Friday, December 30, 2011

On the paradox of sovereignty

There should be nothing surprising in the Hungarian governments reluctance to accept the terms of the EU and the IMF for a new agreement, at least for those following the developments in Hungary. The EU insists on repeal of some recently passed legislation, while the IMF made very clear that there is no way Hungary can hope for anything else than a stand-by-agreement with hard policy conditionality. A detailed action plan, quarterly reviews, and again reinstatement of the fiscal policy framework dismantled  in the last twenty months. At least for the time all of this is unpalatable fro the Hungarian government - despite signs that they are trying to conclude their separate pact with the IMF with or without the Eu's blessing. (The government announced the chief of the Hungarian delegation will visit Washington for informal talks next January in order to meet with IMF general director Christine Lagarde, other directors and the staff responsible for Hungary, but there was nothing about reestablishing contact with Brussels and the EC.)

The reason behind this reluctance is - besides underestimating the risks most probably because government politicians are eyeing the reserves of the Hungarian National Bank as a source of liquidity that can enable the country to weather the storm until growth resume - a deeply seated desire for sovereignty. The conflict - fashioned as an economic war of liberation or independence - is about Hungary's ability to conduct its self-styled policies. One can argue - rightly - how short-sighted this old-fashioned concept of sovereignty is today, discuss how impossible is it nowadays to dissociate one country from the world, or point out that even the giants of the world are steering towards forms of collective world governance, even if only out of necessity. But the Hungarian situation conceals far more than a simple arch-conservative or super-traditionalist understanding of sovereignty. It is deeply paradox.

The government struggles to establish a precautionary or flexible credit line with the IMF, something they phrased as safety net or insurance, an agreement providing IMF money almost unconditionally in case of necessity - in the name of economic sovereignty. They reject conditionality because it would grant supervision over Hungarian policy decisions for a foreign institution.  However, one and a half years ago, at the wake of the previous IMF program everyone expected the parties will to arrange for exactly the same type of agreement. Then the Hungarian government suddenly disrupted the negotiations, after some days of hesitation and confusion announced the war of economic liberation on the IMF and proceeded with her unorthodox measures designed to resolve the problems that the IMF program was intended to resolve. It seemed the IMF won't ever return and sovereignty is regained successfully. Only one year passed and the necessity of a new understanding with the IMF seemed inevitable in order to avoid the worst. But - directly because of the disruption the government inflicted upon the country - the government has a very slim chance to get the desired flexible credit line. The one they would have easily got before the war started. They would have now their beloved sovereignty without the war. But the harder they fought for it the farther it slipped away...

P.S. Actually, if one looks after a similar concept of sovereignty there is one handy parallel in the neighborhood, albeit from some decades earlier. The Romanian government - not independently from the very strong nationalism in the country - thought of and acted similarly in the international community since 1918 and until 1989. Surprisingly their fervor for sovereignty somehow abated in the last decade, or at least they have learnt how to manoeuvre.

Wednesday, December 14, 2011

On thin ice?

Hungary's prime minister is in full gear. With declining popularity and approval ratings he is convinced that it is due to his government's inability to make people understand how well they are treated. Instead they believe in the lies of the opposition. As a result Viktor Orbán appears everywhere, gives interviews (even to reporters earlier exiled to remote corners of the public media) and engages the opposition in the parliament. (Contrary to the British custom there is no informal obligation of the premier to participate on Prime Minister's Questions every week.) Additionally he visits friendly societies, in order to clarify his program for faithful followers. 

Aside from the obvious ominous signs - what to expect from people supposedly belonging to the country's business elite who are listening to Orbán's contradictio in adiecto statements without objection, moreover, taking it with applause - the prime minister made yesterday an interesting comment in one of these circles. He referred to that although it is almost impossible to introduce fixed exchange rate it is worth to contemplate the possibility. 

Given the self-proclaimed and proudly borne "unorthodox" nature of the economic policy of the government, such a hint is not necessarily as meaningless as one would be inclined to take it. There is at least one recent example that a country managed to regain competitiveness and growth with a set of measures including capital - and implicitly exchange rate - controls. Paul Krugman gladly compares the example of Iceland as a country that took a more traditional devaluation focused IMF approach in the aftermath of its crisis to the European countries taking the internal devaluation path. Iceland is an example for a country's potential to convince the IMF  that act of its own design can serve the common aim of returning to growth just as well as the IMF's proposals. According to the latest IMF report on Iceland the government insisted on capital controls in order to make devaluation (and implicitly inflating away debt) easier with pre-empting capital flight.

In the light of Iceland's performance, much praised by the IMF, even the idea that Hungary's leaders are contemplating something similar cannot be written off easily. However, some caveats should be made here concerning the viability of a possible change of strategy. Firstly, Iceland started negotiations with the EU on its accession simultaneously with its IMF program. On the one hand it means a strong pledge that capital controls and exchange rate manipulation will remain temporary, on the other hand it was free from the EU rules, something not given for Hungary, part of a joined EU-IMF credit program. It is hard to see in Hungary’s case how EU law can be eliminated, even if it allows for reintroduction of capital controls in case of economic danger. Secondly, Hungary is still following the path of classic austerity – despite the government’s insistence on the opposite –, it is “on the Greek road”, as Orbán likes to formulate. Even if it is possible to change track, the austerity already has forced its citizens to deplete their reserves, it has not strengthened its banking system (as Iceland did), rather weakened it in the last year, and the typical neo-liberal reforms (for example on the labour market) proudly passed in Parliament yesterday do not suggest the government’s willingness to take an alternative route in order to share the burdens of the crisis more fairly. Thirdly, and this point is knit the former, Orbán has a distorted vision of Hungarian society, impeding him to realize policies strengthening equality. Yesterday he also announced that his policies are aimed at strengthening the middle class. However, the latest income statistic of the Statistical Office showed that people with a monthly per capita net income of 130000 HUF (400 EUR, equivalent of 200000 HUF gross wage) in 2010 belonged to the top income decile. Fidesz’s new flat-tax in 2011 meant a tax raise for everyone with a gross wage under 290000 HUF. One can safely guess that Orbán’s policy – however strongly he is convinced of the opposite – benefits only 4-5% of the population, and certainly not the middle class, only the elite. And last, but not least, a sudden change of track would not only need approval from Hungary’s creditors (something certainly not happening without clearly formulated and well founded strategy), but a bit more capacity to act than the government has shown until today.

Monday, December 12, 2011

Why not?

The crisis of Hungary and the drama of the EU – for a brief period separate from each other and the former even resolved at least in the imagery of the prime minister, Viktor Orbán – suddenly got bound to each other very firmly. Not only was the complete dependence of Hungary's economy on and from the European declared, but the unfolding crisis of the eurozone absorbed Hungary's fate last week, at the meeting of the European Council. The issue of whether the prime minister blundered diplomatically or not in Friday morning is significant only in a strictly Hungarian context as a possible demonstration of the governments rapidly diminishing capacity to handle politics and governance, not the first sign in this sense and hardly the last one. But the whole French-German plan bears utmost significance for the country as well and poses some questions concerning the governments confused reaction too.

