György Matolcsy

Viktor Orbán’s grandiose plans might be thwarted by Strasbourg and Brussels

The bureaucrats, speculators, and foreign press are once again lining up against the Hungarian government.

Let’s start with the forint, which today breached the 300 mark against the euro. The forint’s weakness is the result of several factors: the appointment of György Matolcsy as chairman of the Hungarian National Bank; rumors about the possible exchange of some of the bank’s foreign reserves for rubles; and, the latest, word that the government intends “to assist” Hungarians with their foreign currency loans. The government would convert these loans into ones denominated in forints and would also lighten their burden by paying a certain percentage of their debt. The Hungarian government would use some of the reserves of the Hungarian National Bank for this purpose.

There are political pressures on the Orbán government as well. In the March 5 issue of the Frankfurter Allgemeine Zeitung Michael Link, undersecretary in the German Foreign Ministry, wrote a piece that appeared on the op/ed page of the newspaper and available on the website of the German Foreign Ministry or in Hungarian on the Galamus site. The title itself is telling: “Hungary must remain a country of the law.” In the body of the article Link reasserts that “we cannot be indifferent” to what is happening in Hungary. Earlier the European Commission managed to convince the Hungarian government to change some passages in the Constitution. The Hungarian Constitutional Court also found some of the laws passed by the Hungarian Parliament to be unconstitutional. Now, however, there are new attempts to smuggle back all the formerly objectionable passages into the body of the constitution. These “new initiatives limit the freedom of expression for the alleged protection of the dignity of the Hungarian nation.”

rule of lawAs a friend of Hungary, Link would like Hungary “to demonstrate that the country has an effective separation of power between the legislative and the judicial” branches. As it stands, the Constitutional Court hands down judgments that the government ignores. “We need a vibrant parliament with a perceptible opposition and a confident Constitutional Court.” Link also wishes that “the two-thirds majority the Government relies on is used prudently. A two-thirds majority is not a free ride…. The European values that we share in the world, we must also cherish at home.” For good measure Link mentioned that Foreign Minister Guido Westerwelle shares these concerns. Common European values “must apply to all EU members, both new and old.” As with each member state Hungary remains “master of its cultural identity,” but there have to be shared values. Among them the rule of law is the most central. “It must be able to develop without any ifs, and, or buts.”

The Hungarian answer that came from Gergely Gulyás, a young Fidesz MP and a member of the parliamentary committee on constitutional matters, was that “it is a misunderstanding” that the Hungarian government wants to limit the competence of the Constitutional Court. To the contrary, its latest amendments were made at the request of the Court itself. What else is new? We know from earlier government statements that everybody misunderstands the intentions of the Hungarian government and Viktor Orbán.

On the very same day the Financial Times came out with an editorial on “Orbán’s threat to democratic values.” It is about the same amendments Michael Link was talking about. The article reminds people that last year Viktor Orbán backed down on aspects of a new constitution that would have posed a threat to judicial, religious, and press freedoms. But this week the Hungarian parliament threatened to revive “curbs that violate European values in an amendment to the constitution. If this goes ahead, the response from Brussels should be rapid and robust.” According to the editorial, Brussels should “set out in precise detail where the amendment violates Hungary’s membership of the EU. But once that is established, it should warn Mr Orbán that it is prepared to use the most powerful weapons in its armoury to defend European values.” The article recalls that the EU was ill equipped thirteen years ago to handle the situation when the Austrian government included a far-right party as a coalition partner. But the editorial stresses that “this time there is greater political consensus that Mr Orbán’s attacks on democratic norms cannot be tolerated.” The FT editors suggest a withdrawal of Hungary’s voting rights and add that “financial sanctions too should be considered…. Faced with an economy in deep recession, and a decline in foreign investment, Mr. Orbán needs the money. Brussels should not hesitate to threaten a withdrawal of structural subsidies, for example, if Mr. Orbán does not call on his party to drop any amendments that violate EU membership. If the Hungarian prime minister insists on flouting European values, he cannot expect Europe’s support.”

And if that weren’t enough, today the secretary general of the Council of Europe called on the Hungarian government to postpone the vote on the latest amendment to the constitution. Thorbjørn Jagland wrote: “I have misgivings concerning the amendments that may not be compatible with the rule of law.”  He further argued that with the incorporation of these amendments the government with its two-thirds majority is forcing its will on the Constitutional Court and is thereby endangering the system of checks and balances. He suggests a postponement of the vote in order for the Venice Commission to study the matter.

Viktor Orbán’s Russian roulette

Unfortunately the title of this post is not original; it is borrowed from an article in HVG. But it is an apt description of Viktor Orbán’s efforts to make a financial deal with the Russian government. The outlines of the plan can be stitched together from various sources, but not all the information is available yet. However, to me at least, it looks as if the Orbán government’s Russian orientation is nothing new. It was hatched perhaps even before the 2010 elections. It has been carefully worked out.

Today in the early morning edition of Népszava I found an article about a top secret trip of Antal Rogán, the whip of the Fidesz parliamentary delegation, to Moscow. Although the visit took place on February 28, a day before György Matolcsy’s nomination to be the next chairman of the Hungarian National Bank, the Hungarian press didn’t get wind of the trip until today. Rogán met with Sergei Zheleznyak, deputy secretary of the United Russia party’s chief council. 

