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Emerging Markets

House of glass

Its economic ills may predate the global economic crisis, but the slump has hit Hungary hard. With a self-proclaimed “caretaker” prime minister trying to push through unpalatable reforms, the country’s ability to work its way out of the pit is limited – not least by a political tug-of-war

At the Glasshouse Bisztro, an eatery on Budapest’s Csepel Island, the fried chicken, chips and pickled gherkins, washed down with a pint of draught, will set you back Ft1,200 – that’s all of $5.60. It’s a Monday lunchtime and thus far Emerging Markets is the sole diner. “It’s not easy, you know. I’m retired; only here to help out my son – he’s got several interests,” says Gabor (not his real name), the silver-haired chef.

Csepel Island is not on the regular tourist map, and the Glasshouse – despite the working-man portions on offer – features in no restaurant guide. For good reason: outside, the skyline is punctured by now-cold chimneys which, until 1990 or so, lifted noxious fumes away from the populace below. “It was the steelworks – there were 60,000 workers in the 60s. Now it’s all closed. There’s 5,000, perhaps 6,000, now at dozens of units,” says Gabor.

Such were the left-wing traditions of this industrial sprawl that earlier this suburb was dubbed “Red Csepel”. Times change. Such is the disillusionment with the current Socialist government that in a parliamentary by-election here last month voters chose the opposition centre-right candidate, albeit in a poor turnout. “Red Csepel? That was a long time ago,” says Gabor, who adds, “I’m not into politics.”

Heavy industry Csepel is a thing of the past. Today the suburb is a mirror of contemporary Hungary: modern business and industrial units, even if set cheek by jowl with decaying communist-era plants, provide salaries that get spent on fashionable clothes and modern, if modest cars – the much-derided Trabant is now a rarity even here.

Spending money, that is, for those with jobs. But the global economic slump has hit Hungary hard, particularly in manufacturing, the sector that led economic recovery from the mid-1990s.

The hardest hit

With western Europe accounting for 80% of exports, an economic sneeze in Berlin translates into full-blown commercial flu in Budapest. Industrial production and exports were down some 25% in the first quarter, while tourism, another key sector, has been hit by a collapse of the high-margin conference segment.

True, inflation, now at 3%, is at a record low for recent times, but unemployment is scraping 10% and on an upward curve, compared to 8% a year ago; after several revisions, the government is now assuming a decline of 5.5–6% in GDP for this year.

A similar scenario is being played out across the region, most notably in Slovakia and the Czech Republic. But unlike its neighbours, Hungary has been struggling for years with high state debt and bloated government spending – the budget deficit hit 9.4% of GDP in 2006 – in part a result of the old communist regime buying peace from its citizens, in part successive democratic governments buying votes before elections.

Hungary’s ability to work its way out of the pit is also constricted: only 3.9 million of its 10 million population have jobs, with half of those on the minimum wage of $300 a month. And once turbulence hit world markets last autumn, Hungary was quickly in the firing line, although the government earned some kudos for moving swiftly to arrange an IMF standby loan of $15.7 billion, the first EU country to do so.

While this brought the assurance of national solvency, increased market uncertainty in early March pulled the forint down to record lows of Ft317 to the euro – a 32% decline in six months, burdening hundreds of thousands who had taken out foreign currency mortgage loans with higher monthly repayments.

Soon after, the grind of leading a minority government for nearly a year against relentless opposition criticism proved too much. After losing support in his own party for unpalatable reforms and with his popularity at an all-time low, Ferenc Gyurcsany, prime minister since 2004, stepped down.

Taking the interim lead

Using a political loophole that avoided the need to call early elections, in his place has stepped Gordon Bajnai, a 41-year-old businessman, technocrat and former minister of the economy. With no formal political allegiances, Bajnai insists he is only a caretaker leader determined to push through key reforms to handle the crisis. “One year, one government, one task: to manage the crisis,” and neither he, nor any of his cabinet will run for office after next year’s elections, he said on taking office on April 14.

