national debt

The European Commission is not happy with Hungary’s economic performance

Yesterday the European Commission published a press release after the commission staff concluded its fifth Post-Program Surveillance mission to Hungary. After a few encouraging remarks that welcomed recent economic improvements, the authors of the memo delivered some bad news. The better economic indicators are mostly due to artificial one-off stimuli (a decrease in utility prices, the central bank’s low-interest loan program, the workfare program, and greater use of EU subsidies) and therefore one must be cautious when assessing the state of the Hungarian economy. The report also pointed out that “although the general government deficit has been kept below the 3% of GDP threshold, government debt is not yet on a firm downward path.” Furthermore, it warned that based on the Commission’s 2014 spring forecast, “the country appears at risk of breaching the requirements of the Stability and Growth Pact.” They suggested “additional fiscal consolidation efforts, in order to avoid that an inadequate pace of debt reduction could trigger the re-opening of an excessive deficit procedure in spring 2015.”

That was  not all. The mission stressed the “benefits of pursuing growth-friendly fiscal consolidation.” The mission also called for a  stable and more balanced corporate tax system, including “phasing out distortive sector-specific taxes.” They recommended an improvement of the banks’ operating environment, including a reduction in their tax burden. And finally, “the mission called for improving the business environment and emphasized the need to stabilize the regulatory framework and foster market competition, in particular by removing entry barriers in the service sector.”

All this sounds like reasonable advice. Hungarian economists who are more and more critical of Viktor Orbán’s unorthodox economic policies have been saying the same thing for a number of years, to no avail. And it is unlikely that the Orbán government will heed the European Commission’s advice, especially their call to reduce the tax burden on the banks. Viktor Orbán immediately charged the European Commission with serving the interests of banks and multinational corporations when it threatens Hungary with the excessive deficit procedure.

Banks have it hard in Hungary. Here is one example–András Hámori, a senior executive of the Russian Sberbank Europe AG, gave an interview to Reuters that was later picked up by the Moscow Times. Hámori sees good business opportunities in the Czech Republic and Slovakia as both are expanding markets where taxes on banks are contained. But not so in Hungary where the “regulatory environment posed many challenges, which warranted caution.” He continued: “So when a shareholder decides where to deploy capital he obviously has to look at the potential return, and Hungary here does not rank on top, more like the opposite side.”

In addition to exorbitant tax levies banks also have to cope with the forex-loan problem. Prior to 2008, during the tenure of Zsigmond Járai, the Fidesz appointed governor of the central bank, the interest rate on loans denominated in forints was very high; therefore most people took out loans in foreign currencies, primarily in Swiss francs and in euros. It was a great deal while it lasted, but in the last four or five years the Hungarian forint weakened considerably against both of these currencies, placing a heavy burden on the debtors.

The Hungarian government decided to ease the hardship of those people with foreign-currency loans. With the bill that was recently approved by parliament, the Hungarian government seems to put most of the burden on the banks. According to some estimates this piece of legislation will cost the Hungarian banking sector $4.85 billion. Moreover, it looks as if the banks will have to convert foreign-currency loans to loans in forints.

Over the past week or so the Hungarian forint has fallen from 305 to the euro to 312 today. This weakening stems primarily from the central bank’s cutting interest rates to what some consider “dangerous levels.” In the last two years the interest rate was lowered from 7% to 2.3%, and last week there was talk that the central bank is contemplating at least one further reduction. The forint’s decline only accelerated after the forex bill was submitted to parliament for discussion.

Soource: Politics.hu

Source: Politics.hu

The EU is raising the possibility of reinstating the excessive deficit procedure against Hungary in 2015 because of Hungary’s very high national debt, which has been growing instead of shrinking as the Orbán government promised. This growth is especially glaring if we consider that the government could have reduced the national debt by 10% if it had earmarked for that purpose all of the money it expropriated from the private pension funds of millions of Hungarians. Today there is not one red cent left from this pension money, and it’s unclear what new sources the government can tap to bring down the growing national debt.

Reducing the national debt is especially difficult because the Orbán government is a profligate spender. They are especially keen on nationalizing private businesses. Moreover, beginning this year Hungary will have to pay interest on the 10 billion dollar loan from Russia although the actual building of the reactor will not begin for years. That will add considerably to the national debt.

All in all, I am almost certain that the country’s finances are in a shambles. However, Mihály Varga excludes any possibility of any excessive deficit procedure (szó sincs túlzottdefecit-eljárásról). He admitted that “Hungary probably will have to introduce further financial consolidation in order to lower the national debt.” I will be curious to see who’s next on the hit list.

The population hears only about the economic growth Hungary has achieved in the last few months and the higher GDP than earlier anticipated; they have no clue about how fragile the Hungarian economy really is. One could counter: “Well, just think how many times in the past four years critics of the Orbán government have predicted that the whole economic edifice Viktor Orbán and his right-hand man György Matolcsy built will collapse. And look, nothing of the sort happened.” Indeed, until now they were lucky, but how long will that luck last? There will be a day of reckoning, I believe. Mind you, they might manage to keep the country afloat just long enough to make the day of reckoning a problem for their successors.

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“Tappanch”: Viktor Orbán’s phony wars

It doesn’t happen too often in the world of blogging that readers who are also avid and thoughtful commentators request that one of their own write a “guest post.” But this is what happened. “Tappanch” is always the first to find the salient news of the day. He is never satisfied with journalistic summaries but goes to the statistics. As you will see, he compares several sources of information to come up with his astute observations on the state of the Hungarian economy. I’m sure we will all learn from his considerable research on Viktor Orbán’s mostly lost economic wars.

