me to the surprising fact that businesses owned by church organizations have all sorts of privileges granted by the Orbán government that other businesses don’t receive. For example, lower corporate taxes, no taxes on company vehicles, and lower personal income tax rates for ministers and priests. The Democratic Coalition included repeal of these perks among the party’s sixteen points.

The investigation of the Szeged-Csanád Diocese is still under way. An earlier investigation into the crooked business practices of the Pécs Diocese ended the career of the bishop of Pécs.

It would be interesting to know the extent to which churches are engaged in business ventures and how much the Hungarian government is helping them along. In the Szeged case, the Hungarian Football Association’s 700 million donation to Kiss-Rigó’s business venture comes from the Hungarian taxpayers, who are most likely not terribly keen on a church-built stadium in Szeged.

The end of the Hungarian recession?

The big news of the day is that the Hungarian recession has ended. Well, this is technically true, that is, if the quick estimates prove to be correct. A common back-of-the-envelope definition of recession is two consecutive periods of shrinking GDP. By this definition Hungary was mired in recession throughout 2012. The Central Statistical Office (Központi Statisztikai Hivatal) now claims that GDP grew in the first quarter of 2013 by 0.7% when compared to the last quarter of 2012. Measured year over year–that is, comparing the first quarter of 2013 to the first quarter of 2012, however, Hungary has experienced a 0.9% decline in GDP. As Gordon Bajnai’s Együtt 2014-PM said, “a slower rate of decrease is not growth. It simply means that the decline is diminished somewhat.”

Needless to say, the government is ecstatic. András Giró-Szász, the government spokesman, announced that the government’s efforts have paid off. From here on there is no question that Hungary’s economy will grow rapidly. The somewhat surprising figure is considered to be an important watershed. Some right-wing papers compared the Hungarian figures to the disappointing news of the European Union’s deepening recession by pointing out that while the Hungarian figures are in positive territory, the EU reported a 0.7% decline. Yes, but the 0.7% decline must be compared to the Hungarian 0.9% decline on a year over year basis. And, by the way, few Hungarian newspapers bothered to report that Romania’s GDP grew by 2.1%.

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Mihály Varga acted as if the government’s predictions made at the end of 2012 were right on target. They knew all along that 2013 would be a turning point, at least for economic growth. Considering how bad the budgetary and economic predictions of Varga’s ministry were, I take his claim with a grain of salt. Viktor Orbán himself predicted that 2013 would be “the year of reaping.” In February 2012 Orbán said that 2010 was the year of collaboration, 2011  the year of renewal, 2012 the year of take-off, and that 2013 would be the year of growth. Since 2012 wasn’t the year of take-off, Orbán’s prediction might be equally wrong for this year. Even the most optimistic predictions talk about only modest growth, under 1%.

One thing that is worrisome is the steep decline in industrial production over the last year. Although the overall decline was only 0.9%, industrial production was down by 2.9%.

An article that analyzes and tries to explain what these new GDP figures mean puts it this way: “Is it growth? Is it a decrease? Is it stagnation?”… None of the above.” After this introduction the author of the article explains that since growth is measured on a year on year basis, Hungary is not out of recession. It is troubling that the figures for the first quarter of 2013 are even worse than the truly terrible figures for the first quarter of 2012. The small growth over the last three months came largely from the building industry and agriculture, which is good news for the poorest section of Hungarian society. On the other hand, it is worrisome that industrial production hasn’t yet regained its 2010 level. Car production has declined and Hungarian-produced durable goods are down a staggering 30% compared to a year ago.

Let me add that the construction industry’s relative growth is most likely heavily influenced by government expenditures.  We have only to think of the billions spent on redesigning Kossuth Square in Budapest and building new football stadiums. If these projects are halted, the construction industry might fall back to its previous dismal performance.

There are also worrying signs as far as the budget is concerned. The cash registers that are supposed to report straight to the Hungarian equivalent of the Internal Revenue Service will not be functioning by July 1 as planned because of technical difficulties, and therefore the rather large amount of revenues that was supposed to come from this source most likely will never reach the treasury. The same problem exists with the e-toll scheme I wrote about earlier. In both cases the Hungarian companies who were chosen couldn’t come up with any acceptable solution.

Longer-term economic growth might be sacrificed for the sake of trying to keep the budget deficit under 3%. (Mind you, building useless stadiums or remaking Kossuth Square to resemble its 1944 self are not productive investments, although Orbán is especially infatuated with “a work-based economy.”) In part because of the heavy tax burden placed on them in an effort to shrink the budget deficit, multi-nationals aren’t exactly swarming into Hungary. And it’s highly unlikely that the small and medium-sized Hungarian businesses that the government is trying to promote can contribute enough to GDP to make up for government and foreign investment shortfalls. Hungary has yet to come up with a compelling growth plan, orthodox or unorthodox.