The thought that a legal decision in Budapest could cause alarmingly bellicose rhetoric between two Caucasian nations 2,500km to the east seems highly implausible or did before August 31. But on that day Hungary handed over an Azeri military officer to the Azerbaijan authorities, sparking outrage and talk of war from neighbouring Armenia.
The officer, Ramil Sahib Safarov, had been sentenced to life imprisonment for axing an Armenian officer to death in Budapest in 2004, when both were attending a Nato training course. Armenia immediately cut diplomatic ties with Budapest and warned Azerbaijan with whom it has had a territorial dispute over Nagorno Karabakh since the break-up of the Soviet Union that we dont want a war, but if we have to, well fight and win.
In Hungary, the affair appears to have been a serious blow to Viktor Orban, the pugnacious Hungarian prime minister, who overruled advice from his foreign and justice ministries to implement the transfer.
This was a mistake; I dont think anybody can reasonably defend this decision... but I think this quite clearly damages Fidesz [the right-wing governing party], says Gabor Takacs, an analyst with Nezopont, a right-leaning think-tank. Abroad, the decision has rung alarm bells in the US, EU and Russia, each eager to avoid another hot conflagration in the Caucasus.
Assuming that peace prevails, the affair could be viewed as a very unfortunate bungle by Budapest. But in the context of Orbans track record since taking power in the spring elections of 2010, it raises yet more concerns about his reliability as the leader of what was, in 1989, arguably the champion of reform among the former communist states in eastern Europe. Indeed, so furious has been the pace and number of his political reforms and unorthodox economic policies that barely has a week gone by without Orban making international headlines. Critics say he is undermining democracy and damaging both the economy and investor confidence.
With a two-thirds majority in parliament, Orban is creating a position of total power, by a combination of restructuring independent national institutions and appointing loyal servants to lead them. Examples include the media watchdog, the prosecutors office, the head of the judiciary, the national budgetary council and the central banks monetary council, says Szabolcs Kerek-Barczy, managing director of the Freedom and Reform Institute, a conservative Budapest think-tank.
Complaining that he had inherited a fiscal mess, Orban moved quickly in 2010 to impose punitive emergency taxes applied retroactively on the mostly foreign-owned banks and other financial services, along with telecommunications, retail and energy sectors.
After refusing to meet the IMF in the autumn of last year, claiming to be waging a war on debt, Orban nationalized the mandatory private pension funds. Later in 2011, with the forint falling to new lows against the Swiss franc, Orban forced banks to accept a mortgage repayment scheme whereby borrowers could fully redeem foreign currency loans at very favourable rates, with the banks taking the exchange rate loss. Last year, banks losses were close to 1 billion.
True, the budget deficit was brought down close to the annual target albeit by one-off methods and, boosted by manufactured exports, Hungary had (and still has) healthy current account and balance of payments figures. But despite this, in November 2011, as the euro crisis worsened, investor confidence in Hungary ebbed sharply, and with the forint hitting record lows of 317 to the euro, Orban did a U-turn, saying Hungary would invite the IMF back for a new kind of credit arrangement. In spite of numerous optimistic government statements since late 2011 about signing a new deal, little, apart from two preparatory visits by the EU-IMF teams, has actually been achieved.
One of the sticking points is the decision to apply the new Financial Transaction Tax to transactions by the central bank a move abhorred by both the European Central Bank and the IMF but analysts expect a deal to be eventually clinched. Another problem might be Orbans much-touted Job Protection plan, which is due to be launched next year. The plan reduces taxes for small firms and gives tax relief to those hiring young and old workers, but costs approximately 1% of GDP money that the government does not have.
Orban ultimately wants the IMF deal, but he needs to be seen as defending Hungarian interests, hence all the anti-EU-IMF rhetoric, says Peter Kreko of Political Capital, a Budapest think-tank. Orban and his key supporters (notably Laszlo Kover, the speaker of parliament) have repeatedly engaged in anti-EU and nationalistic rhetoric, fanning fears of irredentism in neighbours with large ethnic Hungarian minorities, notably Romania and Slovakia.
The new constitution and supporting laws which make basic economic policy such as the flat rate of personal income tax subject to a two-thirds majority in future parliaments have also raised concern.
Claiming that the two-thirds parliamentary majority gives Fidesz the mandate for such radical changes, Ferenc Kumin, government spokesman for foreign media, insists that Orban and Fidesz, which he helped found as an anti-communist, student activist in 1988, is now a democratic, centre-right, conservative party, in the western European tradition.
Peter Rona, former banker and professor of international law at Oxford, refutes this. Since the French Revolution, it is a fundamental doctrine that one democratically elected parliament cannot bind a successor parliament with [laws requiring] a two-thirds majority. Its anathema such a breach of the peoples sovereignty that its out of the question, he says. Rona adds that transgressing such a cornerstone means Fidesz has removed itself from the spectrum of democratic parties in Europe.