  * * *

1. The war on debt

The “Basic Law” that replaced the Constitution on January 1, 2012 mandated that each yearly budget should decrease the “debt of the central government”/”complete domestic product” ratio (36 & 37). Subsequently, the Orbán government postponed the effective date of the start of this reduction to 2016. So it created a legal category that restricts the rights of the Parliament and Courts, contingent on the value of the “complete domestic product”, although there is no such notion in economics. Most people assume that the lawmakers meant GDP here.

On the other hand, the debt/GDP ratio depends on how we calculate the debt and how the GDP.

1.1 The denominator: How large is the Hungarian GDP?

The Central Statistical Office (KSH) currently gives three series of numbers.

(a) GDP in current prices.

(b) GDP in previous year’s average prices,

(c) GDP in 2005 average prices.

The three numbers for 2013 and, in brackets, for 2012 were reported to be

(a) 29114.43 [28048.07]

(b) 28360.18 [27175.44]

(c) 21984.68 [21742.74] billion HUFs on December 31, 2013 [2012].

The head of the potential government appointed “Budgetary Council,” Árpád Kovács, used slightly different numbers in a recent article for (a), namely: (a) 29203 [28048].

The GDP is quoted in HUF, but it is also meaningful to convert its forint value into EUR at some exchange rate. I will use the daily conversion rate of the European Central Bank, which can be found here.

The GDP values in EUR were

98.02 [95.96]

95.48 [92.97]

74.01 [74.39] billion EURs at the end of 2013 [2012].

Let’s see the numbers Hungary reported to the European Statistical Office.

2008: 105.54

2009:  91.42

2010:  96.24

2011:  98.92

2012:  96.97

2013:  98.07

So if one asks about the growth of the GDP in 2013, the answer will be at least sixfold. In HUF terms, we get to the numbers 3.80% [4.12% in Kovács’s article], 4.36%, and 1.11%, while in EUR terms, the growth was 2.15%, 2.69%, and -0.50%, an actual decline.

If we use unchanged HUF prices, i.e. (c), agriculture contributed to 0.9% of the 1.1% growth of the GDP.

In reality, the large volume increase in the corn and wheat production was offset by the significant decline in their price.

1.2 The numerator: How large is the national debt?

Are we talking about the debt of the central government? Do we include local governments or Social Security? Gross debt or net debt? Is the debt “consolidated”? Do we measure the debt in HUF or EUR? Which agency reports the debt?

1.2.1 The gross debt of the central government

This number stood at  19933.4 billion HUF when the Orbán government took over on May 31, 2010; at 20720.1 on December 31, 2012; 21998.6 on December 31, 2013; and 23569.3 on March 14. 2014.

So the gross debt has increased by 6.17% in 2013, but even this number was achieved by tricks to lower it artificially for a few weeks around December 31:

12.06:  22,728.0

12.13:  22,645.1

12.20:  22,365.5

12.23:  22,434.8

12.31:  21,998.1 (local minimum)

01.24:  22,862.1

01.31:  22,842.0

02.07:  22,899.3 (all-time high)

They asked the partially state-owned MOL and ordered the 100% state-owned Eximbank to purchase government bonds for 435 billion HUF. They were repaid in January.

If we count in euros, the debt has increased by a smaller percentage because of the declining value of the forint.

It was

72.35 billion EUR on May 31, 2010

70.89 on December 31, 2012

74.06 on December 31, 2013

74.93 on March 14, 2014

Thus the debt has increased by “only” 4.48% in euro terms in 2013. The debt of the central government has grown by 18.24% in HUF or by 3.75% in EUR since May 31, 2010. This last number looks great, unless we recall the fact that the Orbán government took over the private retirement funds (MaNyuP) of 2.9 million workers on May 31, 2011 and has spent it COMPLETELY by December 31, 2013.

statistics

How much of this money was spent for “debt reduction”? (The initial nationalization) + (subsequent voluntary offerings) + interest – (previous capital gains paid to the workers in 2011). The initial nationalization amounts to 2945.3 billion HUF. When I added up the items on the website of AKK, the office that handles issuing government bonds, I came up with the number of 2555.9 billion HUF, which might be a good approximation of the actual new debt the Orbán government created towards the future retirees.

If we add the spent fraction of the retirement forints to the debt, we come up with

19933.4 on May 31, 2010  [72.35 EUR]

22920.3 on December 31, 2012 [78.41 EUR]

24554.5 on December 31, 2013 [82.66 EUR]

26125.2 on March 14, 2014 [83.06 EUR]

So the Fidesz government has increased the debt of the central government by 7.13% in HUF or 5.42% in EUR during 2013. The total debt growth since May 31, 2010 amounts to 31.06% in HUF or 14.80% in EUR. The previous numbers came from the Treasury, which can be found at akk.hu.

The National Bank of Hungary, MNB, has gross debt numbers that are higher by about 1000 billion HUF than the sum of the debt reported by AKK and the spent retirement funds.

24085.5 on December 31, 2012 [82.40 EUR]

25598.8 on December 31, 2013 [86.18 EUR], a 6.28% rise in HUF or 4.59% in EUR during 2013.

The distribution of the gross debt in HUF and foreign currencies has changed since 2010, but the change is not as significant as some government propagandists suggest.

On 2014-01-31 [2010-05-31] {2008-05-31}

40.89% [45.70%] {27.77%} of the debt was owed in foreign currency, “deviza”

0.50% [ 1.26%] { 0.03%} in “other obligations”

58.61% [53.04%] {72.20%} in forints (Source AKK’s website)

1.2.2 Budget deficit and EU support

The budgetary deficit and the growth of indebtness has been mitigated significantly by the support Hungary receives from the European Union. The net EU contribution to Hungary in billions of EURs:

2008: 1.12

2009: 2.72

2010: 2.75

2011: 4.42

2012: 3.28

2013: 4.1  [low estimate, based on Lázár’s statement 4.1= 5.05-0.95]

2014: 4.22 [by the budget plan, 5.21-0.99 @296.9 EUR/HUF]

In this article I use the yearly currency exchange rates EUR/HUF and EUR/USD provided by Bundesbank.

