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Posts Tagged ‘European Union’

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

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

Right-wing Extremism: a New Threat to Europe

February 15, 2010 1 comment

We have recently released the results of our latest research on right-wing extremism. The fact that right-wing extremism is on the rise comes as no surprise. More and more extremist political parties are achieving political success in local, national or European elections. What we were interested in was the social background of extremism: How deeply is it rooted in different societies in Europe and beyond?

The most important conclusion is that while Western societies seem more or less reluctant to embrace such ideologies, some of the new EU members in the east are highly predisposed to right-wing extremism, as are countries beyond the EU’s eastern borders.

This phenomenon poses several threats to the European Union:

  1. A new division is evolving between East and West. It is similar to the Iron Curtain, though its borders do not exactly follow the original. It is not made of barbed wire, but of ideas and politics. Still, it is capable of separating Europe’s two halves for a very long time.
  2. Mainstream political parties in Central and South Eastern Europe  are reacting to the new popular demand for extremism and may apply some of its features to their own political agendas. It’s not that these mainstream parties will become extremists themselves; however, since politics is about hunting for voters, moderates will have to attract more and more extremists to win elections.
  3. Common features of this new political extremism are Euroscepticism and pro-Russian foreign policies. Both undermine the core values of the European Union.

So what now? Countries that are most infected with right-wing extremism have developed different strategies to cope with it, but none of them seems to work. It is therefore extremely important that decision-makers in Brussels not leave these young democracies to their own devices. Brussels should:

  1. Put more effort into analysing and understanding the rise of right-wing extremism;
  2. Understand that this is not a problem of faraway exotic countries. It will punch Europe in the face sooner than expected;
  3. Set up a network of  experts from outside the political sphere and help them cooperate with one another;
  4. Collect best practices on coping with extremists;
  5. Create a European strategy to halt the spread of extremism;
  6. Tell Central Europe’s mainstream political parties very clearly not to meddle with extremism.

The rise of extremism represents a wake-up call to Brussels.

Krisztian Szabados

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