Given the size of the task and the unpopularity likely to be generated as a result, that might be just as well.

In a plan that aims to reduce state spending while providing a stimulus to improve competitiveness and maintain, if not create, jobs, Bajnai came in pledging a wide range of measures, including cuts in public-sector salaries, pensions, maternity benefits, mortgage subsidies, transport and energy subsidies, all designed to reduce state outlays by Ft1,300 billion ($6.1 billion) in the next two years and keep to the budget deficit target of 2.9%. While these cuts will, to some extent, be offset by a reduced tax wedge on wages and social security contributions, VAT on most goods will still rise from 20% to 25% to plug the gaps.

Despite leading from the front by announcing a 15% cut in salaries for government ministers and a 50% cut in their daily allowance for travelling abroad, the programme was promptly denounced as “savage” by Fidesz, the main centre-right opposition party, with leader Viktor Orban continuing to call for new elections as the only way to solve the country’s problems.

Public reaction, however, has so far been relatively muted; as parliament voted to cut the “13th month” pension in early May, some unions, notably in transport and education, announced strike action for May 8, but others called for negotiations.

Inevitably, the fundamental question is: will the measures work?

“I think the main point of this package is that it will fulfil the IMF agreement and thus help us – and simultaneously the Socialists and their Free Democrat allies – buy some time. But if they don’t use theri time properly it will be at great cost,” says Peter Akos Bod, former minister of economy in the centre-right government of 1990–94 and now a professor at Corvinus University.

Bod admits some reform measures, such as raising the retirement age, are sensible and long overdue, but he fears a backlash from the new government next spring. “I’m anxious about the political consequences. Not that people will revolt, but Fidesz, seeking to maintain its high lead in the polls, might be tempted to promise to re-do it once in office. So, we again have a political risk with [potential] lack of continuity,” Bod says.

Contradictory view

Others are more critical. Laszlo Csaba, a professor at the CEU University, says the figures will not add up as the downturn bites further, and measures such as cutting mortgage subsidies will hit a construction industry already reeling from the economic downturn. “It’s contradictory: these policies lack coherence,” he says.

Like Fidesz, Csaba says the Bajnai government lacks a proper public mandate, which can only be achieved through early elections, though he admits that Fidesz, as the certain winners of such a move, have not revealed any details of how they would manage the crisis, despite a torrent of criticism.

But calling elections would have meant four months of no government precisely when firm leadership was needed, argues Kornelia Magyar, director of the Progressive Institute, a think-tank associated with the Socialists. Moreover, she doubts Fidesz in reality wants elections, despite their clamouring. “It would be very bad for Fidesz. As it stands, they don’t have to govern, they can remain popular, and in a year’s time they can take over the country in, hopefully, a better state,” she says.

Bajnai’s situation is certainly precarious: while winning pledges of loyalty from Socialist and Free Democrat MPs to support his programme, with elections just one year off the risk of defections will rise as deputies face crucial votes, fearful for their careers. “I’m sure Bajnai is prepared and has his ideas, but his main difficulty will be convincing Socialist MPs to vote for his programme [because] for sure they will not mean an increase in popularity,” says Mark Szabo, head analyst with the Perspective Institute, a right-leaning think-tank.

Meanwhile Fidesz is promoting the June European Parliament elections as a test of the new government’s credibility – or lack of it – despite the first glimmers of positive trends emerging; the forint, for example, has gained 10% on its March lows.

Back in Csepel, Gabor shuns any role as a political weathervane – scuttling into the kitchen when pressed for more insight. But outside, Laszlo Miraider, a 55-year-old joiner, is more forthcoming on Hungary’s economy and political elite: “Let me tell you straight off, the whole damned bunch are rubbish. I’ve never voted and I never will. Maybe I’m naive. I’ve had my life, what happens to me doesn’t matter: it’s the younger generation I worry about. It’s going to take years to get out of this mess,” he says.

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