In “Hungary, Part I: A Troubled Country,” published in May 2012, we discussed the decline in economic, political, and civil freedom in Hungary since the since the Fidesz party won a two-thirds majority in parliament in 2010, and Viktor Orbán became prime minister. We warned that the attacks on economic freedom were weakening the economy and that the poor economy could “only encourage the strains of bigotry and extreme nationalism plaguing the country.”
Ten months have passed, and the situation in Hungary has only gotten worse. Orbán has continued to attack freedom. The economy is weaker, and, as we discuss in Part II of this article, the strains of bigotry and extreme nationalism are all the more evident.
Economic Freedom
The government’s new assaults on economic freedom have included the following.
Weakening the Independence of the Central Bank and Making it More Interventionist
Orbán has sought influence over the bank since 2010. In 2011, he had to retreat from legal changes that the European Union and International Monetary Fund found objectionable.
However, this month he appointed political ally Gyorgy Matolcsy as the new governor of the bank. As the economy minister under Orbán, Matolcsy led the “unorthodox” policies that included nationalizing private pension assets.
In December 2012, Matolcsy argued the bank should use “unorthodox” monetary policies, later toning down his assertions. Matolcsy’s immediate administrative actions have reinforced concerns about the future of the institution’s independence and professionalism.
Orbán has encouraged the central bank to lower interest rates. The manipulation of interest rates to help the economy is naïve and destructive, an example of what Robert Higgs calls “vulgar Keynesianism.” Lowering interest rates may not even achieve Orbán’s objective of more lending (leaving aside the desirability of having the market, not the government, determine lending).
Nationalizing Additional Industries
The government has continued to nationalize industries. This has included planning to spend over $1 billion to purchase the local natural gas businesses of German energy company E.ON, and to acquire the majority position in a gas storage system.
The creation and expansion of state ownership (other examples are discussed below) represents socialism. This clashes with Fidesz’s purported opposition to this ideology.
Implicitly Threatening to Nationalize Foreign Banks
This month, Orbán said it was “unhealthy” “that foreigners have such a high degree of ownership in Hungary’s banking system.” His “target” is to have “at least 50 percent of the Hungarian banking system to be in Hungarian hands.” Lars Christensen, an analyst at Danske Bank in Denmark, interpreted this as “in effect threatening to nationalize part of the Hungarian banking sector.”
Intervening in the Energy Market
In addition to planning the purchase of natural gas businesses, noted above, the government has distorted the markets for natural gas, electricity, and heating by imposing a ten percent cut on utility rates. This followed Orbán’s assertion that he wanted to make household energy distribution a “non-profit” activity. Reuters observed that “Hungary’s utility sector is mostly foreign owned” and that “gas and electricity prices are a politically sensitive issue.”
The industry won a legal round against the plan, a result Orbán called “scandalous.” Reuters reported that Orbán “said the government would not accept the decision and would submit a new proposal to parliament for even bigger price cuts.” If the plan succeeds, the limiting or elimination of utility profits will amount to the nationalization of utilities, without compensation of the owners.
On March 22, Orbán escalated the threats against utilities, with a blatantly jingoistic and anti-capitalistic appeal. AAP reported:
‘If agreement is not possible, the cabinet will cut utility prices by force to bring them down to average European levels,’ Orban said during a weekly interview on state radio, calling the cuts ‘key to Hungary’s success.’
He accused foreign utility firms active in Hungary of ‘taking hundreds of billions (of forints) of profits back home’ and said companies making huge profits had taken concerted action against Hungarian families.
Mistreating Foreign Creditors
Orbán has signaled that he will expand the policy of forcing foreign banks to accept losses on mortgage loans, through discounted currency conversion. He also has suggested that he will take the same action regarding small business loans in foreign currencies. This type of policy is unfair to creditors, is inconsistent with the rule of law, and discourages foreign lending and investment.
Another possibility is that Orbán will have the central bank use foreign reserves to subsidize the homeowner and small business debtors. This would constitute redistribution to special interests.
Engaging in More Central Planning of the Economy
This month, the government announced its goal to increase manufacturing of goods to be exported to specified countries. Central planning is always a poor policy. Further, the focus also reflects reliance on two fallacies, that 1) manufacturing is superior to services (the “manufacturing fetish”), and 2) exports should be emphasized (mercantilism).
Political and Civil Freedom
On March 11, the Hungarian Parliament passed a substantial amendment to the constitution put in place a year ago. This followed protests within Hungary and international criticism. The amendment attacks political and civil freedom.
If it is signed by the Hungarian President, János Áder, the ‘Fourth Amendment’ will wipe out more than 20 years of Constitutional Court decisions protecting human rights and it will reverse concessions made to Europe over the last year of difficult bargaining as the Fidesz government has tightened its grip on power.
Professor Scheppele characterized the amendment as follows:
The mega-amendment is a toxic waste dump of bad constitutional ideas, many of which were introduced before and nullified by the Constitutional Court or changed at the insistence of European bodies. The new constitutional amendment (again) kills off the independence of the judiciary, brings universities under (even more) governmental control, opens the door to political prosecutions, criminalizes homelessness, makes the recognition of religious groups dependent on their cooperation with the government and weakens human rights guarantees across the board.
