Rocznik Instytutu Europy Środkowo-Wschodniej - PDF

Rocznik Instytutu Europy Środkowo-Wschodniej Rok 10 (2012) Zeszyt 5 Yearbook of the Institute of East-Central Europe Volume 10 (2012) Issue 5 Rada Naukowa Advisory Board Rocznika Instytutu Europy Środkowo-Wschodniej

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Rocznik Instytutu Europy Środkowo-Wschodniej Rok 10 (2012) Zeszyt 5 Yearbook of the Institute of East-Central Europe Volume 10 (2012) Issue 5 Rada Naukowa Advisory Board Rocznika Instytutu Europy Środkowo-Wschodniej Natalia Yakovenko, Adolf Juzwenko, Jūratė Kiaupienė, Andreas Lawaty, Alexei Miller, Antony Polonsky, Adam Daniel Rotfeld, Henryk Samsonowicz, Aleksander Smolar, Oleksiy Tolochko, Piotr S. Wandycz, Jerzy Wyrozumski Komitet Redakcyjny Editorial Board Rocznika Instytutu Europy Środkowo-Wschodniej Jerzy Kłoczowski Przewodniczący Editor-In-Chief, Mirosław Filipowicz Zastępca Vice-Editor, Anna Paprocka Sekretarz Editorial Assistant, Andrzej Gil, Hubert Łaszkiewicz, Tomasz Stępniewski László Csaba Hungary and the eurozone crisis: a comedy of errors? Abstract: The spill-over of the global financial crisis has uncovered the weaknesses in the governance of the EMU. As one of the most open economies in Europe, Hungary has suffered from the ups and downs of the global and European crisis and its mismanagement. Domestic policy blunders have complicated the situation. This paper examines how Hungary has withstood the ups and downs of the eurozone crisis. It also addresses the questions of whether the country has converged with or diverged from the EMU membership, whether joining the EMU is still a good idea for Hungary, and whether the measures to ward off the crisis have actually helped to face the challenge of growth. Keywords: Hungary, eurozone crisis, EMU membership, growth General remarks The crisis of the management of the European Monetary system has become one of the hottest topics in the aftermath of the global financial crisis. While in the pre-crisis period conventional wisdom held the EU to be a safe haven, well-equipped to protect its members from external shocks, the procrastination of both national crisis and EU-level crisis management raised doubts against this insight. Sceptical voices, conventionally associated with the Anglo-American mainstream of the economics profession, spread into continental Europe and policy-making alike. In this short essay we investigate how Hungary has withstood the ups and downs of the eurozone crisis. We pose the question of whether 34 László Csaba the country has converged with or diverged from the EMU membership, which was taken upon as a contractual obligation in the accession agreement of December We may also ask if joining in the EMU is still a good idea for Hungary; furthermore, it is asked if the measures implemented to ward off the crisis have helped to face the challenge of growth. 1. Caught in the storm, longer than ever thought In 2008 Hungary has just come out of a period of external adjustment triggered by the fast growth of external debt and the need to curtail the explosion of fiscal deficit. On its own, Hungary s debt/gdp ratio at the end of 2007 was been exorbitant 67% of GDP, just above the average of the eurozone s 66.3% but the trend was clearly unsustainable and showed no convergence to the Maastricht criterion of 60%. It was all the more disquieting as the starting point in 2001 had been slightly below 52% and thus the most important criterion was missed just at the time when GDP growth was over 4.5% in the entire decade 1. Having managed the external adjustment in , the overall expectation in Hungary was that of recovery. Recovery was seen as quasi-automatic given the favourable global conditions 2. But the writing already appeared on the wall. Following the collapse of the British investment bank Northern Rock in June 2007, basically all informed analysts knew that we were sitting on a volcano. It was to erupt, the question being not if, but when. However, the decision-makers of the period 3 considered the subprime crisis as a basically intra-us affair. As they put it, the tornado marches on a different root and Europe is touched only by its rim. 1 Source (unless otherwise indicated): ECB Statistics Pocket Book, Frankfurt am Main, June For details see: L. Csaba: Hungary: the Janus-faced success story of transition, [in:] A. Fosu (ed.), Developmental Success: Historical Accounts from More Advanced Countries, Oxford, Oxford University Press, 2012, pp J. Király, A tornádó és a hurrikán a 2007.év válságos hatásai [The tornado and the hurricane the crisis-ridden year of 2007], [in:] L. Muraközy (ed.), A jelen a jövő múltja [Present is the past of future], Akadémiai Kiadó, Budapest 2009, pp Hungary and the eurozone crisis: a comedy of errors? 