Updated: Jan. 20, 2012
Hungary was one of Eastern Europe’s star economic performers before it was hard hit by the global economic slowdown triggered by the financial crisis of 2008. Since then, it has become a center of concern in Europe over what many perceive as a turn toward autocratic government.
The recession and anger at the incumbent Socialist government pushed Hungary to the right in parliamentary elections held in 2010. Hungary’s center-right Fidesz party secured a two-thirds majority in second-round parliamentary elections held in late April, giving Fidesz, led by a former prime minister, Viktor Orban, the authority to pass legislation, including crucial economic changes, without having to form alliances with the opposition.
Mr. Orban and Fidesz have made the most of that power, pushing through sweeping measures to reshape the government, the judiciary and the media in a process that has set off alarm bells across Europe. In April 2011, it approved a new “majoritarian’' Constitution, effective Jan. 1, 2012.
The party’s critics say democracy is being killed not with a single giant blow but with many small cuts, through the legal processes of Parliament that add up to a slow-motion coup. And in its drift toward authoritarian government, aided by popular disaffection with political gridlock and a public focused mainly on economic hardship, Hungary stands as a potentially troubling bellwether for other struggling Eastern European countries with weak traditions of democratic government.
On Jan. 2, 2012, a day after the new Constitution took effect, tens of thousands of Hungarians rallied outside a 19th-century opera house in Budapest in a rare opposition protest. It was the first time that opposition groups, from political parties to civil organizations, joined forces to rally against the Constitution, which was drawn up and ratified by Mr. Orban’s Fidesz party in defiance of mounting criticism from Europe and the United States.
Fidesz used its two-thirds supermajority in Parliament to adopt the Constitution, which critics say tightens the government’s grip on the news media and the courts and dismantles democratic aspects of the judiciary. In December 2011, the government passed a measure that critics said seriously weakened the independence of the nation’s central bank.
Party loyalists are being given 9- to 12-year terms at the head of powerful institutions like the public prosecutor’s office and the state audit office. Judges are being forced from the bench with a drop in the mandatory retirement age to 62 from 70, even while the approval process is being altered to assure the speedy ascension of the government’s nominees. In late December 2011, Hungary’s media council announced that it intended to throw an independent, opposition-aligned radio station, Klubradio, off the air.
The European Union and the International Monetary Fund both threatened a loss of funds. In the face of Hungarian intransigence, in January 2012, the European Commission issued a final warning, giving it a week to modify the policies or face formal legal action.
The E.U. Starts Legal Proceedings
On Jan. 17, the European Union started legal proceedings against Hungary. It had been more than 10 years since the Union faced a similar situation, when an Austrian coalition government included a far-right party. Austria was forced into semi-isolation when the bloc’s other countries severed political ties.
The government of Hungary, by contrast, is being taken to task on technicalities rather than the wider claims that it is undermining democracy, centralizing power and destroying pluralism.
The European Commission, the Union’s executive arm, said it was starting proceedings over measures that threaten the independence of Hungary’s central bank and of its data-protection authority, and over rules on the retirement age of judges. Ultimately, Hungary can be forced to change rules that breach European law or, if it refuses, can be taken to the European Court of Justice.
On Jan. 18, in an appearance before the European Parliament, Mr. Orban beat a tactical retreat. He offered to change details of controversial new laws, while resisting claims that his country was sliding toward authoritarianism.
The issues raised by the commission “could swiftly be resolved and remedied,” he told the Parliament, which was meeting in Strasbourg, France. Mr. Orban appeared willing to give the most ground on the judges issue, while being more resistant on the central bank.
On Jan. 20, in an address to the Hungarian Parliament, Mr. Orban promised to abandon plans to merge the nation’s central bank and its financial markets regulator. He said the bank and the regulator “have been operating separately and they will do fine separately in the future.”
Officials in Brussels welcomed the announcement, but said they expected to see further details.
The 27-nation European Union has been grappling with what to do about member countries when they adopt policies that seem to undermine the union’s basic principles.
Though nations must meet specific democracy criteria to join the bloc, once they are members there are relatively few sanctions available to enforce them.
The issue came into focus after 10 formerly Communist countries joined the bloc in 2004 and 2007, despite worries about whether all had completed their transition to Western-style democracy. In the past decade, Poles and Slovaks have elected populist governments, though neither clashed as openly with the European authorities as Mr. Orban.
