HUNGARY: Austerity Fatigue sends IMF Home

By Zoltán Dujisin Reprint | | Print |

Analysis by Zoltán Dujisin

BUDAPEST, Aug 2 2010 (IPS) - Hungarian Prime Minister Viktor Orbán has slapped IMF in the face, shocking an international community used to news of economic difficulties coming from this small Central European nation. But most Hungarians have welcomed it, at least so far.

Orbán is fresh from a smashing election victory in April, in which he obtained a decisive mandate as his conservative party Fidesz – the Hungarian Civic Movement — gained over two-thirds of parliamentary seats, giving it unprecedented power in post-communist Hungarian history.

The prime minister recently said no to a new IMF (International Monetary Fund) credit line that would have prolonged the current 20 billion euro line granted in 2008 under a more cooperative socialist cabinet.

It was his intent to keep Hungary’s deficit in balance by taxing banks and other financial institutions with 700 million euros that IMF negotiators found unacceptable. But Orbán stood firm in spite of international criticism and warnings that Hungary’s currency will soon collapse as a result of stifled investment.

The bank tax would compensate for decreased income tax, as Fidesz has decided to establish a 16 percent flat tax, which it hopes will simplify tax collection and help reduce tax evasion, one of Hungary’s long-standing ills.

The decision is in line with Orbán’s electoral promises, which called for lower taxes, support for small and medium enterprises and an end to austerity measures, and is popular among many Hungarians who resent foreign interference and see it as a recurrent theme in the country’s history.

Many were also happy to hear that when the IMF delegation first arrived in Budapest three weeks ago, negotiators were informed that Orbán was in South Africa enjoying the football World Cup final.

After the failure to reach an agreement with the international organisation, Orbán noted Hungary had already reduced its deficit from 9.3 percent of the GDP (Gross Domestic Product) in 2006 to 4 percent in 2009, making it “the world champion when it comes to cutting spending.”

Hungary’s deficit is among the lowest in the EU (European Union), and its public debt ratio is slightly above average, but “there are other economic problems, few people work or pay taxes in this country, and there are fears that without reforms the country will return to the previous situation,” Zsolt Enyedi, political scientist at the Budapest-based Central European University told IPS.

So far the financial catastrophe that much of the international financial press predicted after Hungary failed to renew its credit line has not materialised. Rating companies have threatened with downgrading the country of 10 million, but are still hopeful the government will re-engage with the international organisation.

But Orbán insists any new agreement will be reached “not with the IMF, but with the EU.”

Instead, he scored points with many Hungarians who since 2006, before the global financial crisis and under a socialist cabinet, have been subjected to a variety of austerity packages.

The prime minister, who also ruled between 1998 and 2002, had been considered an unacceptable figure for the left due to its relations with the extreme right, but in the last years Orbán has profited from his turn to the left in economic matters and from the unpopular governmental performance of the socialists.

“Hungary recently experienced a major loss of trust in the political system and a highly unpopular government,” Ferenc Laczo, a Hungarian student who participated in the last elections told IPS. “You cannot expect them to do severe austerity measures when they are aiming to rebuild confidence, especially as local elections are not far ahead.”

Hungary will elect local officials in October, but the severely unpopular socialists are not his main worry.Rather, the prime minister needs to keep the momentum of what he called a “revolution at the ballots” last April to prevent an even greater rise of the far-right.

Orbán’s Fidesz has for the last decade been accused of pampering the ultra- nationalist far right, whose strength unexpectedly grew following the global financial crisis.

The last legislatives in April saw the far-right Jobbik, Movement for a Better Hungary, obtain 17 percent of the vote, compared to only 2 percent in 2006. The party built on more than resentment against austerity measures and anti- capitalism. It also switched from anti-Semitism to anti-Gypsy rhetoric, which resonates with the electorate on both right and left and is more acceptable in mainstream political discourse.

Orbán’s honeymoon with the far right is seemingly over, but the government feels obliged to keep distance from the practices of the previous socialist cabinet, which for years it accused of subservience to international capital. Otherwise Jobbik, which took a surprising number of votes from former socialist voters, can claim there is no difference between the present and the previous cabinets.

Fidesz has also been actively showing more nationalist minded Hungarians that it is still engaged in symbolic issues dear to the right. A recent decision to facilitate citizenship proceedings for the over two million ethnic Hungarians living in the regions outside Hungary’s borders has increased regional tension, especially with the northern neighbor Slovakia, home to 500,000 ethnic Hungarians.

But Fidesz’s “revolution” also involves an increasing “centralisation of power,” Enyedi told IPS.

“There have been massive layouts in the civil service, it has tried to create bodies to control the press, it wants to influence nominations to the constitutional court, and is planning to rewrite the constitution,” the political scientist says.

“The government is indeed turning to nationalism and authoritarianism, but those who voted for them were aware of this,” Enyedi says.