ONE MORE VICTOR
But if western governments thought Orban was the only leader with authoritarian tendencies in New Europe, by early summer they had to think again. Victor Ponta, the 40-year-old head of the Social Democratic Party which still encompasses some former officials from the now defunct Communist Party took over in May as prime minister of Romania as the head of the Social Liberal Union (USL), a coalition with the National Liberal Party. Championing his democratic credentials as the only prime minister that celebrated adulthood after the 1989 revolution, he like Orban promised fundamental change for his country.
Though espousing leftist ideals unlike Orbans nominally right-wing Fidesz Ponta shares more than a legal education and common first name with his opposite number in Budapest. Sometimes mimicking Orbans very words (both, for example, denounce the period since 1989 as two lost decades for their respective countries), Ponta immediately set about imposing his will on Romania, with many policy moves mirroring those of Orban.
Within a week, Ponta initiated a new first-past-the-post election system and called for the resignation of all county prefects and deputy prefects despite legislation in 2006, supported by the Liberal Party (now part of the Ponta coalition) that gave them the protected status of civil servants. Meanwhile several journalists at state TV were inexplicably suspended. Expert Forum, a Bucharest think-tank, in coalition with several NGOs, promptly issued a statement warning against the Fidesz-ization at breakneck speed in Romania .
The danger is visible that the new prime minister, Victor Ponta, may step in the footprints of his Hungarian counterpart, Viktor Orban, by purging the administration and the public media of independent professionals and critical voices, and engineering a super-majority in the next Parliament, it read.
Ponta suffered some setbacks: his proposed election law was subsequently vetoed by the constitutional court, and a scandal broke that he had plagiarized his PhD thesis something he has denied.
In June and July he began what critics termed a blitzkrieg on democracy, including the use of emergency decrees to replace the speakers in both parliamentary chambers, plus the national ombudsman. Most spectacularly, he had the democratically elected president, Traian Basescu, suspended pending a referendum to sanction his impeachment. The prime minister charged that the president had over-extended his powers, appointing loyal soldiers in all positions of importance in state bodies and thus making normal governing impossible. Ponta said he had merely wished to restore political balance.
Basescu survived as the referendum failed to attract the 50% voter turnout required, and Pontas government horrified the EU by attempting to change the total number of voters after the vote to boost the turnout figure. Investigations are taking place into claims that in some villages turnout was as high as 200% and that some Romanians were raised from the dead to cast their vote.
Mihail Chiru, a researcher in comparative politics at the Central European University, says that to some extent, the criticisms of Basescu are valid as there is some evidence that some agencies are not independent from the presidents control. This has created a lot of resentment, and the feeling that Basescu will never want to share power, says Chiru.
Similar to Orban, Pontas thrust for power has caused alarm in Brussels and Washington: in July Herman Van Rompuy, president of the European Council, voiced deep concerns about Romanias stance with regard to the rule of law and the independence of the judiciary, and urged the prime minister to address the issues identified by the Commission as problematic.
Yet, for all the similarities, there are crucial differences between the two Vic(k)tors most notably regarding economic policy. While Orban plays endless and expensive cat and mouse games with the IMF, denouncing austerity and championing his self-proclaimed growth measures, Ponta has pledged to adhere largely to the terms of the current EU-IMF standby loan, with Romania successfully concluding a review in August to continue with a 5 billion precautionary credit line, and earning guarded praise in the process. Policy implementation remains broadly on track, despite challenging conditions. Progress has been made in reducing inflation as well as government and external deficits, but much remains to be done to increase still weak growth, the IMF said in a statement.
For now, Romania has growth the IMF expects around 1% advance in GDP this year; Hungary, despite repeated rhetoric about the success of unorthodox policies, is in recession. The official forecasts predict growth of 0.1% this year, but independent analysts estimate a contraction of 1%, and there is growing concern that next years budget contains a hole close to 2% of GDP. Romania is surely not out of the woods, with the central bank forced to intervene repeatedly to keep the leu currency from tanking, and with the IMF warning that the political turmoil had dented confidence. But, some analysts say, it is currently less unpredictable than Hungary.
The two countries political problems have contributed a lot to their economic misfortunes, especially in the current climate of uncertainty. Their plights are largely of their own making, as Andreas Treichl, CEO of Austrian Erste Bank which is present in both countries, tells Emerging Markets. Consider if the self-inflicted problems in Hungary and Romania didnt exist. I see no reason except for management in the countries of the political situation why Hungary and Romania couldnt perform the same way as the Czech Republic and Slovakia perform. With proper political leadership, he adds, the general economic situation would not have affected these countries [as it has], and they could actually look extremely well if it wasnt for their own doing or not doing.