Hungary: Hard Times

Among EU countries, the global financial crisis hit Hungary particularly hard, and the precarious situation even forced a change in government in mid April. 

While the previous prime minister Ferenc Gyurcsány and his Socialist Party (MSZP) had been hanging on in a reduced minority government format since spring last year, amidst mounting protests, growing political problems and massive unpopularity, he finally also decided to step down and make way for a new caretaker government last month. 

With a sense of his mandate in question and being unable to muster enough power to push through drastic reform measures and spending cuts, Gyurcsány stepped aside to make way for an interim, "crisis-management" government composed of primarily party-neutral technocrats.  

The move can be seen as shrewd as it is sincere. In a cleverly orchestrated procedure in coordination with the previous junior partner, Alliance of Free Democrats (SZDSZ), Gyurcsány filed a so-called constructive vote of no-confidence against himself in parliament, which allowed him to step down as prime minister but ensured that his party could de-facto stay in power until the next regularly scheduled general elections in spring 2010.

The motivation for such a move is clear, as recent public opinion polls have shown the Socialists plummeting to around 10 percent in electoral support. Additional surveys have also shown the previous coalition partner, Free Democrats, in danger of not even meeting the 5 percent threshold. Early elections would most likely not only devastate, but also erode much of the power of both parties.

“It is therefore in their very interest to prevent early elections at all cost,” Zoltán Berényi, professor of political science at the University of Debrecen, commented for ISN Security Watch.   

In early April, the Socialists and Free Democrats hence agreed on a new prime minister and caretaker government that would be mandated to lead the country to the next general elections and to tackle the hard-hitting economic reforms that would be necessary to prevent Hungary from slipping into a long-term recession.

As the new prime minister, the Socialists and Free Democrats selected Gordon Bajnai, a business upstart and previous “Manager of the Year” who did not have any formal party affiliation, despite having served as economics minister in Gyurcsány's former cabinet. This led the Civic Union (FIDESZ) opposition party to immediately label the new government as “illegitimate” and call for new elections.  The motivations were clear, as the Civic Union would likely win any such contest by a landslide margin.

The general situation that Bajnai and his cabinet are up against reads like an exaggerated mock scenario from a university economics class. Among other problems, Hungary is faced with the forecast of a 6 percent contraction of its economy in 2009, rapidly rising unemployment and astronomical national debt, as well as the single worst performing and least valuable of all emerging-market currencies.

While the global financial crisis has acted as a strong aggregator to all those troubles, many of Hungary's problems were structural in nature and homemade prior to that. For years, the Hungarian government had been indulging itself on a massive spending spree and living well beyond its actual means, creating a heavily bloated and substantially subsidized welfare state and a comfortable government service system without a solid foundation. As a result of all the excesses, Hungary's budget deficit ballooned to a staggering 9.3 percent of GDP in 2006.

Various tax increases and spending cuts by the Gyurcsány government since then did succeed in bringing the deficit back down to 3.4 percent in 2008, yet pretty much also scuttled the Socialist government’s public standing and general popularity.

Bajnai has said he has no choice but to continue with a comprehensive combination of additional tax increases and far-reaching spending cuts in a forthcoming “austerity package.” Among other things, Bajnai has announced his intention to raise the national VAT tax to 25 percent, increase some income tax brackets and introduce a new property tax, as well as gradually raise retirement ages, while eliminating private energy and housing subsidies, freezing state employee salaries, reducing pension payments, lowering public welfare and health benefits and cutting agricultural subsidies.

András Bozóki, professor of political science at the Central European University in Budapest, told ISN Security Watch that the Bajnai reforms “will hurt mostly elderly people and families with younger kids. The rise of the VAT will hurt everyone.”
Despite the likely public unpopularity of all these crisis-management measures, most observers believe that Bajnai’s government will be able to see through its mandate and last till the next regularly scheduled elections in spring 2010.