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.