The uses (and abuses) of Hungarian democracy

In an aside in the post below this one I pose a provocative question:

“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?”

Given the intellectual climate of the past decade-and-a-half, I think I ought to explain some of the assumptions and ideas that lie behind this question, for they also inform my scepticism about the strength of the political institutions in the ex-socialist member states of the EU.

When I first became a PhD student focussed on Central and Eastern Europe fifteen years ago, everyone was attempting to examine something they called “the transition”. Liberalism had triumphed, as had market economics, and democracy – by which observers meant a system based on free and fair competitive elections, regulated by a constitutional order administered by an independent judiciary, would resolve all social conflicts. The study of the “transition” it was supposed, would help states with scant traditions of democracy to become like the USA and the United Kingdom. The end – “democracy” – was never in doubt. In the same way, social scientists (joined later by some historians, who probably should have known better) began to develop elegant, grounded arguments about the conditions of “democratization”, in which History – in so far as it was addressed – was supposed to march inevitably towards “democracy”.

Indeed, most historians of Europe have known better. The reasons for the collapse of pluralist political systems in much of inter-war Europe have been (and will almost certainly continue to be) at the heart of historical debate. As historians concentrate increasingly on the period following the Second World War, the reasons for the development of liberal, pluralist political systems in most of western Europe in the late 1940s, and their spread to southern Europe in the 1970s will become important subjects of historical investigation. Historian Martin Conway in an agenda-setting article on the roots of western Europe’s post-war democratic wave has drawn our attention to the historically-specific circumstances, often socially and cultural rooted, which produced it. If “democracy” is historically contingent, this undermines the teleological assumptions which have underpinned the celebratory tone whose echoes can be heard in much of the democratization literature. Political systems fail and succeed depending on historical circumstances – there is, despite what many would have you believe, no democratic model capable of mediating all social conflicts, and therefore “democracy” is not, in any guise, an automatically exportable system (as we should know from the predictable failure of US-sponsored democracy building in Iraq).

It has not been uncommon in the last two years to find commentators in Hungary, who are prepared to talk to some extent about the crisis of their democracy. They generally attribute this crisis to short-term factors; normally the “bidding war” between the two big parties as to who could promise the most since 1998, or the notorious 2006 speech of Prime Minister, Ferenc Gyurcsány, in which he admitted to lying “morning, noon and night” in order to win that year’s parliamentary election. Hungary’s democracy is certainly in crisis – but this crisis is not due to short-term factors; indeed it is a slow-burn crisis, and can be traced back to the mid-1990s.

This slow-burn crisis began with the announcement of the so-called Bokros package in March 1995 – a programme of economic stabilization designed to prevent the insolvency of the Hungarian state in the face of capital flight, and re-start a stalled economy, named after Finance Minister, Lajos Bokros. At its heart were deep spending cuts that focussed on a range of social welfare programmes, and the package brought about a substantial falls in real incomes – 12 percent in 1995 – the largest such fall since the peak year of the Stalinist dictatorship in 1952.

The problem with the Bokros package – or rather one problem with it; there were many – was a product of its political context. The previous May, voters, fed up with the social and economics strains of economic transformation during the early 1990s, elected the Socialist Party (MSZP), in the belief that they would curb many of the perceived social injustices of the transformation process, and pursue “competent” economic policies that would reverse the reductions in the standard-of-living of the early 1990s. The first ten months of the government the Socialists formed, a coalition between themselves and the liberal Alliance of Free Democrats (SZDSZ), were characterized by ideological disputes between those who sought greater social protection, and those who advocated further market transformation. The announcement of the Bokros package represented the victory of the latter group, supported by the financial markets, international organizations, and most western governments, but crucially not by a majority of the population. In 1994 a majority of Hungarians used the elections – by electing the MSZP – to gain a greater degree of social protection in the face of market forces. The events of 1995 were a demonstration that international financial markets would not respect the choices Hungarians made.


The political consequences were profound. In the short-term they increased the appeal of the populist far right; behind this anti-Semitic sentiment spread, as did anti-foreigner sentiment. During 1995 and 1996, the squeeze on incomes was accompanied by considerable anger. In the 1998 elections, the SZDSZ – previously a popular radical liberal party, perhaps Hungary’s first since the 1840s, capable of winning a fifth of the vote – lost two-thirds of its support, abandoned because of its enthusiastic support for pro-market policies. By the end of the decade with average living standards approaching the levels of eleven years previously, and a deep chasm between rich and poor, relative economic recovery concealed deep-seated anger and frustration. Institutions suffered from low public trust. Hungary was also polarized; a product of the divisive tactics of the right-wing government of Viktor Orbán, brought to power in 1998. Both sides in this political battle were relatively evenly matched in terms of public support. As the negative campaign run by Orbán between the two rounds of the 2002 parliamentary election demonstrated, ordinary voters were deeply suspicious of pro-market economic policies, and fearful of a revival of the policies that had been pursued by Bokros.