The information came from the official website of United Russia. Let me quote some of the most important passages describing the meeting. “The Hungarian guests noted that Russia today is their strategic partner…. These days the Hungarian government is considering the possibility of converting some of the Hungarian National Bank’s reserves to rubles because of the precarious situation of the dollar.” In addition, Rogán invited the Russian party chiefs to attend Fidesz’s next congress in June. He expressed his hope that at that time the two parties will sign a document of close cooperation.

As I mentioned, this development is nothing new. It is not a spur of the moment decision. Some of you may recall Viktor Orbán’s much debated meeting with Vladimir Putin in November 2009 at the party congress of United Russia. At that time there was a debate about how serious these talks were and what the topic of conversation could have been. The follow-up visit of János Martonyi to Moscow in March 2010, that is before the election, received less attention. Martonyi had dinner with Russian Foreign Minister Sergei Lavrov, but not as the future foreign minister of Hungary but as a representative of Fidesz, the “fraternal party” of United Russia.

Pro-Russian government policyCome home!

Pro-Russian government policy
Come home!

Viktor Orbán’s second trip to Moscow, which took place in early February of this year, was also hotly debated in the Hungarian press where he was described as “Putin’s new little kitten.” A few days later the Hungarian media heard that “Orbán exchanged the IMF for Moscow for 4.6 billion dollars.” HVG reported that Moscow would purchase 4.6 billion dollars worth of Hungarian government bonds at a very low, 2.25% interest rate. The article also said that “sometime in the future the Hungarian government might issue government bonds in rubles.” HVG pointedly asked what Hungary would have to give in exchange for all this.

Yesterday Népszava asked the Hungarian National Bank whether they know anything about converting some of the bank’s reserves into rubles, but naturally the government never bothered to inform the bank officials of such a deal. They were obviously waiting for the arrival of an obliging György Matolcsy because surely András Simor would never have agreed to such a “hazardous game.” The ruble is not fully convertible and is therefore an illiquid currency. Moreover, the exchange rate of the ruble fluctuates wildly. Not exactly qualities one wants in a reserve currency.

The bank officials didn’t know about any of these negotiations but Mihály Varga, the incoming minister of the economy, certainly did. Although during his Napi Gazdaság interview today he claimed that he knew nothing about the negotiations, he admitted that there were talks between Budapest and Moscow. He described them as “inter-party talks” and suggested that the journalist “talk to Mr. Rogán.” But he told Ildikó Csuhaj of Népszabadság that it is a good idea to diversify.

By early afternoon Rogán’s press department confirmed last week’s Moscow trip. Not surprisingly, the spokesman said nothing about the central bank’s reserves and the conversion of dollars or euros to rubles. Fidesz’s official website posted information about “talks concerning economic matters” but couched this news in carefully crafted language that may mask the real intent . The Fidesz communiqué reads: “While discussing economic ties the idea of a ruble-based swap agreement surfaced that would make the mutual financing of Hungarian-Russian trade easier.”

And the original, the famous MDF campaign ad: Comrades, this is the end!

And the original, the famous MDF campaign ad from 1989: Comrades, this is the end!

Gergő Nagy of HVG wrote a fairly lengthy article that contained comments from leading members of the financial community. He is the one who called the plan a hazardous “Russian roulette.” Hazardous because most of Hungary’s financial obligations are in euros and because the ruble is not exactly a favorite of currency traders. On the plus side, however, the yield on Hungary’s euro reserves is close to zero while the interest rate the National Bank pays is between 4 and 5%. That means about a 100-200 billion forint loss a year to the bank which by law the state must replenish. The yield on Russian government bonds is between 5 and 6%, which might begin to close the gap but only at great risk that might not be worth it.

Officials of several financial institutions emphasized that the reference to the instability of the dollar during the Moscow negotiations was nonsense. The dollar is still the world’s number one reserve currency and most likely will remain so for the foreseeable future. Sixty percent of world trade is in dollars. Another bank expert mentioned that one of the goals of the central bank is to create financial stability, which also means the stability of the reserves, and Russia is not a financially stable country. For example, in 1998 the Russian government had to declare bankruptcy.

László Tamás Papp wrote a scathing opinion piece entitled “Rogán, ruble, the ruszkis are coming back.” He recalls the fiercely anti-communist stance of Fidesz throughout the party’s existence, Orbán’s attacks on Ferenc Gyurcsány because allegedly he wanted to make Hungary “the happiest barracks of Gazprom,” and his famous speech in 1989 at the reburial of Imre Nagy in which he demanded the immediate withdrawal of the Soviet troops. And here he is now fawning over former members of the KGB. Now he is offering not only the Hungarian National Bank to the Russians but also the Paks nuclear power plant. The party that made sure that Ronald Reagan has a statue in Budapest is now brown-nosing a former KGB agent and a post-Soviet autocrat. Someone who insists on a yearly memorial to the victims of communism on February 25, the day when Béla Kovács, secretary of the Smallholders Party, was taken to the Gulag in 1947, now praises Putin’s Russia. The whole opinion piece is a passionate outcry against the cynicism of the regime and against the people who tolerate all this without a murmur. He ends his article: “You didn’t like Western capitalism? Now you can find out what the Eastern variety is like. If you let it happen, you deserve whatever the eastern winds blow into your face.”

