Viktor Orbán strengthened his power at the expense of Hungarian living standards, says hvg

March 9, 2018

Viktor Orbán strengthened his power at the expense of Hungarian living standards, says hvg
Photo: Facebook/Orbán Viktor

Translation of the first of a series of articles written by Zoltán Farkas entitled “Eight years of crony capitalism: winners and losers, facts and misstatements,” appearing in on 8 March 2018.

The Orbán government did not use the last eight years to close the gap in living standards, but rather with strengthening its power. Part I of Zoltán Farkas’ assessment.

The Fairytale

The second Orbán government came to power in 2010 in the middle of the crisis. The subsequent economic boom is spoken of as a success. In fact, György Matolcsy mentioned a fairytale. In this series of articles we will show how much the Fidesz-KDNP’s economic policies contributed to the results of the past eight years, what is behind the hymn of praise, and what we can expect will happen to the economy if Viktor Orbán remains at the head of the government.

Hungary will pass Austria by 2030 boasted the head of government last year to the Fidesz parliamentary faction. This was a rather bold statement given that for the previous eight years the indicator best suited for comparisons, gross domestic product adjusted for the purchasing power of the currency, did not approach anything like this, at least until 2016.  Every regional rival was able to develop faster.  (Perhaps it is not by chance that at a conference this week György Matolcsy set a different date: 2050).

Hungary’s gross domestic product over the past eight years has grown at an average of 2 percent, which is roughly the rate at which the German economy has grown, only its rhythm was different.

Germany climbed out of the 2009 recession very strong, then rapidly, cautiously moved forward quickly.  By contrast, the Hungarian government’s adjustment to the budget brought about a second recession in 2012, which accelerated its recourse to EU funds. Romania, which is preparing to overtake us, after two years of recession produced average growth of 2.85 percent over the past eight years. Leaving Hungary behind, Poland, which overcame the crisis without any particular shock, experienced annual growth of 3.25 percent.

Before the elections, the Orbán government pushed the economy to its peak. The economy grew 4 percent in 2017 and 4.4 percent the fourth quarter. Behind this stood the fact that the EU programs paid out in excess of 2,555 billion forints, an amount equal to 7 percent of GDP. The oil of the engine, if you like. Meanwhile Brussels paid out 1,105 billion forints, the rest was in the form of advances.  That is, part of it is expected later, but can already be included in the budget in a way that pushes the economy, in part the wage increases timed to take place before the election. That is, the economy is pushed partially by the EU funds expected to arrive later but already accounted for in the budget, and partially by wage increases timed  before the general election. The vast majority of projects are realized with money from Brussels, and that is what is driving the construction industry as well.  When the external sources only arrive in trickles, both areas experience a contraction — most recently in 2016.  Since the government wants to pay out every last cent promised by the EU by the middle of 2019, regardless of what speed Brussels operates at, the momentum will last for a little while longer.  The question is what will happen without free money amounting to 4 percent of GDP?

Auctions, falling prices

Even if there is no inflation, consumers still perceive that there is, even more so if it exists. Consumer prices increased 14.5 percent between 2010 and the end of last year. At the beginning higher taxes increased price levels, which by itself refutes the government propaganda that the stabilization of the budget took place without austerity. In 2014, an election year, official prices were decreased centrally by governmental decree, thereby decreasing inflation, to which the deflationary world market conditions also contributed. Since, according to the economic dream book, price falls also restrain economic activity, the government did not do the electorate the favor of further decreasing the cost of household experience, even though the costs of procurement would have made this possible.

For two years the consumer price index was slightly in the minus, rising since 2016, but still far from the 3 percent aimed for by the central bank. The institute prognosticates that Hungary will attain this by the second quarter of 2019. With this, the perceived inflation will exceed what the statistics show, attributable, in part, to increases in the price of flats and basic foodstuffs not appearing in the index.

In 2010 one euro cost, on average, 275 forints. Last year this was 310.  Between 2010 and 2014, with strong fluctuations, the forint weakened 12 percent. Since then it has been relatively stable. From the exchange rate profit the Hungarian National Bank created the Pallas Athéné foundations.  According to the State Audit Office, it made 177.7 billion forints (USD 710 million) in 2015 alone on the (parliament-mandated) conversion of residential FX loans. However this was not used to reduce the burden on debtors.  Those borrowing in Swiss franks ended up profiting because the exchange rate plummeted two months later. The rival currencies performed better than the forint.  Today one euro costs around 26 Czech Crowns, just as it did in 2009.  The Polish Zloty, on the other hand, has slightly strengthened.