In the 2014 budget plan (September 2013 version), the EU support amounts to more than 10% (!) of the expected revenue, while 7.4% of the outlays were designated to service the interest on the government debt.

Domestic revenue/outlays equals only 85% in the 2014 plan.

In the entire 2014-2021 European budget cycle, Hungary expects to receive 7200 billion HUF, i.e. more than €3.2 billion yearly.

The nominal deficit was:

2008:  3.87= 5696/1.4708

2009:  4.13= 5764/1.3948

2010:  4.22= 5599/1.3257

2011: -4.19=-5833/1.3920

2012:  1.93= 2481/1.2848

The nominal 2013 deficit was €3.13 billion according to financial minister Varga’s January statement.

Let us compare the nominal deficit numbers with those in Kovács’s article. Through 2012, he uses the same numbers Hungary reported to the European Statistical Office as “general government deficit”, which includes Social Security and local governments as well. See here and here.

2008: 3.94

2009: 4.23

2010: 4.15

2011:-4.28

2012: 1.98

2013: 2.32

Kovács contradicts Varga for 2013: Varga stated that the 2013 deficit was 929 billion HUF on January 22, while Kovács gave the 2013 number as 689 billion on March 13. But a recent (February 28) KSH publication puts the deficit of the central government at €3.30 billion (979.8 billion HUF), and the “consolidated” deficit at €3.13.

year: central budget; public finances (államháztartás); with local governments

2010: 3.10; 3.29; 4.07

2011: 6.18; 6.23; 5.73

2012: 2.11; 2.07; 1.76

2013: 3.30; 3.13; n/a

(See p. 26, p. 92 of KSH’s website)

The first two months of the 2014 produced a nominal deficit of 582/305= €1.91 billion euros, which leaves only €1.20 billion of deficit for the remaining ten months of 2014.

Let us calculate a more genuine deficit number, equaling the nominal deficit + the used retirement funds + net EU support

2008: 5.06 =   3.94+0+1.12

2009: 6.55 =   4.23+0+2.72

2010: 6.90 =   4.15+0+2.75

2011: 6.81 =  -4.28+6.67+4.42

2012: 6.49 =   1.98+1.23+3.28

2013: 8.57 =   3.30+1.17+4.1 [KSH data + AKK data + estimate from Lázár’s statement]

2013: 7.59 =   2.32+1.17+4.1 [Kovács data for the first number]

2013: 9.61 =   4.34+1.17+4.1 [see 1.2.3 for the first number]

2014: 7.33 =   3.11+0+4.22   [budget plan]

Simicska’s Közgép won at least 432 billion HUF in public tenders in 2013, so about 30% of the EU support goes through the company of the former treasurer of the ruling Fidesz party. We can state with certainty that the genuine budget deficit was the largest ever in 2013.

1.2.3 The debt of the local governments

Here we use the data of the MNB that can be found here.

The liabilities of the government in 109 HUF at the end of 2013 [2012], growth in 2013:

Central government : 25598.8 [24085.5], 6.28%

Social security fund:  51.5 [  164.5] [the disappeared retirement funds do not appear as liabilities!]

Local governments :  637.4 [ 1280.4]

Total liabilities : 26287.7 [25530.4], 2.97%

“Consolidated” liabilities: 26131.5 [25281.7], 3.36%

“Consolidated debt”: 23067.8 [22392.8], 3.01%

“Consolidated” means that “sub-sectors of the general government” are excluded, as the second note in the MNB spreadsheet explains.

This “consolidated debt” is the number Mr. Kovács uses in his article cited above.

Assets of the government:

Central government:  5848.3 [6583.4], -11.17%

Social security fund:  396.1 [ 368.7],

Local governments:  1592.1 [1414.3],

Total assets:  7836.5 [8366.4], – 6.63%

“Consolidated”assets:  7680.3 [8117.8], – 5.54%

Total net liabilities:

Central government:  19750.5 [17502.1], 12.85%

All governments: 18451.2 [17164.0],  7.50%

“Consolidated” net : 18451.2 [17163.9],  7.50%

Notice that the 2013 general government deficit that can be be concluded from these numbers is (18451.2-17164.0)/296.87= €4.34 billion, and not the €2.32 Kovács or the €3.13 Varga and KSH reported.

Let me summarize: the net financial position of the government is worse than what the gross debt numbers indicate.

During 2013, the increase of the debt amounted to

net debt: 12.85% in the central government,

net debt:  7.50% in the central and local governments combined.

gross debt: 6.28% in the central government,

gross debt: 3.36% in the central and local governments combined.

1.3 The mystical ratios

If you have the right to choose your favorite numerator and denominator, the desired ratio can be achieved with ease. We saw that Budgetary Council chairman Kovács counts with a unique, much lower deficit for 2013 than minister Varga. He also uses a higher “GDP in current prices” for 2013.

His calculations for 2013 [2012]:

Debt: 23068/22393, an increase of 3.01% [“consolidated” debt]

GDP:  29203/28048, an increase of 4.12% [GDP in current prices]

ratio:  78.99% [79.84%]

Let us calculate the ratio using liabilities of the central government from 1.2.2!

Debt: 25598.8/24085.5, an increase of 6.28%

GDP : 29114.43/28048.07, an increase of 3.80% [data provided by the statistical office KSH]

ratio: 87.92% [85.87%]

So we found official data showing the “ratio of desire” up in 2013, contrary to the tenet of Fidesz’s own “Basic Law”.

The ratio from the “consolidated” deficit is the well published (23067.8-22392.8)/29114.43= 2.32%.

But the Maastricht criterion requires member states of the European Union to maintain the yearly ratio of (deficit of the central government + local governments + social security)/GDP below 3%.

This ratio was (18451.2-17164.0)/29114.43= 4.42% in 2013.

