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A mixed bag of economic results shouldn’t derail Viktor Orban’s re-election bid.by Martin Ehl 4 February 2014
The Purchasing Managers' Index measures the mood in the manufacturing industry. The higher the number, the more likely managers see future growth. The latest index, released this week, reached 57.9 points in Hungary, the highest in three years. In Poland, the figure rose to 55.4 and in the Czech Republic to 55.9. Maybe that's down to the Hungarians’ different methodology, but it is certainly evidence that the Hungarian economy is doing better than in previous years.
Orders from Germany, in particular, have been saving the Hungarians – along with the Czechs, Poles, and Slovaks. Audi is increasing its output in its Hungarian factory, opened last year. The lower interest rates of the Hungarian Central Bank and its special program for small- and medium-size businesses is helping to revive comatose domestic economic activity. According to the Economy Ministry, the Hungarian economy last year grew by 1 percent of GDP, which is about one-tenth better than the government officially predicted.
Two months before parliamentary elections it could therefore seem that the ruling Fidesz party is well-placed to defend its two-thirds majority.
That would be the case if Hungary weren’t a small and open economy. Due to financial pressures on the world's emerging economies, the forint fell last week to a record low. The central bank thus found itself in a trap: it should defend the currency by increasing interest rates. But the bank just lowered those rates in order to boost economic growth. To a great extent, Hungarian businesses have been stymied by high interest rates and banks' unwillingness to lend.
The positive situation with the Hungarian economy and the strong pressure on the forint has even led Csaba Szajlai, a commentator for the pro-government Magyar Hirlap newspaper, to get carried away and propose that the government announce, as soon as possible, a date for entry into the euro zone. According to Szajlai, Hungary has never been so close to fulfilling the EU’s criteria for limits on the deficit and public debt. Exchange rate risk, one of the main problems for Hungarian politics and the economy over the past five years, could thus be easily removed. It's just a pity – and this the author happens to omit – that in recent times Budapest doesn't exactly have the reputation of a bastion of Europhiles and reliable democrats in Brussels, which would decide about such an invitation to join the euro zone.
On 31 January, Prime Minister Viktor Orban had again to calm investors and promise in essence the impossible – that for the first time in an election year since the fall of communism he would not increase the budget deficit.
Orban does not confine himself to complicated macroeconomic considerations. Two months before the elections, the most important topic, in the eyes of the government, has become the reduction of energy prices for households. The government doesn't need to increase the deficit, if it makes – unlike in the past – pre-election promises at the expense of someone other than itself. The Fidesz-controlled parliament is now in the process of approving the third reduction in the prices of gas, electricity, and heating in the last year and a half. So far, Hungarians have twice saved 10 percent. Now the price of gas should fall from 1 April another 6.5 percent, electricity by 5.7 percent from September, and central heating from October by 3.3 percent.
In addition to energy companies, the banks, which already pay a special tax, won't be spared. By law, Hungarians will be entitled to two free ATM withdrawals per month up to a total of 150,000 forints ($647).
And if we stay only with economic, pre-election themes, the debate is far from over about the unexpected contract to build two new units at the Paks nuclear power plant, which the Russian state company Rosatom acquired (without competitive bidding). Orban asserts that the contract will ensure long-term, cheap electricity for Hungary, thereby increasing its competitiveness. For its part, the opposition argues that the decision about the construction was rash and will unnecessarily contribute to the country's debt.
While the Hungarians are the most excited about the state of their wallets and mortgage payments, which are closely tied to the exchange rate of the forint, Orban's domestic liberal and Western critics are more taken with a new affair: the "cultural war," related to the construction of a controversial monument commemorating the occupation of Hungary by Nazi Germany in 1944. The collaborationist regime of Miklos Horthy, which shared in the Holocaust, would thus be placed on par with the victims of the Nazi occupation and war in Central Europe.
A review of the accounts and the credit and debit columns should be relatively straightforward – the twists of Hungarian history and its reflection in the Hungarian soul much less so. But both influence voting patterns, and Orban is a master at finding the right mix of the two. His Fidesz is thus poised to defend its two-thirds majority in parliament on 6 April – even if the forint exchange rate isn’t exactly favorable.
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