The interpretations of the council's declaration pointed out at least four important aspects that should be considered from a Hungarian (and more broadly from an East Central European perspective). The proposed new fiscal stability rules can be seen as the end of (or even the outlawing of) Keynsianist economic policies. Furthermore, some argue that a fiscal union following the German blueprint of re-balancing through austerity can bring (or just aggravate) the present state of economics close to depression and bring about a serious challenge to democracy. The latter means that crisis stricken countries, among them Hungary, certainly have to reconsider their place and chances given the restrictive economic environment. But the plan is far from being unproblematic from a pro-European perspective too, it proposes an incomplete transfer union without proper governing bodies and democratic representation, reviving (or even enhancing) the never eliminated complaint of democratic deficit in the EU.

But with all of these issues that certainly should not be neglected or treated in an off hand manner, the Hungarian reaction was very curious. While the government portrays itself (and is selling this idea to its European partners at every occasion) as the champion of far reaching reforms, fiscal prudence and stability, hails itself as the only country that will achieve a budget deficit within the limits prescribed in the Maastricht Tretay, it still failed to sign to a new treaty that will only enshrine these self-proclaimed objects of national pried. Even if its boldly announced aim is to transform the country to the most (or most recently, from today one of the most) competitive countries in Europe , and one that can compete with China. Quite in line with what the Germans are blamed for, trying to make everyone German as a panacea for the crisis.

So, why the restraint? There is an obvious explanation, sovereignty. It means power and as the new fiscla riles and most notably the way they would be enforced would curtail the sovereignty of the parties to the new treaty, the government is not quite willing to hand its power to a European body or accept trusteeship of Germans and French. Especially if it still believes in its vision of a West in decline and an East on the rise. However, even if such considerations certainly played a role in the decision not to accept the new treaty (a position later softened to consulting the parliament on this issue) there is one valid point hidden in all of the verbal camouflage: is it possible to create a fiscal union on the proposed line without hampering or tacitly eliminating democracy? It is not only about the way the Greek and Italian premiers were replaced – seen by many as a plot of mysterious capitalists and foreign politicians –, but about the German plan's content: constitutional fiscal rules that could – in case of a suitable interpretation – ban fiscal stimulus and enforce the further dissolution of welfare institutions. Not that it would be too far from the Hungarian government's aim. It is frequently declaring the end of the welfare state, a new era of work-based society instead of one based on social benefits. But according to its interpretation this process is the result of the rise of the East, an industrious, demographically growing world, whose success can be followed only with its own measures, hence the insistence of gaining competitiveness vis-a-vis China.

But if one considers the process of how the welfare systems were rolled back, it is hard not to see other factors, intra-EU developments behind it. Most notably the insistence on market based investments in ECE after 1989 as opposed to institutional based ones. It meant a competition for investment even into social systems and as in every case investment could be attracted with the fastest and safest return on capital and with the fattest profit. The subsequent necessity to cut welfare systems as there was no need and way to finance them resulted not from the competition from the East but from the competition among new member (and accession) states.

From the above diagnosis one can conclude that some EU-wide measures would be beneficial for the members states in the sense of reducing the pressure on their present welfare systems and societies. Such as a harmonized tax base (part of the German proposal), that would reduce (or probably eliminate) tax competition in order to attract investment. With envisioning more significant reforms of the EU's architecture – in the longer term – there is the possibility to harmonize and connect – and later merge – certain welfare systems, such as health care,, unemployment benefits or pensions. It would alleviate a huge burden from some crisis stricken countries, like in Hungary's case 1-2 billion EUR would certainly reduce the dissipation of medical personnel. And as such changes would require a larger and more flexible EU budget it would make it possible to enact fiscal stimuli even if the member states adhere to the strict fiscal rules proposed. But it needs new political structure, with real political representation and responsibility, an enhanced role of EU instiutions in governing, not (only) intergovernmental action.

But as if such a situation wouldn't be complex enough, internal developments in Hungary makes the country's position even more complicated. Authoritarian tendencies transforming a functioning democracy into an illiberal one at best; a „visionary” economic policy, a mixture of classic nineteenth century capitalism, catholic social thinking from the thirties, neo-liberal dogmas like tax competition and flat-tax, and nationalist protectionism results in an unpredictable and growth restraining voluntarism; an overestimated potential of the country coupled with the belief in national peculiarity, all of these manifested in utterly misguided action and failure to recognize real constraints for the country, ultimately leading to a return to the earlier decried IMF as the only potential source of financing for the next years.

Manoeuvreing between political constraints abroad and a sense of omnipotency at home (given the governments 2/3 majority and its ability to change the constitution according to its will in days) was channeled into an attempt to completely rebuild the state. As a result next year Hungarians have to face not only the expected economic hardships (declining real wages, stagnating, probably even growing unemployment etc.), but the possible chaos brought about radical changes in the structure of the state. (Reducing local self-governments to a minimal role, building a centralized public instruction system, drastic reduction of higher education, centralization of pub,ic administration hitherto enacted by local self-governments etc.) The government during its eighteen months long tenure showed rather incapacity to carry out such sweeping changes, resulting in frequents delays compared to the previously announced deadlines, window dressing without real changes, frequent reversals of earlier measures (the most telling is the example of minor taxes, the government in an attempt to reduce red tape eliminated 10 of them, but in a year introduced another twelve). Nothing happened according to the plans outlined, everything was in a permanent delay and confusion and the deepest changes are still only in the phase of legislation. Not to speak of illusory ideas, like a restructuring of the disability pensions and benefits system, with a failed plan to reconsider the status of almost 400 000 people in six month. Meanwhile the lowest levels of state administration became highly politicized, party commissaries installed, essential systems are underfinanced (health care, education, administration) while the budget renounces significant potential revenues (progressive taxation, a progressive property tax etc.) But there is no EU-wide resolution of the problems on offer from Hungary, neither an attempt to fight for preserving what was left from social equality and cohesion. This fight is not for the greater good of the community – or only in a weird sense, for the greater good of a non-existing, imaginary organic nation –, but for the power of a government sliding into authoritarianism.

The irony of the situation is that the government – while deluding itself that so-called unorthodox measures (windfall taxes etc.) do not mean austerity – creates exactly the same self-generating and self-intensifying cycle of austerity that can be expected from the German plan too. Its followers – and its politicians – still think that it is just temporary, a kind of transition, with the rebuilding of the state finished amelioration of the situation is in sight from 2013. However, given its impact on economic growth and the proven inability of the government to provide effective governance the fight for sovereignty can easily end in a catastrophe. German style austerity carried out while the state simply dissolves. In the face of this prospect – and it is the irony – even a strict, closely monitored IMF-EU program can be favorable.  

Wednesday, September 14, 2011

Disorderly devaluation?

The saga of the conversion of fx-loans in Hungary goes on. According to a report at the Hungarian website the government's main aim is to regain freedom of exchange rate determination and practically carry out a devaluation of the forint, without hurting households with fx-loans. As I'm no friend of this government I'm sceptical a bit, no government politician or supporter used this argumentation until today. However, if it is true it is just an even stronger proof of the incompetence of the government.

I know that I was arguing – not that it would matter the slightest – on behalf of external devaluation, therefore to declare a seemingly identical argumentation could seem paradox. Nonetheless, it is hard to treat the government's proposal as fulfilling the three necessary preconditions of a successful devaluation through the conversion of fx-loans. Any attempt should be comprehensive in its extent, prompt in its execution and orderly regarding the covering of losses and managing the inevitable risks. In this case none of the above preconditions exists.