2. The war on unemployment

E = [employed in enterprises with at least 5 employees]

R = [employed in enterprises with four or less employees]

S = [self-employed]

N = [employed by non-profit organizations]

G = [employed by the government in regular positions]

F = [“fostered” workers, aka as “közmunkások”]

A = [workers abroad, who somehow are counted in the Hungarian numbers]

Employed = E+R+S+N+G+F+A

The last number A seems to be a closely-held secret, it was divulged only once. How many workers and their families work and reside abroad?

We can get some data from observed remittances to Hungary in 2012:

1. Germany: 105,000; $4100

2. USA: 83,000; $4800

3. Canada: 53,000; $4800

4. UK: 51,000; $2300

5. Austria: 40,000; $4600

6. Australia: 24,000; $4900

7: Switzerland: 17,000; $4000

8: Slovakia: 16,000; $3900

9: Sweden: 16,000; $4500

10:Israel: 13,000; $5700

11:France: 11,000; $5100

12: Romania: 8,000: $3100

13: Denmark: 4,000: $2800

14: Norway: 3,000: $3700

All other countries: 18,000

Total:  462,000

The low remittance from UK and Denmark might indicate that the workers there are more likely to stay with their families.

The second trick is to move some of the unemployed to the employed camp using the “közmunkás” category F. F is only an implicitly given number that can be calculated from the data of KSH.

The third problem is that some numbers are contained in moving averages, while others are disclosed every month. Here are the numbers for the three-month average of October-December 2013 [2012]* or for December 2013 [2012] :

E = 1825.7 [1791.7], +1.90% change during 2013,

R* =  785.6 [ 812.3], -3.29%

S* =  439.2 [ 454.9], -3.45%

N =   99.6 [ 104.5], -4.69%

G =  686.6 [ 658.9], +4.20%

F =  178.5 [  86.9], +105.41%

A =   99.4 [  91.4], +8.75%   [the data is on page 6]

If we add these apples and oranges together, we can come up with the victory propaganda numbers of “Employment” = 4114.6 [4000.5], +2.85%

But if we discount the “fostered” workers and the workers abroad included in the statistics, the growth in employment equals the less than great number of 0.38%.

Conclusions

So what do the numbers tell us? First of all, a lot of numbers are not public. Some numbers contradict each other.

Still, we are able to conclude that

1. The GDP growth in constant prices was 0.2% without agriculture in 2013. If agriculture is counted, the 1.1% growth in HUF becomes a 0.5% decline in EUR.

2. The Orban government has increased the debt to an all time high. The total debt growth since 2010-05-31 amounts to 31.06% in HUF or 14.80% [using ECB exchange rates] or 15.10% [using MNB exchange rates] in EUR, if we include the spent retirement funds.

3. The general government deficit reached a record high of €4.34 billion in 2013.

4. The number for the Maastricht deficit criterion was 4.42% in 2013.

5. The domestic employment without the “fostered” workers increased by 0.38%.

—-

P.S. Today, on March 18, 2014, Hungary sold $3 billion of new debt at 5.5% yearly interest. The official gross debt/GDP ratio will reach 84% to 85% at the end of March.

The 10-year bond premium over the 10-year US Treasury note. The data are from Portfolio.

2010: 2.65% (January)

2011: 3.10% (March)

2012: —-

2013: 3.45% (February), 3.25% (November)

2014: 2.875% (March) [over the US Treasury notes]

New details on the Russian-Hungarian agreement on Paks; Kim Scheppele’s “Hungary, An Election in Question, Part 2″

I’m returning briefly to the secretive Putin-Orbán agreement on the addition to the atomic power plant in Paks. Shortly after the news of the agreement became public, I heard rumors to the effect that what the Orbán government actually wanted was not so much a new power plant built by Rosatom but an outright loan of 5 billion dollars. The Hungarian media spent a few lines on this rumor, but the topic was dropped soon enough. Most likely the rumor couldn’t be substantiated. But now Népszabadság has returned to the topic. In a fairly lengthy article the reporter who has lately become a kind of Paks expert unearthed a number of new strands in the story.

The information comes from “an expert who is an adviser to the government with knowledge of the details” who asserted that the original rumor about the loan the Orbán government wanted so badly was in fact true. The government wanted a loan that it could use as it best saw fit. The Russian partner, however, wanted to link the loan to the extension of the Paks power plant. Although negotiations went on for about a year, the two sides couldn’t come to a satisfactory agreement. At this point István Kocsis, former head of Paks and later of MVM (Magyar Villamos Művek/Hungarian Electricity Ltd), was asked by the government to use his good offices with the head of Rosatom. It didn’t seem to bother Orbán that Kocsis had been charged with embezzling billions, a case that is still pending.

Apparently Kocsis achieved miracles and in no time Rosatom had a contract ready to be signed. Népszabadság‘s informant claims that the Hungarians couldn’t change a word in the terms of the contract. There is, in fact, the suspicion that the reason the Hungarian text is so awkward is that most likely it was a translation from Russian. Earlier difficulties arose as the result of Hungarian insistence that the loan be extended to Hungary even if for one reason or another the power plant couldn’t be built or the project were protracted. At the beginning Rosatom insisted that the money would be lent to Hungary only as the work progressed. We still don’t know exactly what is in the agreement but, as Népszabadság‘s informer said, we may find out that “in the final analysis the Orbán government didn’t bring two reactors but ‘a new IMF loan’ from Moscow.”

The way the Orbán government spends money every penny will be needed. As it is, the national debt is higher than ever. It is over 80% even with the large infusion of money the government laid its hands on from the private pension funds. If we discount this “stolen money,” the national debt would be over 90% of the GDP. The government so far has spent more than 600 billion forints buying up private utility companies and is embarking on very ambitious plans to create a so-called “museum quarters” in Pest, which will accommodate the museums and Hungary’s National Library that are currently housed in the Royal Castle. This project is necessary because Orbán wants to move the entire government to the Castle District. The president’s office would move from the Sándor Palace to the Royal Castle and Viktor Orbán would presumably move into the Sándor Palace.

