Hungary's Ever Closer Union

By: Sam Vaknin, Ph.D.

Also published by United Press International (UPI)

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Russian mobsters love Budapest and not only for its views and cosmopolitan atmosphere. They can easily obtain a Hungarian passport posing as "investors" by laundering the proceeds of their illicit activities. The CIA labels Hungary a "major transshipment point for Southwest Asian heroin and cannabis and transit point for South American cocaine destined for Western Europe". It is also a "limited producer of precursor chemicals, particularly for amphetamine and methamphetamine". This is why Hungary made it into the visa regimes of many a Western country in the last few months.

The opposition Hungarian Socialist Party (MSZ) harps on Hungary's tarnished image. It accuses the government of opaqueness in tax collection and budget spending. The current legal codes threaten the rule of law, they thunder.

Two years ago, Hungary was considered less suitable to join the EU than the likes of the Czech Republic, Malta, and Slovenia. Today, its youthful and nationalistic prime minister, Viktor Orban, feels comfortable to state on Hungarian Radio: "It is not us who will join the EU - but the EU will come to us."

The abolition of borders within the EU will make Hungary a "nation of 15 million", he boasts, referring to Hungarian minorities in neighboring countries (mainly in Romania and Slovakia). Hungary is the top performer of the LEGSI index which monitors the stability of countries.

Many consider 38-year old Orban to be his country's main liability. His fiery speeches, provocative statements, and controversial policies often pit Hungary against other European countries, near and far. But this is hypocrisy. Orban's policies are typical of the countries of Central and Eastern Europe and many have emulated them.

Even his "Status Law" which grants employment, education, and social welfare benefits to minority Hungarians elsewhere - has equivalents in Germany, Russia, and Slovakia, among others. It is little known that Romanians enjoy much the same economic benefits in Hungary as their Hungarian compatriots.

As opposed to other countries in transition, Hungary did not have a single bad year since 1994. Orban's reign (from 1998) has been characterized by rapid growth (5 percent p.a.), low inflation (7 percent), and even lower unemployment (6 percent nationwide and less than 3 percent in the Budapest area). The minimum wage has doubled and real wages are up 17 percent, in line with sustained increases in labour productivity.

Taxes were cut and much deeper cuts are planned after the April 2002 elections. Employer participation in social security contributions was reduced from 33 percent to 29 percent in January.

Net external debt is half its level seven years ago - though gross external debt, at 60 percent of GDP, is high. External debt growth is currently driven by the private sector (mainly by multinationals).

This was achieved by a strange mixture of forceful government interference and the introduction of competition almost everywhere. Orban's government seems to have accomplished the impossible: micromanaging a free market economy.

Despite the presence of most multinationals, Hungary is surprisingly xenophobic. Cumulative FDI - though often offset by outflows of portfolio capital - stands at $26 billion ($2.8 billion last year alone), most of it from Germany and the Netherlands. It will likely grow considerably as accession beckons. But foreigners still find it fiendishly difficult to buy land, trade protectionism in growing, and ministers regularly denounce foreign domination and multinational encroachment upon the local economy.

Vaclav Klaus, the Czech Republic's outspoken elder statesman, warned against an emerging "Munich-Vienna-Budapest" axis of evil directed against other Central and Eastern European nations. Jewish leaders accuse Fidesz, the ruling party, of latent anti-Semitism.

In reports published by Lehman Brothers and Dresdner, Kleinwort, Wasserstein, foreign investors felt that EU accession will be retarded and new FDI discouraged should a minority government team up with the ultra rightwing Justice and Life Party (MIEP). Another concern was the loss of control over budget spending.

Hungary reneged on agreements it signed during the heyday of privatization (1993-7), when it raised more than $6 billion by selling stakes in its banking, media, and telecom sectors. The American power utility, AES, sued both the government and the Hungarian power grid for breach of contract for refusing to purchase generated power (admittedly at inflated prices). It grudgingly settled out of court last December.

The government of Canada protests the nationalization without compensation of a Canadian business running Budapest's airport terminals. The Canadians, according to "The Financial Times" accuse Hungary of appearing to "violate the obligations" of the Canadian-Hungarian investment protection agreement.

