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article imageOp-Ed: Will Hungary prove austerity wrong?

By Matthew Turner     Mar 28, 2014 in Politics
Budapest - Enough is enough! As the number of Europeans taking to the streets to protest the economic dictates of Brussels' Eurocrats increases, Hungary is one country that seems to be straightforwardly ignoring the troika's austere policy prescriptions.
Policies that were once dismissed are now acknowledged as feasible alternatives. As Hungary braces itself for parliamentary elections on April 6th, reports are pouring in from all sides arguing in favor of Budapest’s economic policies. Is this change of attitude a signal that austerity is falling from grace?
Judging by its economic figures alone, Hungary is riding high on the back of sturdy economic growth, low inflation and decreasing unemployment, making forecasters quite optimistic about how the economy will develop in the coming years. Indeed, the IMF, the OECD and the European Commission have all issued positive appraisals of Hungary’s forecasts and targets in recent weeks.
This stands in stark opposition to similar analyses published in the fall of 2013, when the government first unveiled its budget for the next year. International financial institutions severely criticized Hungary for its overly ambitious goals of achieving 2 percent growth while slashing taxes without falling outside the 3 percent deficit target.
In a previous post, I asked whether Hungary’s easy money policy could be a feasible alternative to German austerity. Today, Viktor Orbán’s government appears to have answered that question in the affirmative. In its annual review, the IMF broke tradition with its previous gloomy estimates, highlighting that “the Hungarian National Bank was successful in easing inflationary pressures while at the same time cutting the base interest rate to a record low.”
Indeed, the central bank extended its uninterrupted rate-cut trend, bringing the main rate to a new low of 2.6 percent in order to protect the economy from the negative externalities that could be derived from the Crimean conflict. As a direct effect of this series of successive cuts, the country has been showing improvements in both the individuals’ confidence in the market and the private sector. Consumer expectations are at an eight-year high while the economic sentiment index turned positive for the first time in almost 12 years. As households have gained confidence, consumption has risen markedly, boosting economic growth. Economists over at Morgan Stanley predict a 2.4 percent GDP growth, surpassing even the government’s own estimates.
Through its economic policies, it seems Hungary has managed to strike a balance between pleasing European leaders and the electorate, without resorting to the type of populism that is running amok in several core countries. According to the average of five polls, the ruling FIDESZ coalition is credited with an average of 49 percent backing among decided voters, compared with just 26 percent for the opposition coalition.
This is hardly surprising. Opposition parties agreed on a common platform only a few months ago, too late in the electoral process to effectively change its outcome. Worse, Gabor Simon, the deputy head of the biggest opposition party, was arrested earlier this month after failing to explain the origins of a substantial bank account he held in Austria. The account contained the hefty sum of €770,000.
Financial strategists expect Viktor Orbán to win by a landslide. According to Phoenix Kalen and Benoit Anne of the Societe Generale, quoted by Bloomberg, “our base-case scenario (for Hungary) is now a supermajority Fidesz win.”
So what’s in store next for Budapest? In a speech held in March, Orbán outlined his plans for structurally changing the Hungarian economy, gearing it towards becoming the most industrialized nation in the Union. This is not a far off goal, since the industrial sector already contributes to 23 percent of GDP, compared to 26 percent for Germany. To achieve this, Orbán needs to increase the competitiveness of the country’s exports, a feat that will be fulfilled by further reducing electricity prices for consumers and industrial producers alike.
But the real snippet of his speech was that Hungary shouldn’t copy the economic policy staples of the core, ‘developed’ European Union states. This statement echoes a deeper truth: that each country should search for its own way, develop a path that best suits its geography, comparative advantage and economic potential. Even if Orbán’s policies are deemed unorthodox by some, as long as they deliver healthy results while staying inside the macroeconomic targets agreed upon on European level, can we really insist they be changed?
The only questions that remains is whether the Budapest model can mark the beginning of a larger paradigm shift in Europe, with pundits and markets seeming more and more ready to accept non-austerity driven policies.
This opinion article was written by an independent writer. The opinions and views expressed herein are those of the author and are not necessarily intended to reflect those of
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