Faced with extreme distrust among the electorate for the market, a society polarized vertically into winners and losers, and horizontally into right and left-wing camps, the politicians used the state budget, and empty populism as a sticking plaster to conceal the legitimacy problem that first emerged in 1995. From 2002, an election year in which the victorious MSZP both promised and delivered unfunded largesse, the budget deficit and public debt exploded. This explosion of state spending is often presented as a consequence of lax budget control, and the moral failings of Hungary’s politicians. Though both these were present in abundance, this growth stemmed from two factors – one rooted in Hungary’s post-socialist political economy, which I don’t want to describe here, as it is worthy of longer explanation; the other was a symptom of the slow-burn crisis of the political system. Given their adherence to the financial markets (and the necessity thereof), Hungary’s political parties were left with a deep democratic deficit from 1995 onwards. They sought to plug this deficit through using and playing the game of political polarization, but more importantly were only able to win support through using the state budget to compensate their respective constituencies for the failures of the economy to provide them the jobs and living standards to which they aspired. All of this culminated in the 2006 elections, and their aftermath – one of horribly low public trust, deep suspicion of pro-market “reform” measures (demonstrated most clearly by the overwhelming victories for the “yes” camp in the spring 2008 referenda), considerable and growing public anger with low standards of living, and greater assertiveness by the extreme right.

Clearly, therefore, it is not only Hungary’s financial institutions which require rescuing, but its democratic institutions do too. Given the roots of the slow-burn crisis of the political system, it is rather easy to see why the IMF/EU/World Bank package risks killing (or at least wounding fatally) the democratic institutions established in 1989-90.

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 ……

Is this the end of Hungary's post-1989 era? And if so, what comes next?

With the spectacular meltdown on global financial markets holding world attention yesterday, the especially parlous situation in Hungary has been missed. Beginning in late trading Thursday afternoon, the country’s largest bank, the OTP, and its currency, the Forint, were subject to sustained speculative attack. At the same time the market for Hungarian government bonds effectively dried up. On Friday the Hungarian National Bank – in measures familiar to those who have lived through the early phases of the UK’s past currency crises – intervened to prop up the Forint. Faced with the spectre of being unable to re-finance some of the government debt on reasonable terms, Prime Minister Ferenc Gyurcsány announced a package of emergency spending cuts (which are only likely to pass through parliament, if his Socialist minority government can secure the support of enough of the opposition).

For those aware of both Hungary’s economic fundamentals and the progress of the “credit crunch”, the budgetary and currency problems should come as no surprise, despite the bizarre insistence for most of the year by Hungary’s economists that there was nothing really to worry about! This is going to be a tense and difficult autumn in Budapest – with the rest of the region, in the words of the Guardian’s economics editor Larry Elliot, looking like “an accident waiting to happen”, a sharp slowdown in western Europe affecting Hungary’s export-oriented manufacturing sector, the general impact of the global crisis on Budapest as a regional financial centre, a budgetary and a currency crisis, the economic situation ought to be a cause for anxiety. Politically, Hungary’s Socialist government lacks a parliamentary majority, it faces an opposition that has never shown any sign before of putting an overriding national interest before its own immediate short-term considerations of winning political advantage, and a far right that over the past two years has been prepared to use violent direct action on Hungary’s streets. Against this background, one of the problems Hungary faces in seeking to restore market confidence, is that it is difficult to see how the country will overcome these challenges without some major changes to its political and economic institutions.

Autumn 2008, like 1988-9, looks like it will be one of those key turning point moments. This is because it is difficult to see how Hungary will emerge from the challenges it currently faces without some major surgery to the institutions and practices that have developed in the past nineteen years. As in all such moments, it is impossible to say what direction such changes will take, though the risks are considerable. Much depends on how far the relevant actors, including bodies like the European Union as well as those within Hungary itself, are prepared to show imagination and courage in facing the demands of the moment.

Hungary’s economic performance has been weak for some years. From the beginning of the decade up to 2006 economic growth was only really sustained through accumulating state debt. Hungary’s economists have argued that the road to putting Hungary back on a growth path leads to huge cuts in state expenditures – especially social spending – so that high tax rates can be bought down in order that foreign investors will be attracted into the country. After his re-election in 2006, Gyurcsány accepted their advice. The government’s pursuit of this path has led to a state of virtual economic stagnation, and large-scale popular discontent, which has made this strategy politically unviable. Without an alternative, the government has shown every sign of not knowing what do, and since the spring has fallen back on an endless series of short-term tactical manoeuvres designed to buy time.

