Hungary and the West: We need to talk about Viktor

Hungary and the West: We need to talk about Viktor

Hungary and the West: We need to talk about Viktor

Written by Agata Gostyńska , Ian Bond, 26 November 2014

Prime Minister Viktor Orban still dominates Hungary’s political scene, in spite of recent large demonstrations in Budapest. But his political reforms and economic and foreign policies are raising more and more questions abroad as well as at home. If Orban thinks he can ignore such criticism, he is wrong: Hungary's economic development depends on its Western partners.

Worries about Orban’s intentions started soon after his election in 2010, when he quickly consolidated his Fidesz party’s grip on power, and purged political opponents from positions of influence. In 2011, German Chancellor Angela Merkel (among others) criticised measures to control the media; in 2012 the European Commission started infringement proceedings against Hungary for limiting the independence of the Central Bank and the data protection authority, and for compulsorily retiring 274 judges (who were replaced by more Fidesz-friendly figures).

But concerns about Orban have heightened recently as a result of two speeches. His inaugural speech to parliament in May, after his re-election, called for autonomy and 'communal rights' for ethnic Hungarians in neighbouring states, including Ukraine. It upset neighbours like Poland, where Prime Minister Donald Tusk suggested that it sounded too similar to Putin's line on ethnic Russians abroad. Orban’s speech to a gathering of Hungarian students in Romania in July 2014 caused even more trouble. In it, he proclaimed a shift from liberal democracy towards the construction of an “illiberal state" and cited Singapore, China, India, Russia and Turkey as models.

Does the reality of Orban’s policies live up to the rhetoric? Hungarians close to the ruling party argue that the rest of the West listens too much to Orban’s leftist political opponents. They claim that Hungary has been a reliable EU partner, whatever critics say. They point to Hungary’s successful presidency in 2011: it secured Croatian accession to the EU, and laid the foundations for the European Parliament’s involvement in the negotiations on the EU’s long-term budget.

Some foreign experts on Hungary suggest that however alarming the ‘illiberal’ label sounds, what Orban means is merely that the EU’s current approach to tackling the economic crisis is not working; and that the liberal model, which privileges the rights of the individual over the interests of the community, is one of the reasons for its failure. Orban, according to this interpretation, wants to build closer links with economically successful, albeit authoritarian states.

Even Hungarians who do not support Fidesz accept that some of the steps taken reflect a necessary if belated attempt to purge ex-Communists from positions of influence, where they could obstruct change and perpetuate the power of the Cold War-era nomenklatura.

Whether or not Orban’s motives were pure, the effect of his reforms has been to create strongly pro-Fidesz state structures, rather than a politically neutral administration. Murky links between business and politics have developed: in October the US government imposed visa bans on a number of officials, after repeated attempts to get the Hungarian authorities to tackle corrupt practices which favoured Fidesz-linked firms. And Orban has intensified pressure on civil society: in September police raided the Budapest offices of an NGO funded by Norwegian government grants, following Hungarian government allegations that it was funding Fidesz’ political opponents.

Economically, Orban has pursued populist policies, such as trying to reduce the role of foreign investors in key sectors. In September 2014 Deputy Prime Minister Zsolt Semjen said that nationalising the energy sector was the only way to guarantee security of supply for Hungarians, despite ample evidence that liberalising markets would work better. The government has also forced banks to take large losses in order to protect Hungarian borrowers against exchange rate fluctuations, and seems poised to buy up the assets of any banks that leave the Hungarian market as a result. In response, the Commission has expressed concern about Hungary's compliance with rules on state aid.

Orban might be able to thumb his nose at the Commission if his economic policies were a success. But from 2008-2013, Hungary’s GDP grew at the slowest rate in the Visegrad Group (which comprises Hungary, Poland, Slovakia and the Czech Republic and is often referred to as the V4).

