- There is increasing external and internal pressure bearing down on the Hungarian government that undermine the prime minister’s position within a few months even as today the government appears to stand unchallenged and rock-solid with a two-thirds majority in Parliament. By now Viktor Orbán has manoeuvred himself into a corner where his options are limited to bad and even worse political choices. If he enters an agreement with international organisations he has to make a full reversal of his policies or else risk sovereign default and the fall of his government.
- If the government follows a rational course of action in its own interest, it accedes to increasingly stubborn EU and IMF demands, especially the one involving the Central Bank Act, and signs a loan agreement to calm the markets. The serious pressure on the government has increased the chance of a loan agreement. However, considering that in the past 18 months the government has made a series of arbitrary and irrational moves, its readiness to conclude an agreement cannot be taken for granted.
- Strong foreign pressure on Hungary may have a negative political fallout:
- many may come to the conclusion that instead of the government, the international community is punishing Hungary,
- the core supporters of the governing party may interpret recent developments as an international conspiracy against Hungary,
- far-right Jobbik could gain strength; the party already demands that Hungary withdraw from the European Union, and euro-scepticism can strengthen in the public opinion – as it happened in Austria as a consequence of the sanctions against the country in 2000.
The Hungarian government is subjected to strong international and domestic pressure
- The Orbán-cabinet is under pressure from two directions. On the one hand, it faces increasing and open international pressure coming from global organizations (IMF, European Union and the European Central Bank) as well as from some EU member states and the United States of America. In this context the Hungarian government faces the biggest challenge when simultaneously foreign criticism is aimed at its economic policies and it is perceived as violating fundamental democratic values. Consequently, along with correcting the course of its economic policies, the government is also expected to soften its authoritarian measures pursued relentlessly since taking office.
- On the other hand, public support for the governing party is on a steady decline. According to the latest Szonda Ipsos opinion poll, 84% of the electorate believes that things are heading in the wrong direction and in January the Fidesz camp shrank by 16% in the population as a whole. In the meantime, MSZP stands at 11%, Jobbik at 8%, LMP at 4% and Ferenc Gyurcsány’s Democratic Coalition at 2%. With all that, the governing party is still leading in the polls among committed voters thanks only to the extremely high rate of undecided voters (57%). In other words, no one knows where this large block of potential voters would cast their ballot in an election while clearly many are unhappy with the government’s performance. Moreover, the public mood will deteriorate further following February 1st when rising prices and declining income will result in a tangible drop in living standards. The level of discontent is further illustrated by the number of large anti-government rallies held in the Budapest despite the chilly weather, and demonstrations are expected to continue in the coming months. Furthermore, general criticism against the government is increasing in its own camp as well, with a number of right-wing intellectuals having openly expressed concerns over the state of affairs in Hungary along with the growing isolation of the country.
- Pressure coming from two directions elicits self-contradictory double-talk from the government. To the outside world, with Tamás Fellegi pushed to the front stage, the government tries to project its readiness for compromise even as the domestic audience continues to be fed freedom-fighting rhetoric and references to national rights all in the interest of avoiding austerity measures allegedly dictated from the outside. A part of the right-wing media goes as far as envisioning foreign conspiracy aimed at Hungary, reinforcing a mentality of resentment and affinity for conspiracy theories rampant in Hungarian society.
The Central Bank Act in the focus of attention
- In the eyes of the Hungarian government the Central Bank Act has assumed special importance at the levels of economic policy, power relations and symbolic language. It is all but certain that international credit will be granted only if the Central Bank’s current “level of independence” remains unchallenged, although within that a number of scenario are conceivable.
- As a way of playing for time the government may agree not to appoint a new deputy governor and Monetary Council members until the end of András Simor’s mandate. However, this will be seen as nothing more than a smokescreen for under terms of the new Act the Council is granted significantly more powers in running the National Bank of Hungary and its government-appointed members are already in the majority. While the government is likely to take steps in that direction, the European Union is certain to find these efforts unacceptable and insufficient.
- Also, one cannot rule out that to make the best of the current situation the government will amend delegation rights, i.e., a new deputy governor and Monetary Council members will be nominated by the governor of the National Bank of Hungary. While such a decision would represent a total retreat, the repeal of the entire Act could be avoided.
- The government’s decision to rescind the Act would represent a clear-cut resolution of the issue. However, such a move would result in a huge political defeat for Fidesz and personally Viktor Orbán, making it highly unlikely at this point.
- At the same time it is important to note that András Simor’s mandate expires in early 2013 when, even if it rescinds the Act now, Fidesz will have the chance to appoint a new governor and deputy governors and have a major influence on shaping monetary policy. In other words, the European Union may win but a single battle by sticking to its current position.
- Three basic scenarios could be played out:
- An agreement is reached where the Hungarian Prime Minister accepts the cost of making radical changes in his economic and public policies. In all likelihood this will involve a sputtering implementation of the terms of an agreement and recurrent conflicts between the government and international organizations. This is the most likely scenario in this moment.
- An agreement is reached where the Prime Minister refuses to accept the cost of needed changes in his economic and public policies. This would imply the Prime Minister’s resignation and, in turn, that would destabilise the government anchored to a continued Fidesz majority for the governing party’s popular support and the internal cohesion of the Fidesz-KDNP coalition are based on Viktor Orbán’s personal charisma.
- No agreement is reached, leaving the government no option but to tap the Central Bank’s foreign currency reserve and some other internal sources (e.g., selling Mol shares). However, through these measures the government would be unable to ensure the country’s long-term financing and by the third quarter could face the real danger of sovereign default. While some circles within the government may believe that a controlled bankruptcy would not be such a bad idea, they ignore the potentially dangerous political fallout of such an eventuality. For instance, the oft cited Argentine example of a “successful state default” led to the fall of the government. According to an IMF paper, the defaults regularly have extremely negative political consequences: “ruling governments in countries that defaulted observed a 16 percentage point decrease in electoral support, and that in 50 percent of the cases (11 out of 22 episodes) there was a change in the chief of the executive either in the year of the default episode or in the following year. This is more than twice the probability of a change of the chief of the executive in normal times”. Potential supporters of a controlled bankruptcy fail to appreciate that a properly managed state bankruptcy has a chance to succeed only with major international backing (Greece being a case in point).