October 20, 2012

The economic motives behind the attacks on Hungary

Date de publication: 2012-05-14

"The Economic Motives Behind the Attacks on Hungary" 
by Professor Magdolna Csath

Good afternoon, ladies and gentlemen, I am an economist teaching at the Janos Kodolanyi University of Applied Science.  I would need about an hour to summarise the situation in Hungary and the conflicts between my country and the EU.  Let me start with a very important idea which was sold to the Hungarian population in 2004 when Hungary joined the EU.  The people were told that the most important thing about joining the EU, apart from joining a "club with European values", was that the people would be able to expand economically into the rest of Europe.  "Any Hungarian will be able to open a café in Vienna", we were told. 

The Hungarian population realised very quickly that the so-called European values are very far from the traditional Hungarian values: they were based on business interests.  In addition, I have never met a single Hungarian who has been able to open a coffee shop in Vienna as promised.  Instead, it has been the other way around.  Hungarian properties have been acquired by businesses from the core countries in the EU - France, Germany, etc. It is this which explains the conflict today with the new Orban government.  The government is trying to return to traditional values, which are in the new constitution, and it is also trying to build a new Hungarian economy.  The government is attempting to raise some taxes from the transnational companies and banks and they are also trying to gain some control over some foreign businesses active in Hungary.
To illustrate the problem, let me remind you that the former French president, Nicolas Sarkozy, telephoned our president when a new system of luncheon vouchers was launched in Hungary.  Previously, this service was offered by a single French supplier.  The fact that the French head of state called his Hungarian counterpart over such an issue shows how economic matters are at the heart of the problem, not constitutional ones.  