The volume of fx-loans is around 1 million households. The ration of non-performing loans is around 10%. The proposal of the government intends to cover only 300 000 at best, so, the remaining 700 000 would still make a very significant electoral base not to let the forint devalue. And this is the maximal number the government claims will have an opportunity to make the conversion. The Minister of National Economy allegedly argued that only 50 or 100 billion HUF loss will be incurred to the banks, a sum that gives only about 75 000 existing loans converted. Hardly a reduction enabling the government to devalue.

Neither is the proposal prompt enough to make a sufficient reduction for a quick devaluation. Although the prime minister told yesterday that only a limited time frame would be allowed to the debtors to make the conversion (a solution with many – albeit very different – risks), this evening the reports states that the possibility will be open indefinitely. So, even with the compulsory lending of forint based loans prescribed for the banks the process would be slow (given the practical and procedural necessities, finding the suitable new loan, preparing the documentation etc.) and without it it will only be a cherry picking of the better debtors. Meanwhile everyone will avoid the not so promising clients, effectively reducing the number of conversions and therefore postponing the restoration of freedom of exchange rate manipulation. With the process underway for months or probably even for years the economy can not have the boost hoped from the devaluation.

It is again hardly an orderly solution. Although the distribution of the losses is clearly settled at least for the time being* nothing else seems to be in place to impede the dangerous process induced by the conversion. First of all there could be a long period of risen demand for forint that will inevitably lead to higher interest rates, while the exchange rate will be depressed (but probably not depressed enough to lift the exports significantly) to compel the National Bank to raise its policy rate and simultaneously inflating the country's foreign currency denominated sovereign debt. Even at the present rate of 286-287 forint for one euro the debt grew with 800 billion forint, 26+ of the amount the government reduced it back in summer. It would effectively mean the end of the debt reduction course, up to this moment the main objective of government policy.**

Beyond the practical issues the new strategy (external devaluation) is the third one in 16 months. Initially there was an attempt for a stimulus through tax cuts that almost immediately failed due to policy constraints. The EU forbade any deviation form the agreed deficit target of 3,8% of GDP. During the autumn the government made an experiment with classic austerity and tax cuts, but the budget collapsed already in January, leading to the very typical austerity program (internal devaluation), the Széll Kálmán plan and the primary objective of forced and fast debt reduction. And now the government turned around again, this time opting for external devaluation. Albeit not in a very sensitive way. (It is worth to take a look at what happened in Iceland, where – with the assistance of the IMF – a consolidation program based on external devaluation was carried out successfully. It needed far more and far stronger cooperation and effort than the Hungarian government envisages.) And not only the sudden and unexpected turns and twists speak fro themselves, there are a lot of contradiction between these strategies. Austerity is the opposite of the stimulus, while external and internal devaluations are hardly reconcilable and the former will initially raise the debt to GDP ratio. A sensitive mixture of these approaches would still be possible (especially of the first and the third), but it would need a more complex and sensible approach, one that calculates with every possible effect and takes into account every potential risk. Unfortunately the only economic quality the government seems to possesses is a very high marginal propensity for gambling.

* However, the prime minister admitted yesterday that the EU Court would most probably declare the move illegal, order compensation and fine Hungary, but he was eager to assure the people that they do not need to fear, the state will take this burden.

** There are a numerous other risks. For example the conversion means the liquidation of Hungarian assets and payment of huge sums to foreign creditors. Reducing national wealth and handing it over to foreigners, a reduction of the capital and with it the possible base of investment, and obviously will have a negative impact on the current account.

Sunday, September 11, 2011

Self comment on the previous post

Maybe soemone who has read this blog carefully will obstruct my previous post that earlier I was no friend of banks and suddenly taking an issue on behalf of them can only be the expression of political bias. In order to clarify this (but not denying some political bias, anyway, why should a blogger be unbiased, it is supposedly a very personal genre) let me present my opinion. Firstly, banks are not persons, therefore they could not have virtues and vices and banks as such can hardly commit sins and deserve punishment. Any reference in texts claiming that banks has acted one way or the other is a simplification and a pars pro toto. Banks are instiutions managed by humans, and these humans obviously can be judged even for the morality of their handling of business. However, at the moment, In Hungary these humans should not fear any punishment, it is pardoxically reserved for non-person without the free will that is the basis of any moral judgement. Furthermore, these humans are defended, their income taxes (note I'm speaking of those who run these banks and not those who work at the local bank subsidiary in the cashier's desk) were cut and - implicitely, but logically - they are always included in that virtuous group of hard-working people who were obstructed in their work by the previous, progressive tax system - at least in the fantasy world of these politicians. So, if there is at all someone who deserves punishment it is not the instiution, but the humans.

Secondly, and it is in a way a logical consequence of the above outlined problem, banks as institution can hardly be substituted for anything else than banks, whatever name they will carry. If they were driven to excesses - as they surely were -, if their payment schemes encouraged reckless behavior and ever growing taking of risk through the innovation of new finacial means to distribute these risk around the world then they need regulation, better control. But this is not the same as recklessly punish them with enforcing on them huge losses. Someone malicious could even say that anyone, even the dumbest, can punish the banks but only a few clever can regulate them properly in order to avoid the recurrence of such excesses. Because the banks, be them the good, old family banks or the new investment empires are essential for the economy. The immediate effects of the credit crunch in 2008 (when the flow of capital was frozen in a moment and the economy stalled) and the visible effects of the present reluctance of banks to lend (slow growth, even in Hungary, 0% q-o-q, 1,5% y-o-y in the second quarter of this year after two quarters with y-o-y growth above 2%) prove this very basic truth. It was obvious from the start of the crisis that there will be losses and the main issue will be the distribution of these losses. Not only according to abstract ideas of justice and fairness but according to the very practical necessities of the economy. I was always in favor - not that my opinion would carry any weight in this issue - of strict regulation, limiting the bonus schemes of banks and brokerage houses, dividing banks into retail and investment ones etc. But - however painful it is for my moral and political convictions - I tried to be always aware of the fact that the banking system has to be put in order with the help of the public. Unfortunately not too much was done in this regard and even these meagre achievements were - at least in Hungary - undone by the new government.

Saturday, September 10, 2011

Frustration, failure, voluntarism

Hungary is still only a secondary front-line of the renascent crisis, not among the headlines and for a superficial observer (i. e. for most of them) it could seem justified. Although the slippage in this years budget (and the obvious: the flat tax was not capable to stimulate growth) could warrant some worry, the government is imitating action at every negative sign, this time announcing 100 billion HUF correction measures. Hardly credible (enhancing tax collection makes 40% of this amount, and a freeze on government purcheses another 40%) and hardly structural, but it didn't really disturb analysts. Not even the news that the execution of the Széll Kálmán-plan (the bouquet of austerity and supposed reform measures planned to bring 550 billion HUF savings next year and about 900 billion until 2013) suffers from serious slippages, and exactly at those fields from where the government expects the highest savings could shake the belief in these guys. They can at last claim that the government is devoted to the deficit figure and ready to apply new measures if necessary. (I would really like to know how long would they bosses at their banks tolerate if they would announce that they had managed to failed to achieve the planned profit in the first eight months of the year, but they are very committed to the planned number and are ready to make corrective measures.) Anyway, it was hardly the sensation of the week, especially in the light of the government's even harder commitment to the flat tax.