The main victims of Orban’s domestic policies may be his own citizens, but his foreign and security policy could damage wider European interests. His statements often hint at a wish to revise Hungary’s borders, established after the First World War, which left Hungarian minorities spread across several neighbouring countries. His implicit encouragement of irredentism worries other countries, particularly Slovakia and Romania which have significant ethnic Hungarian populations. It also complicates co-operation within the V4.

As neighbours of Ukraine, the V4 should have been central to formulating the EU's response to Russia's annexation of Crimea and continued interference in the Donbass. The V4's experience of economic and political transition and of European integration should make them natural mentors for the new authorities in Kyiv. Instead, Orban has contributed to V4 disunity and questioned EU efforts to put pressure on Russia.

One European politician who has known Orban for many years suggests that his cultivation of Putin comes from a mixture of anger at the way other EU leaders treat Hungary and pure opportunism. Whatever the cause, Orban has tied his country closely to Russia, especially in the energy sector. In January 2014 he signed an agreement with Putin on expanding Hungary's Paks nuclear power station; 80 per cent of the project will be financed by a Russian state loan. In July, he restated his support for the South Stream gas pipeline from Russia to Europe (which would bypass Ukraine) – a project which the Commission has said is illegal in its current form.
And in September, after a meeting with Gazprom CEO Aleksei Miller, he halted the re-export to Ukraine of gas bought by Hungary; by doing so, he made Russia's cut of gas supplies to Ukraine more effective.

Though the US has loudly criticised Orban's democratic back-sliding and closeness to Russia, Brussels has more leverage with Hungary than Washington. What can the EU do with this awkward but democratically-elected man? So far, the member-states and the Commission have only grumbled, to little avail. As an organisation often criticised for its own lack of democratic legitimacy, the EU has hesitated to challenge someone who has a large majority in his national parliament.

If the political will to act exists, the EU has two types of tools it can use. First, the Commission can take action against a government which breaks European law and in the process goes against EU values. It allows the Commission to launch infringement proceedings. But such proceedings cannot address cases where a government acts contrary to the EU's values but does not break any specific EU law. In the case of the compulsory retirement of judges, the Commission based its legal action on EU rules against age discrimination in employment; but it had no standing to tackle more fundamental questions of the rule of law and independence of the judiciary. Hungary settled the case by compensating the judges but not reinstating them.

Second, the EU can address democratic shortcomings in a member-state through Article 7 of the Treaty on European Union, which enables the European Council to determine “the existence of a serious and persistent breach of EU values” in a member-state; and to suspend some of its membership rights, including voting rights. The European Council must decide unanimously (minus the country concerned) that a breach has taken place. Other countries would probably want to see evidence of much more serious misbehaviour than anything Orban has yet done before resorting to such a nuclear option.

Article 7 also has a ‘warning mechanism’: four-fifths of the member-states may determine that there is a clear risk of a serious breach of EU values in another member-state. This ‘yellow card’ permits a dialogue with the member-state in question before more radical steps are taken. But member-states are even afraid of using this mechanism. It would fuel debate about whether the EU should be able to interfere in the affairs of a member-state. It could also lead to an East/West split in the Council, if the Central Europeans believed that ‘old’ member-states were using Article 7 against them while overlooking failings in one of their own number. It is worth noting that in 2000, when Austria’s coalition government included the far-right Freedom Party, other member-states introduced political sanctions without using Article 7 that had been introduced by Amsterdam treaty and entered into force in 1999.

Doing nothing about Orban’s policies is not acceptable. He has challenged the EU’s role as the champion of democratic values, which was the basis of past enlargements and is the reason the EU has remained so attractive to countries like Ukraine. Inaction would weaken the EU’s power of example.

Some governments would like a proper debate about Hungary’s behaviour. In 2013 the German, Dutch, Danish and Finnish foreign ministers wrote to the Commission urging it to do more to promote respect for the rule of law in the EU. They proposed various measures to respond to breaches of EU principles that could be deployed before escalating to the use of Article 7. These ranged from political dialogue with the Commission about issues of concern to the suspension of structural funds (currently only possible if a country breaks the EU’s macroeconomic rules).

