Since just over three years ago, our country has been going through a difficult time of re-orienting economic, internal and foreign policy following a change to the ruling elites as a result of the 2015 elections. In the press and in various publications, Poland's current situation is portrayed as similar to that in Hungary after the 2010 change of government. Now, in the year when another decisive elections will be held, it would be worthwhile to reach for "CHESS AND POKER - a chronicle of victorious battles fought for the freedom of the Hungarian economy", a book by Helga Wiederman, published 3 years ago.
Helga Wiedermann describes how the Hungarians, following an eight year rule by the same party (the socialists), inherited a ruined economy, empty national coffers and a society full of quarrels. However, they quickly discovered that capital does have a nationality, and the invisible hand of the market is controlled by the international financial lobby and rating agencies are far from independent and their ratings are not based on an apolitical assessment of a country's financial standing. Sounds familiar, doesn't it?
And that is why this book is a must. Even more so that the author is not just an experienced economic journalist, but also the former chief of staff for minister György Matolcsy, the prime architect of Hungary's sovereign economic policy. This allows us to take an insider's look at the workings of the Hungarian government, we are privy to political and economic decision processes, the back-stage of chess and poker manoeuvring between Budapest and Brussels and the secrets of negotiating with the International Monetary Fund. The author, as a participant of the aforementioned events and a member of Orban's team, wrote this book in plural first person, imparting a personal and emotional feel to it.
"Chess and poker" is a story of how to consistently engage in one's own national policy, how to deal with the onslaught of Europe's liberal media and of how to be successful. And certainly we should not uncritically transpose Hungarian experiences onto the Polish reality, but the book will make it easier to anticipate the opponent's moves.
At the helm once again
In today's world, the freedom of a country primarily depends on the sovereignty of its economy. There is no need to send legions armed to the teeth in order to conquer and subordinate another country. It suffices to make that country slip into debt and then take over its financial institutions and the entire economy. Greece is the most flamboyant example of such actions – a semi-bankrupt country, where its most important decisions are not made in Athens, but in Brussels and Berlin. The same fate was to be in store for Hungary. The policies of the socialist governments between 2002 and 2010, lethal for the country and its economy, "prepared" Hungary for such a situation. However, the liberal left wing elites went too far, bringing the country and the society to the brink of a disaster. Despite control over most of the media as well as foreign support, after 8 years in power the socialists suffered a shattering defeat – two thirds of voters opted for the centre right coalition led by Fidesz. After 8 years, Viktor Orbán was prime minister once again.
However, faced with a dire situation, the victors were in no mood to celebrate. A week after forming the cabinet, the scale of the difficulties and the cunningness of the opponents they had to face became clear.
Skeletons in the closet
The budget, inherited from the socialists, was in a dire condition. Inflated expenditures and understated revenues made it impossible to achieve the goals stipulated therein and to maintain a 3.8 per cent GDP deficit. And these were the expectations of the European Union and the International monetary Fund, which granted financial assistance to Hungary within the scope of emergency aid.
It became an open secret that Bajnai's socialist government submitted a convergence programme to the EU which contained falsified figures. They managed to maintain a 3.8 per cent deficit – at least in theory – due to understated expenditures and understated revenues and through the use of various manipulations which adjusted the figures. The European Union turned a blind eye to these creative tricks and in 2009 approved the Hungarian convergence programme without comments.
As long as the previous government was in power, it was impossible to obtain reliable information pertaining to the actual state of the country's finances. A special commission, appointed by Orbán to investigate the actual state of the budget found that the deficit will exceed the forecast threshold by at least 0.7 per cent and may even reach 7.5 per cent of GDP by the end of the year.
Faced with such a situation, in order to obtain UE's permission to increase the budget deficit and to give the new government more time to deal with the financial mess left over by their predecessors, Lajos Kósa, leader of Fidesz, made a dramatic speech wherein he compared Hungary's situation to that of Greece:
– On the basis of what we have found out after taking over the government, it seems that at the moment our priority is to avert bankruptcy. There is a slim chance that we will not follow in the footsteps of Greece, as the situation is far more dire than we imagined.
However, neither EU leaders nor the then IMF managing director, seemingly blind to the risk, were intent on following the mythical convergence programme. Olli Rehn, the European Commissioner for Economic and Monetary Affairs maintained that the Hungarian deficit will not exceed 4 per cent, whereas Jean-Claude Juncker, the then president of the Eurogroup, which brings together Euro Zone's finance ministers, declared in a characteristically arrogant manner, that in his opinion the only problem is that Hungarian politicians talk too much. Also Dominique Strauss-Khan, the then managing director of the IMF (soon to be plagued by a sexual scandal) failed to see any reasons to be worried about the Hungarian economy.
And even Vector Orbán, during his visit to Brussels, failed to sway the decisions of EU's stewards. José Mauel Barroso, the then president of the European Commission, surrounded by flashing cameras warmly greeted the Hungarian prime minister. However, behind closed doors the atmosphere suddenly turned icy and Barroso adamantly rejected the request to increase the budget deficit, which would help to kick start the Hungarian economy. The UE held fast to its opinion that in order to deal with financial crises countries should tighten their belts, cut costs, wages and pensions of its citizens, just as Greece did. And we have to remember that Hungary wasn't the only problem Brussels had to deal with. Issues, similar to those in Greece also arose in Spain, Italy and Portugal.
