Dismantling Democracy: How Hungary is Turning its Back on the EU (Part III)

By Otto Faludi | May 15, 2012 at 10:10 am | No comments | Opinions & Editorials | Tags: Acquis communautaire, András Baka, Banks, Brussels, Budapest, Canadian Hungarian Democratic Charter, Council of Europe, Curia, democracy, economics, EU, Euro, European Union, Eurozone, Fidesz, Hungary, Infringement, József Szájer, Judiciary, Magyar Nemzeti Bank, Magyarorszag, National Judicial office, Pension, Retirement funds, Supreme Court, Tünde Handó, Viktor Orban

Identifying Economic Concerns in Hungary

Background – Economic problems in Hungary are not an especially new reality, and they have been aggravated by the global financial crisis which propelled the collapse of once fruitful European economies in Greece, Spain, Ireland, and elsewhere. In December 2011, shortly before the new constitution drafted by Fidesz came into effect, Standard & Poor’s (S&P) credit rating agency downgraded the Hungarian national debt to ‘junk’ status, which the Orbán government criticized as a move caused by “pressure from market players interested in strengthening the dollar zone and weakening the Eurozone.”[i]

According to a BBC report explaining the downgrade, S&P described constitutional changes enacted by Fidesz as being a major factor in its rating decision, citing alleged political interference in the country’s free market economy.[ii] It must be understood that concerns vis-à-vis the Hungarian economy are multifaceted – according to CBS News, investors have also been spooked by negative outlook on the “sustainability of the government’s efforts to ensure that the state budget deficit stays within EU guidelines.”[iii]

However, the most troubling aspect of new constitutional changes to Hungary’s banking system for investors – and particularly EU lawmakers in Brussels – has been a major overhaul of the Hungarian Central Bank in a way that critics fear will curb its ability to operate independently. Under new legislation, the changes would precipitate an increase in the membership of the supervisory Monetary Council, the appointment of a new president of the Central Bank who would have authority over the institution’s governor with the latter acting as Vice-President, and the appointment of additional deputy governors.[iv]

 The view from Budapest – Upon emerging from decades of communism in 1989, Hungary began what looked sure to be a successful transition to the framework of free market liberal democracies. Under the leadership of Hungary’s first democratically elected premier József Antall, the country transformed swiftly – albeit painfully – into a functioning capitalist economy, experiencing massive inflation and negative growth due to the loss of former markets in other post-Communist eastern nations. However, the negative outlook changed in the mid-1990s under the supervision of Gyula Horn’s government, which induced positive growth, decreased inflation, and introduced currency stability by the late 1990s.[v]

While economic and political mismanagement by successive Socialist governments has reversed the positive outlook of the mid-to-late 1990s in the past decade, with economic stagnation exacerbated by the global financial crisis, it is not all bad news for Fidesz. Since 2010, the new government has stabilized the national economy, bringing it into positive growth hovering around 1% by increasing taxation in a number of areas – including a heavy focus on foreign-owned enterprises in the country.[vi] The Orbán government has also attempted to fall within the acceptable parameters of EU member state budget deficits by “forcibly transferring most of the assets of private pension funds to the state to cut the high budget deficit” and through “cutting the eligibility period for unemployment benefits, tightening disability pension rules, and abolishing earlier retirement.”[vii]

The question for Hungary at this time is to decide whether it can stay afloat on its own, or if it should attempt to secure an emergency loan of €20 billion from the IMF in case investor confidence in Hungary continues to decrease in light of the Orbán government’s unorthodox and rapid restructuring of the state economy.

The view from Brussels – The opinion of European lawmakers on the hasty overhaul of the Hungarian economy and banking sector by Budapest is one fraught with anxiety, shared by foreign investors and companies. Constitutional reforms which have restructured the management of the country’s Central Bank are first and foremost on the bucket list of Brussels’ concerns. Although Fidesz capitulated to EU demands to cancel the merger between the country’s Central Bank and its financial regulator in January 2012, the government has not officially reversed other elements of the Central Bank Act which could hasten political interference in what is supposed to be the independent operation of this institution as per European law.[viii]

In a press statement released in late December 2011, the Hungarian Central Bank referred to new changes imposed upon it by the supermajority parliament, as a measure designed to “influence central bank decisions by the Government or political influences…contrary to the Treaty on European Union.”[ix] Additionally, the statement warned that the new legislation would “increase the unpredictability of the economic environment and jeopardize the stability of the Hungarian economy.”[x]