35 Furthermore, the Socialist government was intent to showboth the domestic and external audiences that the crisis was over. Therefore the fiscal plan for 2009 was formulated in an extremely optimistic manner, in terms of growth and financing. Submitting a fiscal plan based on a 3% growth forecast for 2009 in October, weeks after the collapse of Lehman Brothers, was asking for trouble. And external markets did react swiftly, attacking the exchange rate in an aggressive manner. The collapse could only be averted by a blitz stand-by loan, orchestrated together by the IMF, the EU and the World Bank. Both its size 20bn and the involvement of the Washington Twins in managing the affairs of a respectable EU member-state constituted major innovations for the period. In other words, economic policies from the minute of agreeing to the bailout were subordinated to meeting quantitative targets of debt servicing, irrespective of any other broader considerations. The caretaker Bajnai government was eminently fit to manage this task. While cultivating the image of technocratic managers not unfamiliar for the post-transition Left they were supported by the Socialists only and by two centrist parties, rightly fearing early elections. All in all, the administration did not have to care about socio-political concerns, while the centre-right opposition Fidesz did not have to care much about economic exigencies and could put the entire blame for suffering on the Left. The price to be paid in the second half of the electoral cycle when governing parties refused to step down despite their loss of legitimacy 4, was heavy. In 2009, the GDP dropped by 6.9%, the debt ratio jumped to 72.9%, unemployment jumped to 10% against barely over 7% in the preceding period. Oddly enough for a contracting economy, inflation remained at 4% (HICP, y/y), when at the same time the euro area barely escaped deflation with 0.3% annual inflation in Let us underscore what can be documented by a broad survey of sources: Hungary has not entered a crisis because of the spill-over of the global financial crisis in the last quarter of The country was 4 The infamous lie speech of the then Premier in May 2006 leaked to the press in September only triggered 6 weeks of violent street protests, calmed down by the opposition by calling for referenda on social matters. The latter was won, by a majority of 85% on 9 th March This would, in theory, have called for a resignation of the government. But they were sticking to power, irrespective of the consequences including their devastating defeat two years later and the annihilation of the two centrist formations, the heroes of early transition years, MDF and SZDSZ. 36 László Csaba already on a slowing track from 2004 onwards and the growth in could only be sustained owing to the accumulation of external debt. In adjustment did happen, but structural and institutional weaknesses have not been remedied. The government produced a large number of reform projects, but their implementation was in reverse order to the breadth of the initiatives, covering all walks of life. By contrast, the caretaking Bajnai government did address some of the overdue issues. These included the increase in retirement age, cutting disability and early retirement schemes, cutting central administration and severing tax collection. These measures have, for a variety of reasons, survived the change of government and have been intensified by the Széll Kálmán Plans no 1 and no 2 of the centre-right government in Inflated expectations improvised solutions As follows from the sketchy overview produced above, the centre-right attained a landslide victory in In an unprecedented manner, they won both the national and municipal elections with a convenient margin, in theory allowing the new coalition to do whatever they wished in terms of change, reform, restructuring. Life is not as it is in books. First, a double majority implied that the most difficult items of public finance, relating to municipalities, welfare provision, public firms and the like could not be easily touched upon as fellow party-members were running those too. Second, already by June 2010, i.e., upon the formation of the new government, the external environment had turned quite sour. The allies of the country, who were funding it under the still running IMF/EU stand-by agreement made no secret of judging the government on its fiscal conservatism. While one may puzzle on the theoretical rationale of the insistence, the evolving Greek crisis and the new rescue package and related items 5 have clearly dominated over country-specific considerations or considera- 5 J. Featherstone, The Greek sovereign debt crisis and EMU: a failing state in a skewed regime, Journal of Common Market Studies, Vol. 49, 2011, No. 2, pp ; see also: A. Visvizi, The crisis in Greece and the EU/IMF rescue package: determinants and pitfalls, Acta Oeconomica, Vol. 62, 2012, No. 1, pp Hungary and the eurozone crisis: a comedy of errors? 