A majority of member-states have so far blocked proposals to enhance the EU’s role in policing the rule of law. Some, like the UK, fear that strengthening the Commission’s power would play into hands of eurosceptics; others, including in the Baltic States, worry that the EU would interfere with their policies towards national minorities. The General Affairs Council will revert to the issue of the rule of law in December, but there is no guarantee of progress. For the moment, therefore, more informal ways of handling Orban must be found.

The other members of the V4 have an important role to play. Some of them share Orban’s misgivings about sanctions against Russia; but they have developed a ‘brand identity’ as modern, successful European societies, and Orban’s populist nationalism threatens this reputation. They should work behind the scenes to shift Orban back into the liberal, market-oriented European mainstream.

British Prime Minister David Cameron should also speak up. Orban joined Cameron in his unsuccessful efforts to oppose the nomination of Jean-Claude Juncker as Commission President. Cameron’s views on the EU are sometimes compared with those of Orban. But unlike Orban, Cameron has been outspoken about the threat Putin's policies pose to Europe. Nobody has accused Cameron of trying to monopolise state institutions for the Conservative Party. Cameron could suggest that Orban join the UK in trying to reform and strengthen the EU, internally and externally, rather than chasing after illiberal democracies that have their own economic and political problems.

Perhaps the best hope is that other centre-right politicians in Europe can talk Orban round. He has benefited from the support of the European People’s Party (EPP), which unites most of the centre-right parties in the EU, including Fidesz. It is time for leaders like Angela Merkel of Germany or the new Polish Prime Minister, Ewa Kopacz, to remind Orban that almost 80 per cent of Hungary's trade is with other EU member-states, and that his main economic and political partners are still in the West, not in Moscow.

Agata Gostyńska is a research fellow and Ian Bond is director of foreign policy at the Centre for European Reform.

О британской иррациональности...

О британской иррациональности...

О британской иррациональности...

Written by Ian Bond, 18 November 2014
From Ukranian Daily DEN

European and national parliaments: the zero-sum fantasy

European and national parliaments: the zero-sum fantasy

European and national parliaments: the zero-sum fantasy

Written by Agata Gostyńska , 18 November 2014
From Policy Network

BBC Radio 4: The World Tonight

BBC Radio 4: The World Tonight

BBC Radio 4: The World Tonight video icon

BBC Radio - The World Tonight
By Charles Grant, 13 November 2014
From BBC Radio - The World Tonight

Roundtable on 'Reforms and growth in Italy and the EU'

Roundtable on 'Reforms and growth in Italy and the EU' with Pier Carlo Padoan

Roundtable on 'Reforms and growth in Italy and the EU'

21 November 2014

With Pier Carlo Padoan, minister of economy and finance, Italy

Location info


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Does a eurozone slump make Brexit more likely?

Does a eurozone slump make Brexit more likely?

Does a eurozone slump make Brexit more likely?

Written by Simon Tilford, 10 November 2014

Two years ago the British economy was performing in line with the eurozone’s. Since then, it has grown rapidly and the country’s Office for National Statistics (ONS) has announced that the 2008-9 recession was shallower than previously thought (see chart 1). Over this period, the eurozone economy has stagnated, leading to a big gap in growth rates. Indeed, the UK has now performed better since the first quarter of 2008 than Germany, the eurozone’s supposed ‘star performer’, let alone the eurozone as a whole. Is this superior performance likely to continue? And what will it mean for the UK’s relations with the eurozone and its membership of the EU?

The UK suffered one of the biggest economic shocks of any member of the EU in 2008. The crisis led to a large contraction in financial and business services, a major industry in the UK: Britain faced one of the biggest banking sector crises of any EU country, with the government having to provide unprecedented support to crippled financial institutions. How has the UK done not only much better than comparably hard-hit eurozone economies, but also better than less hard-hit ones?

