Premier Gordon Bajnai is convinced that the country has now survived the worst of the crisis: “Hungary is definitely beyond the bottom of the financial crisis. The crisis of the real economy and the labour market, however, is still continuing. With the tough measures which we have implemented since April we have managed to stabilise the country again and win back the trust of investors. Last October a lack of confidence in the country was Hungary’s greatest problem.” He expresses a certain satisfaction with the results: “The forint has strengthened considerably against the euro. The Hungarian national economy is now regarded as one of the most stable in the CEE region by noted investment banks such as Merill Lynch and J.P. Morgan.”
The time bomb
It is no mystery to Bajnai why the crisis struck Hungary so quickly and so deeply last autumn: “For over ten years there were no significant structural reforms. The leading political parties all stayed away from such reforms out of fear of their popularity ratings declining. The reform backlog finally led to the debts and the record deficit of 2006. The economy showed a falling growth rate. The few initiatives that there were, for example the first steps towards healthcare reform, were nipped in the bud. Nevertheless, in the second term of my predecessor Ferenc Gyurcsány the government pulled off the feat of reducing the budget deficit from almost 10% to 3.5%. That is a considerable achievement within just three years.”
The PM sees Hungary’s relatively low employment rate as one of the country’s chief problems. Just 57% of the population of working age is in officially registered paid employment. “Since turnout at the general elections is around 70%, politicians of both camps realised that they can only win elections with the votes of people on benefits. Those people are then recklessly lured in with promises, which in part are then actually fulfilled at the expense of tax cuts.” The consequences are a public spending quota that is too high and economic growth that is too low. Both were clearly responsible for the budget rocketing, he said.
According to Bajnai it was not surprising therefore that the financial crisis hit Hungary hardest last year among the countries of the region and that the country was the first to have to seek international assistance. The stand-by loans of the IMF, the EU and the World Bank totalling some EUR 20 billion prevented the worst from happening, Bajnai said.
Backing
In January and February this year it quickly became clear that restoring trust was insufficient. “Our structural problems were unchanged. When I succeeded Gyurcsány in April, I determined to finally end the political stalemate. I made it absolutely clear that we need a consistent anti-crisis programme. Before being sworn in, as a precaution I secured the signatures of the former coalition partners, the Hungarian Socialist Party (MSZP) and the Alliance of Free Democrats (SZDSZ) in support of that programme. It was also important to me that the main actors would take that painful path with me in full knowledge of the consequences, including for their popularity. The fact that I received that support made it clear to a few that happily there are still MPs who are really willing to exercise the responsibility that comes with their mandate of acting for the good of their country.”
Reforms
In principle it was then a question of three fundamental reforms, Bajnai said. The first was pension reform: “We have changed the pension system in such a way that it is financeable for the next 40 years.” The second was welfare reform: “We have increased the motivation of citizens to seek employment. At the same time we have reduced the opportunities for people fit for work to live without paid work at the expense of society.” And finally the start of tax reform: “We have increased VAT by 5% and introduced a property tax on high-value properties. On the other hand we have perceptibly reduced wage contributions. From next year they will be 8% lower than the level this year. At the beginning of the year Hungary was the second most expensive EU country in that respect with 54% of wage costs going to the state. With 46% from next year Hungary will be average in the EU. The next government needs to continue on that path.”
Curbing spending
“Hungary has undertaken the greatest correction on the cost side of the budget in recent European history. Within just two years we have cut costs on a scale of 5% of GDP: in absolute figures that means around HUF 1.2 trillion in total. From the first day of my term in office I made it very clear that it would be painful and that all layers of society must carry that burden.”
‘Solidarity’
It is evidently important to Bajnai that his policies are reconcilable with social democratic ideals. “I don’t think that we are offending the principle of solidarity. However, we can only afford as much solidarity as the circumstances allow. The crisis doesn’t follow any ideology. It is simply there, and forces one to take appropriate measures.”
For citizens who are really in need there are, however, several solidarity elements. The government, for example, set up a crisis-management fund for families in need and launched public-utility work schemes for around 100,000 long-term unemployed, Bajnai said. “Our tax reform benefits low and medium earners, above all. People average earnings will take home the equivalent of an extra month and a half’s net salary next year.