Yesterday another interesting tidbit about the Putin-Orbán agreement saw the light of day. An LMP member of parliament, Bernadett Szél, initially demanded access to the document but her request was refused. LMP will sue the government on that issue. She was, however, granted a half-hour interview with Mrs. László Németh, who admitted to her that the Orbán-Putin agreement was signed before the Hungarian government had a chance to authorize the deal. Lately, it seems, Fidesz politicians often slip and tell the truth by mistake. Like Lajos Kósa about the tape of Ferenc Gyurcsány’s speech at Őszöd. The next day he had to “correct himself.” That was the case with Mrs. Németh as well. Her ministry immediately corrected her. The ministry’s spokesman claimed that it is clear from the January 31 issue of the Official Gazette (Magyar Közlöny) that the authorization was dated January 13 and it was on January 14 that the agreement was signed. My only question is: why did they publish the text of the authorization only on January 31?

Finally, let’s not forget about the Holocaust Memorial Year. András Heisler, president of Mazsihisz, decided to step down from the advisory board of the House of Fortunes. Since Mazsihisz (Federation of Hungarian Jewish Communities) opposes the establishment of this new museum, Heisler saw no reason to remain a member of the board. Moreover, as he said, the board is totally inactive. Mária Schmidt, who is the government-appointed director of the project, called the board together only once.

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Hungary: An Election in Question

Part II: Writing the Rules to Win – The Basic Structure

Professor Kim Scheppele, Princeton University

How did the governing party Fidesz stack the deck so much in its favor that the upcoming Hungarian election’s results are not in doubt?

Fidesz started immediately after its election victory in 2010 to reshape the electoral system to ensure its hold on power. The Fidesz parliamentary bloc, which enacted constitutional changes without including or consulting any opposition party, slashed the size of the parliament in half, redrew all of the individual constituencies unilaterally, changed the two-round system to a single first-past-the-post election for individual constituencies, and altered the way votes were aggregated.

Moreover, Fidesz has granted dual citizenship and therefore voting rights to ethnic Hungarians outside the borders who are overwhelmingly Fidesz supporters, while at the same time maintaining a system that makes it comparatively harder for Hungarian citizens living or working abroad to vote.

The media landscape and campaign finance rules overwhelmingly benefit Fidesz and a series of last-minute changes to the law just before the campaign started put the newly united center-left opposition at an even greater disadvantage. In addition, the governing party has captured the election machinery which is now staffed with its own loyalists.

The sum total of all of these changes makes it virtually inevitable that Fidesz will win.

The devil is in the details, so let’s walk step by step through these various ways that the governing party has changed the rules in its favor.

As one of its first acts in office, on 25 May 2010, the Fidesz parliament amended the constitution it inherited to cut the parliament’s size in half. This was a move lauded by all sides of the political spectrum, as the old 386-member parliament was widely perceived as too large to be effective and too expensive for a small country in debt. The new 199-member parliament that will be seated after the 2014 elections will represent new electoral districts that had to be newly drawn to accommodate this new, smaller parliament. Redrawing the districts was not only widely welcomed, but also required by the Constitutional Court, which had ruled (first in 2005 and again in 2010) that the old districts had become too unequal in population size to give all citizens an equal vote.

The old districting system already favored Fidesz because the larger districts were in the urban strongholds of the left and the smaller districts were in the rural districts of the right. As a result, rural conservative votes were given more weight because it took fewer of their votes to elect an MP. But the way that Fidesz redrew the districts for 2014 gave their party an even greater advantage than they had before.

Without any consultation with opposition parties, Fidesz enacted a new “cardinal law” in 2011 that simply set the boundaries of the districts (Law CCIII/2011). While most election laws provide principles for drawing districts and assign some neutral or at least multi-party body to actually draw the boundaries, the borders of the districts in Hungary are now written directly into the law. Moving a district boundary by even one block requires a two-thirds vote of the parliament. The districts are therefore heavily entrenched and were not the result of either a public or an inclusive process. No justification for these districts was offered by the governing party.

Of course, not all districts in any electoral system have identical numbers of voters. But how much can districts vary before they deny equality of the vote?  The Commission for Democracy through Law (the Venice Commission), recommends no more than 10% variation as the international standard. The Venice Commission is not terribly clear about what this means, but given that the Venice Commission is working with a principle that demands that votes be weighted as equally as possible, one can guess that this means that districts should not vary by more than 10% in population overall.

The Hungarian law is fiendishly clever in appearing to come close to that standard while being miles away from it. The Hungarian Election Law (Act CCIII of 2011 – section 4(4)) mandates that the districts should not vary by more than 15%. The Venice Commission was not thrilled with the difference, but let it pass. They shouldn’t have.

A closer reading reveals the trick. The Hungarian law requires that districts vary by no more than 15% calculated from the mean number of voters in the district. This is not an overall 15% deviation, as the Venice Commission presumed, but is instead a standard that permits districts to vary by 15% below the mean and 15% above it.

An example demonstrates what a huge difference this makes. To aim at an average district containing 100 voters, a 10% overall deviation would permit districts to vary between 95 and 105 voters. (Divide 95 by the 10 voters that separate the largest and smallest districts and you get about 10%). The Hungarian law would permit districts to vary between 85 and 115 voters – 15% above the mean and 15% below the mean of 100. The gap between 85 and 115 voters in a district would be 35% overall! (Calculated the same way as above: 30/85 = 35%.) This is a huge difference that the Venice Commission did not seem to see.