Chart 1: Economic growth

Source: Haver

The principal reason for the UK’s outperformance is macroeconomic policy. First, Britain has imposed less austerity than other hard-hit members of the euro. The UK’s coalition government has talked tough on the need for austerity but since 2012 has eased up considerably; in 2014 fiscal policy has boosted growth slightly. The UK’s structural deficit – the government’s deficit adjusted for the economic cycle – is on course to rise this year and is now the highest in the EU (see chart 2). Second, the Bank of England has pursued a much more expansionary monetary policy than the ECB. It cut interest rates faster and more aggressively than the eurozone’s central bank and has held them at record low levels first in the face of higher than target inflation and more recently against the backdrop of a recovering economy. The Bank of England also launched quantitative easing in 2009, which succeeded in stimulating the economy.

Chart 2: Structural budget deficits (per cent, GDP)

Source: Haver

A number of other factors have no doubt contributed to the UK’s stronger performance. Crucially, the British government moved quickly to clean up the country’s banks, taking stakes in the hardest-hit and winding up others. Partly as a result, credit growth has not been as weak as elsewhere. And timely action to recapitalise the banking system means that British banks are in a better place to respond to increased demand for credit than those in many eurozone economies.

The structure of the UK labour market has no doubt contributed to the relative resilience of private consumption. After the crisis, unemployment rose less than one might expect, given the steep drop in output. There appears to have been a number of reasons for this: firms were loath to let go hard to replace skilled workers, businesses slashed labour-replacing capital investment; and a large number of workers moved from full to part-time work. This helped prevent the huge increases in unemployment and hence collapse in consumer demand (and investment) seen in parts of the eurozone.

The surprisingly strong rebound in house prices does not seem to be having much of an impact on economic growth.  A strong housing market can boost consumption as home-owners borrow against the rising value of their homes or run down their savings (believing that the rising value of their homes cushions them from future risks to their income.) But there is little equity release taking place and house price inflation is heavily concentrated in London; prices across much of the country remain pretty depressed.

Finally, the weakening of sterling in the wake of the crisis has not enabled the UK to steal a march on the eurozone by virtue of having a cheap currency. Sterling fell from €1.50 in January 2007 to a low of €1.09 in January 2009, before recovering steadily to €1.27 in October 2014. At such, it is not undervalued relative to its long-term trend, trading at around the level it was at just prior to its ejection from the European Exchange Rate Mechanism (ERM) in 1992 (see chart 3). Secondly, Britain’s trade deficit with the eurozone has ballooned since the beginning of 2008 as growth in British domestic demand has outpaced that of the eurozone. The UK is certainly not guilty of ‘beggaring’ the eurozone: quite the reverse.

Chart 3: Pound-sterling’s real effective exchange rate

Source: World Bank

Can the UK’s outperformance be sustained?  Business investment is finally recovering, making the economy less dependent on consumption. Employment is rising quite strongly, and the number of full-time jobs is rising and the total of part-time ones shrinking. The fall in unemployment should eventually see real wage growth turn positive. Strikingly, the UK has experienced one of the largest falls in real wages of any EU state since 2008, which partly explains way immigration has become such a salient political issue.

Monetary policy will remain expansionary. The Bank of England is likely to delay raising rates until it is clear that recovery is firmly established and real wages have started to rise. That could be considerably longer than the markets currently assume. Although the UK economy is growing strongly, inflation pressures remain weak. Consumer price inflation stood at just 1.2 per cent in September (core inflation was 1.6 per cent). Given the high levels of corporate and household debt, any increases will be gradual. Once the general election to be held in May 2015 is out of the way, fiscal policy will be tightened somewhat irrespective of the outcome, holding back economic growth a bit.

The biggest cloud on the horizon is foreign trade. Exports to non-EU markets are up by around a third since 2008, whereas those to the eurozone are yet to return to 2008 levels. The UK’s sizeable current account deficit (of around 4 per cent of GDP) is entirely accounted for by trade with the eurozone. If, as appears all but certain, eurozone growth remains depressed for years, the UK’s deficit with it will continue to rise. And when the ECB finally launches QE, the euro is likely to weaken against sterling, exacerbating the trade imbalance. Despite the size of the UK’s external deficit, there is a risk of sterling strengthening too much, undermining the gradual recovery in investment in the tradable sector.

