Hungary’s Fight for Economic Sovereignty (event archive)

December 7, 2011 by  

As the entire Euro zone struggles with a prolonged legitimacy crisis and an imminent break-up of the much treasured European economic solidarity is in shambles, Hungary continues to come up with “unorthodox” solutions to fix its own problems. Former head of the Hungarian National Bank, previous Minister of Finance, Zsigmond Járai shared his thoughts on money, markets and the borrowing game.

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While the countries of the Eurozone are ruminating over the possibility of giving up more of their economic sovereignty to salvage the common currency, Hungary is simultaneously leading its own so-called freedom fight for greater financial independence.

The implementation of Hungary’s “unorthodox economic policies” started about one and half ago, when the freshly elected Fidesz government embarked on a path towards faster economic growth – a laudable and worthy goal. This action plan included lower general taxes without cutting government spending and a deliberately higher budget deficit. Since the latter measure was incompatible with EU regulations, Hungary changed its economic course and resorted to levy higher taxes on banks, which were perceived as punitive by many economists. Whereas this solution did indeed help to balance the budget, it undermined the government’s original goal to speed up growth. The lack of predictability and the hostile rhetoric about the financial sector have alienated future investors and discouraged banks to extend more loans.

Nonetheless, recent news seems to indicate that the government is willing to steer back the country’s policies to the economic mainstream. For example, it has expressed a will to restart negotiations with the IMF before Hungary’s economic woes worsen and rating agencies further downgrade the country. What has to be borne in mind, however, is that the prospective IMF aid is not a panacea for all financial ailments but a means to kick-start recovery. Long-term growth rests on the government’s credibility in policy matters and a business-friendly regulatory framework that does not put an unnecessary burden on entrepreneurs. In all likelihood, Hungary will have to abandon its unusual and so far unproductive economic plan, and heed the commonsensical advice of economists.

Fidesz itself has deviated from the classic precepts of conservatism in its purportedly praiseworthy and revolutionary freedom fight. Even though it has consistently employed the conservative rhetoric of personal responsibility, its policies have revealed a lack of substance. If anything, populist actions like bailing out Swiss franc mortgage holders and blaming the crisis solely on the financial sector, denying the additional culpability of the government and ordinary citizens have damaged the ethos of accountability. If Fidesz wanted to present itself as a dyed-in-the-wool conservative party, it should most likely go back to the beaten track and terminate its risky economic experimentation.

In sum, the current situation of Hungary is unusual albeit not unique. It reflects two important historical lessons: 1) economics can never be fully separated from politics and 2) politicians often need crises to re-orientate their focus from the next elections to long-term solutions.

Hopefully, officials of the current government will eventually take the criticism to heart and realize that while we all cherish freedom and independence, the substitution of common sense with revolutionary zeal could endanger both and make us more dependent than ever on the help of others.

by Zsófia Göde

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