Hungary needs a change of economic policy direction. The majority of the public has been aware of this since at least a few months ago when the government admitted that it would be forced to crawl back to the European Union and the International Monetary Fund for a credit agreement. However, the government communications designed for the domestic audience contain no hint of change ahead.
Many were expecting the announcement of specific measures and a political change in the prime minister’s state-of-the-nation speech and in his speech at the opening of the parliamentary session. However, this was always unlikely given that Fidesz, as it approaches the halfway point of the legislative term, is announcing a period of consolidation, which many are mistakenly taking to mean a change of direction and political correction.
However, the message conveyed by “consolidation” is precisely that of the direction taken so far being the right one. It is designed to signal that the measures taken to date will be kept in place (in particular the flat rate personal income tax system) and that the government’s political position will be stabilised.
In other words, the “consolidation” watchword does not necessarily bring reassurance, or a political turnaround. Despite the climb-down shown by Prime Minister Viktor Orbán in recent weeks, we cannot be certain that he is really striving for smooth negotiations and a speedy agreement with the international organisations.
For that it would be necessary for the Hungarian side to accept the preconditions of the European Commission in a way that is reassuring to it, and the demands set out at the credit negotiations. However, the conditions that have already come to light are not simply fiscal and economic policy expectations. Instead, in several respects, it is also a question of the political institutional system that the Orbán government restructured and now wishes to consolidate, and the system of checks and balances.
In the coming weeks we can expect to witness the government only backing down from its own position to the extent that is absolutely necessary in the given circumstances in the interests of survival. The international organisations are holding the trump card: how Hungary is viewed on the markets depends primarily on the likelihood of a loan agreement being reached. If the government wavers even a little, it could cause an immediate loss of confidence with serious consequences for the forint exchange rate and the financing of the country.
That the negotiating process will be conflict-ridden is suggested by the government having made clear that it wishes to extend its room for manoeuvre. It is at pains to defend its decisions to date, is continuing to say one thing at home and another abroad, and is attempting to limit the say of the international organisations to the greatest extent possible.
The EU-IMF duo, on the other hand, wishes to make an example of Hungary and is demanding firm guarantees that the programme agreed upon will actually be carried out. While the international loan agreement is a necessity for Hungary, for the European Union it is primarily an opportunity to prove, in the midst of its greatest crisis yet, its ability to assert its interests and for the president of the European Commission to demonstrate his own strength to the EU.
The real question from the start has been that of whether, given the existing international economic and political circumstances, it was worth setting out on the path of “unorthodox” economic policy. As a result of that economic policy, the Orbán government has had to go back begging to the IMF.
Moreover, owing to the “freedom fight” of the recent months, the demands of the international organisations have become increasingly strict. It is clear that in terms of the conditions set, the government is in a much worse position than when the initiation of the talks was announced.
The credibility of the government has worsened on the international level and the markets will immediately punish any step that is not in the required direction. The freedom fight to give Hungary more leeway has itself restricted the country’s room for manoeuvre. Consolidation will not be easy.