Chart 4: The UK’s current account balances

Source: Office for National Statistics

The UK’s economic prospects look reasonably good, but are flattered by the dire outlook for the eurozone. After expansion of a little over 3 per cent in 2014, most forecasters expect the British economy to grow by 2.5-3 per cent in 2015 and around 2.5 per cent the year after. Even the European Commission, which is notoriously bullish on the eurozone (resulting in it having to repeatedly revise down its numbers), expects the difference between eurozone and UK growth rates to be around 1 per cent in both 2015 and 2016. Most other forecasters expect a bigger gap.

What does this mean for relations between the UK and the eurozone? On the face of it, there is no reason why much stronger growth in the UK than in the currency union should harm relations. After all, Britain grew more rapidly than the eurozone in the decade running up to the crisis, and this coincided with a period of almost unprecedentedly good EU-UK relations. A Britain whose economy is expanding reasonably quickly could be more at ease with itself and with the rest of Europe. Concerns over immigration could dissipate, with attitudes returning to the grudging acceptance seen prior to the crisis. It could also become harder for the rest of the EU to ignore UK concerns about particular issues, helping to address the widely held perception in Britain that the country is unable to defend its interests.

However, there is a less optimistic scenario. Although real wages should start to edge up with the tightening of the labour market, it will take many years before they return to pre-crisis levels. As a result, popular resentment over immigration will remain a problem, especially as immigration from struggling eurozone countries set to remain high. At the same time, the UK’s net contribution to the EU budget will rise, reflecting its increased wealth relative to the EU average. This is likely to be happening at a time when Britain is becoming increasingly marginalised within the EU, partly because of its own lack of engagement but partly because it is not a member of the eurozone. Finally, the proportion of the UK’s trade conducted with the EU will fall steadily from the current 45 per cent. Although EU membership makes it much easier for UK exporters to access fast-growing emerging markets, eurosceptics will still cite the declining relative importance of EU trade as evidence of the diminishing benefits of being in the single market.

May’s general election will have a large bearing on which of these two scenarios is closest to reality. If the Labour Party wins or is able to form a coalition with the Liberal Democrats, there is a good chance it could be closer to the first. Relations with the EU would certainly be better than under the current government, although tensions over the EU budget, immigration and management of the eurozone would still be considerable. However, such a government will need a healthy majority if it is to resist pressure from eurosceptics within its own ranks to adopt a tougher line with the EU.

A Conservative administration, especially one with a small majority or even governing as a minority, will struggle to avoid the latter scenario. Much of the party is now eurosceptic and is bound to be even more so after the election. Egged on by the media, much of the party could agitate to leave the EU in 2017’s membership referendum. Antagonistic relations with the EU would isolate Britain, allowing eurosceptics to argue that it cannot defend its interests. With some justification, they would use rising budgetary contributions to argue that Britain is paying for the eurozone’s failure to get on top of its problems. And the fall in the proportion of UK trade done with the EU will be grist to the mill of those Conservatives who argue that the benefits of single market membership are exaggerated. In this case, economic outperformance could hasten Britain’s exit.

Simon Tilford is deputy director of the Centre for European Reform.

BBC Radio 4 Week in Westminster: There may be trouble ahead

Week in Westminster: There may be trouble ahead

BBC Radio 4 Week in Westminster: There may be trouble aheadvideo icon

BBC Radio 4
By Charles Grant, 01 November 2014
From BBC Radio 4

Link to media:

Cameron risks painting himself into an anti-Europe corner

Cameron risks painting himself into an anti-Europe corner

Cameron risks painting himself into an anti-Europe corner

Written by Charles Grant, 04 November 2014
From Financial Times

With focus on eurosceptics, Cameron risks 'Brexit'

Cameron's policies 'make EU exit more likely'

With focus on eurosceptics, Cameron risks 'Brexit'

By John Springford, 01 November 2014
From Agence France Presse

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