No surprise: György Matolcsy will be the new chairman of the Hungarian National Bank

One can only marvel at the speed at which nominations for high positions are approved in Hungary. Early this morning we learned that the inevitable had happened: György Matolcsy was nominated to be the new chairman of the Hungarian National Bank, with his post as head of the Ministry of National Economy to be filled by Mihály Varga. Two or three hours later we heard that the parliamentary committee had found both candidates to be outstanding. On Monday, I’m sure,  the House will confirm them and members of the government parties will stand and rhythmically applaud the excellent job Matolcsy did in ensuring Hungary’s “economic success” in the last three years.

How subtle. The capitons read Greetings to Mr Matolcsy / At last the Hungarian National Bank is in Hungarian handsPhoto

How subtle! The posters read: Greetings Mr. Matolcsy / At last the Hungarian National Bank is in Hungarian hands

Although the final result was never in question, there was some heat during Matolcsy’s confirmation hearing. Even outside of the chamber the MSZP spokesman called Matolcsy a “ridiculous public figure”; inside, members of the opposition questioned Matolcsy’s suitability for the post. Fidesz members of the committee welcomed Matolcsy’s assurance that he plans to pursue a conservative monetary policy. He emphasized his determination to keep inflation in check and promised to stop the spread of bank loans in foreign currencies. On the other hand, Tibor Kovács (MSZP) envisaged a bumpy road for the new chairman because of his reputation. His appointment holds not so hidden dangers for Hungary’s financial stability, he added. Gábor Scheiring (PM = Párbeszéd Magyarországért) also had a few harsh words to say about the appointment of the least successful member of the cabinet to be head of the central bank. MSZP, Jobbik, and independent members voted against him but naturally it didn’t matter.

During the hearing Matolcsy talked a lot about the sins of his predecessor, András Simor. According to him, the Hungarian National Bank didn’t fare well under his six-year stewardship; Matolcsy promised a bright future for the bank over the next six years. Well, we know how much Matolcsy’s predictions and promises are worth. Otherwise, he tried to calm nerves as much as possible and gave the impression of a man who knows his job. The trouble is that Matolcsy really doesn’t have any banking experience. But he sounded, at least on the surface, knowledgeable and responsible with a couple of incomprehensible sentences. He promised to achieve price and financial stability while supporting the government’s economic policies. He added that he will safeguard the independence of the Hungarian National Bank, something a lot of people doubt at the moment, both in Hungary and abroad.

Matolcsy’s nomination and confirmation hearing didn’t roil the currency market. As almost every commentator pointed out, the markets had already priced in Matolcsy’s appointment. But even if the forint didn’t budge, credit default swaps (CDS) did rise. During the month of February they fluctuated between 290 and 305; today they moved up to 310. Not a steep rise but perhaps significant nonetheless. In any case, according to domestic and foreign commentators Matolcsy will be cautious for a while, testing the water before he makes any significant changes in the bank’s policies. But then he will probably stir things up. For example, in the past he talked about the desirability of weakening the Hungarian currency. Peter Attard Montalto of Nomura is convinced, as are most economists and opposition politicians, that the Hungarian National Bank will cease to be an independent institution. Montalto is also certain that Matolcsy will make decisions that may not be beneficial to the Hungarian economy but will further the political goals of Fidesz.

We don’t know yet what will happen to the two vice chairmen. Will they be fired or left in place for the sake of appearance? The two current vice chairmen always voted with the chairman, but since the appointment of five extra members of the monetary council they were consistently in the minority. In the past Viktor Orbán insisted on appointing a third vice chairman, but that plan was thwarted by András Simor and the European Central Bank. Now it seems that a third vice chairman will be appointed after all. Matolcsy handpicked his favorite man from his ministry, Ádám Balog, assistant undersecretary in charge of taxation. Balog was instantly replaced by another government official. So, the appointment of a third vice chairman has been in the works for some time.

Some people jokingly call Matolcsy’s economic theories “esoteric” in the sense that few people understand them. Matolcsy wrote several books that presumably offer some inkling of his thought processes. In the near future I will try to summarize what I can find on the subject. One of his “discoveries” is that “success is sometimes invisible, sometimes incomprehensible, unusual, or at times painful.” Here are few of his ideas: Only people matter and not governments, companies, or financial institutions. What matters is what people believe in, what moves them and how they behave. So, what is important is whether success and accomplishment are associated with us.

These are just a few of Matolcsy’s ideas that one can only hope he will not carry with him to the Hungarian National Bank.

The Hungarian scene: From economics to parochial schools

It is hard to pick just one topic to discuss today because too many important events have taken place lately.

The biggest bombshell yesterday was the final word on the Hungarian economy’s performance in 2012, which turned out to be worse than expected.  Hungary is still in recession, with the country’s GDP shrinking by another 1.7%. Hungary is the worst performing economy in the region and it doesn’t look as if there will be any change in the trend. After all, in the last quarter the economy performed even worse: the GDP decreased by 2.7% year on year.

The government blames the sluggish economy of the European Union and last year’s drought for the dismal numbers.  György Matolcsy naturally predicted that next year the Hungarian economy will be booming, and in his weekly essay for Heti Válasz he said that in twenty years Hungary will catch up to the living standards of the Scandinavian countries. He loves long term predictions, perhaps because he stumbles when trying to deal with the next few months. The brand new budget for 2013 will have to be readjusted because of the Hungarian government’s ill-advised purchase of E.ON. It is almost certain that new taxes will be levied either on businesses or on consumers in order to balance the books. And new taxes will put further pressure on growth. I may also add to that bad news another growth killer: the cost of agricultural products grew by 18.1%  in December year on year and by 15.4% during 2012. All in all,  Hungary has had the worst performing economy in the whole region in the last three years.

