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.  

An action plan of indecision? Updated

Hungary's new prime minister, Viktor Orbán announced yesterday his "action plan" a set of measures seen as the guidelines of the government's economic policy. The announcement followed days of insecurity caused by remarks of Fidesz and government officials on the budget deficit this year, frequently using phrases "like Greece", "default" etc. This debacle (retrospectively Fidesz politicians - speaking only from behind the defense line of anonimity - hinted to a conscious strategy, but the party has a tendency to reinterpret every failure afterwards into a plan of a mastermind, therefore it is less and less credible with time) signaled the abandonment of earlier ideas and the realignment of the possible policies.

Anyway, the prime minister delivered a very conscious speech conveying the will and energy to achieve his goals and announcing 29 measures. It had an immediate effect, it was certainly a good show of an illusionist, especially among Hungarian analysts, whose obsession with flat-tax is almost a medical case. Many of them hurried to hail the greatest structural change of the last two decades etc. And the impression in general was certainly favorable, on the surface the new policy seemed to be really well thought. Nevertheless, if scrutinized with a more critical eye - without allowing oneself to be deluded by the flat-tax - it is a surprisingly empty and astonishingly not elaborated package.

The starting point was that the government has to achieve a budget deficit as high as 3,8% of GDP this year, because the IMF and the EU (espacially the latter) would not let them to raise th target to 5-7%. However, Fidesz promised a "tax revolution" in the campaign (although it was clear that they couldn't decide whether to opt for flat-tax or a family-tax system, copying the French model) and tax cuts for enterprises. After they lost a lot of room for manoeuvre when they had to accept the lower deficit figures they still stuck to this idea and decided to find other sources of revenues to offset the income losses. The solution was imaginative but not quite convincing: the banks will pay a half of their profit to the budget in order to allow them to relax the tax burden on individuals and on other companies. Besides the 16% falt tax combined with the family tax the prime minister announced the reduction of the wage costs in the public sector, reduction of tax on companies' profit (at least for those who has a profit less than 500 million HUF) from 19% to 10%, complete freedom of distilling spirits for individuals (really!) a freeze of public services fees for the population, a ban on mortgage based fx-loans and some symbolic measures, for example reducing costs in the state sector and subventions to political parties.

However coherent it seems (and the underlying idea, even if its is horrific, is really coherent) it do not need a Nobel-prize winner to discover how scratchy it is nd how much it lacks the essence of political action: decision on some core issues and acceptance of confrontation. First of all it is still not a decision to fuse two tax systems based on very different principles, it is the opposite: an escape from decision. Considering this state of affairs it is not quite surprising that today none ion the government was capable to give information on details. There will be something with a 16% flat tax rate and with tax breaks and credits for families raising children, but to wich amount the latter will extend, what will happen with the so-called "szuperbruttó" in the present system ("super-gross calculation" an effective extension of the tax base, it taxes the ammount of the social contribution as if they would be part of the income itself) and the tax rebate. Even more serious issue is the problem of "lower wages". The present system - due to a very extended tax rebate - lays only 16% tax on a monthly income of 230000 Huf well over average and median wage in Hungary. The elimination of this part of the system was announced - in two years - which at first sight will effectively mean a tax hike for everyone with 230000 Huf or lower income. There were hints that the government will ensure that no one pay more, but there seem to be no other solution than to raise wages, but an effective 20% wage raise will not deliver one if the most sacred result of as flat tax system (at least in the eyes of its adherents): lower labour costs. (On the idea that it will create incentives to present previously untaxed incomes for the tax authority you can see my earlier post. The very theory used to support the flat tax contradicts to this idea. There is no evidence, ECE countries with flat tax are more infected with black and grey economic activity than Hungary, according to every estimate.)

