Archive for July, 2010

It’s good to be an analyst in Hungary

Two statements by senior politicians from Hungary’s governing Fidesz party over past two weeks:

Tibor Navracsics, Deputy Prime Minister, June 23

“Obviously, during the planning of next year’s budget we will have to reckon with whether we can meet (the 3 percent 2010 target). We hope we can meet this undertaking by the (previous) Bajnai government, which would bring the budget deficit below 3 percent.”

György Matolcsy, Minister for Economic Development, July 2

“Hungary will seek a two-year precautionary deal with the IMF and EU for 2011-12 in the range of 10-20 billion euros and hopes to agree with lenders on a higher budget gap than 3 percent of GDP for next year.(…) The deep structural reforms which the government is planning for 2011 and 2012 will have significant additional costs, and the difficult situation of the euro zone economy could also make deep deficit cuts hard next year. (…)

In Hungary, totally contradictory statements from the government are no barrier to analyzing and predicting political tendencies.

These statements reflect uncertainties over the direction of economic policy within Fidesz. While both Navracsics and Matolcsy agree that the budget-deficit target for 2010 (3.8% of GDP) is carved in stone, the 2011 deficit goal is apparently up in the air.

Hungary’s government is set to meet this month with its main creditors, the EU and the IMF. The Hungarians will probably try to persuade them that minor fiscal loosening, along the implementation of certain reforms, may be a good medium-term investment for the country and won’t endanger economic stability. The success of this move is highly uncertain, as EU leaders and investors are still afraid of financial turbulence – or even wholesale collapse – among its members. Moreover, Hungary’s forint tumbled and its credit-default swap prices shot up following the recent crises in Greece and Romania, demonstrating that Hungary’s economy is still extremely vulnerable and fragile. Both the IMF and the EU are reluctant to let countries loosen their fiscal policies if they are able to keep their budget deficts below 3%.

So the uncertainty remains: The generosity of IMF and EU will decide whether Navracsics or Matolcsy will prevail.

Péter Krekó-Krisztián Szabados

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Independent Constitutional Courts: One man’s joy is another man’s pain

Few institutions generate stronger hatred among emerging-market investors these days than Romania’s Constitutional Court. By striking down the Romanian government’s pension cuts June 25, the court sparked financial panic that led to a general loss of investor confidence in the entire Central and Eastern European region. As a result of the court’s ruling, the IMF decided to postpone its June 28 review of its €20 billion standby loan; fund managers are currently discussing the fate of the loan’s next €900 million tranche – money that the country desperately needs.

The ruling sent credit-default swap prices skywards while currencies across the region tumbled. The Romanian lei hit a record low of 4.37 to the euro on June 28. Not only investors who took the hit: Households and companies that have foreign currency-denominated loans are now at a higher risk of default than ever before, especially in Hungary, where more than 600,000 households have foreign-currency credits. Weaker currencies and higher debt-service expenses can hamper economic recovery; moreover, a rise in non-performing loans may destabilize the banking sector. It would be unjust to blame Romania’s Constitutional Court for all Central Europe’s economic hardships ¬ but its ruling is helping to destabilize the region’s still-unstable economies.

After the court handed down its decision, Romania’s government decided its only recourse was to raise the value-added tax to 24% from 19% as of July 1, or lose its IMF lifeline. Romania now has the second-highest VAT in the European Union behind Hungary, Sweden and Denmark at 25%. This kind of austerity measure will affect all Romanians, and not just pensioners. Is there anyone in Europe who is satisfied with the court’s action (besides maybe a few hundred thousand Romanian retirees)? The fact that the Constitutional Court is one of the most important democratic counterweights to the government is poor comfort to the millions who must bear the brunt of the ruling.

Across the border in Hungary, the problem is just the opposite. There, the governing Fidesz party is systematically eliminating institutional checks on its power, emboldened by a two-thirds parliamentary majority that allows the party to amend the Constitution singlehandedly. Last month, Fidesz MPs watered down the Constitutional Court’s independence by changing the rules for nominating the judges. Under the old system, each parliamentary caucus had the right to delegate one member to a committee that would nominate a judge by consensus. The full Parliament would then vote on the nominee, with a two-thirds majority required for confirmation to the court. Under Fidesz’s new rules, the governing majority will nominate Constitutional Court judges. Parliament still needs to confirm each candidate with a two-thirds majority, but Fidesz controls 68% of the seats. Fidesz can thus appoint and elect Constitutional Court judges on its own.

Fidesz’s efforts have met with harsh criticism at home and abroad. Outgoing President László Sólyom expressed his displeasure by vetoing the law on Constitutional Court nominations. However, Hungarian law makes it easy for MPs to override presidential vetoes, so Sólyom’s gesture was largely symbolic.

Romania and Hungary are grappling with problems that are mirror images of each other: In Hungary, Fidesz is meddling with nomination processes to switch off institutional controls on its powe; the Constitutional Court is just the tip of the iceberg. In Romania, an overly independent Constitutional Court is wreaking havoc across the region. The underlying tension is nothing new: Economic and governmental efficiency and the high principles of democracy are more often enemies than friends.

On the other hand, Fidesz doesn’t necessarily need the Constitutional Court to drive Hungary’s economy to near-bankruptcy; as the events of June 2010 proved, Hungary’s government is perfectly capable of doing that on its own.

Péter Krekó