Endless emergency 

The war on debt started with a lie, followed by a series of cosmetic solutions and delusions. On the one hand, despite the prime minister repeatedly saying it, Hungary in the spring of 2010 was not worse than Greece. After the previous year’s recession, economic growth returned, and by then there had been no obstacle for a year to Hungary borrowing money. On the other hand the crisis served as a pretext for narrowing the jurisdiction of the Constitutional Court.  The cloaked body should only strike down a budget, taxes, duties or obligatory contributions if they violated basic rates. The state of emergency lasted until the state debt did not decrease to 50 percent of GDP.  According to the Széll Kálmán plan announced in March 2011, this was to happen by 2018, but continues to appear to be so far as to be out of view.

After the first big debt reduction measure in the form of the nationalization of the private pension funds, the redemption of the state paper they contained decreased gross national debt by seven percent as a ratio of GDP. However, this effect was offset by the weakening of the forint by increasing the forint value of the foreign-currency based debt. At that time undersecretary Péter Benő Banai and Dániel Palotai, chief economist at the Hungarian National Bank, acknowledged that the confiscation of the funds’ assets was “one of the cornerstones of the budgetary consolidation” and that “without the (redemption of state paper), it would not have been possible to put the state debt on a path of diminishment.”

Seven years later their honesty seems commendable. In the years that followed, from increasing the assets of the state to the construction of sporting facilities, supports paid to churches, and programs launched to win the votes of Hungarians living abroad all proved to be more important that decreasing the debt.   The gross state debt as of the end of last year was 72.3 percent of GDP.  But calculating with the Eximbank loans as well, the necessity of which the government disputes, brings this to 74.5 percent.  The Banai-Palotai duo believe that without the “pension reform” the state debt would exceed 80 percent today.

National oligarch training

In vain does the prime minister deny that oligarchs do not exist. In fact, they do. András Lánczi, the rector of Budapest’s Corvinus University, acknowledged its existence to the Financial Times.  And he told hvg that what appears to be corruption was actually “the realisation of a political concept.”

Over the course of the privatization of the 1990s numerous multinational companies entered the markets of the former communist countries, out of a desire for adventure, curiosity, or in the hope of profit.  However, with the passage of time, they reviewed their global empires and started to withdraw from those places where they did not achieve a defining market share.  This created the possibility of a strengthened national asset-owning class to take over the subsidiaries. This allowed the strengthened national asset-owning class to purchase their subsidiaries.  In the interest of speeding up this process, the Orbán government did not refrain from bleeding them or using compulsion.  This was not simple protectionism, but an enrichment using political and literally familial means of power.

The forcing out of banks and multinationals began with the introduction of special taxes. This policy in the energy sector worked in that a number of service providers threw in the towel and left.  The owners of the super and hypermarkets, on the other hand, hold on despite the earlier sectoral special taxes and the new pumping experiments, as its main Hungarian rivals exhibited less and less strength.

In the likewise overtaxed telephone sector, the consolidation of Norway’s Telenor created an opportunity for the national asset to enter this market.  There is financial backing to go with it: the state or Hungarian-owned banks are responsible for the majority of domestic lending.  And they are not afraid to finance the clientele. The dividing up of the market with laws continued in tobacco retailing , the publication of textbooks, the advertising market, and the privatization of state lands, among other areas.   In the media, allies belonging to the innermost circles created a lopsided market and a hegemony in their propaganda.

The highly lucrative empires, taken over from the multinationals, now make profits for the privileged people. There are no domestic brakes on the squeezing out. International obstacles also proved to be weak. Some were exhausted, primarily the easily circumvented EU infringement proceedings. The question is whether the head of government’s son-in-law becoming a target could bring about a change. The influential international media has already denigrated the Hungarian government and its head over corruption. According to Transparency International’s Corruption Perception Index, Hungary fell nine rankings to 66th place. Of the EU member states, it only ranks above Bulgaria.