Yet Viktor Orbán goes on with his success stories. Every Friday morning we learn that all is in order. This time the story is that “five indicators in the Hungarian economy are all right; there is only one which is not and that is growth.” Naturally, receiving relatively high amounts of money per capita from the European Union is also a sign of Viktor Orbán’s political genius. As he repeats time and again, after Latvia Hungary received the most money per capita. But that is not something one ought to be proud of. It actually means that, after Latvia, Hungary is the country in which the economic problems are the greatest within the European Union.

It is hard to know when Fidesz supporters will realize that something is very wrong with the economic policy of the Orbán government. Even conservative economists, including Zsigmond Járai and László Csaba, are critical of György Matolcsy, and yet it doesn’t look as if Orbán is planning to get rid of him although naturally MSZP is demanding his resignation. At least Orbán announced this morning that he doesn’t plan any changes in his cabinet. But almost everybody is convinced that Matolcsy will be appointed the next governor of the Hungarian National Bank and that Mihály Varga, until now minister in charge of the nonexistent negotiations with the IMF, will replace him. Skeptics claim that nothing will change even if Varga takes over because the orders come from the prime minister, who seems to be an economic illiterate.

On the level of undersecretaries, on the other hand, there were changes in the last few days. Zoltán Balog decided to get rid of some people who were giving him headaches one way or the other. He dismissed László L. Simon, undersecretary for cultural affairs, admitting that he couldn’t work with the man. Rózsa Hoffmann was demoted, although my feeling is that Balog wouldn’t have minded parting with her. According to rumors Orbán saved Hoffmann’s skin, most likely not because of his personal feelings for this schoolmarm but because her dismissal would have created trouble between himself and his loyal supporters in the Christian Democratic parliamentary caucus. So, she relinquished all duties connected to higher education; she will be in charge only of elementary and high school education.

Orbán and Balog decided to pick István Klinghammer, former president of ELTE, to replace her because they were hoping that he would, because of his experience with university students, be able to find the right tone in negotiating with the rebellious students. However, I very much doubt that Klinghammer’s dictatorial style and his apparent disdain of the students will endear him to this bright young crowd. Because of his age (72) he spent almost his whole life in the Rákosi and the Kádár regimes, and his educational philosophy seems to reflect those days when Hungarian universities were no more than extensions of high schools. Hoffmann is seven years younger than Klinghammer, but she is also of that generation. These people reject anything considered to be progressive educational thinking. Klinghammer thinks that there are far too many young people going to the university and that they study Mickey Mouse subjects. He was against the Bologna system (B.A., M.A., Ph.D. sequence) and I’d bet that, if he could, he would return Hungarian higher education to those good old days when, in his and Hoffmann’s opinion, Hungarian education was the best in the world.

And while we are on the subject of education and Zoltán Balog’s ministry, let me touch on something that made my blood boil this morning when I read the report about what happened in an elementary school in Balatonfüred that had been taken over by the Hungarian Reformed Church. Let’s keep in mind that Zoltán Balog is a Hungarian Reformed minister. According to the article, two teachers were dismissed from the school because “they did not pray with sufficient devotion.” Mind you, the Hungarian Reformed Church promised at the time of the takeover of the school that there would be no discrimination on the basis of religious affiliation. Now, however, the Hungarian Reformed minister in Balatonfüred referred those who complained about the dismissal to §44 of the Hungarian Reformed Public Education Law that makes it a teacher’s duty to help the students become committed members of their church and country. In addition, the students should become believers. When the parents wanted to know what the two teachers had done wrong, they were told that “they behaved strangely.”



The officials of the Hungarian Reformed Church obviously lied when they promised religion-neutral education to all children. And the naive parents didn’t read the Hungarian Reformed Public Education Law. All this while the school is entirely financed by the Hungarian state. On all the taxpayers’ money, including the atheists’.

At least before the nationalization of schools in 1948 parochial schools were maintained by the churches and by tuition fees. Then it was crystal clear that in a parochial school there would be a large dose of religious indoctrination in addition to the compulsory subjects. In theory children of “other faiths” were left alone. They didn’t have to attend church services or the religious instruction offered in school. But in the school I had to attend out of necessity for two years the nuns made it quite clear that non-Catholics were simply tolerated and handled differently from the Catholics, who were in the great majority.

Churches certainly can have their own schools, but they should also finance them. Parents who think that their children would benefit from attending parochial school should pay for the privilege. And before parents are misled, as it seems the parents of this elementary school in Balatonfüred were, they should read all the paragraphs of the parochial schools’ public education laws. Very carefully. In this case, I’d bet a good number would change their minds.

Fidesz pow-wow in Gyula, February 5-7, 2013

On my Facebook page I discovered a note that István Vágó, the television personality, posted about a Tacitus quotation. In Latin it goes like this: “corruptissima re publica plurimae leges.” One doesn’t even have to know Latin to get the gist of the sentence. “The more numerous the laws, the more corrupt the government.” Well, well, perhaps Viktor Orbán should read Tacitus’s Annales in his spare time. The sentence in its entirety has even more relevance to Hungary: “And now bills were passed, not only for national objects but for individual cases, and laws were most numerous when the commonwealth was most corrupt.” “Bills passed … for individual cases”! Count the ways the Orbán government has resorted to this dubious practice.

