Bekesi: Hungary is living off EU grants

December 27, 2013


“Nearly all investment in Hungary today is in the form of EU grants”.

For the second year in a row Egyenes Beszéd’s Olga Kalman conducted a year-end interview with Hungarian economist Laszlo Bekesi, who served as finance minister under the first Socialist government of Gyula Horn.


2013 was a very fortunate year in all economic respects.   Whereas under normal circumstances the economic policies of the current government would have led to noticeable failure, this has not happened thanks to the recovery.   The world is finally recovering from the economic crisis of 2008.  It looks as though the palliative measures employed by the world’s large economies have worked.  As a result of this confidence is growing throughout the world.  Demand is rising.  Previously unseen amounts of money are circling the globe in search of investment opportunities.  This money also finds it way to countries whose economic fundamentals are not that strong.  With this it is possible to finance countries like Hungary pursuing risky economic policies which are not that strong.

Without doubt the Hungarian economy entered a new phase in 2013. Many call it a turning point, but rather it is the recovery which axiomatically follows a deep recession.  Hungary is now in recovery instead of in recession.  This is not a result of the government’s economic policies but rather that of the autonomous movements of the economy.  Whereas in times of recession economic actors respond to low demand by decreasing production, decreasing capacity, downsizing workforces, postponing capital investments, putting off maintenance, and maintaining low inventories, once the economy turns the corner and domestic or foreign demand increases then gradually all these things come to be replaced.

Monetary Policy

Under its new leadership the Hungarian National Bank is essentially copying the policies of the central banks of large economies intended to increase liquidity.  The “loan expansion” program pumped HUF 2500 billion into the economy whose effects have yet to be felt.  It did so at considerable risk. The first risk is that the loans are not being used to finance investments but rather to refinance disadvantageous foreign currency based loans.  The interest savings can be invested in capital improvements but more often than not is simply invested in treasury bills which offers a no-risk, high rate of return.

The second risk is the actual cost of the loans. The money is lent to banks at 2.5% for a minimum cost to the Central Bank of 1% of the total amount.  In the case of HUF 2500 billion that is HUF 25 billion (USD 118 million). The question is how much it will benefit the economy.  If it generates additional taxes sufficient to cover the cost, then it is no problem.  However, if the loans are not used to increase production or fail to grow the economy, then the cost will end up being borne by Hungarian taxpayers in the form of new taxes or cuts in government services.


2013 was a bumper year for agriculture, boosting the economy 1% over last year.  Growth in this sector cannot be attributed to the policies of the government.

EU funds

The government’s policy  the second half of 2013 has been to fund whatever it can with EU structural, cohesion, and agricultural fund grants to stimulate the economy and create the illusion of sustainable economic growth.  Repairing roads and sidewalks is important but will not result in sustainable economic growth.  Were it not for EU funds there would not be any investment in infrastructure or economic development in Hungary.  Neither local governments nor the national government have the wherewithal to undertake such investments.  Hungary is living on EU funds.

Industrial output and exports

In a small economy such as Hungary’s two or three large investments can greatly boost economic output.  Investments undertaken in Kecskemét (Mercedes) and Győr (Audi ) were planned years ago and have nothing to do with the policies of the current government.  Positive developments in the world economy mean these factories are producing at full tilt because they can sell their goods.  This increases Hungarian exports and grows Hungarian GDP.

Long term economic growth prospects

Serious experts acknowledge Hungary is in recovery but warn that the effects of “one off” measures before the election (increase in wages, decrease in taxes, increase in social spending) will be short lived.  In order to keep the budget deficit to under 3% new austerity measures will need to be introduced the second half of 2014.  Serious projections show GDP falling back to 1% in 2015 after growing to 2 per cent in 2014.  This will result in Hungary falling farther behind.  Regardless of what central bank governor György Matolcsy says, credit rating agencies have no intention of recommending Hungarian debt to large investors.

We must not promulgate the illusion that the Hungarian economy has rid itself of any problems, or that reforms necessary to increase the growth potential of the economy have taken place and that it is only a matter of time before GDP growth of 1% becomes 2% and then 3%.  It’s an illusion to think that the percentage of people working or actively seeking work will increase from 57% to the EU goal of 70%, or that young people will remain in Hungary in the absence of jobs, or that skilled workers will return home from abroad, or that the investment rate will increase from 17% to the 23% necessary for sustainable economic growth (or even to the 20% necessary to prevent essential maintenance and investments from being put off), or that the divide between rich and poor will decrease.


The obvious reason for the nationalization of the credit unions was so that ownership could be transferred to circles close to power.   The credit unions worked well and followed conservative lending practices.   For this reason whoever ends up owning the Takarekbank will greatly enhance their ability to make profit.  It is unrealistic to think the savings unions have enough capital to repurchase the majority share stolen from them by the government.

Referenced in this article:

Bekesi Laszlo,, 23 December 2013