Is it Worth Fighting With a Central Banker?

Hungarian Prime Minister-designate Viktor Orbán and his Fidesz party have launched a series of verbal attacks on National Bank of Hungary (NBH) Governor András Simor over the past few weeks. As Political Capital had warned, Fidesz’s plan to “conquer” the central bank from Simor was in the works long before the elections.

Once the elections were in the bag, Orbán went straight from the frying pan into the fire. At an international news conference April 26, Orbán labeled Simor an “offshore jouster,” a reference to the central banker’s offshore business dealings. We have analyzed what constitutional or technical instruments a government would need to replace a central banker. Now I would like to ask: Is it worth it?

Before the elections, the markets were optimistic about Orbán’s expected victory. The future seemed rosy – a stable government with a strong devotion to economic and fiscal discipline, despite the political conundrums of the campaign. Then came the surprise: First, international coverage of the elections did not focus on Fidesz’s historic two-thirds majority in Parliament; rather, the headlines played up the electoral successes of the ultra right-wing Jobbik party. A second blow hit Fidesz when foreign journalists at Orbán’s first post-election news conference emphasized his remarks on Simor instead of his political and economic plans. Reporters and market analysts focused on only one thing: how the war with the central bank would affect Hungary’s financial stability.

So Orbán’s first international appearance after his historic ballot-box victory brought controversial results. Since then, Fidesz and even Orbán have somehow moderated their words on the governor, but uncertainty remains. Unfortunately, this uncertainty can easily become a risk factor at a time when market players are nervously watching events in Greece and predicting the collapse of the Eurozone. The forint has already started to tumble against other major currencies; some analysts say the war between the government and the central bank might increase the forint’s vulnerability.

To be fair, Simor made several mistakes. Though he did nothing illegal when he transferred part of his wealth to the sunny island of Cyprus, global investors can hardly consider it reassuring when the person who is responsible for the stability of forint evacuates his money to… well, let’s call it a “tourist resort.” In preparation for the war with Fidesz, Simor hired a highly controversial figure to be his communications consultant, giving more ammunition to the hitmen in the pro-Fidesz media. Simor explained his choice by saying the the NBH needs ‘brand management’. For God’s sake, the central bank is not Toyota or BP.

Nonetheless, I recommend both sides stay calm, or at least keep the fight behind closed doors, not in front of cameras. What Hungary needs is a relaxed environment. The country has plenty of problems to cope with. The last thing it deserves is an exchange-rate crisis or a downgrade by international credit-rating institutions.

Krisztian Szabados

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Greece: The Dark Side of Hungary?

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.

Peter Kreko

Categories: Crisis, Greece, Hungary

A sovereign Palestinian state is the key to Israel’s survival

The declaration by the Palestinian prime-minister Salam Fayyad in the Israeli daily Haaretz that he will declare an independent Palestinian state by 2011, with or without Israeli agreement should be taken seriously. It comes only days before Jordanian King Abdullah said in an interview with the Wall Street Journal that Israel’s long-term survival is at stake. The situation on the ground between Israel and the Palestinian areas has made the creation of a Palestinian state an absolute necessity to Israel’s survival. Sheer demographics in the combined Israel / Palestinian Authority areas effectively mean that there are now more Palestinians in the combined area than there are Israelis. However, those people are effectively unable to control their destiny and the international community is increasingly getting impatient with the situation. The longer it takes to create a Palestinian state, the more difficult it will be possible to create one. If no state is created, Israel has no choice but to absorb the Palestinian population in the West Bank, including Jerusalem and afford them equal rights to its own citizens. This effectively means Israel will no longer be a Jewish state as in less than ten years, more than 50% of the combined population will be non-Jewish.