But the end of the week brought back the memories of last year, when hardly a week passed without events and announcement testing everyone's heart and patience. It turned out that something was cooking (besides the books) in the witch's kitchen run by the government, a new plan to save the fx-loan holders.

Well, the malicious will certainly point out that as a complete program with this aim was already implemented and started two weeks ago it was even more short-lived than this year's budget, another object of pride of the government. But as one of the reasons the government came up with this new idea was the not qiite spectacular success of the original program (there was no opportunity to show long queues, praising the government in the TV) it is worth to be mentioned. The other reason behind the new plan – at least in my opinion – is the complete failure of the flat tax and the resulting frustration with the economic policy. I'm sure they attribute the lack of internal demand not to the fact that the new tax system was a tax hike for most of the population and it favored the segment with the least marginal propensity to consume, but to the spiking mortgage rates due to the CHF based loans. I fear it is telling regarding the mind-set of the government that facing the obvious collapse of the whole of their economic governance they decided to stimulate their original stimulus, instead of changing the pattern of redistribution. (Furthermore, they will cement in this tax system with a two-thirds majority law.)

What is the problem with the proposal? Firstly, it is its aim: to „release” the income of households in order to make them spend more on consumption. Secondly, the set-up of the plan and the parameters applied. Not only is there a few evidence that the weakness of the forint was the main reason of the weakness of domestic demand* but it fails to address the major problem caused by the fx-loans: the effective fixed excahnge rate of the HUF. As long as hundreds of thousands has fx-loans the country can not devalue because it will immediately harm, cause pain to millions. But external devaluation would improve export competitiveness faster and with less pain (mainly thorugh import generated inflation) than the internal devaluation (austerity) executed by Fidesz. However, the government only hopes to bring redemption to a quarter of the 1,2 million households with fx-loans with their plan to enforce a conversion of the loans at an exchange rate of 180 Huf (50 forints weaker than last Friday's close), signaling that they do not really want to get rid of the effective peg in order to curve out more room for manoeuvre for the economic policy, but to fend of the popular pressure.

As for the second problem the plan lays the whole of the burden and the losses on the banks. However, the balance sheet of these banks is already full of hidden losses due to the non performing loans and the loss of value of the real estates serving as collateral fro these fx-loans. As long as they can keep their debtors afloat they not necessarily can declare these losses and they can manage „only” with setting up appropriate reserves. So, they can hope – and in this sense their interest is common with their debtors' interests – that at the end these loans will be payed back according to schedule and they can release the reserves set up to cover projected but at the end avoided losses. However, as soon as they are forced to accept the conversion of these loans (or the repayment in one sum) at 180 HUF exchange rate they will realize huge losses on these loans that has to be covered. According to preliminary estimates it can be as high as 1100 billion HUF. It will effectively force them to recapitalize. Even if their owners (Western Banks mainly) will provide them with the necessary capital – that is far from being certain – they will certainly try to find as much foreign capital as they can for this purpose. One option is to freeze lending and use the capital to cover losses. And on the long run they will certainly pay close to zero rates on deposits, as they won't need to accumulate capital this was because they won't lend. (There is of course the secondary effect of losing confidence in Hungary. As this move would be most probably illegal, violation of existing contract by a third party without interest in these contract, violation of property right and that way unconstitutional and against EU law if the government implement it it will be equal with the declaration that no investment and no property – remember the private pension funds! - is safe here.) Anyway, it could bring the banks to the decision to withdraw – gradually or even abruptly – from Hungary. It will certainly cause further reduction in lending and tighten already very tight financial conditions. And such events are rarely beneficial to economic growth, something the government desperately wants to deliver.

As the plan is clearly not part of a coherent one on how to free the Hungarian economy from constraints from which it can be disentangled it is hard to see how it could lead to positive result. It is not aiming to the solution of the most important problem, just for short term political gains. (And it is the expression of frustration as the information on the discussion in Fidesz's caucus suggest. The most important supportive argument against the objections of the more restrained members was that the banks caused this whole mess they should bear the whole of the burden.) Not that there wouldn't be place for an orderly and well balanced solution to the problem. There were even plans proposed by bankers. And even if those were rejected with the cooperation and advice of the IMF and the EU (and with their loan) a kind of bad bank or special financial vehicle could be set up in order to clear the bank's balance sheets, convert the loans and that way achieve simultaneously the re-ignition of bank lending to the economy (that was already constrained by the huge implied losses and the subsequent frenzy to collect enough capital to cover these probable losses) and the lifting of the burden of households. But it would obviously end the economic war of liberation so proudly waged by the government.

*According to the data of the Office of Statistics retail sales grew in this year m-o-m and y-o-y as follows:
               m-o-m        y-o-y
January     0,9% and   0,9%
February -0,3% and   0,1%
March     -0,5% and -0,9%
April       -0,3% and -1,2%
May         0,5% and   0,7%
June        -0,5% and -0,5%

Meanwhile the CHF-HUF exchange rate fluctuated between 220 and 205 HUF in January, between 203 and 214 HUF in February, between 201 and 214 HUF in March, between 200 and 210 HUF in April, between 204 and 221 HUF in May and between 214 and 228 in June. Funnily, retail sales declined in the month when the CHF was weakest.

Wednesday, August 10, 2011

Scholars of humanties will save the world?

Yesterday - at least as I see, without any qualification and only intuitively - was a fine example how the psychology of the markets work. At the start almost every stock exchange plunged, almost a free fall, but they soon began to recover, most probably on the back of expectations that the FED will announce new measure to boost the sluggish US economy. The expectations ranged as far as the immediate announcement of quantitative easing adn what happened? Well, nothing. The FED reiterated that they are aware of the problems, just as they were earlier, they will keep interest rates practically at zero, just as it was for a while, they will pump back their profit into the financial system, again as it is happening even now, and of course they will consider anything that can help the economy. None of these measures helped to stop the deterioration so far, and to expect a different outcome for now would not be too logical. An none of these measures is new in any sense, not to speak of being surprising. Or did anyone honestly expected the FED to raise its rate in the face of the slump? (Just because today's hedalines speak of markets rebounding due to FED's announcement of keeping rates zero.)

Thus, the FED did not change course, while the markets were expecting something new, that could steer the world economy in another direction. The initial reaction were as one would expect: sell-off at the stock exchange. But, curiously, after some time euphoria settled and the markets rallied. Given what happened it is counterintuitive at best.. Market participants were waiting for the announcemtn of radical changes and what they receieved was the announcement of no change at all. Initially they reacted asthey should, but somehwo reconsidered their position and began to trade like the FED would have given them what they had expected. Instead of the usual market-bashing probabyl it is better to draw some conclusions.

