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.

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.

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.”

Devotion

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.