01/17/2012 05:20 PM

Nosedive in Budapest

The Political Origins of Hungary's Economic Crisis

By Clemens Höges

Hungarian Prime Minister Viktor Orbán came into power on a wave of political disillusionment. But his policies have not only caused many to question his commitment to democracy, but have also steered Hungary to the brink of insolvency.

The matter of the 5,000 pigs was tricky, and so was the case involving 200,000 sex toys for women. But otherwise, bankruptcy proceedings are hardly noteworthy for Zsolt Szabó: "You look at the records, fire people and then see what you can save for the creditors. You get used to it," he says.

Szabó, who runs a company called Reorg, is a sort of gravedigger of the Hungarian economy. His office is located in a decaying industrial zone of the capital Budapest. Many warehouses are already empty, while others contain gaudy and cheap fashion from China. Szabó's shiny Audi is parked in front of a drab office building. The economist, 33, with his mop of curly hair and pinstriped jacket, is sitting in his office inside. He smiles a lot, and with good reason. Business is excellent. Reorg, with its 17 employees, liquidates bankrupt companies throughout Hungary -- and the number of companies going out of business is on the rise. Szabó estimates that he could be dealing with about 400 in 2012.

He is in the process of liquidating a pig fattening operation. "I eat pork, but I had no idea what pigs eat," he says. But he learned quickly, and he made sure that the 5,000 animals in the pens would continue to receive their corn. He also learned that corn has become far too expensive for the company.

Before that Szabó liquidated a company that sold rubber sex toys for women. Most Hungarians are now spending money only on things they truly need. Those who still have jobs earn an average of €680 ($864) a month. It isn't a good time for selling sex toys, especially since the Hungarian currency, the forint, has been losing value for months. Szabó was able to sell off the company's entire inventory "for a few pennies," he complains, but at least he was able to get rid of it. "Anyone who has cash at the moment can buy a lot of things for very little money in Hungary." Signs that read "eladó" (For Sale) hang on houses, ruined buildings and cars all over the country. But there are no buyers.

Not Abiding by Deficit Rules

Hungary is running out of money -- and the economy is faltering badly. Rating agencies have downgraded the country's sovereign bonds to junk status, and creditors are now charging the government about 10 percent in interest on new loans. Last week, the European Commission even threatened to withhold funds in 2013, arguing that Budapest is not abiding by the deficit rules.

But the country's real problem is Viktor Orbán. The German newspaper Die Welt has called the right-wing nationalist prime minister of European Union member state Hungary, whose Fidesz Party holds a two-thirds majority in parliament, a "Puszta Putin," a reference to the plains of Hungary. A new constitution, which guarantees him a frightening amount of power, has been in effect since Jan. 1. Orbán has removed the word "Republic" from the country's official name, which is now simply "Hungary." His supporters are staunchly behind his "national revolution."

A new media law intimidates critical journalists, and some have already been fired. Orbán has also enacted new laws that have forced the courts to bend to his will. He has reduced the powers of the country's Constitutional Court, and judges are now appointed by an agency headed by the wife of a fellow party member. Orbán now wants to force older judges -- in other words, those who were not appointed by his party -- into early retirement.

This is one of the reasons Brussels launched infringement proceedings on Tuesday. But the European Commission is even more upset about Orbán's attempt to gain control over the previously independent central bank.

Democrats throughout the rest of Europe find the man difficult to stomach, and US Secretary of State Hillary Clinton has sent him a warning letter. But money is the best means of applying pressure in the fight against Orbán. To refinance old debt, he needs about €20 billion ($25.4 billion) from the International Monetary Fund (IMF) and the EU.

Failing Investor Confidence

Orbán sent an envoy to meet with IMF officials in Washington last week, and the man is scheduled to fly to Berlin this week. In a written rebuke, the European Commission makes it clear that funds will only be provided to those committed to democracy: Legal stability and respect for "democratic principles and basic rights" are the best ways to guarantee "the trust of citizens and the confidence of partners and investors," the Commission wrote.

Orbán long refused to tolerate foreign interference. Hungary, he said, had allowed itself to be subjugated by the Habsburgs and later the Soviets, and now that the nation was free, a Hungarian should no longer have to bow to anyone. But now the premier is slowly coming around, although the tug of war between Orbán and his detractors is still a risky game. Both sides could be bluffing. A Hungarian bankruptcy would be a serious blow to European banks, especially those in Austria. Can Europe allow an EU country to rush headlong into financial ruin in order to stop a man whose democratic convictions might not be worth a €20 billion bet?

There is a coffeehouse on the banks of the Danube River, not far from the magnificent parliament building in Budapest. Strings of Christmas lights are still hanging in the windows in early January and the millionaire Ferenc Gyurcsány, probably the country's best-known politician after Orbán, is sitting in one of the café's big leather armchairs. At 1.90 meters (6'3"), he is a tall man, has sharp features and wears rimless glasses. He is drinking jasmine tea while the iPhone next to him on the table flashes hectically. Frank Sinatra singing "I Did It My Way" is wafting from loudspeakers.

As Orbán's predecessor, Gyurcsány ran the country in his own way. Many blame him for Hungary's disaster and for the fact that Orbán was able to acquire so much power and transform the country.