In the actual districts were constructed as a result of the new election law, the variation became even larger than that. As you can see in the chart below, the smallest districts in Hungary now have about 60,000 voters while the largest districts have nearly 90,000 voters, roughly a 50% gap. (The horizontal axis shows the number of eligible voters in the new constituencies based on voter data from 2010, and the vertical axis shows the number of districts in the new scheme with that number of voters.) Not only are the actual districts highly unequal, but this variation has no apparent justification.

sizeThe Size of Parliamentary Districts in Hungary after Redistricting
Source: Calculations by Gábor Tóka, Central European University

Hajdú-Bihar County, in the eastern part of Hungary, provides a case in point. A last-minute amendment to the 2011 election law divided the city of Debrecen into two districts of highly unequal size. Now, one district has 87,278 voters and the other, right next to it, has 60,125 voters. These are very nearly the largest and smallest districts in the country, side by side, without official explanation.

The government may have given no reasons for its districts, but this huge variation in district size is not random. As Political Capital shows, the left-leaning districts are systematically 5,000-6,000 voters larger than the right-leaning districts, which means that it takes many more votes to elect someone from a left-leaning district than to elect someone from Fidesz.

The borders of these new districts also appear to be drawn to Fidesz’s advantage, since they just happen to break up the areas where the opposition alliance voters have traditionally been strongest and they scatter these opposition voters over a new Fidesz-majority landscape. Historically left-leaning districts were partitioned and blended into historically right-leaning districts, creating fewer districts where left-leaning candidates are relatively certain to win.

One of the most obvious gerrymanders occurred (again) in Hajdú-Bihar County. In the 2006 election, which went nationally by a wide margin to the Socialists, the county voted three of its nine districts for the Socialists and six for Fidesz, as you can see in the chart below, on the left. If the results from the 2006 election were tallied in the newly drawn six districts for that country, as shown on the right, Fidesz would now win every district. The map reveals that this all-Fidesz result was accomplished by drawing the districts to divide up the compact concentrations of Socialist voters so that they would become minority voters in Fidesz-dominant districts.   Examples like this one can be found all over the country, as left-leaning districts were partitioned to break up clusters of opposition voters to mix them with even more conservative voters from neighboring areas.

hajduThe US may have invented the gerrymander, and so it may seem presumptuous for an American to complain about the new districts. But the Hungarian gerrymander is different from the (also outrageous) American type. In US national elections, gerrymanders occur at the state level, which means one party cannot redistrict the whole country at once. In the US, districting plans are also subject to judicial review to check the worst self-dealing. In Hungary, however, the whole country was redistricted by one party all at once so the Hungarian gerrymander is far more decisive. And there is no judicial review to correct excesses. In addition, unlike in America where the governing parties in the states get a new shot at gerrymandering every 10 years, after each census, it will take a two-thirds vote of the parliament to change any district in Hungary’s future.

Hungarians don’t just cast votes for individual representatives in districts of the sort we have just seen, however. Hungarians cast two votes in national elections. In addition to casting ballots for representatives in the voters’ individual constituency, voters cast second ballots for party lists. Those votes are aggregated across the country and additional parliamentary seats are awarded to parties based on these results, above and beyond the seats won in the individual districts.

In the new parliament as in the old one, MPs elected both ways sit together with equal status. While this dual system of MP elections appears to mitigate the effect of the gerrymander, the new parliament, unlike the old, allocates more seats to the individual constituencies than to the party-list mandates. The new parliament features 106 district mandates and 93 party-list mandates. Since individual constituencies are awarded on a winner-take-all basis, this tilts the system toward an even more disproportionate distribution of mandates than in the prior also-disproportionate parliament.

Individual constituencies in Hungary were allocated from 1990 to 2010 in a two-round run-off system. Unless a candidate won 50% or more in the first round, a second round would be held between the highest vote-getters to determine who won the mandate. This system meant that many political parties would field candidates in round one, and then form coalitions before round two after the relative viabilities of the individual candidates could be assessed. Hungarian political culture grew up around this system so that parties were not accustomed to bargaining before any votes were cast.

The new electoral system in Hungary eliminates this second round, benefiting Fidesz, as the largest single party. It can now win districts outright without needing majority support because it only has to get more votes than any other party on the (single) election day to capture the constituency. Given that the districts have been drawn to give Fidesz an advantage overall, one can imagine other parties will have a hard time winning constituencies which have been constructed precisely so that Fidesz is the largest party.

The design of the new system means that the democratic opposition would only have a chance to win individual constituencies if the various opposition parties of the left could create a grand coalition before the election so that they didn’t run candidates against each other. But this was a result that everyone familiar with politics in Hungary knew would be hard to accomplish. The parties in the “democratic opposition” (excluding Jobbik) are sharply divided both by ideology and personality. But unless these parties could set aside their differences to unite, they would surely lose.

The announcement on 14 January that five parties in the opposition had managed to agree on a single list of candidates for the single-member districts as well as a common party list was therefore something of a political miracle.

But can the party leaders of the Unity Alliance bring all of their voters along with them? Many voters for the smaller parties on the left often don’t trust the larger Socialist Party which now dominates the coalition.  And some personalities in the mix are popular only within their own parties and unattractive to the others in the coalition. As a result, it cannot be assumed that votes for the five parties can simply be added together to produce a united whole that is the same size or even larger than the sum of the parts.

Because voters cast two ballots on election day, the individual constituencies are only part of the story, though they are the largest part. Parties will also run national lists to compete for voters’ second votes. The new conditions that came into effect since the last election actually make it easier than it was in 2010 to nominate candidates for the individual constituencies and to register parties with national lists, something that is consistent with a dominant-party strategy to divide up the opposition as much as possible.

But the party-list system also builds in incentives for small parties to join together to form a larger alliance. To be approved to run a national list, parties must field candidates in at least 27 individual constituencies in at least nine of the 19 counties plus Budapest. While this guarantees that parties are truly national, it also aggravates the problems created by the loss of the second-round runoff in the individual constituencies. Any new national list adds to the “clutter” of individual candidates in the individual constituencies and further fragments the vote.