Fayyad himself is not in a strong position. Although he has the support of the international community including the US and EU, he is very weak locally. His party won only 2 seats in the Palestinian parliament, with less than 4 percent of the total vote. He therefore needs the support of the Israelis if his plan to create a state is to succeed. If this does not happen soon, before his supposedly interim government is out of office, creating a Palestinian state will become almost impossible. The Israeli government needs to look at the long-term survival of Israel rather than the survival of an extreme right-wing government. This may only come with the diehard supporters of Israel in Europe, namely the Eastern European countries and Germany, standing up to the Netanyahu government. By blindly giving the false sense of security to Israel, even at a time when the US and UK have become increasingly vocal in their opposition to Israeli anti-Palestinian policies, they are helping Israel commit suicide. A united position of the international community may be the only way the right wing government of Israel can justify taking pro-Palestinian state steps to its constituents. There is very little time left and if Fayyad is out of power or the current Israeli government plans to make a viable and sovereign Palestinian state are slowly implemented on the ground, the unusually pessimistic prediction of King Abdullah may increasingly become more likely.

It may sound like an exaggeration, but Israel’s long-term survival may depend on how strong a united EU policy is and this largely depends on Germany and the Eastern European members of the EU.

Ghanem Nuseibeh

Categories: Israel, Palestine

Fidesz’s Deficit-Loosening Ideas – Who Will Be the Disciplinarian?

Alex has just arrived back from Brussels, where he had the honour of posing a question to Gert-Jan Koopman, economic affairs adviser to European Commission President José Manuel Barrosso:

Alex: In Hungary, the people who are almost sure to win next April’s elections are talking about letting the budget deficit slide to 7.5% instead of the 3.9% agreed with the IMF. Since the country is small and is not a member of the Eurozone, would this pose a problem for the European Commission?

Koopman: “That would obviously be a problem… Hungary has a convergence plan and we would hope that Hungary sticks to it as much as possible.”

“It’s true that Hungary is a small country that doesn’t use the euro. But if every member starts relaxing its budget discipline… then we wouldn’t have much discipline anymore.”

This response strengthens our opinion that Fidesz, which is all but certain to win Hungary’s April elections with an unassailable majority, will face huge difficulties if they ignore the 2010 budget-deficit target of 3.9% of GDP and try to implement fiscal stimulus policies. The main barrier is not IMF, as several analysts have suggested, but rather the European Union as it trembles in the shadow of the financial markets.

In our previous analysis we described the situation following the Greek crisis as possibly advantageous for Hungary:

Predictably, the Greek crisis caused a domino effect in emerging markets as investors became skittish. The prestige of the euro has also been seriously damaged. Even so, Hungary should be grateful to Greece. After 2006, Hungary gained a reputation as the “liar of Europe” – not just because of former Prime Minister Ferenc Gyurcsány’s infamous “Oszöd speech,” but because of Hungary’s much higher-than-expected budget deficit in 2006. Hungary can now pass on this title to Greece… By tightening their belts and pursuing strict fiscal policy during the recession, Hungarians have become models of prudence, to such an extent that Greek Prime Minister Geórgios Papandréou attempted to calm the markets by saying he would follow the Hungarian path.

At the same time, we added:

The bad news is that Fidesz, the party that is all but sure to win this April’s election, cannot let the deficit climb back upwards.

Fidesz’s chances of renegotiating Hungary’s $15.7 billion (€11.5 billion) loan from the IMF may be better. We should recall the rumours that the IMF had agreed to allow Fidesz to run a deficit of 5.5% of GDP for 2010. While this hearsay has proven false (Fidesz, still an opposition party, is not a typical negotiation partner for IMF), it is based on the fact that the IMF has been open to modifying the terms of its loans in the past.

Fidesz will have a much tougher time convincing the EU that it needs to loosen its deficit target. Koopman’s comment reflects fears of a domino effect – if Hungary wants to loosen the conditions, everyone else will, too. Given the shock over the Greek crisis, the Hungarian economy’s less-than-stellar reputation, and past experience, fears of Hungary falling back into a state of “fiscal alcoholism” would be justified.

Fidesz seems to be getting the message: The party’s policy wonks are talking less and less about fiscal stimulus and Fidesz’s election manifesto is cautious on this question. On the other hand, Fidesz still hopes it will have some room for bargaining – and they probably do. Former National Bank of Hungary Governor Zsigmond Járai, an economist close to Fidesz, recently declared that a 5% GDP deficit would be acceptable for both the IMF and the EU. Given that Fidesz’s “offer” was 7-8% several months ago, we can see a clear tendency toward improvement. And, since serious doubts have arisen about Hungary’s ability to fulfil its 2010 deficit target, 5% may prove quite realistic.

