2015 was a difficult year for the European Union (EU). The Euro crisis reached yet another climax with the currency area staggering on the brink of Grexit. The Ukraine conflict has become entrenched, while diverging expectations and interests among EU partners have become evident. Since August 2015, additionally, the EU has been confronted with its biggest challenge so far: the influx of refugees. As no solution has been found yet, those predicting the collapse of the EU have become more numerous.
The EU is largely viewed as a cornerstone of European stability and prosperity. Currently, however, the EU faces a range of political and economic pressures, including slow growth and persistently high unemployment in many EU countries, as well as the rise of populist political parties, at least some of which harbor anti-EU or „euroskeptic” sentiments. Such factors are complicating the EU’s ability to deal with a multitude of internal and external challenges, e.g.:
1.) the June 2016 vote in the United Kingdom (UK) in favor of leaving the EU;
2.) the Greek debt crisis and lingering concerns about the eurozone;
3.) the ongoing migrant and refugee flows;
4.) a resurgent Russia; and
5.) a heightened terrorism threat.
Amid these difficult issues, the future shape and character of the EU are being increasingly questioned.
EU`s New member states (NMS) of Central and Eastern Europe (CEE) and the candidate or Associated West Balkan have had a growth-rate in excess of the EU average in the 2000s. This trend was broken or translated these countries into the global crisis in 2008 that reached Southeastern Europe as well. Similarly to the United States (US) and Western Europe the crisis of the banking sector soon spread also to the real-economy. However, the banking sector is not only „infected from the outside” but from the construction fever of most countries including the repayment difficulties of borrowed loans. The crisis was handled generally by similar Keynesian methods. However, the room for manouvre of the NMS were more limited than one of the Old member states (OMS).
Since 2010 Hungary has worked under Prime Minister Viktor Orbán to adopt a managed and centrally planned form of capitalism, namely an „unorthodox economic policy” was pursued.
What are the main characteristics of the unorthodox economic policy?
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Breaking off the neoliberal economic policy;
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the interruption of taxing the population, the enterprises, groups with lesser advocacy power;
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common bearing of public financial burdens;
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the conscious, rational influence of the state on the economy;
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the strengthening of state regulation and control;
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the positioning of domestic enterprises and the population.
These are the essence of the Hungarian model, which has historical origins namely:
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the post-compromise Hungary,
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the two world wars,
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the „Széchenyi Plan” of the first Orbán government between 1999 and 2002.
Thus, the Hungarian state consciously, reasonably entered the economy, and centrally regulated and coordinated it.
What are the main characteristic of a neoliberal economic policy?
According to the neoliberal philosophy, market players can create economic growth and financial equilibrium with unlimited automatizms. But the facts prove that this is untrue. In the US in 2007, in Western Europe in 2008 and in Hungary in 2006, the over-withdrawal of the state from the economy caused an economic crisis.
In the neoliberal state, under the pressure of capital, the state does not take the taxes needed to operate the welfare state. The state is first financed by issuing sovereign debt, and when it becomes problematic, the formation called a „debt state” becomes a „consolidation state”. In practice, this means continuous and brutal constraints, which also hit small people. Budget constraints, however, run out of demand in the economy, which the neoliberal state tries to counteract by monetary policy. This is followed by quantitative easing of central bank banknote printing programs. With these successive phases, the neoliberal state really tries to expel the crisis of capitalism in time.
Viktor Orban introduced his so-called „unortodox economic policy” in 2010 by breaking off cooperation with the IMF, whose aid of 20 billion euros he intended to replace with investment from eastern countries such as Azerbaijan, China, and Russia, which would not demand strict terms. The decision turned out to be a somewhat poor one, since the eastern opening never brought the economic fruit expected: no major new investment materialized during this time, with the possible exception of a controversial deal with Russia on the construction of two new blocks at the Paks Nuclear Power Plant. Meanwhile, total export to non-EU countries grew by over 20 percent, a proportion that could have been easily achieved without the change of political orientation.
The „unorthodox economic policy” was not just an aid play. In fact, it also included a mixture of steps that the IMF highly recommended and some that the IMF clearly opposed. The former included a higher value-added tax (increased from 25 percent to 27 percent in 2012) and a reduction of many social benefits, such as unemployment benefits and pension bridges, both reforms aimed to bring the budget under control.
Among the economic initiatives that neoliberal economists did not like were nationalizing strategic assets, primarily in the energy and financial sectors, and levying higher taxes on the banking, telecom, insurance, and retail sectors, as well as on foreign-owned media. The Orbán government even proposed an Internet tax that spawned public outrage and did not go into effect. To improve Hungarians’ purchasing power, the government also pegged the national currency to the euro and Swiss franc at an unrealistically favorable exchange rate. All of these moves drastically increased the role of the state in the economy.
The public protested against some of Orbán’s moves, but owing to the lack of a credible opposition that could make use of the public’s discontent, not much happened up to now. According to Transparency International and Freedom House corruption has increased while media freedom has further deteriorated.
Orbán’s „unorthodox economic policy” exacerbated his already poor image abroad, but it has since started to bear some fruit. The program has also slowly attracted some supporters in the CEE—for instance, in neighboring Slovakia, where the government seemed to be using Orbán’s playbook when it adopted a 0.4 percent bank tax, introduced legal restrictions on foreigners acquiring agricultural lands, and tried to nationalize part of the pension system. Even the region’s largest player, Poland, might have picked up on the Hungarian vibe. In 2014, the government of Polish Prime Minister Donald Tusk radically changed the second-pillar pension system, while the newly elected conservative president (Andrzej Duda) promised to raise taxes on banks and said that he considers foreign ownership of banks to be detrimental to the country’s economy.
Although the reforms in Hungary created statistical growth, they did not solve Hungary’s structural economic problems. Even worse, they did not improve people’s daily lives. The dissonance between impressive upticks in economic indexes and the stagnant standard of living is shocking. According to Eurostat, over 30 percent of Hungarians are at risk of poverty and the TARKI Research Institute suspect that more than 40 percent of people are already living below the poverty line. Meanwhile, entrepreneurs can more easily make a profit thanks to a flat income tax of 16 percent, but their earnings are subject to a 27 percent value-added tax, which is the highest rate in the EU. Things are especially bad for the Roma population, one of the most significant ethnic minorities in Hungary.
Orbanomics, the unorthodox and much-criticised policies of PM Orbán, seemed to be working over the past seven years — Hungary has been among Europe’s best economic performers even though its approach has put it at loggerheads with the EU and the IMF. However, a surprise contraction has now left Budapest considering fresh stimulus measures. The figures are a blow to Orbán’s approach of shunning austerity and opting for populist economic measures — an approach being watched by other CEE countries such as Poland, which has adopted similar measures to please voters.
Budapest, 19th November 2017.
Matyas Benyik
Remark: This above paper was prepared for the EU Critical Seminar 18 November 2017 held in Gothenburg entitled „Breaking with EU politics: Yes to just transition, common welfare, peace, environment and antiracism”