So it makes sense, under these rules, for small parties to form a common national list. To avoid competing head-on and perhaps pushing each other below the 5% threshold for entering the parliament, small parties on the same side of the political spectrum are pushed by the logic of the system to join forces. But as soon as they do so, they run into another problem. In all elections since 1994, parties have had to meet a 5% threshold of the popular vote to gain a fraction in the parliament. For two parties that run together, the threshold rises to 10% and for three or more parties, the threshold is 15%.

If the smaller parties were going to unite for 2014, then, they ran the risk of together missing the higher threshold required of joint party lists. The rules of the game have therefore pushed the small parties of the “democratic opposition” to do what they did – which was to join with the Socialists to form Unity. Only an alliance with the larger Socialist party guaranteed that these smaller parties would be able to enter the parliament given the higher thresholds for joined lists. Because many of the smaller parties were created precisely to distance particular groups of voters from the Socialists, however, this is an uneasy alliance at best.

So that is where we were as the campaign was launched, witnessing a democratic opposition alliance whose members do not like each other much but who have to work together if they are to have any hope of ousting Fidesz given the way that the rules are structured. The public squabbling that occurred as the grand coalition went together belied the name of Unity Alliance and weakened their electoral position. They have the campaign period to convey a new unified message, but – as we will see – that is going to be very hard.

Attila Mesterházy and Gordon Bajnai on the campaign trail

I noted yesterday that the election campaign has begun. I should have added that Fidesz has been campaigning from the very moment its government took office in May 2010. With election comes what Hungarians call “the spreading of the goodies,” at least temporarily making the electorate happy so they will support the government at the next election. This practice, which cuts across parties, has been largely responsible for Hungary’s chronic indebtedness and its large budgets deficits. Very often this largesse was financed with borrowed money.

Prime Minister Viktor Orbán swore that it would never happen under his watch that Hungary would borrow money to pay for social benefits. In fact, he was so serious about national indebtedness, which he considers the source of all the ills of the Hungarian economy, that it was written into the constitution that “the Central Budget … will have to ensure that the level of the state debt does not exceed half of the value of the gross domestic product of the previous calendar year.” Right now the national debt is larger than ever and only yesterday the government announced that Hungary had submitted a registration statement to the SEC for the issuance of up to $5 billion in debt securities. This will be the second such bond issue in US dollars this year. I wonder what Viktor Orbán will do if his government is unable to fulfill its constitutional duty with respect to the level of the national debt? It’s not that I fear for Orbán’s political well-being. This government is very inventive, so I’m sure they would come up with something to avoid the resignation of the government.

While the government has the means to distribute money and other perks, the opposition must be satisfied with promises. As has happened in Hungary time and again, these promises turn out to be empty. The 2010 promises of Fidesz, including one million new jobs in ten years, couldn’t be fulfilled. In fact, it was just announced that fewer people have jobs today than a year ago. The Balatonőszöd speech was partly about putting an end to this practice and stop deceiving the electorate. For a while the opposition parties seemed to have paid heed and refrained from falling back on their bad habits. Their politicians kept emphasizing the difficult economic situation and the long road ahead. But as the election gets closer they seem unable to resist the temptation.

So, let’s see who is promising what. MSZP held a huge meeting in Miskolc, a town that was once an MSZP stronghold. The crowd responded enthusiastically when Attila Mesterházy announced that if the MSZP, hand in hand with Együtt 2014-PM, wins the election “the winners will be the children, the youth, the women, the employees, the small- and medium size entrepreneurs, and the pensioners.” In brief, everybody.

Fair enough. Almost everybody would indeed win if Fidesz were sent back into opposition. But what specifically did Mesterházy promise? From September 2014 on students will receive a free education at Hungarian colleges and universities. A year ago the socialists were talking only about a tuition-free first year, after which tuition would be charged based on academic achievement and social needs. But now, it seems, there is no qualification. We know from past experience that the Hungarian budget cannot possibly afford the luxury of totally free higher education.

The socialists also plan to create a situation in which at least one person in each family is employed with a decent salary. I assume that he does not consider the current salary of workers employed in public works projects, which is not enough to keep body and soul together, decent. According to Mesterházy, the desired level of employment can be achieved by abandoning “this idiotic economic policy.”

He promised more money for education and promised to build gyms instead of football stadiums. They will spend more money on healthcare. Unemployment insurance, which was truncated by the Orbán government, will once again be available for nine months. The socialists will make sure that public transportation for people over the age of 65 will be “truly” free. Mesterházy admitted that to achieve all these things one must have robust economic development, but he added that “yes, we will achieve this too.” MSZP wants to modify the across-the-board lowering of utility prices, which currently threatens the industry with bankruptcy. The socialists suggest lowering prices only for those in need. MSZP would also change the tax system and get rid of the flat tax, which has done a lot of damage to the economy.

As you can see, there are plenty of expensive promises here. The healthcare system is in ruins, and it seems that the same is true of education. Even with higher taxation on the “rich,” as Mesterházy called those whose incomes are above average, healthcare and education cannot be salvaged. As currently configured, healthcare is a bottomless pit. Throwing more money into it is no remedy. It’s time for some fresh thinking.

Source: publisherdatabase.com

Source: publisherdatabase.com

Együtt 2014-PM also began its campaign, and it looks as if the party is concentrating, at least for the time being, on the under-35 generation. The party’s slogan is “Come home, stay home!” According to E14, the flight of young Hungarians is “one of the most serious problems today.” If they win the election they will open offices in each embassy and consulate where they would offer jobs in Hungary for those currently abroad. They would also assist those Hungarians who just finished their studies abroad and would like to return to Hungary. In addition, he promised that “he would guarantee a job or training that would lead to a decent job for all those under the age of 30 who hadn’t had a job in the last six months.”