Similarly vague is the idea of the reduction of costs of public services. It is even not clear whether this applies to the entire public sector, only to certain parts of it or to the state owned companies? While the prime minister mentioned 120 billion Huf as saving for this year and referred to it as 15% reduction of these costs, the only concrete measure was a 48 billion reduction at state owned companies. (But it is tricky as it is the 15% of the wage bill for the entire year while the cuts will come in the second half. The result: 25-30% for six months!) Whether public instiutions, ministries, authorities or schools, the health care sector etc. will bore the remaining 72 billion or just a part of it it is still not clear.

The freeze on public services prices was declared to be temporary, until the government negotiates something with the respective companies. However, price control will soon be reestablished. The bank tax announced without preliminary consultations. Even the method of "liberating" spirit distillation is not clear., it is at the moment not more then a wish list without calculations. And it is based on a very tight calculation, without any reserves and always counting on the most optimistic scenario. If the bank tax falls of or fails to deliver the necessary amount, if growth will remain sluggish the deficit will soar up and austerity will settle to other sectors. Moreover, even the real extent of tax cuts is not clear, because no one knows the amount of family tax breaks and rebate and the future of the present tax rebates. Therefore no realistic calculation of the effect of the package on the budget is possible. (And no structural reforms - some percentage points relaxation in an already almost flat-tax system is far from being one, across the board cuts in the public sector can also be seen hardly as such,Gyurcsány would have been ridiculed by the same "analysts" with a similar action plan who are now praising Orbán.) We have seen the sorcerer, the white rabbit was fat and juicy but it evaporated in a day....

However, the direction is clear: redistribution of wealth from the lower strata to the rich (the very rich) and from the poorest regions to the richest quarters of Budapest. It's negative effect on local economies is predictable as purchasing power will dissipate (while the positive effects of creating jobs is doubtful at best, the recovery could easily turn out to be fragile with the austerity programs of EU governments, the most far-sighted ideas of the Fidesz program were postponed - investment into energy efficiency, for example - or even thrown off etc.) and already huge differences in the country will grow. Well, the show was excellent, but the road is still covered by thick fog.

Update: So, we have a plan with the aim to keep under control the budget deficit and boost competitiveness through lower labour costs. But the secretary of state in the ministry of national economy responsible for tax issues announced today that the "szuperbruttó" will be eliminated and no one will be worse off in the new system (i.e. no one will have lower net income) than in the old one. No details, of course.

But even in this very basic and vague form the plan seems to be way off the announced aims. If the government will pressure companies to raise wages it will negatively affect labour costs without an equivalent raise in productivity. At the moment the average wage of 56500 physical workers in the agriculture is 109746 HUF. They would need a 12,2% higher wage in order to have the same level of net wage. But it would mean an additional 3,5% in higher social contributions as well. Similarly, the (non-existent) average industrial worker (441900 people) will need a 7% rise in wages what would mean an additional 2% in social contributions. The 195900 workers in the commercial sector will need a 10,7% higher salary, an additional 2,9% burden in social contribution. Moreover, the state employs hundreds of thousands of public sector workers and teachers, nurses etc. who also will have to enjoy the benefit of higher salaries in order to offset negative effects - if the secretary of state mentioned above told the truth. 3,5% raise for average employees in the health care sector (148300 people), 13% for physical workers in the same sector (90200 people), 10% for physical workers in the educational sector etc. Certainly more than 30 billion HUF just in order to compensate them real wages still declining. It is still not a well thought plan, just improvisation.

Detruisez l'Autriche-Hongrie - reloaded?

Indivudal states - as entities and historical individualities - are not eternal ones. A significant part of the world's and Europe's sovereign entities are relatively newly established, and many of the seemingly resilient ones went through phases in the last hundred years when their existence and/or sovereignity was in doubt. It is quite clear in the Eastern part of the EU, where every new member state didn't exist 150 years ago (or at least not in their present form and as sovereign states - for example Hungary or Romania), many of them was established as independent nations after the WWI but ceased to exist between 1939 and 1944, while others emerged as new "powers" of the region. The realignment of ECE happend again in 1945-1947 and after 1989.