Sovereignty
Bajnai strongly rejects the supposition that the IMF and the EU now have the say on the key questions of economic policy in Hungary. “Both organisations check our measures, but the authority to plan and make decisions clearly remains ours.” On the other hand it is clear that Hungary does not have a lot of room for manoeuvre under the given circumstances, he said. “The international financial markets are more merciless than all other institutions. Significant devaluation of the forint could rapidly cause serious difficulties for many foreign currency borrowers. Ten thousand homeowners could lose their homes. Preventing that is key to our actions. The fact that in doing so we are also fulfilling the expectations of the IMF and the EU is merely a positive side effect.”
Growth & austerity
Reacting to the repeated accusation made not least by the opposition that the government’s excessive austerity measures are restricting economic growth more than necessary, Bajnai explains: “It is a question of choosing the lesser evil. We have a relatively small domestic market. Around 80% of the goods and services produced here are exported. If under these circumstances we tried to stimulate consumption, it would lead to an increased deficit, which in turn would result in lower confidence of the markets in Hungary with corresponding negative financial consequences for the budget. Through our consistent consolidation measures we have now sacrificed perhaps at most one percent in growth, but in exchange we have laid the foundation for a sustainable growth path. We have been able to reduce wage contributions, restore balance and reduce interest rates perceptibly. Since the outbreak of the crisis the key interest rates have fallen by two per cent.”
Step by step
The logical chain of cause and effect behind his economic policy is as follows: “If we manage to increase the confidence of the markets, our currency will be stronger. When inflation is low enough, then the key interest rates can be reduced. From a certain interest rate level and, moreover, when there are positive signals coming from the country’s export markets, the Hungarian economy will grow again. Our measures to reduce taxes will lend greater momentum to that growth. At the end of the chain is a higher employment rate. The economy can only be returned to a sustainable growth path and sustainable workplaces created in that logical succession.”
From around the middle of next year the Hungarian economy will grow again. “From 2011 I am anticipating growth of 3.5 to 4%. That would put Hungary around 2% above the EU average and ahead of the other countries in the region.”
The euro question
Only the euro is missing from this pleasant idyll. Bajnai is reluctant to mention a specific date for its introduction: “The euro should come as soon as possible. Under the given volatile global circumstances it would, however, be irresponsible to name a specific date.” In view of the practices of other countries that have recently introduced the euro, in his opinion it is extremely important to increase long-term competitiveness ahead of euro introduction. “Hungary has to do its homework and should not seek exemptions. Hungary has the habit of always looking for a backdoor. In this case however, the door preceded by the ERM-II corridor, is what we need to adhere to. We are on the right path: next year we will be able to demonstrate the fifth-lowest deficit among the EU countries.” The recent prognosis by J.P. Morgan, according to which Hungary will get the euro ahead of Poland and the Czech Republic, also fits with this positive impression of Hungary’s growing euro maturity, he added.
Political dividends
Bajnai takes a level-headed view of the current popularity low of the governing Socialists and does not regard their election chances as hopeless. “The Socialist and liberal government have done a huge amount in the long-term interests of the country in the past months without thinking of their momentary popularity. Its successes are undisputed. They can point to deeds and not just rhetoric. If they can now manage to convey that to voters, I think it is premature to write them off in terms of the coming general elections.”
Stakes too high to gamble
In Bajnai’s opinion the outcome of the general elections will do little to change the consolidation and growth path that has been embarked on. “Whoever wins the election, the possibilities to leave the sustainable path that we are on are limited even in the short term. Irresponsible steps could quickly lead to the freezing of EU transfers and spell financial trouble for the borrowers of Hungary’s 1.7 million foreign-currency loans. The moment that a political power starts to behave irresponsibly, the international finance markets will not hesitate to respond accordingly. The high political consequences will deter even populist politicians from a return to the old practice of the irresponsible, short-term-focused ‘buying’ of votes. As a result I do not think that the real problem is in the short term. I am much more concerned about what certain politicians will want to do after the country has slowly recovered from the crisis. Will they be wise enough not to repeat the mistakes of the past? Will they remain faithful to the sustainable growth path, even when external pressure subsides?”
Courting FDI
In Bajnai’s view there will also be permanency in relations with foreign investors. “In the past years Hungary has been able to attract more foreign investments than the other countries in the region, amounting to some EUR 60 billion and resulting directly in around half a million workplaces. Some 60% of our export goods are produced by foreign-owned companies. In addition to the huge capital import, foreign investors are also behind considerable technology import. In short, they are hugely important for Hungary’s national economy. As a result any Hungarian government should make efforts to establish firm and predictable relationships with foreign investors. Looking back over the past two decades, I am not too worried in that respect. So far all governments have had responsible relations with foreign investors. It would be suicidal to change that approach.”
