If Lehman Brothers had collapsed in the autumn of 2006, Hungary could easily have found itself in the same boat Greece is in right now. Hungary’s international credibility crumbled after the 2006 budget deficit turned out to be 9.3% of GDP, the highest in the EU and double what had been forecast. Prime Minister Ferenc Gyurcsány, who had just won re-election in April 2006, abandoned his campaign promises and introduced austerity measures. Then, in September, Gyurcsány was caught on audiotape admitting he had deliberately lied about the state of the economy in order to win the elections (the infamous “Őszöd speech”). The ruling Hungarian Socialist Party lost more than a third of its voters in the space of four months.
Today, it appears Hungary has come out in one piece, despite some “hot” moments in 2008-2009. Yet the spectre of “Greece-alization” still haunts the country. Greece is an excellent compass for Hungary – to know which way not to go.
The parallels between the two countries are striking. Both Greeks and Hungarians consider tax evasion national sport – tax dodgers drain between a quarter and a third of Hungary’s GDP from the tax base, according to estimates by the National Bank of Hungary. Since both countries were occupied by foreign forces for centuries, the tradition of “stiffing” the authorities and hiding income is ingrained in society. Rampant corruption (or at least the perception thereof) undermines citizens’ willingness to pay taxes in both countries: They are reluctant put their money in a “leaky bag.” Both the Hungarian and Greek tax systems are too complicated for the average citizen to grasp, which further encourages tax evasion and avoidance – and the temptation for cheating grows even stronger if there are loopholes in the system. Both countries’ governments are guilty of “permanent tax reform” – tinkering with the tax system every one or two years. This exacerbates the problem because taxpayers, companies, accountants and even tax authorities are unable to keep up with the changes. In Hungary, only an extensive, long-term tax overhaul can solve this problem. But there are justified fears that the incoming government will continue the policy of “minor alterations every year” in an effort to produce some short-term successes.
Further political radicalisation seems almost unavoidable for Greece, as we mentioned in our May 6 analysis. Forces on the extreme right – and especially on the extreme left – may gain popularity at the expense of the centrist government and opposition parties. An extreme lack of trust in political institutions and the political elite is a common feature in both Hungary and Greece. Hungary’s incoming government, led by the Fidesz party, will have a chance to weaken radical-right forces if people perceive it as successful. However, the Greek crisis may severely restrict Fidesz’s fiscal room for maneuver; for example, the International Monetary Fund and the EU may no longer be inclined to let Hungary raise the 2010 budget-deficit target in its standby loan agreement. This will make it tough for Fidesz to to improve living standards quickly, which is what many of its voters expect. Since Gyurcsány’s Socialists have completely lost their credibility as a governing force, disappointment in Fidesz can easily push voters towards the ultranationalist Jobbik, a system-critical party that hasn’t been discredited as a government force yet.