Hungary is facing a financial and solvency crisis for the third time in the past six years. The exchange rate of the forint is weakening, interest rates are rising, and government securities can hardly be sold or can be done so at horribly high yields. The causes of the three cases are different.
At the beginning of 2012 Hungary is facing a financial and solvency crisis for the third time in the past six years. The exchange rate of the forint is weakening again spectacularly, interest rates are rising, and government securities can hardly be sold or can be done so at horribly high yields. The causes of the three cases are different. In 2006 the increase of government debt as a result of expansive fiscal policies triggered the crisis. In 2008-2009 the global financial and economic crisis led to the fall of the government that had lost credibility by that time. The present financing difficulties are partly related to external (particularly European) negative factors. Nevertheless, the major causes are inherent in domestic policies in general and economic policy in particular. They are rather complex and overlap each other.
? Some elements of the legislation of the past 19 months contradicted to basic democratic and European values;
? Appearance and reality diverged permanently in economic trends, this is one of the major causes of the continuation of the excessive deficit procedure against Hungary in the EU;
? The style of governance and the behavior of the government triggered first shock, later soft warning, and finally definite resistance from international and domestic political and economic partners.
? The economy has reached a dead end from every aspect.
All these led to general and severe loss of confidence both in Hungary and abroad. At present Hungary is the classic example of legal uncertainty, unreliability and unpredictability in the whole world. That‘s why investors do not want to finance the Hungarian economy at low interest rates, that’s why the business sphere is unwilling to invest, that’s why foreign and domestic capital is leaving Hungary, that’s why small and medium-sized companies are suffering, that’s why men-in-the-street transfer their savings abroad.
The present financial and solvency crisis is rooted basically in confidence and is of political nature and only secondarily has its roots in economic policy. GKI has already stressed for many months that first institutional and legal changes are necessary. International organizations, too, insist to them as a precondition of the start of negotiations since only corrections in the legal environment provide guarantee for genuine changes.
From the economic point of view the most important institutional and legal changes are as follows:
? respecting the independence of the central bank,
? return to the norms of the rule of law by restoring the competence of the Constitutional Court,
? creating the future freedom of tax policy by modifying the law on financial stability,
? implementing the conditions necessary for the autonomy of the Budgetary Council,
? the practice of law-proposals submitted by individual MP-s rather by the government should be abolished, each draft proposal should be discussed with the professionals and stakeholders concerned,
? reasonable time should be ensured for those concerned for the adjustment to planned changes in the case of the introduction of necessary reforms and changes, corrections in the laws approved of or submitted for approval should be made,
? the tax system that was destroyed by quickly approved laws of poor quality should be cleaned,
? in the pension system the first step should be the eliminations of the existing contradictions, later the whole scheme should be revised.
It is obviously uncertain whether these changes would really take place. According to GKI, the financing of Hungary can be ensured by an agreement with the IMF, the EU and the ECB. Therefore, it is probable that the major part of institutional and political changes will be accomplished. Without it a financial and a government crisis is threatening, and the later is likely to precede the former (that, at the same time, would fend off the danger of national insolvency). Thus, in spring 2012 basic changes will take place in economic policy. It is possible to get out of the dead end.
GKI Economic Research Co.