Not Sustainable

The calamity began in May 2006. Gyurcsány, still a Socialist at the time, had just won the parliamentary elections in another coalition with the liberals. His government ran the country for four years "using the social democratic method," he says, "raising taxes and spending money." For example, civil servants received a 50-percent pay raise, and Hungarians were led to believe that this was how things would continue. It was also what Gyurcsány had promised during his election campaign. But he knew that, in fact, this was not a sustainable situation.

To address his concerns, he invited members of his parliamentary group and a few experts to a government retreat on Lake Balaton. He told them how things stood with the country's finances. "But they didn't understand me. They kept insisting and after three hours, I couldn't take it anymore." Then, he erupted. With the doors closed and no journalists in the room, Gyurcsány said that he and the party had lied to the people. "We lied in the morning, in the evening and at night."

In the ensuing weeks, he forgot exactly what he had said at the retreat, but someone had brought along a recording device, and it all came out in September. It was a massive scandal, bringing protesters into the streets and giving Orbán numerous opportunities to humiliate the prime minister. But Gyurcsány had been elected, and he followed through with his austerity program. Then came the economic crisis, and Gyurcsány had to save even more money.

Orbán's followers organized a referendum to finally put an end to Gyurcsány. The referendum only addressed questions like a special doctor's office fee of about €1, university tuition and meal subsidies in hospitals, but more than 80 percent voted against Gyurcsány, even though he was now telling the truth. "Orbán was brilliant. I used to admire him. He's a fantastic speaker," Gyurcsány says. Now, though, he adds, the prime minister seeks only to appeal to Hungarians' sense of national pride, telling them not to allow themselves to be debased by foreign powers and their austerity dictates.

Ruining the Economy

Soon afterwards, Gyurcsány lost his majority in the parliament and resigned. There was a transitional prime minister, and in the end Orbán won his two-thirds majority in a resounding victory.

In the last few months, Gyurcsány has tried to reposition the Socialists. "The next conflict will not pit right against left," he preaches, "but democrats against autocrats." This, he says, is why the party must "move toward the center." And yet, he adds, "the Socialists want to turn left."

To address these changes, he established a new party in October, the Democratic Coalition. Recent polls show that party at about 5 percent, with the Socialists at 20 percent, and Orbán's Fidesz Party at 38. But the next election isn't until 2014.

If Gyurcsány had called for new elections earlier, at least Orbán would not have achieved the two-thirds majority that has allowed him to rewrite the constitution as if it were a piece of scrap paper, says András Vértes. "As a result, we now have more of a political than an economic problem." Vértes, who is not aligned with any party, was considered as a transitional premier after Gyurcsány's resignation. But he told the members of parliament that if he were appointed to the position, he would only bring experts into his government, not politicians. He also insisted that every member of his parliamentary group sign a pledge stating that they would not vote against these experts for an entire year.

It killed his prospects. Vértes laughs, as he sits between palm trees in the offices of GKI, the economic research institute he heads. The country's largest, it works primarily for the European Union, with Vértes and his team keeping Brussels informed about what is happening in Hungary.

'We're at an Impasse'

Orbán is unpredictable, his policies are arbitrary, and he is playing around with the economy, of which he has little understanding, says Vértes. For example, Orbán imposed a special tax on banks that "practically eliminates their profitability." The tax appeals to many Orbán supporters, because they already see bankers as gangsters. The premier is forcing a crisis tax on major companies mostly in the telecommunications and energy sector -- also a popular idea, because it mainly affects foreign companies. Orbán has introduced a 16 percent flat income tax which, says Vértes, benefits high income earners and is disadvantageous to ordinary citizens.

The consequences, says economist Vértes, are that the banks no longer lend money, the telecommunications companies are hardly investing anymore, and consumer spending is taking a hit. "Now we're at an impasse."

The "extraordinary measures" are temporary and are primarily meant to kill time until economic reforms take effect, says Zoltán Cséfalvay, a professor of economic geography. He is a state secretary in the Economics Ministry responsible for international financial matters. There is a European flag in his office, but it is very small and is standing on a table in the corner.

He cites numbers that don't sound half bad. The budget deficit, he claims, was 2.8 percent in 2011 and will end up being 2.5 percent in 2012. Greece -- a country whose name, he says, shouldn't even be mentioned in the same sentence with Hungary -- has a sovereign debt load worth more than 160 percent of GDP, while Hungary's is only 80 percent.

Back on its Feet

The professor has many other numbers. But even if they are all correct, what he is saying really amounts to the same thing Vértes is saying, namely that Hungary has more of a political than a financial problem. Of course, Orbán's man sees the root of the problem in the rest of Europe, and with foreign powers. "Those, for example, who introduce special taxes are always violating economic interests," he says.

He toys with an oddly flattened Plexiglas egg on his desk. Hungary sent such eggs, called Gömböc, to Expo 2010 in Shanghai. The shape is based on exciting mathematical problems. In any event, the object does the same thing as a roly-poly doll: No matter how much it is pushed around, it always returns to an upright position. The state secretary proudly points out that two Hungarians performed the calculations to make the device.

Now the question is whether the country as a whole can likewise find the formula that will allow it to get back on its feet.

Translated from the Germany by Christopher Sultan


Related SPIEGEL ONLINE links:

All Rights Reserved
Reproduction only allowed with permission