More and more laws are being hatched with the greatest of ease and without any compunction. Just today Lajos Kósa, managing director of Fidesz, announced that the temporary provisions the Constitutional Court found unconstitutional can easily be remedied. “It is simple: the Constitutional Court didn’t accept our concept that there is a Basic Law and there are the temporary provisions. So, we just have to combine the two. Not a big deal.” This is how legislative work is being conducted in today’s Hungary.

Lajos Kósa made this statement in Gyula, close to the Romanian border, where the Fidesz-KDNP parliamentary delegation is holding a three-day meeting. Orbán is also attending this gathering. Earlier, the opposition forces announced a demonstration protesting the Orbán government’s policies to be held in conjunction with this meeting. A few hours later the Peace Marchers said that they would go to Gyula in support of the government. Indeed, busloads of pro-government sympathizers showed up from all over the country. They even came from Romania. I saw a sign indicating that the men and women behind the sign were from Oradea/Nagyvárad. As usual, the pro-government sympathizers were more numerous than the opposition forces thanks to the nationwide recruitment organized by so-called civic groups that by all indications are financially supported by the government. One of the organizers of the Peace March was Zsolt Bayer, the notorious anti-Semite who also wants to solve the Roma question “by any means.”

In the past few details of  these Fidesz pow-wows leaked out to the public, but it seems that party discipline is becoming frayed as difficulties mount. It doesn’t matter how often government officials repeat that the Orbán government’s almost three years in office “have been a success story,” fewer and fewer people believe the government propaganda. After all, according to the latest polls, 75% of the adult population of Hungary think that the country is heading in the wrong direction. It is thus not surprising that inside the Erkel Hotel where the meeting is taking place there were apparently a few tense moments.

A few hours after the commencement of the “retreat” the public learned quite a few details. By 7:00 p.m. Világgazdaság reported that Viktor Orbán had announced that the next governor of the Hungarian National Bank will be György Matolcsy after all. That piece of news sent the forint tumbling. The press department of Fidesz promptly issued a denial, claiming that Matolcsy’s name wasn’t even mentioned at the Gyula meeting. So, the forint stabilized. Hungarian analysts are still convinced that the next bank chairman will be Matolcsy, but they believe the bitter pill will be administered slowly over time to avoid a collapse of the Hungarian currency.


By early morning today newspapers reported that there was “sharp disagreement” at the meeting over the lowering of utility rates. We’ve heard for some time that the state is planning to fix the price of natural gas. First they talked about a 10% reduction in the price across the board, but lately Fidesz politicians raised the stakes. János Lázár talked about a 30% reduction sometime in the future. And more and more promises were made: they will lower the price of water, fees for sewage, garbage collection, even the price of the compulsory cleaning of chimneys. Clearly, these ideas are preliminaries to the 2014 election campaign. It seems that Fidesz has decided to follow the bad old habit of paying off the electorate before the election and imposing austerity packages afterwards. In this same vein Fidesz politicians began talking about reintroducing a thirteenth-month payment for pensioners. Mind you, perhaps only once at the end of 2013. Perfect timing.

There are about 60 Fidesz-KDNP MPs who are also mayors, and in most of their cities the water companies are owned by the local government. The water companies at the moment are barely making it, and if the government forces them to lower prices they will go bankrupt. These politicians therefore argued for some kind of compensation from the central government. But, as we know, the government has no money. What new trick will they come up with to cover the cost of this generosity? One can only guess, but the Orbán government is exceptionally inventive when it comes to taxes.

Today the arguments continued. This time József Ángyán, former undersecretary in the Ministry of Agriculture, was on the offensive. He has been a severe critic of the Orbán government’s handling of the long-term leases of thousands and thousands of acres of government land; the leases were given to friends and relatives of Fidesz politicians. You can read more about Ángyán in a post entitled “Agricultural subsidies and the Fidesz oligarchs.” Orbán is really fed up with Ángyán. The only reason he hasn’t asked for his resignation from the party and from the Fidesz parliamentary delegation is because he is convinced that sooner or later Ángyán will resign on his own volition. Orbán stated, however, that he considers Ángyán “not worthy of the caucus of which he is a member.”

And finally, it seems that Viktor Orbán has given up his pet project: voter registration. After the Constitutional Court annulled the proposed law, Fidesz politicians for a while indicated that, although they would obey the ruling for the coming elections because of time constraints, they have every intention of changing the law after the 2014 elections. It seems that they have changed their minds. Why? I think because studies and polls indicated that registration might hurt Fidesz more than it helps.

Some people are convinced that Orbán might take advantage of this apparent defeat. After all, if registration had been deemed legal, no elections could have been held before 2014. Without that time constraint Orbán could call for early elections when the opposition is in total disarray. Knowing him, this scenario is a real possibility.