Teetering on the Brink of Collapse
Hungary’s economy, a star performer in the 1990s, has weakened drastically, and it now trails many others in Eastern Europe. The financial crisis has brought high unemployment and poverty, particularly in rural areas.
A member of the European Union but not one of the 17 countries in the euro currency union, Hungary was teetering on the brink of collapse in early January 2012, amid fears that its center-right government was alienating the International Monetary Fund and the European Commission in Brussels at a time when Budapest was hoping for their help.
Beset by deteriorating finances and a confrontation between the government and the Hungarian central bank, Budapest’s credit rating was cut to junk by two ratings companies. Mr. Orban, the prime minister, risked having a monetary fund rescue line cut off when he introduced laws to strip the Hungarian central bank of its political independence.
The developments unnerved investors, who shied away from buying some of the bonds the Hungarian government offered in a sale on Jan. 5, and forced the nation to pay a higher interest rate to compensate for the risk. Hungary sold only 35 billion forints ($140 million) of the 45 billion forints in one-year Treasury bills it offered, with the average yield rising sharply to 9.96 percent.
Voter Outrage Toward the Socialists
The level of antagonism in Hungarian politics rose significantly starting in September 2006, when radio stations played a leaked recording of Ferenc Gyurcsany, the Socialist prime minister, who admitted that he had lied to the public about the dire state of the country’s economy before elections.
Before austerity became the watchword for countries like Greece, Ireland and Spain, the Hungarian government was cutting government jobs, raising taxes and imposing new fees to try to control its growing budget deficits as early as 2007. Steel barriers surrounded the Parliament building to protect it from tens of thousands of demonstrators.
Dissatisfaction over cutbacks and Mr. Gyurcsany’s speech helped fuel the rise of the nationalist, anti-Semitic Jobbik Party. Once a fringe group with a paramilitary wing, an energized Jobbik won nearly 17 percent of the vote in 2010.
But the main beneficiary of voter outrage toward the Socialists was Fidesz, which gained a critical two-thirds majority in Parliament — enough to pass constitutional amendments and even an entire new Constitution without votes from opposition parties.
The country received a €20 billion, or $27 billion, bailout from the International Monetary Fund and European Union in 2008, but exited the fund’s stewardship in 2010, after Mr. Orban cut the program short soon after his election.
Hungary has its own currency, the forint, which means it was not caught in the same trap as debtor nations on the euro, like Greece, which were unable to devalue their currency. But any potential gains for Hungarian exports have been offset by the weakness in its customer countries across Europe. And many Hungarians took out mortgages in other currencies, meaning devaluation raised the cost of repayment.
Credit Ratings Downgrade
In November 2011, with the euro crisis spreading east, Mr. Orban said that he would be heading back to the I.M.F. for help. He said that Hungary would seek “an insurance-type agreement” from the I.M.F. Mr. Orban insisted that Hungary, which has frosty relations with the fund, would not have its policy dictated to it in any deal, and said he did not believe loans were needed.
Despite Mr. Orban’s overture to the I.M.F., the next week the country’s credit rating was cut to junk status by Moody’s Investors Service. And the I.M.F. had made clear that it was unlikely to help the country unless it pulled back on its undermining of the central bank.
Mr. Orban’s methods have flown in the face of conventional economic wisdom.
He has rolled out a collection of ad hoc measures, including the nationalization of pension funds, new taxes on services and a decree giving Hungarians, many of whom borrowed in other currencies to finance their homes during the credit boom, the possibility of paying off their foreign-currency-denominated mortgages at artificially favorable rates. Not surprisingly, the last step has drawn howls of protest from mortgage lenders, which are seeing a significant sum — about 5 percent of their assets according to analysts at Commerzbank — disappear.
The background to the drama is the ill wind blowing in from Western Europe. Growth is slowing in Hungary’s key export markets, and turmoil from the euro zone debt crisis has been pushing up the cost of capital. Financial markets, where signs of stress abound, have forced the government’s hand.
The forint was down about 8.5 percent against the euro in 2011, while the main stock index was down 20 percent. Yields on Hungarian 10-year government bonds reached a 2011 high of 8.8 percent on Nov. 16, a level that raises the cost of refinancing the national debt, which stands at close to 80 percent of gross domestic product. And households are strapped.
In November, Fitch Ratings and Standard & Poor’s both put Hungary’s debt ratings on review for a possible downgrade to “junk,” or non-investment-grade, status, citing policy initiatives that could choke off credit, hurt growth and possibly endanger the government’s fiscal goals.