It is not words that matter - sometimes instead of deed - but only how they are interpreted by actors on the market. Even if what they have heard was the opposite what they longed for they could still reinterpret it as if it would be the much desired news. But there is still a delicate case here: it seems words of financial institutions are more or less unintelligible for their audience and it confuses them, This time for the better - leading to positive evolution of the market -, but it can easily turn out to be the opposite. And this is the point where scholars of humanities could have a significant role in ameliorating of the workings of the economy. Who else are in a position to make a thorough textual and discoursive analysis of the words of financial institutions. Probably with a wide scale reserach project every statement and every interview of the respective central banks and their leaders should be collected and alaysed in order to determine the real meaning of words and phrases. And as personalities in the financial world change it would be a never ending story. But with the help of these scholars the markets would have a dictinoary or theasurus of the central banks enbaling them to undertsand their statements immediately. Funny, it seems the markets needs translators and they will collapse without the help of those useless humanity scholars.

Monday, August 8, 2011

August again, leaders on holiday - what about a new Marshall-plan?

Not that it would be a typical one, with almost unbearable heat, slowly radiating from the walls of houses and even the shade of trees not offering relief without the breeze. And I don't believe in theories that for some mysterious reason August would be a month dedicated to and the most suitable for catastrophic events to happen. But after another half a year of "it is a strong recovery, fundamentals are OK, everything will be perfect, only those profligate Greeks should make themselves more accommodated to the inevitable decline of their living standards and work more" narrative suddenly the whole world seems to accept that we are on the verge of absolute collapse and disaster. (So much for the rationality of markets. ;) ) Well, according to the most capable economic leadership in any country of the world Hungary is a safe haven, China will defend it from anything that would happen. But otherwise, the world is doomed. (Just look at exchange rate and the bond yield curve of the last days, no sign of Chinese buying Hungarian debt at least not with discount.)

In a sense it is undeniable, but - I hope for many - not exactly the events are the most worrying, but the apparent lack of any kind of leadership and ideas,
what to do and how to act in order to avert the worst. What we only have is a renewed argument whether neo-Keynesians have it wrong or not, whether we should eliminate deficit now and at once or not, whether tax cuts will bring the so urgently needed growth. But as the events unfold no one seems to make an attempt to exert control over them. Those, who are supposed to be leaders, are just gaping at the incoming storm. However, even if sometimes the situation seems to be the contrary, it is lack of invention and new ideas that lies at the root of the sudden outburst of the crisis, everyone hoped (and thought) to have buried very deep. As the debates show the faith in the capacity of the states to act is shaken but there is no other entity to turn to in distress. To leave it for the market is a good idea but it would surely be suicide. Sovereig default would certainly bring down banks and companies, wiping out their - real or imaginary - wealth and resources, and of course individuals too, leading to the - at least temporary - death of those very markets we should turn to. The markets would like to see the states resolving the crisis, but abhor from most of the solutions offered. As long as the present crisis is seen singularly as a competitiveness issue - and not a lack of sufficient demand in the world- the markets will demand more and more austerity, leading to even less demand and so on. It is certainly a delusion from the recovery that the possibility of growth is associated exclusively with competitiveness as if Say's law would be unconditionally true. Despite the fact that in the light of recent revelations the performance of some economies in the last more than one year was probably driven by Chinese and US quantitative easing, creating a favorable environment at the emerging markets. Probably it is really not so easy to accept that extreme high German growth was not something given because the Germans are industrious workers but because there was demand somewhere for their products. (Even if the significant slowing in the last months would suggest otherwise.) The problem is that as long as the demand side is not really taken into account no one is really ready to accept: austerity might bring about the classic deflationary spiral.

Furthermore, the addressing of the international imbalances, the rebalancing of economies has not even begun. Even in Germany with its vigorous growth internal demand remained suppressed, and show only modest strengthening, while the German industry  has till not reached its peak output before the crisis. Not to speak of the other major and minor economies. According to the last IMF report on China even the authorities accept the necessity to direct the country to a more balanced economic model, with better social services, comprehensive pension and health care system, cheaper social housing, all costly and serving as automatic stabilizers but hopefully enhancing internal demand - for imports as well. With the turnaround of emerging economies the developed one could probably better rely on external demand, making plans of debt reduction based on exports via growing competitiveness more realistic, and not only them: there is the Eastern periphery of the EU too. Anyhow, one thing is clear: reform and spending cuts are no quick fix for the problems and even if there would be capacity and determination to implement them at once it would need a lot of time to change the course of those economies and generate growth that would make debt reduction credible.
Unfortunately there are complementary problems concerning the possible resolution of the crisis, structural ones but this time not on the labour market nor in the tax system, but at the very heart of economic governance, and well beyond the all-too-known issue of the Eurozone being a monetary union without a fiscal one. These structural problems mean serious constraint on the possible path of action for politicians and central bankers and accompanied with the lack of imagination makes the successful escape from the crisis one of the least possible outcomes.

The classic panacea for debt is threefold:
- faster growth
- austerity
- inflation
and these are often interlocked and interwoven.

The austerity is only viable in a benign and favorable international environment; when growing export markets offer a substitute for weakening internal demand fast enough to avert a long lasting economic slump. In case of an independent currency the fastest and easiest way is devaluation, otherwise harsh cuts in production costs are needed (and austerity to make it credible that the declining budget revenues won't lead to soaring deficit) and thus the restored competitiveness would enable producers to outbid their rivals. However, at the end the whole process could turn out to be a classic beggar-thy-neighbour policy, reducing cost in competition forcing others to do it and making gains in export at the cost of others and not as a result of a expansionary economic environment.
In order to avoid such successes being short-lived sustainable faster growth at the end needs more demand from somewhere, therefore the first option is very much constrained by the international environment again, if there is no opportunity to generate internal demand. Thus the present economc situation  is anything but favorable to these options: no chance of a devaluation as it is either impossible due to the lack of own currency or due to the practical peg in currencies of countries where significant part of individual, corporate and state debt is foreign currency denominated. And with a markedly slowing world economy - according to some it is almost certainly will be in recession in the second half of the year - there is no internal demand to rely on while austerity wipes out internal.

There is of course the third option - inflation. Most of the debt problems in the last century (actually even before that) were eliminated with this option. Whether it is fair or not, it is an effective way to reduce debt-to-GDP ratio and reduce the value of claims on the state and on the individual as well. Not inflation indexed debt will soon lose its real value when facing 4-5-6% or even higher inflation with negative real interest rates. The problem here is twofold: without the chance to devalue (that is inflationary per se) it can only be achieved by issuing money (and/or directly monetizing debt). But money issuance is usually the privilege of Central Banks that are independent of government, exactly for this reason: not to let the latter monetize their debt and inflate away the problem. 

There are of course psychological factors here in play too. Many fear - and it is not unjustified - from high and protracted inflation as it can be very destructive and usually distributes the burden unfairly across social groups. Furthermore it can push upwards bond rates, just aggravating the sovereign debt situation, making the financing of a country more and not less harder. And there is the much dreaded phenomenon of stagflation, when inflation fails to bring growth and while prices are soaring, the economy still flatlines. So, even if it can really offer a solution - as recently the IMF's chief economist, Olivier Blanchard suggested - it requires desperation and leadership and it can probably achieved only at the price of giving up ideas like the independence of central banks. (As it would need the revocation of their independent right for setting rates and issuing money. But as an ultimate solution at the edge of complete disaster it is still an option - an option that also needs time, at least a bill should be passed in parliament.)