Another round of talks between Viktor Orbán and José Manuel Barroso

Viktor Orbán had a full schedule today: a lecture in Brussels and three important meetings with José Manuel Barroso, president of the European Commission; Herman Van Rompuy, president of the Council of Europe; and Martin Schulz, president of the European Parliament. A pretty exhausting schedule, especially since tomorrow the Hungarian prime minister is flying to Moscow to have a discussion with Vladimir Putin. The meeting will be brief, only half an hour, but the topics to be covered are weighty: setting natural gas prices for the next ten years and possible Russian involvement in the extension of the Paks Nuclear Plant.

In anticipation of the Orbán visit to Brussels, commentators differed in their assessment of what Viktor Orbán could expect in his negotiations. Some predicted difficult negotiations while others contended that after the two-year-long “freedom fight” it was time for Hungary to mend fences and normalize relations. Interestingly enough, Magyar Nemzet‘s commentator predicted a tough time, especially in light of the IMF-EU report released on January 28. The IMF officials predicted that in both 2013 and 2014 Hungary’s deficit will exceed 3%. If the European Commission takes the report seriously, their opinion might adversely influence Ecofin’s decision about lifting Hungary’s Excessive Deficit Procedure (EDP). And Viktor Orbán’s political future might depend on this decision. If the EDP is lifted, the Hungarian government could spend more freely in 2013 and early 2014 in anticipation of the election sometime in April of that year. Otherwise, further austerity measures must be introduced.

Viktor Orbán’s meeting with  Herman Van Rompuy was also more than a courtesy visit. As it stands, the European Union is planning to reduce the subsidies to Hungary by 30% over the next seven years. Considering that the little investment there is in the country comes from the EU convergence program, a 30% reduction could be devastating to the Hungarian economy.

Orbán began his Brussels schedule with a lecture at the Bruegel Institute, a European think tank specializing in economics. HVG somewhat sarcastically entitled its article about Orbán’s appearance at Bruegel “Orbán teaches economics to his audience in Brussels.” The very idea of Viktor Orbán giving a lecture on “work-based economies” to a group of economists working for this think tank borders on the ludicrous. I also wondered what his listeners thought when he boasted about his government’s achievements and called his economic policies a “true success story.”

The meeting between Barroso and Orbán took place in the afternoon and lasted a little longer than expected. At the subsequent joint press conference Barroso told the reporters that they talked about the upcoming EU summit in early February, about the 2014-2020 EU budget, and naturally the present state of the Hungarian economy. For the time being the Commission has no definite opinion about the past performance of the Hungarian economy, but by February 22 their recommendations to Ecofin will be ready. There was one sentence here that I think needs more clarification: “We also discussed the quality of the economic adjustments.” To me this means that Barroso and the Commission are aware that the way the Hungarian government achieved the low deficit may not be optimal.

Viktor Orbán and José Manuel Barroso at the press conference, January 30, 2013

Viktor Orbán and José Manuel Barroso at the press conference,
January 30, 2013

Viktor Orbán was more exuberant. “It was an excellent meeting,” he announced. They discussed matters that had created friction between the the Commission and Hungary in the past. He claimed that on the issue of the Hungarian National Bank they came to an agreement quickly. He admitted, though, that there are outstanding issues. Orbán indicated that he has no intention of backing down: the European Court of Justice will decide those issues he refuses to address himself. I might add here that cases the Commission sends to the Court usually go in the Commission’s favor.

Barroso sent a message to the Hungarians about the “rights and duties of the European Commission to insist that all national governments respect the laws of the Union.” The Commission tries to be impartial and objective. The Commission, like an umpire, must enforce the rules and regulations. This comment was most likely prompted by last year’s anti-European Union demonstrations instigated by the Orbán government.

Viktor Orbán might claim that the meeting was successful, but serious differences of opinion remain between the European Union and the Hungarian government over economic policies. The IMF-EU delegation predicted that further budget adjustments will be necessary to hold the deficit under 3%. Viktor Orbán disagrees, but I would be surprised if in the next few months, sometime before April, György Matolcsy didn’t announce another new tax in order to boost revenues.

All in all, at least on the surface, the meeting was friendly, or at least the two men pretended that it was. However, both Barroso and Orbán were careful in formulating their thoughts. In fact, Orbán opted to speak in Hungarian instead of his customary English, ostensibly because most of the reporters present were from Hungary. I suspect that the real reason was to avoid any imprecise formulation of his carefully worked out statement.

Whether Viktor Orbán was hoping for a public promise of support with regard to the Excessive Deficit Procedure I don’t know, but he didn’t get it. Olli Rehn, the commissioner in charge of finance, will have to mull over the details of the IMF report as well as the 2012 economic data submitted by the Hungarian Statistical Office. In my opinion, the 2013 budget belongs in a Brothers Grimm collection. The question is what the experts in Brussels will think of it.

IMF delegation’s report on the economic health of Hungary in 2012

The IMF delegation was back in Budapest, but the visit was not part of the non-existent official negotiations between the International Monetary Fund and the Hungarian government. It was simply a routine examination of the Hungarian economy. Every six months, according to an agreement signed after Hungary received a substantial loan from the IMF, the officials of the Fund have the right to assess the financial well-being of the country.

The delegation arrived on January 16 to look over the balance sheet of 2012 and to suggest steps to correct perceived mistakes in the economic governance of Hungary. Mihály Varga, the man in charge of the non-existent negotiations, told the press that “all talks with the IMF are after all about the loan guarantee Hungary would like to receive.” The Orbán government wants to have a financial arrangement that would allow them to pursue their uniquely Hungarian economic policies without anyone looking over their shoulder. They sure don’t want to have those pesky IMF officials poking around.