37 tions of the business cycle. European governance gradually learned new forms of tight coordination, such as the European Semester and many others. Withdrawal of EU funds from fiscal trespassers was mandated. The second Orbán government was taken by surprise as the above events unfolded. Their original platform included major restructuring, even at the cost of temporary fiscal deterioration, in line with international experience. While it was supposed to run to 7%, which would have been in line with the 6.6% actually achieved in the EU-27 in 2010, this idea was considered by the EU Commission as a dangerous derailment, as a drift toward populism. Therefore also by virtue of the terms of the inherited stand-by agreement the room for manoeuvre has been narrowed. The surprise component is perhaps the strongest single explanatory factor of what was later termed unorthodox policy measures. The government resorted to a series of poorly prepared, improvised measures in order to meet the stringent deficit criterion of 3.8% 6. These included raising the value added tax during the calendar year, cutting expenditure items, and not least nationalizing the previously compulsory private pillar in the pension system. The latter generated sizable revenues for 2010 and even more for 2011, thus allowing the country to record a headline surplus (sic!) of 4.3%. The ratio of public debt to GDP grew only slightly, i.e. to 81.3% by 2010 and started to decline to 79.3% in 2011, further declining somewhat in Sectoral taxes were imposed, both in 2010 and 2011, on banks, retail chains, the pharmaceutical industry and telecommunications. These did generate revenues; however, they were distortive and one-shot measures, heavily criticized not only by the European Commission but also by top politicians from France, Austria and Germany, intervening in favour of their respective banks and corporations, both directly and at the EU fora. While these measures did suffice to make both ends meet, broader restructuring such as re-tailoring public administration or of public firms, especially in the transport sector fell victim to the pressure of daily fiscal improvements. As global and European upswing gave way to stagnation and uncertainty, especially on the financial markets, conditions for growth and the ensuing improvement of the employment 6 The actual final number was 4.2%, an innocent slip against the major deviations in Greece, Portugal and Spain, but also in France and the UK in These numbers are extremely sensitive to exchange rate volatility, which has indeed been a problem for Hungary during the entire period of scrutiny. 38 László Csaba situation failed to materialize. Especially the latter proved painful, with Hungarian unemployment rates traditionally way below EU standards reaching the EU average of 11% and getting stuck. This happened at a time when the centre-right government was elected on a ballot promising to create 1 million new jobs in a decade. In the first two years, only 80 thousand were created, a mere four per cent. This of course created serious social strains and disenchantment, especially among the young, the better qualified and the more mobile. The comprehensive country report of the OECD 8 has rightly stressed the lack of employment and employability as one of the major structural weaknesses in the Hungarian economy, which is to be seen at the root of the fragility of fiscal improvements in the medium term and beyond. 3. The return of the IMF/EU tandem in shadow boxing It could be seen from the sketchy overview above that the relationship of the centre-right government and the international organizations has been strained from the very outset. The idea to disregard fiscal targets angered the IMF. In return, the Hungarian government launched what it called a freedom fight and, in one of its first moves in June 2010, terminated the stand-by agreement of Simultaneously, the conflictual relationship with the European Commission intensified. This happened in part owing to disagreements over the economic strategy implemented, and in perhaps larger part, due to dissimilar approaches to a series of non-economic issues, including retroactive legislation, media laws and changes in the judiciary system. The adoption of the new Basic Law of Hungary, making references to the Christian roots of the nation, supporting explicitly the concept of marriage as a liaison between man and woman only, as well as making historic and emotional references, stirred heated debates in the European Parliament, whose co-decision powers have been considerably extended by the Lisbon Treaty of Also the Commission saw the crisis management as a window of opportunity to enhance its own influence at the expense of national governments.this is particularly true given the fact that the Lisbon Treaty called the Commission the guardian of all European val- 8 OECD, Hungary March 2012, OECD Economic Surveys, Paris 2012. Hungary and the eurozone crisis: a comedy of errors? 