There is of course a substitute for inflation, implemented in the last years too, quantitative easing. This time the central bank pumps money into the financial sector, either buying assets - sovereign bonds etc. - at the market. It is presumed that this money will find its way to companies who want to invest or to individuals who will spend it, because the more money is circulating in the system the less constrained are the banks to lend them. (In a sense it is again Say's law...) Sometimes it works, but in the last years it only had some unintended consequences and perverse effects: a rally at the emerging market stock exchanges and soaring commodity prices, at the end not enhancing the capacity of individuals and companies in the respective developed economies to spend more, but reducing it. The problem lies in the method of pumping the money in the system: through the intermediaries of banks. For companies, As long as demand is sluggish and existing capacities are underutilized (which is certainly the case now, when even Germany has not reached its peak output again) this is just cheap money to reinvest in financial assets (or in cae of a tax cut it is just additional profit).For the individuals this is not necessarily welcome. Those, who are deleveraging (i.e. paying down their debt) the main concern is not how they could take more debt on themselves, but how they could earn more money to pay their monthly rates. (And again: if it would be a tax cut, it would most probably be spent almost immediately on existing debt.) But the main problem - especially in declining economies is to produce something and sell it. (However, it also can be a problem for a rebalancing economy. For example if the US would need to export more and import less in a drive towards a more balanced economy then they also would need to produce something and sell it.) And the main reason they are not doing it is lack of sufficient demand: there are still underutilized capacities, internal demand is suppressed by austerity, external demand suffers from the end of cheap money at the emerging markets and consequently from the slowing of the global economy. So, the task for politicians and economists is twofold: they must ensure that money pumped into the economy is used to purchase - in a very broad sense - additional products in order to make output growing. And the main obstacles they have to face are: fears of sovereign default even in case of economies with an own currency (thus there is no room for fiscal stimulus); and fears of inflation (thus there is no room for monetizing debt).

At this point I’m not claiming that I would be more imaginative than our leaders. But reading Tony Judt’s Postwar made an embryonic idea growing in my mind. If states need to circumvent the obstacles of the markets who perceive every non-conventional action to lift internal demand as dangerous, while conventional action accepted by the markets was proven ineffective then what to do? It is clear that somehow money should be given to companies in order to make them produce, to individuals in order to make them buy goods… Actually something resembling of the post-war Marshall-plan can be a daring attempt but maybe not doomed to fail.

In case of the Marshal-plan goods from the US were transported to the participant countries according to their wishes that were based on plans. These could be consumer goods, investment goods, commodities etc. Usually the US delivered and paid for it, from its own treasury and the receiving countries used them. Either fed the population or built up infrastructure or plants etc. But it always created second tier effects in the receiving countries while it pumped money into US companies – who otherwise would have to face the rapid decline of military orders. Something similar could probably allow distressed countries to invest (in plants, infrastructure, services, human capital, education etc.) and thus generate not only income for their population but lay the foundations of later exports and ensure a healthy level of new orders for companies in the donor countries. (The Germans are planning something on a much lower scale in Greece, but with not much haste and with too old-fashioned methods: offering investment chances for companies.)

There are of course risks and institutional problems as well. Everything should be well-planned and at least moderately effective, i.e. there is no room for huge misallocation for investment, a reason to implement good planning, just in case of the Marshall-plan. Furthermore, few states can be the donors directly, as it would only make their debt grow. But there are ways to bypass these last obstacles. Not only would it be desirable to extend the program to the world (as a means to help addressing international imbalances and rebalancing of economies) but it would distribute the risk very broadly, Furthermore, there are institutions in the world system and in the EU that could implement such a program: the two reconstruction banks, World Bank and EBRD. For example if the EU would decide to issue Eurobonds – and they wouldn’t immediately pass on the money raised to distressed countries – they can place it into a huge reconstruction fund and finance the new Marshall-plan in Europe. They have to capitalize with it the EBRD and then let them coordinate the planning. afterwards the Germans and French can deliver the goods – paid from the fund - to the Greeks, who could earn their wages while using it or selling it or buying it… And the money would at least cover one and a half transaction and not immediately sucked up outstanding debt.
It is far from being an easy and elegant solution and it would still require a lot of human effort. It depends on the capacity and ability of a lot of individuals. But at least it offers the elimination of the main obstacles in the way of a lasting solution and addresses a real problem and not an imaginary one.

Friday, March 25, 2011

The taxation liquidity trap

It was clear for a while that the Hungarian government's secret weapon to curb economic growth is a low tax economy. (Well, with a supposedly strong and active state, something that would most probably result in a despotic state instead, but it is a sidetrack here.) The reason they gave why the government does not want to join the new competitiveness pact of the EU was nothing else that the country wants to keep its tax-independence.* They argue that Hungary needs to regain competitiveness with the "most competitive tax system", i.e. with very low tax rates. Apart from the narrow-mindedness of such attempts one have to admit that rational argumentation never really could deter ECE politicians from operating and manipulating with the tax rates in the hope they will attract investment, make black and grey economy visible and kick-start local companies. In case someone refers to the fallout in budget revenues the usual answer is that higher growth rate will generate even more tax revenues.

Opinions are divided whether it is true or not and how much impact lower tax rates on real and potential growth has. I will not argue here that the assumption of the government can be wrong, because another phenomenon raised my interest, what I baptized as the taxation liquidity trap. The liquidity trap is a well-known phenomenon of economics, it is a situation when monetary policy has no or minor influence on activity because people fail to invest even if interest rates are low. However, in some cases liquidity trap is simply identified with the so-called zero bound, a situation when the institution setting the policy rate of a country hasn't any room left because interest rates already attained zero. (Although, theoretically negative interest rates are also possible, but it is rarely exercised.) If one assumes a really competitive environment regarding taxation something similar is conceivable considering taxes.

Suppose there is already a tax competition, what is in fact the situation across ECE. Countries tried to attract investment with ever lower tax rates and flat tax and as as during the boom years before the crisis it seemed to work politicians are still faithful to this idea. One can find tax rates in the region like the 10% in Bulgaria or Macedonia, 16% in Romania and Hungary (where there is in fact a two bracket corporate tax with 10 and 19% rates) 19% in Slovakia etc. For a while, under the pressure of the terrible situation of the budgets politicians accepted the IMF's view and refrained from every kind of serious tax cut. However, after Hungary "reformed" its tax system and introduced a new nominally 16%, de facto 20% flat tax the tax competition was revived.** Bulgaria plans even lower taxes, Romania a 10% or 12% flat-tax and so on. (The reason is never a thorough investigation of the situation in one's country. Such plans usually appear after a media outlet runs a tabloid story on companies immediately leaving the country and settling in one of its low tax neighbours. It is also noteworthy that the UK government joined this competition recently.)

Anyhow, it is clear that countries competing for investment and hoping to generate growth with lever lower taxes can easily outcompete each other for a while. But what happens when they arrive to the point of zero taxes? Well, in case the earlier tax cuts have proved themselves and delivered the envisaged result probably everything is right for a while. But what happens, if not? These countries simply will lose the means they see as the best way to curb growth, therefore they will be left without any hope for it. Furthermore, it is hard to expect a very long period of sustained growth, without minor or major recessions or periods of stagnation. If a country renounced taxes they hardly would have any means to counteract such slumps, especially as in this magnitude the abolition of taxes would mean a very low level of budget revenues. If and when a country reaches these levels of taxation it will arrive to a taxation liquidity trap and if earlier hopes for strong growth wouldn't materialize they will be stuck.