There are other worrying reversals- neatly embodied by the Szechenyi Plan for national economic development.

Hungary's budget deficit in the first two months of the year - at half a billion dollars - is four times the deficit in the corresponding period last year. Revenues are expected to deteriorate further as customs and duties are lowered - for instance on American cars.

Agricultural producer prices collapsed by one eighth in January alone, forcing the government to dole out supplementary subsidies. The western and eastern parts of Hungary - heavily dependent as they are on agriculture and basic manufacturing - do not share in the prosperity enjoyed by Budapest.

The government also decided to raise gas prices by less than inflation - all part of a new regulatory regime, replete with hidden, pre-election, subsidies. It has cancelled plans to privatize Postabank, opting instead to merge it with other state entities. It has re-nationalized a few motorways and all future motorways will be financed by the state-owned Hungarian Development Bank.

Hungary is also a greying country - 15 percent of its population are older than 65. Its workforce is contracting as its net population growth rate has turned negative. It part privatized its pensions but its un-revamped health care system masks enormous contingent obligations. Corruption is rife and the informal economy large.

Still, Hungary is flourishing.

Though its annual budget deficit and trade deficit - at $2 billion each - are c. 4 percent of GDP, its sovereign debt is the second highest rated among all the economies in transition. Government consumption is a mere 10% of GDP. Hungary is an open economy - trade constitutes two thirds of GDP.

Services make up more than 60 percent of Hungary's GDP - compared to half as much in industry. But Hungary is fast becoming an important components manufacturing and assembly zone for richer EU countries. Its industrial sector is likely to grow. Its energy monopoly, MOL, is consolidating with other oil companies in Central Europe. Its current account deficit is a mere 2 percent of a vigorous and expanding economy. More than three quarters of its exports are to EU destinations.

Interestingly, almost 40 percent of Hungary's population live in rural areas - though agriculture accounts for only 5 percent of GDP and 6 percent of the workforce. Only 16 years ago, more than a fifth of Hungary's population worked in agriculture.

Hungary's financial system is advanced and sophisticated. Interest rates are on a prolonged downward trend. The National Bank of Hungary has cut interest rates 7 times since September last year. Both gross national savings and gross domestic investment equal more than 25 percent of GDP. Less than 9 percent of the population are under the official poverty line.

Hungary has become a major supplier of car parts to the British motor industry. It is linking up to the hinterland of Eastern Europe and the Balkan by rail and road. The private sector accounts for 80 percent of GDP.

The Danube - Hungary's primary sea access - has been re-opened for traffic four months ago, for the first time since the Kosovo war. This saves Hungary tens of thousand of dollars in excess shipping costs - daily. Moreover, a Romanian-led consortium is promoting the idea of opening an alternative oil shipping lane cum pipeline through Hungary to ease the pressure on the Turkish straits.

Stratfor, the US-based strategic forecasting firm, has this to say about the re-opening of this vital transport route:

"The river's reopening will have several important effects ... It will promote trade and integration among European Union members and applicants alike ... To keep shipping costs under control, the European Union will facilitate the construction of alternate shipping infrastructure bypassing those straits.

All of these circumstances necessitate closer cooperation, both economic and political, among the EU states fast-tracked for membership and other powers in the region. Ultimately, that could help smooth the EU expansion process and aid the economies of several riparian states...

The Danube reopening comes at a fortuitous time. The European Union is accelerating expansion efforts, and all of the riparian states are either EU members or potential members. Although the EU does fund numerous infrastructure projects to promote trade, the Danube provides an instant avenue for economic integration. The EU's decision last year to shoulder most of the cost of clearing the river served as a nice political push for closer relations with applicant nations as well."

Orban's assertive comments notwithstanding, Hungary's economic future is pivotally dependent on a smooth accession to the EU, probably in 2004-5. Despite its polished, Western, image, it must invest heavily to comply with EU environmental standards and to overhaul its tax administration and legal system. Such budgetary outlays - especially in an election year - will strain Hungary's compromised fiscal discipline even further. Hungary (and the IMF) are discovering that EU accession may be incompatible with macro-economic stability.

Still, Hungary is a regular favorite of multilateral institutions.