– The Commission does not want to impose anything upon member states, however it is in the common interest for countries to bring order to their budgets, as all steps to the contrary shall be punished by the markets – declared Barroso after his meeting with Orbán.
Faced with such a situation, Orbán declared far reaching changes in Hungary and that an action plan shall be announced within 72 hours, and that one of its primary objectives will be to maintain the deficit as declared by the socialist at 3.8 per cent. The world understood that Hungary will bow down to pressure and will put together a restrictive economic plan in accordance with the expectations of the markets.
Steps to the contrary
The economic plan announced by Viktor Orbán in the parliament took everyone by surprise. Firstly because there were no leaks as to what it might be. Secondly, neither the media, nor the experts had any idea what to do in a situation where the government is intent on maintaining the deficit at a low level and at the same time is declaring a tax decrease, According to accepted economic models and mainstream literature, such things should be mutually exclusive.
The plain contained 29 points and was based on work and mutual responsibility. That is why a new tax system was prescribed, which was to stimulate the creation of jobs by decreasing the burden on manufacturers and by simplifying the system. And thus, tax on profit for small and medium enterprises was reduced to 10 per cent and one third of permits and concessions were eliminated. Temporary work was simplified and a gradual decrease of personal income tax to 16% was announced.
However, reconstructing he tax system and stimulating business would certainly not suffice. Monet was needed to avert the crisis. Orbán's government intended to obtain these funds pursuant to the mutual co-responsibility principle from those economic entities which did not suffer too much during the crisis and even managed to generate a profit.
And it just so happened that last group was made up of commercial banks and foreign international corporations. In the name of mutual responsibility we introduced the bank tax.
That operation made it possible to increase the income forecast by their predecessors from 13 to 200 million forints. Anticipating the response from the EU, IMF and the financial lobby, prime minister Orbán sent an appropriate signal to them:
We want to introduce a three year bank tax and then to withdraw it after 3 years. We hope that by that time the Hungarian economy will start growing and will be able to achieve its goals without the additional tax.
The initial reactions from western media to this unconventional plan were almost enthusiastic. Reuters reported that the new Hungarian government, through its radical restructuring of the tax system, reduction of public sector wages and the bank tax not only broke away from the restrictive policies of Bajnai's government, but also manged to calm financial markets which were uneasy about the prospect of a budget deficit increase. However, it was too good to be true.
The International Monetary Fund
On the fourth day after the Orbán government was sworn in, representatives of the International Monetary Fund and the European Union arrived in Budapest. Their haste was understandable. The IMF did not have the best experience in cooperating with the Hungarian prime minister from the previous years, when his first government paid off the socialist obligations of Gyula Horn and showed them the door. Representatives of the Fund returned to Budapest in 2008 at the request of the socialists who were once again in power. Although Guyrcsány and Banjani governments' propaganda and verbal messages claimed they did not need money from the IMF, they consumed the 14 billion euro loan within 2 years.
IMF's dissatisfaction was induced by the independence of the Hungarians in creating their economic policy, especially the lack of consultation on the issue of the bank tax. Representatives of the EU in the name of the "defence of independence" of the Hungarian Central Bank opposed the reduction of the salary of its president, András Simor (a socialist nominee) from the exorbitant 8 million forints to "just" 2. However, this issue was closed by setting an upper limit for public sector salaries at the level of 2 million forints.
The bank tax was where the real battle was to take place. The heads of parent companies of banks operating in Hungary quickly took from their subordinates the right to negotiate with the government Viktor Orbán, on the one hand fearing the Hungarian debt, on the other they wanted to use the IMF delegation to put pressure to cancel the 3-year banking tax period. However, the fact that the Hungarian government did not intend to continue the IMF loan agreement or even take the last instalment of the loan taken by its predecessors, deprived the Fund's representatives of any leverage. Orbán and Matolcsy tried to persuade the IMF to give Hungary a flexible credit facility akin to the one which Poland had at the time, however, the Fund's representatives argued that the condition was to abandon the "unconventional and harmful" economic policy which boiled down to dancing to the rhythm of their music.
Hungarians could not agree to such terms. Negotiations were suspended, and the IMF delegation left Budapest with nothing to show for it 2 days before their planned return.
Growth stimulation
During the years of the socialist rule, a large majority of EU funds, allegedly intended for investments, were wasted on the renewal of historic roads and the construction of fountains. There was no investment in production undertakings which would create new jobs and generate profits in the long term. 5 thousand billion forints were wasted in such manner. For a long time, Orban's government had neither the time nor the money, but had to stimulate the economy and create new jobs. In this situation, international (mainly German) corporations, locating their production in Hungary: Opel, Audi and Mercedes turned out to be the allies. These companies increased their investments by building new factories, increasing production and employment. The fact that Audi wanted to build its factory partly on Natura 2000 sites wasn't an obstacle either. After a few months, Brussels gave its consent (the rhetorical question automatically comes to mind: is the nationality of the investor's capital important here?).