There is another effect of such policies on the state itself. The more revenue they eliminate the more constrained their budget will be the less chance they will have to regain the lost revenues even through stronger growth. A quick and rough back of the envelope calculation can prove it. If and when a country cuts its tax rate from 35 to 30 percent it can calculate a loss of 1/7 of revenues. With a 3% sustained growth - ceteris paribus - they can collect the same sum circa five years later. If higher growth through lower taxes would come true and they could achieve sustained 4% growth tax revenues will attain the earlier volume four years later. However, if and when a country cuts the same 5 percentage points from a 15% tax rate, they will practically never regain the lost amount of money. With the above mentioned pair of assumptions the revenues five years later would still not higher than 80% of the earlier revenues. At the end the government certainly have to cut budget expenditures and slowly dismantling the state as any tax hike would have an immediately negative effect on growth.***

* It is an horrific custom of theirs always to coin a new word they think of as an inventive way of communication. I fear it rather conveys stupidity.

** Normally it shouldn't have happened as the new Hungarian tax system is a huge tax raise for the 80% of the workforce and as the government insists that companies have to compensate their workers for their lost net revenue it is in fact a blow to cost competitiveness. However, not only Hungarian politicians are stupid, their regional peers also have no idea about what's going on around them and they bought it was a significant tax cut. Ironic, isn't it? Only the politicians in the neighbouring countries believe in this tax cut, no one else. :)

***There is a factor not taken into account here, the growth of revenues from indirect taxes in case higher sustained growth is achieved. It is not easy to simulate the across the economy effects of such tax cuts and the resulting higher growth. However, if empirical evidence could give any idea, ECE is momentarily experiencing a jobless recovery, exports soaring and internal demand flatlined. As a consequence relatively high growth rates are not accompanied with soaring revenues, because of the lower effective indirect tax rates on export, most notably the lack of VAT paid.

Friday, March 11, 2011

Hungary, even more path-dependent?

Hungary is again pushing forward on its path towards its demise with the so-called Széll Kálmán-plan and the Draft Constitution. It would be (or probably will be) entertaining to analyze the constitution in depth in the light of Fidesz's organic/integral nationalism, how it correpsonds to this idea.JUst as it would be important to give a more detailed coverage of the economic plicies of the government, sometimes seemingly sane, but considered in its entirety lunatic at all, again very much an expression of the above mentioned ideology. However, in this post I will only formulate some preliminary thoughts and conclusions on one of the most worrisome aspects of the new constitution.

1. The new constitution will implement a debt ceiling at 50% of the GDP (although the GDP they measure to will not necessarily be identical with the Eurostat/National Office of Statistics data, a separate law will define it). Legislation on taxes and social contribution, as well as on the pension system will be subject of laws passed by a qualified - 2/3 - majority. It seems an exteremely rigid framework for any meaningful economic policy, practically requiering consent of the government and the opposition even to minor changes.
2. The government promised to bring down the debt-to-GDP ratio to 50% until 2018. The nationalization of rpivate pension funds can kickstart it and the government predicts a ratio between 65-70% in 2014 but 15% is still a long way to go. (Between 1998 and 2001, during their tenure they are still very proud of, Fidesz reduced the debt level from 62% to 53%, or 9% of GDP, with tight budgets between 1998 and 2000 and GDP growth around 4%.) 15% (more realistically around 20%) in four years seems a daring promise.

I tend to conclude the political intention and the legal framework will create a peculiar situation. Firstly, it will certainly put Hungary in the straitjacket of almost another decade of strong austerity, after 5 years from this experience. Moody's had some calculation on the possible scenarios of debt reduction and they concluded the 50% level is attainable only with an extraordinarily benevolent international environment and not quite realistically high growth rates. I would characterize it as voluntarism, and an extremely dangerous form of it.
Furthermore, there is a risk that the package - or more precisely the declaration of intention - announced last week - is simply not calculated properly. For example the Ministry of National Economy wants to spend the revenue from the electronic toll system entirely on debt reduction, while the Ministry of National Development counts on it as a source for the maintenance of public roads. Or, the government is propelling forward with a legislative package on public instruction, with an estimated annual extra cost between 300-500 billion HUF while the entire ammount of budget savings is estimated around 900 billion per year. And there is the danger, that they simply misinterpreted Hungary's economic woes. It seems they believe in the magic mixture of flat-tax (actually a significant tax-hike on labour in case of about 85% of the employed workeforce) and super-flexible labor market (i.e. very low level of social aid and unemployment benefits) just like Bajnai or earlier the Reform Alliance.
Meanwhile important elements of command economy appeared, especially the central regulation of prices for public services and utilities. But after it turned out that the new flat-tax is in fact a tax-hike they put pressure on employers to raise wages, now they threaten with legislation on this issue. And they couldn't find a solution for the problem of the fx-denominated loans, for the indebtedness of local authorities - the majority of which was controlled by Fidesz since 2006 and deliberately taking the path of making debts - and the PPP projects. The flat tax, due to the above mentioned reasons probably will not bring a significant rise in internal demand and households are still struggling with their debt and with rising public utility costs. I'm not really optimistic, although I can imagine the markets temporarily buying the package and waking up to an even worse situation after austerity bites but fails to bring meaningful growth.

P.S. It is again worth to look at Romania with its totally incompetent government, After narrowly escaping colapse and pushing thorugh a hard austerity package, still far from reducing budget deficit significantly enough, they are in a hurry to implement tax cuts. Although tehre is still no convincing proof that it could bring growth alone and Romanian is sliding down to large scale poverty with last years measures. Moreover, it will create a whole in the budget eytremely hard to patch, just look at Hungary, what is happening there. The government had to accept austerity after it carried out tax cuts around 500 billion HUF. Now, they have to cut public expenses, unemployment benefits, social aid etc. in order to save the money they handed out nicely, as a gift for the very rich and a narrow upper-upper middle class. 

Monday, February 14, 2011

Pride over not being prejudiced

Ok, it was a safe guess. Nothing specific and new in Orbán's speech. Even though I have to admit, even my guess was too optimistic: Orbán didn't even announced anything specific regarding unemployment benefits. Anyway, I'm proud as clearly I was among the few expecting what really happened.

Saturday, February 12, 2011

Playing Cassandra, resolving cognitive dissonance and on the importance of not investing too much emotional and intellectual capital in expectations

As I try to take a distance from politics in a stricter sense it could mean that in less troubled times I remain silent. My intention is not to comment on everything happening in Hungary or in ECE, especially not when someone else is perofrming it with more expertise and in line with my opinion, rather to give my ideas when I feel I can express thoughts and ideas less prevalent in the public discussion. (Even if this blog is clearly not part of any kind of public discussion, just a variety of a diary or a notebook.) Furtherome, many occurences in the politics are connected to the crisis only indirectly. Although the electoral success of Fidesz in Hungary, their two-thirds majority enabling them to pass a new constitution and change the basic laws of Hungary according to their will, was not independent from the economic crisis and the populations distaste for and discontent with the Socialists and asuterity, the concept according to they are acting is their very own, rooted in their nationalist ideology what is not a reaction to the crisis. Therefore, although I can offer some thoughts on this problem it is only tangentially part of this blog. Nonetheless, the "war of economic independence" or "economic war of independence" as Fidesz labelled its economic policy in the summer that is part of this broder effort of reshaping the country, reached its next phase this Feburary, after the quasi-nationalization the compulsory private pension funds. The Fidesz now has its own budget, not one they can pretend to have no responsibility for and they acquired enough room for manoeuvre with the partial default and forced natioinalization to come up with their own and original ideas.

