At the beginning of 2012 Hungary is facing a financial and solvency crisis for the third time in the past six years. The forint is weakening again spectacularly, interest rates are rising and government securities can hardly be sold or only at horribly high yields.
The causes on the three occasions are different:
– in 2006 the increase of government debt as a result of expansive fiscal policies triggered the crisis;
– in 2008-2009 the global financial and economic crisis led to the fall of the government, which had lost credibility;
– the present financing difficulties are partly related to external (particularly European) negative factors.
Nevertheless, the major causes are domestic policies in general and economic policy in particular. They are rather complex and overlap each other:
– Some elements of the legislation of the past 19 months contradicted basic democratic and European values;
– Appearance and reality diverged permanently in economic trends; this is one of the major causes of the continuation of the excessive deficit procedure against Hungary in the European Union;
– the style of governance and the behaviour of the government triggered first shock, then gentle warnings and finally definite resistance from international and domestic political and economic partners; and
– The economy has reached a dead end in every respect.
What’s to like?
All the above led to general and severe loss of confidence both inside Hungary and abroad. At present Hungary is the classic example of legal uncertainty, unreliability and unpredictability in the whole world. That is why investors do not want to finance the economy at low interest rates, that is why the business sphere is unwilling to invest, that is why foreign and domestic capital is exiting, that is why small- and medium-sized companies are suffering and that is why men-in-the-street are transferring their savings abroad.
The present financial and solvency crisis is essentially to do with confidence. It is of a political nature and only secondarily has its roots in economic policy. GKI has already stressed for many months that first institutional and legal changes are necessary. International organisations, too, insist on them as a precondition of the start of negotiations because only corrections in the legal environment provide a guarantee for genuine changes.
To regain respect
From the economic point of view the most important institutional and legal changes needed are:
– Respecting the independence of the central bank;
– Return to the norms of the rule of law by restoring the competence of the Constitutional Court;
– Creating the future freedom of tax policy by modifying the law on financial stability;
– Implementing the conditions necessary for the autonomy of the Budgetary Council;
– The practice of legislative proposals being submitted by individual MPs rather than by the government should be abolished, and each bill should be discussed with the professionals and stakeholders concerned;
– In the case of all necessary reforms and changes, reasonable time should be ensured for those affected to adjust to planned changes, and laws already approved or submitted for approval should be corrected as necessary;
– The tax system, which has been damaged by poor-quality laws rushed through Parliament, should be cleaned up; and
– In the pension system the first step should be the elimination of existing contradictions, and later the whole scheme should be revised.
Financing at stake
It is obviously uncertain whether these changes will really take place. According to GKI, the financing of Hungary can be ensured by an agreement with the International Monetary Fund, the EU and the European Central Bank. Therefore, it is probable that the major part of institutional and political changes will be accomplished. Without it a financial and a government crisis is threatening, with the former likely to be preceded by the latter. We must fend off the danger of national insolvency.
Thus in spring 2012 basic changes will take place in economic policy. Hungary must back out of this dead end street. It is possible to do so.