Though often accompanied by monetary loosening due to massive capital inflows, Hungary's 15 percent band exchange rate regime (its crawling peg was abandoned in October) and inflation targeting are often lauded by the OECD.

The World Bank has committed to Hungary $2 billion in projects since 1991 - mostly for structural and institutional reforms and macro-economic support. Hungary is a recipient of Japan's Exim bank's co-financing facilities. As Hungary's transformation progressed, lending by these institutions dried up lately and Hungary owes the World Bank a meager $550 million.

By June 2001, the EBRD has invested $1.2 billion in Hungary in 64 projects worth $4.9 billion - most of them in the private sector, in telecommunication, transportation, and banking.

Hungary's elections may result in a hung parliament. If so, fiscal rectitude will be the chief victim. Hungary's monetary policy is strained to its limits. Labour shortages are likely, especially in the cities. Expect more populism, nationalistic fervor, and glitches on the path to the EU.

But Hungary was among the first communist countries to introduce a free market system in the 1960's. It became a member of the World Bank in 1982. It withdrew from the Warsaw Pact in 1956. It has always been a pioneer. "The Hungarian model" - state interventionism coupled with a thriving private sector - is working. No amount of political tinkering can bring it down.

EU: Values or Valuables? Time to Suspend Hungary, Poland (Brussels Morning)


The European Union is trapped by its own rhetoric. Its money and mouth are not on the same page, to mix my metaphors. It has yet to make up its mind whether it is mostly an economic union or a purveyor and custodian of values such as the rule of law and human rights.


As it veers towards the latter, the august body has a tendency to issue idle and laughable threats against its own errant members. It is bad policy. Carrying a big gun is only half the trick – using it from time to time is indispensable.


The latest – fourth - annual rule of law report spared no one, not even Germany. But, not for the first time, it singled out Hungary and Poland for censure. The European Commission will withhold budget funds to penalize both. Again, this is not unprecedented.


Poland is an egregious case, verging on authoritarianism. Last month, the European Court of Justice ruled that the country’s judicial “reform” should be repealed.


In the banana republic that this country had become, the Minister of Justice is also the Attorney General. Judges are dismissed if they don’t toe the line. The supreme court of the land ignores ECJ rulings. Poland paid 360 million euros in fines in the past 3 years for this particular infarction.


Polish judges who invoke EU jurisprudence are reprimanded and disciplined. A newly founded administrative commission can exclude opposition politicians from public office. The media is anything but independent.


In the understatement of this new century, the report concludes that "serious concerns persist related to the independence of the Polish judiciary.”


The right-wing obscurantist and populist Law and Justice (PiS) party is campaigning in the September general elections. Euroskepticism or even EU enmity are vote grabbers. Poland’s Justice Minister, a far right stalwart, castigated the ECJ as politicized.


Why is Poland still a member of the EU in the wake of several identical condemning reports? Why isn’t it at the very least suspended? Because other members – including until recently Slovenia and now Hungary - resemble it too inconveniently. The EU is no longer either liberal or democratic: it is merely cynical, deceptive, and delusional.


The report’s scorecard for Hungary is an instance of such hypocrisy. This polity’s parliament passed legislation to placate the EU, vowing to bring the hopelessly decrepit and corrupt judiciary up to EU standards.


The Commission rejoiced in a self-congratulatory bout:


"The new rules on the Supreme Court will contribute to the transparency of its functioning and will decrease the possibility of political interference.”


Alas, it conveniently forgot to mention the rampant corruption in the nexus between politics and law in Hungary. Not to mention the brutal emasculation of the other critical watchdog: the media.


Hungary has been hitherto denied c. 12 billion euros in funds to no avail. No amount of money withheld will buy these members probity and healthy governance. Hungary is even blocking EU legislation in extortionate retaliation.


There is only one way to go about it: the EU needs to suspend members which hanker after Moscow and Beijing more than they care to imitate Brussels and Berlin.


The EU is the reification of a philosophy, the reincarnation of an ideology of liberal democracy at its fairest and best. Countries like Hungary and Poland taint and compromise this vision. They have no more claim to the EU than Turkey does. They should go their separate ways. They have no place in the EU.


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