An additional boost for the Hungarian budget, which was supposed to meet the tight plans entailing reducing the deficit and boosting the economy, was to come from additional taxes: sales tax levied on hypermarkets, from private energy companies and mobile network operators. However, the downside of this solution an expansion of the camp hostile to the government.
Grilling
Neither good economic results nor a reduction of the deficit below the expected EU threshold of 3 per cent or even the consistent recovery from the crisis satisfied Brussels. The attack took came at the end of November 2012, when Standard & Poor's announced a downgrade for Hungary. The uncertainty about who would replace the head of the central bank, András Simor (the same one, whose EU salary had fought so much two years earlier) was to be the threat to the financial stability of the Hungarian state.
The real reason was to put pressure on prime minister Orbán, not to nominate the architect of Hungarian economic reforms, György Matolcsy, to replace Simor.
Timothy Ash, an analyst at London's Standard Bank did not mince his words:
The government should appoint a credible successor to the head of the central bank, Andras Simor, because the financial markets would probably "not be happy with" a candidate such as the minister of national economy, György Matolcsy. (...) an unconventional candidate could annoy financial market participants who want an orthodox successor.
The pressure was not limited to downgrading the country's rating and verbal demands. With the help of a clever financial operation, a group of investment banks launched an attack on the Hungarian currency - the forint began to lose value, seemingly due to government inefficiencies and the weakness of the Hungarian economy. The goal was not only to force "their" candidate for the head of the central bank, but above all to overthrow the Orbán government by bankrupting Hungary.
- We've managed to fend off two big attacks so far. (...) In the first it seemed that the struggle concerns the budget deficit, bank tax and the Monetary Fund. However that was not the case. The question was whether the Hungarian government would be free to decide on national matters.
Whereas in the second one, one had the impression that the struggle was for a one-off repayment of debt, for the independence of the central bank and for democracy. Once again, the truth was elsewhere. It was about whether, by bankruptcy, bank panic or a coup d'état, the finance world could remove the Hungarian prime minister who was elected in free elections from his post – as summarized by György Matolcsy.
In this situation, the Orbán - Matlocsy duet went all in. The Hungarian government announced a return to the negotiating table with the International Monetary Fund and the European Union. This halted the sale of Hungarian currency and securities on the financial markets.
The game
The central bank of Hungary was supposed to be the ace in the sleeve of the IMF and the EU. Towards the end of 2012, marked by the recession, the management of the Hungarian Central Bank (still under the leadership of Simor) sent a report to Brussels, which showed that the bank's losses in the next year would be 203 billion forints. This was to cause problems for the Hungarian budget and give the EU arguments for maintaining the excessive deficit procedure against Budapest.
In March 2013, György Matolcsy became the new head of the central bank, and in just one week he drafted a rescue plan for state finances. The team of the former minister of the economy reduced the risk of the bank loss from the predicted level of 203 billion forints to zero, thus showing that the previous report, so readily received by the EU commissioner Olli Rehn, was based on false calculations. The new report was immediately sent to Brussels. So the EU fell into its own trap, unable to deny the position of the independent central bank, since the previous report was adopted "without baring an eyelid."
Particular elements of the unorthodox economic model began to bear fruit. Economic indicators started to rise, debt in foreign currencies for housing purposes fell by over 1 billion forints, employment and consumption increased, and the budget deficit did not exceed the EU threshold of 3%.
Other countries in the EU began taking cue of the Hungarian government's actions: Poland, to save its budget, abolished open pension funds, Spain and France introduced a tax on telecommunications services, which forced Brussels to abandon the procedure against Budapest regarding the failure to meet EU obligations.
In May 2013, after 9 years, the European Union withdrew the excessive deficit procedure against Hungary. After repayment of the last instalment of the IMF loan, the representatives of the fund closed the office in Budapest and left.
However, the crowning of the efforts of Orbán's government and his team was the result of the spring 2014 elections.
- I am glad that we followed the economic policy initiated in 2010 to the end. Fortunately, I never wanted or had time to hesitate - György Matolcsy summed the struggle for the Hungarian economy which went on for more than four years.
The iron consequence of Viktor Orbán's economic policy management and "lion and fox" tactics in competitions with the International Monetary Fund and the European Union resulted in Hungary not only healing its economy, but also helped to save the country from becoming dependent on international finance. Unorthodox, i.e. incompatible with the recommendations of Eurocrats "who know better", concept by György Matolcsy proved that in relations with the West there is no "win-win" convention, where both sides are winners. The example of open investment funds and housing loans in francs has shown that these "wins" only work one way - for the benefit of the banks.
Today, Hungarian politicians are collecting the reward for their assertive policy - in the 2018 elections Fidesz won for the third time, and with unflagging support - with the Jobbik as the coalition partner they won over 70 per cent of the seats in the Hungarian parliament. It would be worth remembering all that during this year of double elections in our country.
Helga Wiedermann - "CHESS AND POKER - a chronicle of victorious battles fought for the freedom of the Hungarian economy" pub. by KAIROSZ/FRONDA 2016
Rafał Karpiński