Past losers can be future winners. In a
Political Capital analysis published
one year ago entitled “Losers take it
all?” we predicted that countries such as
Hungary with the fewest fiscal tools to
stimulate their economies might profit
most from the global economic crisis,
because the need to restore international
credibility will force them to abandon
spendthrift policies and take dramatic
measures to cure their “disease.” We
added that deficit spending would only
prolong a country's economic woes, not
solve them.
We told you so
The stories of how Hungary and Greece
have dealt with the economic crisis appear
to have proved us right – at least partially.
Hungary, which was close to bankruptcy at
the end of 2008, took out an IMF loan and
made brutal spending cuts, especially
under Prime Minister Gordon Bajnai. The
austerity programme further reduced the
Hungarian Socialist Party’s popularity but
was the only path to take. The Greek
government meanwhile responded to the
crisis with lavishly spending money that it
did not have. The strategy was successful
in the short term: Greece’s GDP fell 2.6%
in the fourth quarter of 2009 year-on-year,
compared with a slump of 5.3% in
Hungary, according to Eurostat Flash estimates.
But Greece – a founding member
of the eurozone – is saddled with a
mammoth budget deficit, soaring debt,
rising interest rates on government bonds
and higher credit default swap prices. The
country’s credibility is in tatters – again.
Mission impossible
Let’s not forget how voters are going to
react to the EU and government plan to
reduce its deficit from 12.7% of GDP to
under 3 per cent by the end of 2012. Such
a feat may seem almost impossible, especially
considering that Greeks are
completely unwilling to tighten their belts.
Public outrage is widespread and even
workers at the Greek Finance Ministry
went on strike over salary cuts. If they
cannot understand the necessity of publicsector
wage cuts, lower social spending
and higher taxes, then who can?
Ugly elsewhere
The situation is similar in other
members of the eurozone: Spain has a
budget deficit of 11.25% of GDP, while
Portugal’s is 9.5%. The governments of
Greece, Portugal, and Spain – three of
Europe’s remaining left-wing administrations
– are faced with widespread discontent
and harsh conflicts with trade unions.
Spain, Portugal and even Ireland and Italy
are desperately trying to prove that “We
are not Greece” – just as Hungarian
authorities trembled “We are not the next
Iceland!” in 2008.
Predictably, the Greek crisis caused a
domino effect in emerging markets as
investors became skittish. The prestige of
the euro has also been seriously
damaged. Even so, Hungary should be
grateful to Greece. After 2006, Hungary
gained a reputation as the “liar of Europe”
– not just because of former prime minister
Ferenc Gyurcsány’s infamous “Oszöd
speech,” but because of Hungary’s muchhigher-
than expected budget deficit in
2006. Hungary can now pass on this title
to Greece.
Looking good, comparatively
There are other reasons why Central
European countries should tip their hats to
their Hellenic friends. Hungary, whose debt
level is at 80% of GDP, is a model of fiscal
prudence compared to Greece, whose
debt is above 110% of GDP. By tightening
their belts and pursuing strict fiscal policy
during the recession, Hungarians have
become models of prudency, to such an
extent that Greek Prime Minister Geórgios
Papandréou attempted to calm the
markets by saying he would follow the
Hungarian path.
The good news is that Hungary will now
gain a strategic fiscal and political advantage:
while other governments have to
tighten belts in the future, Hungary will
have no need for new austerity measures.
The bad news is that Fidesz, the party that
is all but sure to win this April’s election,
cannot let the deficit climb back upwards in
case that they suffer swift punishment from
the markets. It appears Fidesz may be
getting the message: Although Fidesz
politicians still talk about a 2010 budget
deficit of 7-8% of GDP, James Morsink, the
leader of the IMF delegation to Hungary
recently said Fidesz has assured him that
they will continue with a strict fiscal policy.
Borrow an idea
Greek and EU leaders have furiously
rejected the possibility of an IMF loan, but
this might be the best choice both for
Greece and the eurozone. The IMF’s
reviews of Hungary are a big reason for
the rising confidence in the country. In the
words of a columnist at The Economist:
“Greeks should be ready to turn to the IMF
before they lumber themselves with an
even worse fate.”