Some of the important constraints remained, from the EU with the deficit target under 3%, and from the broader environment as the crisis still looms over Europe. (During the Irish crisis Hungary was significantly affected.) But the government now tries to pre-empt negative reaction and contributed to the growing expecatations regarding a fresh refrom package due in February, at aboput 600-660 billion HUF. The story offers an interesting experience of human behavior and psychology, its failings in a supposedly rational and competitive environment. Especially as it is not the first occasion we can observe an almost identical chain of action and reaction. The sequence is always built on communication according to the taste, expectations and desire of the so-called analysts (or in its impersonal form the markets), a sudden eruption of enthusiatsic love for the government, even more communication and more active emanations of this strengthening love and... Well, in the earlier cases the end was always disappointment but it is clearly not a hindrance of the renewed passionate realtionship. Anyway, and this is where I dare to take Cassandra's role and robes, I would be surprised to see a different outcome this time, as the facts and the stark inner contradictions of what the government suggests and the analysts accept as a new, profound reform agenda are pointing to the opposite what the markets are expecting and waiting for. But this revived love-story is telling in itself.

It began already in December, when - even before the budget was passed - the government announced they will prepare and introduce a reform package in Februay. Common sense would have warned everyone as the least normal course of events is to make a budget with huge efforts, bring it to the parliament, proceed with it with energy and determination only to abandon it after one and a half month. Is this the way governments work? - could have asked everyone. But, instead, it caused jubilation and was taken as a sign that the Fidesz was brought back to its senses and at last they admitted the necessity to come up with structural changes bringing budget spending under control in the mid- and long term. Soon the opening moves of this subtle chess play were made, firstly György Matolcsy and later Viktor Orbán himself - in an interview with Wall Street Journal - told that his government will ensure the state pension fund will not spend more than it recives in the form of social contributions (although the ministry made it clear already in November that it means transfering disability pensions to a separate fund financed from the budget), and announce cuts concerning subvention of medicines, the social services for unemployed and the public transportation system. They even mentioned the sum of 100-100 billion HUF in case of the former two and 50 billion in the case of the latter. As these are the pet targets of every analyst who are reluctant to admit that the structural problems in Hungary can not be solved by simply cutting budget spending in some sectors it was well received and generated a wide-spread belief in the coming of a substantial reform package in mid-February. Neither an easy reality check - asking whether it is possible to cut 100 billion from these funds, both not higher than 340 billion per year while unemployment is well over 10% - nor Fidesz politician's instistence on not doing harm to the population and tampering with their benefits could have deterred analysts from their firm conviction that soon something important will happen. Optimism prevailed even after the first reports on the process of the preparation surfaced, showing that the government is still in the phase of brainstoriming in early Februray. (At that moment the different ministries still collected their ideas independently from each other and they had to put them forward to Matolcsy and Orbán, who are entitled to the final choice.) Optimism was not shaken by the emergence of other details - later admitted by Matolcsy - , suggesting that the plan is not to cut 600 billion in 2011 - an earlier assumption of the markets - but making a cosmetic surgery in this year and delivering some more substantial budget correction in 2012 and 2013. (A few days later the plan turned out to be to begin savings in 2013!) Furthermore, as the process of the planning was in delay the announcement was postponed. Originally the promise was a package published in mid-February. In January it was modified, mid-February became the date when the government could discuss it in first readingand the date of the announcement was established at 28 Februray. In early February the new informations suggested even more delay.

Nevertheless, analysts were very excited at the beginning of this month and expected Viktor Orbán to share important elements of the package with the public in his so-called "state of the country" speech, due on 7 February. As Orbán held a very banal speech, composed of proverbs and self-styled popular sayings analysts, the markets did not show dispair or at least some surprise, they predicted that Orbán will make the whole package public on 14 February, in the parliament, and expetced the Fidesz caucus to discuss it between 9 and 11 February. The latter obviously did not happen, but expectations remained.

However, as there seem to exist no coherent package in the moment, the ideas during the long barainstorming more and more turned towards raising new revenues instead of planning the reforms eagerly awaited it would be astonishing to hear something really significant, different from Orbáns 29 points and the economic plan implemented in October - with the quasi-nationalization of the pension funds. Something certainly will be announced, probably pointing out some directions vaguely, packed in the banal terms of the renwal of the country and it is also probable that cutting unemplyment benefits will be one of the few explicit measures. But it will fall short of any kind of reform and will be very far from the expectations driving the markets to extasy in the last few weeks. There are at least three reasons to expect this outcome. Firstly, Fidesz is aiming at a renewal and reorganization of the nation in its own, nationalist terms. What they try to realize is not some cost-effective restructuring of sub-systems based on thorough consideration of existing models and good practices, but the only model that would express the substance and spirit of the Hungarian nation. It is quite different in the sense that the plans are based on a set of speculative assumptions, but they assume that no constraints of costs may impede its realization. (Exemplified by Orbán, who told the Fidesz caucus, that even if people are right that the governments plans for the public instruction system will cost more than at present, it is the responsibility of the economic minister to find the necessary resources, and not the secretary of state for education to adjust plans to budget constraints as the plans are pointing to the right direction.) Such approach also means that fields analysts consider important in the reforms could be of secondary importance for the government, leading to their neglectment, while other sub-systems - like education - won't be restructured according to the criteria analysts are expecting to direct the changes. Secondly, Fidesz clearly wants to avoid confronting any significant electoral group and as long as they can implement measures that at least seemingly do not affect the people - like the so-called crisis-taxes - they will opt for thes. It is hard to expect major changes in the funding of the public transportation system if it would mean rising costs for the population - for example elimination or curtailing of existing benefits for students, children under 6 or people over 65. The whole brainstorming approach and the continous delay of the announcment is exactly because of this reluctance. According to the information leaked, the apparatus was always very effective in bringing new ideas of new revenues and not quite successful in outlining cost-cutting measures. Thirdly, the present structure of the government and its personal composition with a lot of inexperienced and not quite bright party hacks occupying key positions in ministries consisting concurring departments without a minimum of internal coordination and with a minister responsible for economics ad budget who only trusts in a very limited number of people is an obstacle in the way of preparing a coherent plan, assessing every proposed measure in the context of the state as a public institution and an instrument to deliver public good the most effective way - apart from its assessment in the light of Fidesz's nationalist ideology.

I do not realy want to contemplate the question why analysts again swallowed the bait. Probably they invested too much emotional and intellectual capital in their belief of Fidesz's rationality and willingness to go down the way they expected and at the end they could not disengage. However, it is of some use, at least at a personal level. For a while I had to feel guilt as I was crying with the pack of analysts whom I had criticized earlier. Now it is a chance to detach myself and again point out their failings. Vanity and arrogance as it may be, but reassuring because it restores a part of my identity. :) It resolves this particular form of cognitive dissonance.