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.
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.