The neo-liberal diagnosis of Hungary’s problems was fatally flawed because it failed to address the underlying causes of the country’s budget deficit and debt-related problems. These lie in a crisis of employment and employability – in 2006 only 54.5 percent of the population of working age were active in the labour market. In large part, this problem is a legacy of the state socialist social settlement instituted after the completion of agricultural collectivization in 1961, that was based on the offer of semi-skilled industrial employment and related welfare benefits to the population. People moved into industry, yet remained in the villages – performing semi-skilled jobs. This settlement crumbled in the 1980s, but collapsed during the recession that marked the early years of the transition. Most of these jobs were never replaced, as new employment was concentrated regionally in Budapest and the north-west, while many of the new unemployed lacked the skills, or the economic means to get new jobs. As large parts of eastern Hungary fell into crisis, and huge regional and social inequalities opened up the state budget became an enormous sticking plaster covering the gaping wound of rising social tension. By the turn of the millennium this unequal social structure crystallized, and elections became increasingly competitive making it impossible for political leaders to ignore the demands of many living in depressed regions. At the same time they had to appease the demands of “winners” for tolerable tax rates.

A parallel can be drawn between Hungary and a crisis-ridden industrial regions like north-east England, where governments have sought to replace decimated industries with new greenfield investments like Nissan. While these investments have helped, such regions have remained dependent disproportionately on state expenditure and have high levels of labour market inactivity. The key difference is that the north-east of England receives transfer payments from other regions in the UK, while Hungary has to resolve its own problems, with no transfer from anywhere. No-one has solved these problems satisfactorily anywhere in Europe, and given that Hungary’s problems are not different in kind (though perhaps in extent) to those of all of Central and Eastern Europe’s ex-socialist states, coming up with a solution is now urgent. Clearly these problems require radical changes in Hungarian economic policy. It might be argued that from over-zealous implementation of the bankruptcy law during the recession of the early 1990s, through the Bokros austerity package in 1995, ill-considered increases in the minimum wage under Viktor Orbán, to the unfunded largesse of the Medgyessy years, state policies have oscillated between excessive neo-liberal dogmatism and a series of short-term political fixes that have cumulatively undermined Hungary’s long-term growth prospects. In the medium and long-term increasing employment is the only way of driving forward the economy – the policies required to do this, however, will require resources over a long period of time.

At the moment, however, the financial markets are driving the Hungarian government towards policies that are likely to lead to social, economic and quite possibly, political disaster. To avoid this it is important that the European Union help Hungary finance its debt and its deficit, and that rather than forcing it to accept frankly unrealistic budgetary targets in the interests of monetary convergence, it uses its resources to stimulate growth both in Hungary and in Central and Eastern Europe as a whole. As the post-1989, post-socialist era comes to an end, what is at stake is the nature of the institutions and politics of the next period of the history of the country and the region. As we know from previous financial crises they can result in both catastrophes and opportunities. Let’s try and avoid the catastrophes …….

Haider's legacy?

Austria woke up to the news this morning that Carinthia’s Governor, Jörg Haider was killed in a car accident while driving home during the early hours of this morning. With the country’s political parties attempting to form a new government in Vienna just less than two weeks after an earth-shattering election result, which left the two far right-wing parties (Haider was the leader of one of them) a major political force, the short-term political consequences are significant. In the long-term it is significant too.

While the obituaries will focus on his notorious 1991 comments approving of National Socialist employment policies, and on the European Union’s misguided attempts to isolate Austria when his FPÖ entered the federal government in 2000, there are other aspects of his legacy that are well worth considering. In a book published earlier this year, the political scientists Anton Pelinka, Hubert Sickinger and Karin Stögner (by no means friends of Haider), have made the case for his role in transforming not only Austrian politics but its political culture. The point could be extended to Europe as a whole. Haider was a political innovator in that he pioneered many of the elements of a right-wing populist politics that learned to use the commercialized and tabloidized media to great effect. Many of the tactics he deployed during the 1990s in his initial rise – the use of campaign slogans that looked like tabloid headlines, his careful crafting of a self-image as the ally of the people against the system, the use of the rally, the petition and the referendum to underline the populist nature of his pitch – have been widely copied. Hungary’s opposition leader and former Prime Minister, Viktor Orbán has shamelessly copied many of Haider’s tactics. The parallels with Silvio Berlusconi’s construction of his appeal are similarly obvious.

As I’ve argued on this blog before, when commentators look at Austria’s radical right they are obsessed with what it reveals about the country’s relationship to its past. What they miss is the way Austria’s radical right is better seen as a warning about a possible future for politics across Europe. The populist right that Haider shaped in Austria speaks to those who engage with the tabloid media and commercial television; it positions itself as the voice of popular “common sense” against elites. Established parties have found this kind of populism difficult to deal with. Whether they are any more successful in future will determine Haider’s legacy, and possibly the future of politics across the continent as a whole.