Even if the IMF and the EU are willing to let Hungary’s deficit rise slightly (8% of GDP is out of the question), the price of their indulgence may be deep and extensive economic reforms – an extremely unappetizing prospect for the next government.

Peter Kreko-Alex Kuli

Women in the CEE countries: still not appreciated?

March 9, 2010 1 comment

March 8 is the day Europe honors its women, regardless of whether they live in the western or eastern halves. But that’s where the “equality” ends. When it comes to political, economic and social status, females are much better off in the older European Union members than in the former communist states.

Roughly one in four MPs in the EU is female. However, the proportion of women lawmakers in the 12 members that have joined since 2004 is 16%, compared to 29% in the EU15. Since 1998, female participation in national parliaments has increased 8% in the old member states; while some new members have followed this trend, the Czech Republic, Slovakia and Romania lag behind. Hungary has even registered a decline in its proportion of female MPs.

Proportion of female MPs in national parliaments
  Hungary Romania Czech Rep. Slovakia Poland Bulgaria EU15 average
January 1998 11.4% 7.3% 15.0% 14.7% 13.0% 10.8% 21.3%
January 2010 11.1% 11.4% 15.5% 18.0% 20.0% 20.8% 29.3%

Perhaps parliamentary elections in spring 2010 will bring change in Slovakia, Czech Republic, and Hungary. But regardless of the outcome, male domination of Hungary’s national assembly is unlikely to change: Less than 8% of candidates in single-member constituencies are female. The problem should not be solved by positive discrimination or quotas, as these tools frequently reinforce negative stereotypes about women (They’re weak, that’s why they need institutional support.) Still, change in gender norms would be beneficial.

The reasons for these phenomena are complex. Underrepresentation cannot simply be explained away by gender discrimination.  Fewer women are interested in politics than men: In the 2009 round of European Social Survey (ESS), a biannual EU-funded poll of societal attitudes, 55% of male respondents said they were “very interested” or “quite interested” in politics. Only 42% of women answered in the same manner.

Gender equality in the workplace is even more important than in politics, as it affects the life of practically all women. Men in the EU still earn significantly more then women, with the average pay gap at about 15 percent, according to official Eurostat statistics. There is no significant difference between the old and new member states in this regard. Lower wages for women are due in part to the difficulty of females getting into management positions. In the CEE countries, this handicap is backed by social prejudices: Nearly half of the Slovakians think women do not always have the necessary qualities to fill such positions, compared to an average 23 percent in the EU15.

Women in the EU12 are also behind their Western European peers in terms of health outlook. Life expectancy is much lower for women in the post-Soviet bloc than in the EU15. Life expectancy for men in the EU12 is even worse. This means more widowed years for women – still not a great perspective.

Communism’s official policy of eliminating differences between women and men in the workplace and politics has clearly failed. Instead, 40 years of state socialism has cemented rigid female role patterns. These countries need years of hard work if they want to change attitudes and thought patterns – and not just among men, but among that section of humanity that is being honoured today. More then 15 percent of Hungarian women agree strongly that when jobs are scarce, men should get preference over women, according to the 2009 ESS survey.

 

Female inequality is not just an ethincal, but a political risk factor as well. According to World Economic Forum’s latest Corporate Gender Gap Report, leading companies are not doing enough to advance the cause of gender equality. The number of female and male graduates in higher education is almost equal; wasting this potential talent decreases a country’s competitiveness, which has become increasingly important since the global economic crisis struck. Political decision makers cannot afford to damage their country’s competitiveness due to gender inequality.

Common Misunderstandings About Hungary

Over the past few weeks I have been meeting with leading analysts from banks, funds and other financial institutions from all over the world. Everybody is interested in what’s going to happen to Hungary after the elections and what risks the future may hold. I have come to realize that there are two common misunderstandings about Hungary.