IMF-Hungarian government negotiations, January 16, 2012Photo László Beliczy / MTI

IMF-Hungarian government negotiations, January 16, 2012
Photo László Beliczy / MTI

Mihály Varga simply doesn’t understand why the IMF is reluctant to extend a loan guarantee to Hungary without no strings attached when, according to him, everything is swinging. The deficit is low, the government bonds sell well, the price of their credit default swaps is reasonable, and the Hungarian economy is stable. But, it seems, the IMF sees all this very differently.

The unofficial negotiations continued off and on throughout the two weeks the delegation spent in Hungary. For Varga the question was “whether the IMF is willing to accept Hungary’s current model of economic policy as the basis of negotiations or it insists that we change the structure of our economic governance.” The answer came on January 28. The IMF does not accept György Matolcsy’s unorthodox economic model, and it insists on a different course of action. If Hungary does not comply, there can be no question of a loan. Forget about a guarantee.

It is unnecessary to summarize the contents of the fairly lengthy IMF report here. It can be found on the IMF website. The gist of  the report is that “a new policy course is needed to deliver the required medium-term fiscal adjustment in a sustainable way to support growth and confidence, repair the financial sector, and promote structural reforms to boost the potential of the Hungarian economy.”

The weak performance of the Hungarian economy is due both to structural factors and to specific domestic policies. The IMF doesn’t share the Hungarian government’s claim that Hungary’s problems are due solely to the weak performance of the European Union as a whole. The report argues that the “increased state interference in the economy and frequent and unpredictable tax policy changes, particularly on the corporate sector, undermined private sector activity. This contributed to a negative feedback loop between slow growth, weak investment, bank disintermediation, and high public debt.”

If the current policies are continued, the IMF report predicts, the general government deficit will increase in 2013-15. The IMF, like most Hungarian economists, predicts that there will be revenue shortfalls. As a result, the deficit will be above the maximum 3% necessary to exit the European Union’s Excessive Deficit Procedure.

In addition, the IMF delegation was deeply concerned about Hungary’s potential growth. They predicted that growth, if there is any at all, will be in the 1.0-1.5% range in the next two years. In order to foster growth the IMF would like to see “increased policy predictability, a level playing field for all businesses, and structural reforms.”

The Ministry of National Economy immediately reacted to the IMF, but it was as brief as possible. It simply stated that according to the government the “Hungarian economy in fact is in a much better situation than is portrayed in the IMF’s report.” Moreover, “the steps taken by the government are not ad hoc but will remain permanent features of the system.” Well, if this is true, the Hungarian economy will be unlikely to recover in the medium term.

The government’s take on the country’s economy is optimistic, and the ministry of national economy contradicts the IMF assessment on several points. For example, they do not admit that government policies contributed to the recession. In a report of its own, the ministry blames the problems on outside factors: recession in the euro-zone, the drought that produced a poor harvest, and the economic decline of several foreign businesses (Nokia, Flextronics, for example). Otherwise, they list a number of reforms the ministry considers “structural.” Among them, taxation, changes in education, healthcare, pensions, public transportation, and solving the problem of municipal indebtedness. The document can be read in its entirety on the government’s website.

Mihály Varga tried to shift the blame for the sluggish Hungarian economy to the European Union. After all, Hungary was forced by the EU to lower the deficit and to put into place austerity measures that resulted in economic contraction. He also insists on continuing the exorbitant tax levies on banks that has further stifled economic growth because of the lack of credit from banks that can barely keep their heads above water.

In contrast, most of the media described the IMF report as “devastating.” HVG emphasized the real possibility that because the IMF-EU delegation predicts a higher than 3% deficit  Hungary might remain under Excessive Deficit Procedure. That would be very bad news for Hungary. I assume that one of the topics José Manuel Barroso and Viktor Orbán will discuss in Brussels tomorrow will be the delegation’s critical remarks about Hungary’s economic policies.

On the right, the economist György Barcza, who used to work for ING Bank (2001-2012) but moved over to the pro-Fidesz Századvég last November, was the first one to raise his voice against the IMF’s critical report. He claimed that “the IMF didn’t dare tell the truth.” The members of the delegation criticized but did not say what remedies the Hungarian government should implement.  Barcza claimed that if the tax levies on banks and on international companies were lifted the budget would lose about 800 billion forints. In order to make up this sum the government would have to take drastic measures. It would have to introduce a 0.5% property tax. The tax rate for those who earn more than 4 million forints per year would be 50%. In addition, the government would have to stop the generous tax rebate to which families with three or more children are entitled.

Well, I’m no economist but I have other ideas that might solve the problem of the missing 800 billion. For example, the government could sell its MOL stock for which they spent billions, not in forints but in euros. I would suggest getting rid of the recently purchased shares in Rába. They shouldn’t have spent billions on a Hungarian-language university in Romania.  They shouldn’t have spent 13-14 billion forints on TEK (Terror Elhárítási Központ). It was really not necessary to spend 2-3 billion on a 400-member guard for the parliament. They shouldn’t be spending billions on recruiting voters abroad. Hungary doesn’t need several new football stadiums, each costing 10-20 billion forints.  And what about taking over the loans of municipalities that under Fidesz leadership piled up debts they can’t pay? I’ll bet that one could easily make up those missing 800 billion forints.