The important point is that the present configuration of this part of the continent is not necesserily an eternal, given one sanctioned by thousands of years of history, or a divine action: it is a reasult of the collapse of greater frameworks of states, empires and would be nation states. Those who are familiar with the region's history will almost automaticly associate to violence, war, armed attacks on neighbours after reading such an introduction, especially after the rise of extrem rightist (and extreme nationalist) forces at the election for the European Parliament. But my only concern was to highlight that states can collapse, fail and be dissolved due to the circumstances. Some of them is simply collapsing, as its institutions can not control its territory, others' endgame begins at the fringes, with the loss of efficiency of the state administration and with the emergence of alternative powers at the local or regional level, others simply implode due to their incapacity to fulfil its tasks and responsibilities towards its subjects, and these factors can coincide with each other. But, although in many times a kind of external impact - in the form of war, crisis, presure from a great power etc. - plays an important role in it, the internal incapacity (impotency) of the state is almost never lacking among the factors behind such developments. And - as it is a lesson from these events - even the largest and seemingly quite stable formations can be dissolved very rapidly, at an astonishing pace.

Maybe we can see similar processes at the fringes of the EU today. Countries, struck by the crisis, without room for manouvre and having lost a significant part of their state revenues, compelled to follow prescriptions of great creditors who rushed to their aid and bailed out them, are in more and more dire situation, as they are forced to cut down their public services. The budget cuts in Latvia are affecting the public instruction system, the health care (for example certain surgeries will only be available for clients of foreign helth insurance systems from the autumn, as the Latvian helath care will cease to finance those for Latvian citizens), maybe the police, the judiciary system. In this case it is the result of accross the board budget cuts, but other examples exist in Romania or Hungary as well. In the latter the state financing available for hospitals was reduced significantly and only the reduction of their services could lead to some balnce in the expenses and revenues. (Meanwhile the cuts in the contributions of employers and employees to the health care budget will significantly worsen the financial situation of the health insurance system.) In Romania the lack of funds is almost everywhere, but it surfaces quite sporadically, either in regional or in sectoral terms. According to press reports one county tribunal will be closed in August due to the lack of financing, the salary of judges will be cut with 1/3 of it (in a country where - accoding to the EU's assessment - corruption is in full bloom, and the state is incapable to act against this phenomenon decisively), in many cities there is not enough money to open the schools in September etc. Although the government insists that they will provide at least the necessary basic financing, it is far from being certain, especially as Romania has to comply with the conditions of the IMF and the EU in order to receive the individual tranches of its huge loan.

Not that it would be exclusively a fault of the external world. The Latvian government is desperatly defending a currency peg from an eventual devaluation (and from this perspective salary cuts in the public sector are lying on the road to "internal devaluation"), the Romanian is caught between electoral promises last fall, an uneasy coalition of "social democrats" and "conservative liberals", an alliance for Romania('s wealth), really aimed to divide the resources of corruption among them, and between the coming presidential elections, while in both countries the "econimc miracle" of the last years was "financed" with low taxes and growing consumption - based on loans and loans and loans, leaving no buffer for a case of crisis.

But the most worrying development is concerning the future of the EU. The predictions - forecasting problems in the coherence of the eurozone - are not ceasing, while the handling of the crisis highlighted the deficiencies of the inter-governmental approach in times of crisis. The reluctance of the Germans to develop a real common perception of the crisis, to allow European institutions to act independently (although those never has shown much willingness to act that way) although comprehensible, was certainly not benefitial. And as Wolfgang Munchau points out: after the Constitutional Court's decision on the Lisbon Treaty everything will be even more complicated. Even in the field of common economic policy. Not to speak of facing the real problems, the incapability of ECE in the long run to dael with its underlying social problems and with the impact of the demographic trends without a common social policy. But if the slow dissolution of the East will continue it could easily reach to the heart of the union itself.