The first is about the euro. Accession to the euro zone is not the focus of the election campaign at all. Except for the far-right Jobbik party, all mainstream political parties agree that Hungary needs to adopt the euro as soon as possible. This is actually the only political issue that enjoys widespread political consensus. Parties don’t campaign for or against the euro and don’t expect any political benefits from doing so. Financial analysts tend to see the euro as essential for political success, but that’s not the case. The issue is simply not on the table. Of course, should Jobbik perform surprisingly well in the elections (which is exactly what I anticipate), the euro may get into the spotlight. This scenario is unlikely, since Jobbik will not have any real power unless it becomes Fidesz’s coalition partner or wins the elections. Neither scenario can be excluded, but at this stage neither has much chance.

Certainly Fidesz has not helped foreign analysts better understand its stance on euro. Fidesz’s economic- and fiscal-policy talking heads have declared several times that boosting the economy (even at the price of boosting the deficit) is a priority, while introduction of the euro is not. There is a persistent conflict within Fidesz between the desire for short-term economic growth and quick Eurozone accession.

The second misunderstanding stems from Western political experience. In old democracies, voters usually reward or punish the incumbent government based on the country’s economic situation. If the economy is doing fine, voters tend to support the incumbent party; if not, they vote for the opposition. This is not valid for Hungary. The country’s economic performance has never had any effect on the outcome of the elections. There is no correlation between support for the government and GDP growth.

At the same time, Political Capital’s research has found a strong correlation between support for governing parties and the perceived state of the economy and the perceived outlook for living standards. Hungarian voters are strongly influenced by perception — and there is frequently a disconnect between the popular perception of economic growth and reality. This is why many of the analysts I met were surprised that Hungarians don’t appreciate the caretaker government’s performance.

Krisztian Szabados

Categories: Hungary, populism Tags: , ,

The Threat of “Regional Elitism” in the Post-Communist Bloc

February 21, 2010 Leave a comment

Regional inequities in wealth are extremely high in post-communist countries, according to the latest data from Eurostat. The richest regions of Slovakia, Hungary, the Czech Republic and Romania — including the capital — show relatively solid economic figures, while regions far from the capital show remarkably poor results. It is as if the “East-West” frontier isn’t drawn along international borders, but within these countries.

The most shocking difference is in Slovakia: GDP per capita is 160% of the EU-27 average in the western Bratislavsky kraj region — more than three times higher than in the Vychodná Slovensko region in eastern Slovakia, where per-capita GDP is 46% of the EU average.

In Romania, per-capita GDP in the Bucuresti-Iflov region is also more than three times higher than in the Nord-Est, Romania’s least-developed region:

We can see similar imbalances in Hungary and the Czech Republic:

The EU’s new member states also show a much higher imbalance in regional economic production than the EU-15:

These inequities may have crucial political consequences. People in formerly communist countries are nostalgic for big-government paternalism, have strong egalitarian ideologies and a need for high state redistribution. The majority of voters feel that the transformation to a market system has brought unbearably high gaps in income levels and huge social injustices.

These figures show that national governments and the EU have a lot of work to do in increasing social and regional cohesion.  Although a huge amount of money has been spent on closing the gap between the regions, people!s wishes remain unfulfilled.

Possible risks of these regional economic imbalances:

  • Social instability and a rise of social (or agrarian) populism. Regional inequities can be used as a political tool to mobilise voters in the poorest regions. Political parties can build upon the voters’ feelings of relative deprivation and fuel dissatisfaction in the countryside. As in most countries, the capital is by far the most developed region, and agrarian populism built upon the urban-rural rift can be a driving political force. On the other hand, if governments raise spending on regional integration, the more developed regions can accuse the poorer regions of “free riding”.
  • Ethnic tensions. In the CEE countries mentioned, the majority of the Roma population lives in the least-developed regions. Frustration over unemployment is high in these places, and anger over the lack of opportunities is even stronger. Welfare chauvinism can become a powerful force in politics.
  • A good opportunity for extreme right. Far-right populist parties can capitalize on the above factors, using dissatisfaction over living conditions and ethnic conflict to harvest votes. This is exactly what is happening in Hungary’s 2010 parliamentary elections, where the far-right Jobbik party stands to make the biggest gains in the least-developed counties. In some counties, Jobbik may even beat the governing Hungarian Socialist Party into second place.

Csaba Molnár- Péter Krekó

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