The Hungarian government’s newest business venture: Installing an e-toll system

György Matolcsy’s failed attempts at putting together a budget that doesn’t need almost immediate adjustment are legendary by now. The final budget accepted in December looked suspicious from the very beginning. Matolcsy included about 400 billion forints from taxes that were not in accordance with European Union laws. If the ruling of the European Court of Justice goes against Hungary, which seems likely, the companies that were so taxed must be reimbursed. So, there is already a 400 billion hole in the 2013 budget.

But that is just the beginning.  There are two other listed sources of revenue that most likely will not add a forint to the coffers of the Hungarian state. You may recall that the Orbán government hoped to receive 75 billion forints from an e-toll system that would require trucks over 3.5 tons to pay per kilometer fees on Hungarian roads. The system was supposed to be functional by July 1, 2013. Another 95 billion forints of value-added tax was supposed to be received by introducing a cash register network directly connected to the Hungarian equivalent of the Internal Revenue Service.

Well, it looks as if neither system will be in place by July 1. Here I would like to explain what went wrong with the e-toll system. Let’s start with the fundamentals. To work out such a complex system takes a lot of time. For example, in Germany, where the system functions well, the government began thinking about its introduction in 1998 but the law regarding the e-toll system was enacted only in 2002. The Germans hoped that the system would be up and running in 2003, but it was completed only in 2006. It is based on a satellite positioning system.  The Austrians also took their time planning and eventually setting up a system in 2003. In Hungary, by contrast, the decision was reached within a few months and by September companies were invited to tender bids for the new electronic toll road system. There were two bidders: T-Systems, a unit of Magyar Telekom, with a 53.4 billion forint bid and Getronics with a bid of 34.89 billion forints. The Hungarian government opted for the lower bid although Getronics had no prior experience in this area. On January 19, in large measure because of the hefty fines that would be levied if it did not complete the project on time, Getronics decided not to sign the contract. The Hungarian government, instead of turning to T-Systems, the under-bidder, decided to go it alone as a kind of “general contractor.”

Before pondering the wisdom of this move, let’s go back a bit in time to review Viktor Orbán’s attitude toward tolls in general. When he became prime minister in 1998 there was a functioning per kilometer system in place. It was the old-fashioned variety, with gates where one got a ticket which drivers paid once they left the toll road. Viktor Orbán in those days didn’t like that system. In its place the first Orbán government introduced a system based on prepaid fees that allowed the owner of the car to be on the road at certain times. It was called the “matrica” system. Matrica means sticker in Hungarian.

So, after 1998 all the “gates” on the toll roads were dismantled because Orbán maintained that “gates are for football fields and not for roads.” At that time there were altogether about 80 such gates on two highways (M1 and M3). To build them cost about 5 billion forints; it was another 1 billion to demolish them. I remember being horrified at the idea of demolishing these gates and substituting the “sticker” system that I found unfair. After all, a valid sticker cost the same whether the person drove 200 km or 20km on any given day. Moreover, ascertaining whether a driver had a valid sticker was haphazard; the state relied on spot checking.

Fourteen years later Orbán obviously changed his mind. As far as I’m concerned this would be fine if the e-toll system was professionally and competently designed and executed. But, according to rumor, the job will end up in the hands of companies whose management teams have close ties to the government. The rationale for choosing them will be based not on experience and competence but on political connections. Most people claim that in Hungary there is simply no company capable of creating an e-toll system that is up to snuff. Yet Orbán promised the pensioners in Vásárosnamény that on January 23 Hungary will have an e-toll system that will be all Hungarian.

Illustration to's article on the subject of e-toll

The illustration accompanying’s article on the subject of  an e-toll system, Hungarian style

The government’s self-confidence is not shaken. András Giró-Szász announced that Getronics’s pulling out is only “a minor detail.” Orbán assured his listeners that all the budgets he submitted in the past went through with flying colors and this will also be true of the 2013 budget. Well, flying colors is surely a bit of an exaggeration because we all remember how many times Matolcsy had to change the figures and how many new taxes had to be introduced to meet the EU’s deficit target.

A toll system that works only in Hungary and that is not compatible with those of other countries in the European Union would be a waste of money, according to experts. Apparently within a few years the European Union is planning to introduce a single system that will be based on satellite technology. There is another problem if a unique Hungarian system is introduced. There is a Union rule stating that trucks from EU countries cannot be stopped at borders. That means that inside of the vehicles there must be a piece of equipment that is able to record the traveled kilometers. In an incompatible system that wouldn’t work. Trucks would need a separate Hungarian recording system. In addition, European Union rules require that all information about time, route, etc. must be safely stored, and experts fear that any system that could be introduced in five months wouldn’t be sophisticated enough to ensure the safe storage of information.

All in all, most people are pretty certain that with the Hungarian state as “general contractor” the proposed e-toll system will be a flop. Earlier the Hungarian government wanted to have its own mobile service and announced its plan with great fanfare. Even though the new company existed only on paper, it received a frequency necessary for operation. The government even appointed a CEO. Everybody told the government that it was an unnecessary expense. There were three other providers and there was no reason to have a fourth company. As a blog writer said, “the catastrophe was predictable.” And it was. The blogger is certain that the same fate awaits the e-toll business of the Orbán government.