Bajnai offered up a few numbers. He would spend at least 1% of the GDP on higher education and would again open the doors of colleges and universities to anyone who has the ability. Bajnai also promised 250,000 new jobs in four years. Well, that number is more modest than Orbán’s one million in ten years, but as we know governments cannot create jobs.

It’s not clear whether people actually believe these promises or whether, after all the unfulfilled and unfulfillable promises, they are jaded. Hungarians say they don’t believe politicians, but perhaps their belief is selective. Perhaps they believe promises from which they themselves will benefit and disregard the rest. Perhaps they believe some of the promises of their favorite candidate and none of the promises of the other candidates. Who knows? I doubt they would be honest with pollsters.

At any event, it’s tough to campaign with the message that people should prepare themselves for more lean years when opponents are promising a host of goodies in a “rising tide” economy. People want hope and change and a “yes we can” attitude.  (And a few more forints in their pockets one way or another.)  Disappointment that the government hasn’t delivered sets in only later.  Just ask Barack Obama.

Politics and finances: Orbán’s Hungary today

Judging from the comments, most readers of Hungarian Spectrum consider Sándor Csányi’s spectacular exit from the ranks of shareholders of OTP an event that overshadows all other news, including whatever the current opposition is doing. Perhaps in the long run the panic that took hold of Budapest yesterday following the precipitous fall in the stock price of Hungary’s largest bank might prove to be more significant than any purely political event. However, what happened at OTP cannot be separated from politics.

By now we know that even before Csányi, the CEO of OTP, decided to sell his OTP stock worth about 26 million euros, some other high-level officials of the bank had already gotten rid of theirs. I assume they sold because of the probability that the government will “take care of the Forex loans one way or the other.” The exact way is still not entirely clear, but it is likely that the banks will again be the ones that will have to bear the financial burden of the “government assistance.” This rumor began to circulate about a week ago.

And then came Viktor Orbán’s interview with Margit Fehér of The Wall Street Journal. In this interview Orbán made it clear that the bank levies are here to stay. He has reneged on his initial promise that the very high extra taxes on banks would be needed for only a couple of years. Now the official position is that the bank levies will remain until the national debt is under 50% of GDP–perhaps in ten years “if the euro zone could do better.”

Another political decision that most likely had an impact on the misfortunes of OTP was the government’s abrupt announcement of the “nationalization” of 104 credit unions privately owned but functioning under the umbrella of TakarékBank Zrt. TakarékBank and its credit unions are really the banks of the countryside. They are present in 1,000 smaller towns and villages, which means that they cover about a third of all Hungarian communities. One can learn more about TakarékBank here. One thing is important to know. TakarékBank was run by and with the consent of the individual owners and board members. Clearly, the state wants to take over the whole organization and most likely run it as a state bank. What is happening here is no less than highway robbery. As some people said, the last time something like this happened in Hungary was during the Rákosi period. Sándor Demján, chairman of TakarékBank’s board, swears that they will keep fighting all the way to Strasbourg to prove that what the Hungarian government is doing amounts to nationalization without any monetary compensation.

If Orbán succeeds in the nationalization of TakarékBank, it might pose a serious threat to OTP. All in all, it’s no wonder that OTP officials didn’t think that their investment was safe. The alarm bell might sound in foreign banks as well (don’t forget that Orbán’s plans include a banking sector that is at least 50% Hungarian owned), and if that happens the whole banking sector might collapse. But I guess that would fit in with Orbán’s goal of tearing down all the carry-overs from the past and replacing them with his own original creations.

Let’s return now to the interview Orbán gave to The Wall Street Journal. Some of his statements are just a regurgitation of what he said in his rambling speech to the foreign ministry officials about a week ago but this time in even stronger language. For example: “The future of Europe is Central Europe” and by “now we are once again part of [this] powerhouse.” He also repeated some of his often used lines about the nonexistent strides Hungary has made since he took over: the national debt is falling, foreign trade is rocketing, Hungary no longer needs “other people’s money,” unemployment is falling, and finally that when he took office only 1.8 million people paid taxes but now that number is “close to 4 million.” No one has any idea where Orbán got his figures about the number of taxpayers, but they bear no resemblance to reality.

The interview is a rare self-portrait that could be the topic of another post, but here I would like to bring up two points.

This is the first time, at least to my knowledge, that Orbán openly declared that he really doesn’t want to join the eurozone. This despite the fact that Hungary is obligated to adopt the euro as the country’s currency since it was part of the conditions for membership in the European Union. But today Orbán thinks that Hungary “should exploit the advantages of not being in the eurozone.” I was already suspicious when he insisted that the Constitution should include a sentence stipulating that Hungary’s currency is the forint, but in the interview he was quite explicit on the subject: to change the constitution’s declaration that Hungary’s currency is the forint “will require a two-third vote of Parliament. So, to join the euro will require a strong, unified majority. This guarantees that it will not be a divisive issue. Whether Hungary joins will depend a lot on how well the new, integrated eurozone functions.”

And finally a point that might interest amateur psychologists. Orbán said: “When you have to save your country, to renew your country–that is when a job like this is appealing to someone like me. This is a real challenge, not just like reorganizing a bureaucracy. People like me, we like to do something significant, something extraordinary. History has provided me that chance. Actually, it provided it three times. I’ve always gotten historical challenges as a leader. When things are going well, I seem to lose the elections, because the people don’t need me anymore.” There is a Hungarian saying “A próféta szólna belőled!” meaning I hope your prophecy comes true. But all joking aside, it seems that Orbán is not confident about winning the next elections. He is afraid that all his extraordinary accomplishments will only make an opposition victory more likely. I guess the winning campaign slogan, contrary to everything we know about electorates, would be: “If you’re better off than you were four years ago, throw the bum out!”