Professor Scheppele concluded that the amendment “provides further evidence that … Orbán recognizes no limits on his power.” The president has said he will sign the amendment.
EUobserver.com noted that the amendment “would create the constitutional basis to ban political advertisements in commercial media during election campaigns.” It continued, “Candidates who want TV exposure will now have no alternative but to have their views aired on a much smaller public media broadcaster that is heavily influenced by Orban’s right-wing Fidesz party.”
The Parliament’s passage of the amendment resulted in international condemnation. A Washington Post editorial called the action a “power grab” by Orbán. The Economist warned:
Hungary’s Constitutional Court can no longer reject constitutional amendments on matters of substance—only on procedural grounds. The court must also ignore more than 20 years of legal precedent, basing future rulings on the constitution enacted in January 2012.
The amendment also sparked criticism within Hungary and a demonstration. AFP reported:
Around 4,000 Hungarians rallied in Budapest [on March 17] against Prime Minister Viktor Orban, branding their leader a dictator ….
Protesters carried EU and opposition party flags and held banners dubbing the prime minister ‘Viktator.’
On March 19, the U.S. Commission on Security and Cooperation in Europe held a hearing, “The Trajectory of Democracy – Why Hungary Matters.” (See all the testimony in the March 20 and 23 posts here.) In Professor Schippele’s prepared testimony, she explained:
Under cover of constitutional reform, the Fidesz government has given itself absolute power. It now has discretion to do virtually anything it wants, even if civil society, the general public, and all other political parties are opposed.
Professor Schippele quoted James Madison, from Federalist No. 47: “The accumulation of all powers, legislative, executive, and judiciary, in the same hands, whether of one, a few, or many, and whether hereditary, self-appointed, or elective, may justly be pronounced the very definition of tyranny.” She concluded, “By James Madison’s definition, Hungary is on the verge of tyranny.”
Economic Impact
There are two economic effects of the poor policies of this administration. The first is the suppression of activity simply by the reduction in economic freedom. The second is the inhibition of growth due to “regime uncertainty,” Robert Higgs’s term for uncertainty concerning the regime (i.e., system) of property rights.
Dr. Higgs explains the concept of regime uncertainty:
[I]t has to do with widespread inability to form confident expectations about future private property rights in all of their dimensions. Private property rights specify the property owner’s rights to decide how property will be used, to accrue income from its uses, and to transfer these rights to others in various voluntary arrangements. Because the content of private property rights is complex, threats to such rights can arise from many different sources ….
Because of the great variety of ways in which government officials can threaten private property rights, the security of such rights turns not only on law ‘on the books,’ but also to an important degree on the character of the government officials who administer and enforce the law.
As Dr. Higgs observes, private investment is generally required for growth, and regime uncertainty paralyzes this. Dr. Higgs has focused on regime uncertainty as having prolonged the U.S.’s Great Depression and current recession. The principle, however, that regime uncertainty discourages growth has universal application. As Dr. Higgs discusses, the harm done by uncertainty was recognized even by James Madison in 1788.
Orbán has not only reduced economic freedom, but also created great uncertainty regarding property rights. The effects are predictable.
In June of 2012, in an interview on CNN (video is here, and transcript is here), Matolcsy (then economy minister, and now governor of the central bank) claimed, “The Hungarian fairy tale or the Hungarian example will be a successful one in a year’s time.” He also asserted, “[T]he crisis is over.”
However, as recognized by August, Hungary had slipped into a recession, which deepened in the fourth quarter. The European Bank for Reconstruction and Development has predicted a further contraction this year.
Orbán has failed to acknowledge the reality of the effects of his policies. During a trip to Jordan this month, he claimed the government had made Hungary the most competitive nation in Europe. The International Monetary Fund’s report on Hungary issued in January clashes with this assessment:
The decline of Hungary’s productive capacity in recent years has been deeper than in peer countries; Hungary’s ranking has deteriorated in the Global Competitiveness Report; investment is at record lows; and labor participation, although improving as a result of recent government measures, remains low by regional standards.
Unemployment is also high. Deutsche Welle reported, “Eleven percent of Hungarians are unemployed, with the number jumping to thirty percent for the young.”
Recognition of Economic Effects of Orbán’s Policies
The IMF report noted above recognized that “increased state interference in the economy and frequent and unpredictable tax policy changes, particularly on the corporate sector, undermined private sector activity.” In January, the leader of the Socialist Party, Attila Mesterhazy, criticized Orbán’s interventions in the economy, including the nationalization of businesses, and identified the creation of unpredictably as the worst problem.
This month, Enrico Cucchiani, the CEO of CIB Bank owner Intesa Sanpaolo, observed in an interview with the Budapest Times, “Hungary as you know used to be very good for financial services; it has now turned into a sort of nightmare.” Also this month, Reuters reported that the head of Erste Bank “said reviving lending and demand in the recession-bound economy would be a gradual, tough process that will also require economic stability and a significant reduction in the uncertainty plaguing investors.”
Conclusion
Orbán has continued to weaken economic, political, and civil freedom. His poor policies and creation of uncertainty are suffocating the economy.
In Part II of this article, we address the problem of emerging neofascism.