Nagging question of corruption
Given this conviction it is not surprising that Bajnai reacted quickly to the open letter signed by nine embassies complaining about a lack of transparency in Hungary. Last Monday the Prime Minister met with the signatories of the letter to allay their concerns. Incidentally he himself a few weeks ago had tabled a package to combat corruption. “The corruption package endeavours to change general conditions systematically and to make them more transparent and less susceptible to corruption. The ambassadors were concerned about two cases. The Suez issue was primarily a legal problem and also connected to the behaviour of the city of Pécs which I have condemned several times. Instead of turning to a court, the city administered justice itself. That is unacceptable. My government intervened and initiated negotiations between Suez and Pécs. The problem now seems to be resolving itself. The ambassadors incidentally were concerned primarily not about the fate of two specific investors, but about Hungary’s future. They wanted to help. To that extent we had no problem seeing eye to eye quickly.”
Still much more planned
With the selection of a Socialist prime ministerial candidate last week, the end of Bajnai’s period in government is now firmly in sight: in around five months he will hand over the office to a successor. The Budapest Times asked about his plans for his remaining time in office. “Until the very last minute we will have plenty to do. We are a crisis-management government. While the crisis continues there is no rest for us. Following the passing of the budget we want to improve and strengthen the financial market watchdog PSZÁF. It should be put in a position where it can act rather than merely react. We will also continue the fight against corruption. In addition we intend to take measures to protect jobs outside Budapest and do more to promote small- and medium-sized enterprises. We will also take concrete steps to increase public safety, particularly in the countryside.”
Advice for next PM
Bajnai has clear ideas about the tasks of the next government: “It should continue consistently on the growth path that we have embarked on. Alongside that it should continue the process of gradually reducing debts, improving the living circumstances of the population and reducing the tax burden on employment. Of course the next government will also have to take on the reform backlog, particularly in the areas of public administration, education and local government. In addition the Roma issue should not be forgotten. Around six per cent of the Hungarian population belong to the Roma minority. Without their integration Hungary’s long-term development is at risk.”
Jobbik
On the question of far-right party Jobbik Bajnai’s attitude is uncompromising. “The party has some very dangerous views. All of Hungary’s democratic parties should distance themselves from Jobbik. As a democrat one cannot make compromises with an extremist party. On the other hand, it is important to realise that there are some fundamental causes for the current popularity of this party. These are issues which many Hungarians are critical of and on which they feel there is a need for change, in particular public safety, corruption and Roma integration.” It is the duty of the democratic parties to come up with a democratic response to these challenges rather than sweeping them under the carpet, he added.
For the common good
Bajnai’s explanation as to why he took on the thankless task in April of leading the government – which was bound to entail numerous attacks on his person and little applause – is strikingly simple: “Somebody had to do the work. And in any case, regardless of what our place is in society, it is the duty of every citizen to do something for the common good and not only for themselves. I have the luck and the honour to assist my country in this difficult time, in this exposed position. I knew that it wouldn’t be easy and that I would be exposed to a lot of attacks. It is, however, a very good feeling to be able to give so much back to one’s country. After all I have a lot to thank my country for.”
After politics
What is Bajnai planning to do after the elections? “It’s not good for my current tasks if I focus on the work that I will do after this job. That would distract me from performing the tasks at hand.” The one thing that appears to be certain is that he will have a rest. With a characteristic smirk he adds: “After such an intensive experience I believe a period of detoxification is advisable. Politics is not everything in life. There are more important things. Unfortunately that view is not very widespread among Hungarian politicians.”
It is also certain that he will devote more time to his family after handing over office. “Following state crisis-management, domestic crisis-management will be high up on my agenda. I have accumulated a big-time deficit towards my children. As prime minister I haven’t seen nearly enough of them.
Regardless of what I will do professionally following the elections, I will definitely spend more time with them.”
Premier Gordon Bajnai is convinced that the country has now survived the worst of the crisis: “Hungary is definitely beyond the bottom of the financial crisis. The crisis of the real economy and the labour market, however, is still continuing. With the tough measures which we have implemented since April we have managed to stabilise the country again and win back the trust of investors. Last October a lack of confidence in the country was Hungary’s greatest problem.” He expresses a certain satisfaction with the results: “The forint has strengthened considerably against the euro. The Hungarian national economy is now regarded as one of the most stable in the CEE region by noted investment banks such as Merill Lynch and J.P. Morgan.”
