On the verge of catastrophe .....

In 1989 Hungary helped set the trend (along with Poland) for the rest of the Central and Eastern European region. The introduction of visa-free travel for its citizens to the west in 1988, the dismantling of its physical border barrier with Austria in May 1989, and its ruling party’s attempts at pre-emptive democratization set the stage for the collapse of the GDR and other state socialist regimes around it. Unfortunately for its citizens it is the first country to be hit by the financial markets growing willingness to question the long-term viability of Central and Eastern Europe’s capitalist economies. It is the first place in which we can see the likely policy response to the unwinding of the region’s economic boom. We should therefore pay attention to what is happening in Hungary, because it offers us a glimpse of the region’s and the continent’s future. Unfortunately, it suggests to this observer that if people want to think about the most likely future of domestic politics in the region, they ought to start reading about the 1930s, because over the next few years some very uncomfortable parallels are likely to emerge.

In my last post, I expressed the hope that the Hungarian and international authorities would seek to avoid “catastrophe”. The superficially generous $25.1 billion “rescue” package for Hungary co-funded by the IMF, the EU and the World Bank seems to dash any of these hopes. Instead these bodies, supported by a Hungarian government and an economic establishment who seem to have collectively lost their minds, are intent on driving Hungary headlong towards catastrophe. Just as in the rest of the EU governments are busy part-nationalizing banks, cutting interest rates, and preparing economic stimulus packages, Hungary is being forced to cut back its state expenditures savagely, and decimate its public sector. The likely consequences for Hungary’s real economy – with which the IMF/EU/World Bank seems to be blissfully unconcerned – are spelled out by economist Edward Hugh on his Hungarian Economy Watch blog.

Given the programme most likely means that Hungarians are being expected to forego economic growth and any improvement in living standards for the foreseeable future, one wonders as to the likely consequences for domestic politics and stability. I’ve been watching Hungary’s politics now for close to two decades, have published – both in academic texts and in the Hungarian media – analyses of domestic politics, and can claim a reasonable record in correctly identifying general trends. I have to say that I do not see how Hungary’s political institutions can survive the strains and conflicts that will be thrown their way over the next few years. I’m not going to try and predict what comes next, but I am sure that the process of getting there involves a lot of political instability, violence and misery.

There has been a tendency in the media in the UK to see Hungary’s problems as a result of moral failings and a propensity of the population to live beyond their means. I could say more about this – all I would point out in response is that those who throw stones should not sit in glass houses! If the financial markets had applied the same tests to the UK that they are now applying to Hungary, the British government would be faced with bankruptcy! This kind of finger-pointing is unwise for a reason that is less polemical – as László Andor has pointed out, what is happening in Hungary has consequences that spill way beyond its borders.

Because Hungary is part of the EU, the impact of an economic crash and political tension will be instantly felt in other states, through the migration that will inevitably result. Most importantly – as I hinted above – most of the region is beginning to feel the impact of economic crisis, and Hungary is not the only EU member likely to have to seek assistance from outside. In other words, Hungary’s crisis is an early (perhaps, not a very early) warning for what is likely to engulf the whole region. In the, admittedly, worst case (but quite credible) scenario, the risk is that democracy, and the project of the eastern enlargement of the EU will fail spectacularly. While the consequences for the peoples of Central and Eastern Europe are likely to be catastrophic, the effects on the security of western Europe are not inconsiderable either.

It really is high-time, therefore, that the EU and the governments of its largest countries woke up to the fact that they have little choice but to pursue policies actively that close the income gap between EU15, and those ex-socialist states that have joined since 2004, and that they are going to have to ask western European taxpayers to pay the costs of that convergence. As a first step they need to scrap the misconceived and disastrous “rescue” that has been put together for Hungary, and assemble a support package that allows the Hungarian government to protect its citizens (after all, what use is democracy if a government is stopped by international bodies and financial markets from protecting its most vulnerable citizens from the chill winds of economic turbulence?) Then, they might recognize that the project of creating a neo-liberal version of the free-market economy, and expecting sustainable transformation through encouraging speculative foreign investment has been a spectacular failure, and that they need to start again. After that, comes a more difficult, but nevertheless necessary step – western European security demands that living standards converge between the two halves of Europe, and that that is not going to happen without substantial public investment. Time to recognize then, that the EU needs a substantial budget, some direct revenue-raising powers, and greater ability to co-ordinate macro-economic policy. I’m not holding my breath – but I wonder just how many disasters will have to happen before they realize that these steps are urgent ……