Despite outcries from European lawmakers that the banking legislation would override European laws such as Article 130 of the Treaty on European Union that protects the independence of central banks from political influence by explicitly forbidding them to obey commands from their governments, the bill was passed in January 2011 with a strong majority of votes in Parliament.[xi]

Summary – The failure of Budapest to adequately address concerns on the issue of economic sustainability and central bank independence comes at a particularly inconvenient moment when Hungary is attempting to negotiate an IMF lifeline of €20 billion in order to prevent a default on its debt obligations.[xii] The forced nationalization of hitherto privately held pension funds has annoyed Brussels further, in what the EU sees as an attempt by Hungary to disguise its budget deficit that would otherwise top 6% without the transfer of those funds to government control, twice the amount permitted by EU agreements.[xiii]

Clashes between Central Bank governor András Simor and PM Orbán have illustrated the gaping divide that exists between the country’s banking system and its government, with the former accusing the latter of playing political games that run contrary to the spirit of European democracy. Additionally, fifteen major foreign firms “have filed a [joint] complaint to the European Commission about hastily-adopted taxes in Hungary which they say threatens their activities in the country”[xiv], reflecting the consequences of the government’s methods which have resulted in these (and other companies) posting hefty losses.

Fidesz’s attempts to meet the budget criteria set out by its adoption of unorthodox taxation policies, and alleged governmental interference in the activities of the Central Bank continues to be a sore point in relations between Brussels and Budapest which show no signs of a thaw. As the Hungarian Prime Minister recently told thousands in a speech commemorating the Hungarian independence war of 1848, “financial independence [from external influence] is a precondition for freedom.”[xv]

Conclusion

A word of caution for observers watching the Hungarian political scene is to recall that the country’s experience with democracy is a very new experiment for one of the oldest independent nations in Europe. Long described by historians as a gateway between East and West, Hungary has a rich and complex history of competing societal groups which have at times coexisted and prospered like during the reign of King Matthias Corvinus in the 15^th century, and on other occasions have thrown the country into existential crises as during World War II.

The resounding election of the Fidesz-Hungarian Civic Union in 2010 with a parliamentary supermajority shows that a large portion of active voters sought to give the party a mandate to make concrete changes with the hopes of replicating prosperity in neighbouring countries like Slovenia and Slovakia after a turbulent 20^th century. However, it must also be remembered that Fidesz went into the election promising not to amend the national constitution even if they had the power to do so, a promise which they quickly reneged upon.[xvi]

In a letter chastising the constitutional overhaul by Fidesz, Princeton constitutional law expert Kim Lane Scheppele noted that “Fidesz did not campaign with the promise of a new constitution” and questioned the sincerity of the party in removing “the 4/5ths rule from the constitution” in order to accelerate new changes with its two-thirds majority.[xvii] Furthermore, while Fidesz distributed a 12-point questionnaire to Hungarian citizens regarding constitutional changes, only 11% of the questionnaires were returned meaning that a fraction of the country’s population was actually consulted in the adoption of monumental changes to legislation determining the basis of Hungary’s fundamental laws.[xviii]

 While Fidesz is not the first right-wing European party to ascend to power under the EU’s watch, it is the first member state that has been threatened with legal consequences for failing to adhere to its commitments under the doctrine of the acquis.[xix] The adoption of new cardinal laws drafted exclusively by Fidesz lawmakers is set to allow government intervention into moral and ethical matters that could limit women’s rights, fuel tensions over the Hungarian diaspora in neighbouring countries, marginalize the LGBT community, promote the exclusion of social minorities in Hungary, and infringe on a number of other fundamental human rights that are crucial to the success of liberal democracies worldwide.

The approval of the new media laws limits the ability of the press to report stories that are critical of the government, and allows a government-appointed data czar to regulate all media activities in the country, leaving the door open to state censorship. Political manipulation of the judiciary and the Curia through new constitutional measures puts the independence of both institutions at stake, again giving the parliament free reign to control these bodies through government-friendly political appointees.

Finally, the attempted domination of the Central Bank by parliamentary forces suggests that Fidesz is attempting to control the independent operations of the country’s banking sector, which Orbán has said is a key to preserving the country’s freedom. In all of this, it seems that the main goal of Fidesz under the leadership of the dauntless Viktor Orbán is to defend its sovereignty as Hungarian leaders failed to do on that fateful day in Versailles some ninety years ago. Prime Minister Orbán has warned that “Hungary will not be a colony”[xx] of the European Union but this statement begs the question then: will Hungary be a democratic partner?

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