39 ues. Accordingly, Brussels sought to interpret its own prerogatives in an extensive manner. While the process of severing fiscal and banking regulations has gradually reinforced the federalist elements 9 in the institutional structure of the EU, in the debate over who is compelled to do what and when anything is but settled. For instance, the Commission s initiative of January 2012 to withhold cohesion funds from Hungary was seen as legitimate in terms of the Six-Pack package on fiscal stringency adopted only two months earlier. However, the subject of the controversy was not an actual statistical figure, but a forecast for 2013, i.e., an event yet to be materialized. While the Commission did not consider the Hungarian measures sufficiently sustainable, the Hungarian government disagreed. The solution came in May 2012 when the new mediumterm fiscal plan, integrated in the more general Széll Kálmán 2.0 Plan, convinced the Commission s experts of the plausibility of sustainable improvements. The government was forced to request an IMF/EU rescue package in mid-november It happened as the Greek crisis escalated, once again triggering tremors reaching from Spain to Romania, all across the European periphery. The exchange rate of the forint plummeted from 280 Ft/euro to 323 Ft/euro; spreads, bond yields and CDS skyrocketed. Hungarian government bonds were sold at close to 11% yield in a country that recorded growth of only 1.1% on a year-to-year basis 10. Under the panic generally ruling in Europe an IMF/EU rescue package, whose nature was unspecified, was asked for. Oddly enough, while the IMF was quick to fix the real crisis cases, such as Bosnia, Belarus, Egypt and even Spain, negotiations with Hungary tiptoed until 17 July 2012, when a delegation of the creditors arrived in Budapest. One may wonder why it took 7 months to get down to business. The answer lies in the changing role of the European Union. The EU as it stands today is far more than a free trade area with a single currency, as portrayed in the British press. The EU has developed into a truly political institution with wide-ranging prerogatives in a number of areas, from social policy to environmental protection, deciding over legal claims and sustaining peace in Macedonia. It is far from settled in legal and political terms how far the EU can go in ap- 9 H. Berger et al., Euro Area Policies Selected Issues, IMF Country Report, No. 12/182, Washington DC, , offers an analytical overview of major issues. 10 Even if we consider that the rate of forint inflation was close to 5%, the real rate of interest far exceeded the rate of growth, which is clearly unsustainable in the long run. 40 László Csaba plying the community method, i.e., supranational prerogatives. Some considered it a too far reaching method even before the adoption of the Fiscal Compact of March 2012 and the European Stability Mechanism in June Just because of the unsettled nature of affairs, the Commission does have a leeway, much greater than conventionally, in re-interpreting its own prerogatives and deciding over its own competences. In this case, the Commission clearly wished to signal its eagerness to exhaust in full the potential vested in it by the European Semester, by the Six-Pack package and the Fiscal Compact, as well as the cross-border banking regulations. These constitute the fiscal discipline component, against which net contributors, from Germany to Finland, agreed to soften the stance on the mutualisation of debts, issuing Eurobonds and targeting the bailout of Spanish banks, originally prohibited by the statutes of the ECB. Given that the Greek drama was far from over, it was further complemented by the Spanish and Romanian cases, with Italy suffering continuously from distrust of the markets due to its exorbitant close to 123% debt/gdp ratio, and by May 2012 time had come to discontinue the play for the general audience. While the question-marks on Hungarian fiscal sustainability have not been fully addressed, the Commission agreed following a visit by the Hungarian Premier to Brussels in May 2012 to launch negotiations in substance. It happened later with the 8 weeks of additional delay reflecting the remaining discontent. In short, although the seven month of wrestling may be considered an insubstantial issue, it played an important role in putting the Hungarian credit deal eventually on the agenda. While jabs were big, pain was next to nil, with Hungary remaining on the international capital markets, while Cyprus, quite unexpectedly, collapsed in June Assessment and outlook As we have seen, the evolving crisis of the EMU especially in terms of governance has implied an external shock par excellence for the Hun- 11 For an extensive review of those doubts see: F. Scharpf, Monetary union, fiscal crisis and the pre-emption of democracy, Zeitschrift für Staats- und Europawissenschaften, Vol. 9, 2011, No. 2, pp Hungary and the eurozone crisis: a comedy of errors? 41 garian economy and policy-making all over the period of The spill-over of the global financial crisis triggered the bailout package. Later, the indecisiveness in managing the Greek debt created animosities within the EU. Finally, the return to the umbrella of the IMF/EU twins proved to be more of style than of substance. The evolving new governance structures in the European Union pose new challenges to managing economic m
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