I would like to put this into a European context and pinpoint a few things.  I am sure you all know that Greece is currently undergoing terrible hardship because of the austerity programme demanded of it by Brussels.  Hungary is in a similar position.  But what is the real reason for the crisis in the EU?  I would like to stress that we must make a fair diagnosis in order the establish the correct therapy.  The message put about today to all peoples of the EU is to say that they are living beyond their means and that this must come to an end. In fact, he truth is that we live in an era of finance capitalism in which it is more profitable to trade in money, risk and associated products than it is to manufacture goods or offer services.
You can see the effects of this in the statistics.  When the changes happened in Eastern Europe, the average income of a Hungarian worker was about 50% of the European average.  Today, it is 22%.    Or take the case of Spain.  In Spain, between 2009 and 2010, the 50 largest Spanish companies increased their profits by more than 35% and the salaries of their CEOs increased by around 30%.  In the same period, wages increased by 0.5%.  So it is simply a lie to say that ordinary people are living beyond their means.
Moreover, the real reason for the current crisis lies in the financial sector.  The banks have stopped doing what they are supposed to do - financing the real economy and the manufacturing sector.  They instead offer innovative products, hedge funds and other speculative instruments with no real value behind them, and as long as they make profits, they are fine.  When they run into difficulties, they ask states to bail them out.  This is one of the reasons why deficits have increased in Europe.  Before 2007, indeed, there was only one country with an excess  deficit in the EU, Greece.  By 2009 - 2010, by contrast, 23 our of 27 countries were in a state of excess deficit, i.e. above 6% of GDP.  Why?  Because the EU failed to regulate the financial sector, for instance through a tax on speculative financial transactions.  Even though there were proposals to this effect, including in the European Parliament, nothing happened because of the lobbying power of the banks. Instead, the banks ran into crisis and had to be rescued.
By October 2011, a sum equal to twice the value of German GDP had been spent on saving the banks.  Moreover, there are many tax havens in Europe, as well as numerous indirect subsidies to banks in the forms of tax holidays.  Companies, especially transnational ones, also receive many subsidies from the state.  These companies pay low rates of tax or no tax at all.  All this leads to a drop in revenues, more spending and an increased budget deficit.  The solution, imposed in the form of an "austerity drive", involving higher taxes and lower spending on health, education and culture, in fact only aggravates the vicious circle in which austerity causes recession which pushes down consumption and decreases public revenues.  In brief, money is channelled out of people's pockets and into those of bankers and big business.  So this is the real diagnosis, not that the population is spending too much.
This vicious cycle is operating especially dramatically in the peripheral countries.  I would like to emphasise the double standards in the EU.  I do not know whether you were able to follow the recent debates at the Davos conference but the last session was chaired by Christine Lagarde, the president of the International Monetary Fund, and she said that we have to continue with austerity in the peripheral countries - Spain, Portugal, Greece etc. - but that it is time to encourage investment in the core countries.  Somebody asked her what is going to happen to the populations in the peripheral countries because of the recession:  GDP is falling everywhere and that means falling living standards and rising unemployment, and therefore inevitably a higher deficit and more austerity.  Christine Lagarde replied that those people who do not find jobs in Spain or wherever will have to go to Germany and seek employment there.  But what are we really talking about here?  What is the most important economic resource nowadays? It is brains, knowledge, innovation, creativity.  This is a new type of colonisation: we are talking about transferring the brain power into the core countries.  And what will happen to the peripheral countries affected by the brain drain?  They will never have a chance to catch up if they lose their best brains to other countries. 
I would like to emphasise that the Hungarian deficit is not very high, it is below 3%, and we are not a euro zone country.  So why should decrease the deficit any further?  The EU wants us to reduce it to 2.5%, which makes no sense. It only pushes the present government further down the austerity path, which will – sooner or later – cause social problems, and will alienate the population from the present government. 
I would also like to mention another problem which is unfortunately typical for peripheral countries.  It is a structural issue.  If you look at what happened in the 1990s, during the economic transition from Communism, Hungarian industry was completely destroyed by different policies.  The general policy was privatisation and those companies which were privatised were bought by core country companies who set up screwdriver operations, low value added activities which needed no brains but only tolerant people who were cheap by Western European standards.  Hungary is now competing with low wage economies and those people who have talent emigrate to the core countries. 
In Central and Eastern Europe these basic structural problems are aggravated by subsidies for multinational companies, by tax  holidays, by corruption and by public-private partnerships which are often created to move money out of the state budget to private pockets.  Big business and politics are very close but this is not an exclusively Hungarian phenomenon!  A lot of money has been siphoned off from the countries of Central and Eastern Europe through  foreign companies and banks!
Here I would like to say something about the role of the National Bank of Hungary.  The National Bank is supposed to serve the basic interests of the country, just as all central banks are supposed to ensure that inflation remains low and to support the economic policy of the government.  But the present president of the National Bank of Hungary does not want to support the economic policies of the government!  The National Bank could buy Hungarian government bonds, but the bank is "independent" of the Hungarian government and the Hungarian people.  The government has tried to change this a little bit, and this explains the attacks from the EU, which has insisted on retaining the full "independence" of the central bank.  You have probably heard of the G30 group of international banks to whose secret meetings central banks are invited.  Why are central banks not independent of the banking sector but independent of the states they are supposed to support?  The National Bank of Hungary keeps interest rates very high – at 7%, this is the highest in Europe - which is very good for speculative transactions but very bad for the real economy, especially for national small and medium enterprises which simply cannot borrow at that rate.  SMEs are therefore in a very serious situation whereas, with lower rates, they would be able to kick-start the economy and create jobs.
I would like to turn to the fiscal pact just for a few minutes.  It is being sold to the population as a solution to the crisis.  The fiscal pact is in fact an austerity treaty.  The proposed deficit is 0.5% of GDP, not 3% as in the Maastricht Treaty, so the countries which sign the treaty have to reduce their deficit even further.  This is impossible without very harsh austerity measures.  Second, the national budget will be first checked by the European Commission and Council before it is seen by national parliaments.  This is a very clear limitation on national sovereignty.  If a country cannot decrease the deficit to the desired level, it will be fined, a Commissioner can be appointed to make sure that the country complies with European law.  This is a clear path to political union.  But more centralisation is not a solution to the crisis, it is just a way of creating a new kind of Europe.  Hungary has been trying to redefine national values and to regain some power from the European Union and that is why we are the bad guys now.
There is a serious democratic deficit in the EU and the Hungarian government has been trying to find some room for manoeuvre following eight years in which the so-called left-wing government served the interests of Brussels and the multinationals.  The Hungarians do not appreciate these double standards.
What exactly has happened in the 2 years since Viktor Orban was elected?  The new government did not want to continue with austerity because we have had austerity for six years already, starting in 2007 before the crisis hit Europe.  The government tried to find other solutions, such as taxing the banks and other multinationals especially in the telecoms industry.  But these businesses are owned by the core countries!  So Brussels was not happy.  This is the true reason for the attacks against Hungary over its constitution.  There are serious economic interests behind these attacks.
To summarise, the Hungarians feel colonised by the core countries of the EU.  EU money very often is offered to ruin the economy, for instance to rip up vines and fruit orchards.  We do not get money for building up the economy.  The Hungarian economy is controlled by foreign companies so we have no right to decide what will be produced in Hungary.  If your economy is controlled by foreign businesses, then they also control what kind of knowledge is needed.  In other words, the education system and thus the whole of society is under control, while the national interest is neglected.  For instance, the government wanted to save the Hungarian national airline, MALEV, but it was not allowed to do so and the airline stopped operating in February 2012.  But the EU has no problem allowing Hungarian taxpayers' money to go to the German car manufacturers AUDI, Mercedes and their suppliers !
What is happening today in Hungary is self-defence.  We are trying to defend our traditional values, family values, Hungarian national culture, we are trying to rebuild society and to strengthen its cohesion which has been terribly weakened.  We are trying to rebuild our national economy which has been ruined since the 1990s but especially in the last 8 years.  We are also trying to regain control over those sectors of the economy which are controlled by transnationals from the core countries.  This is of course against the interests of the EU which is controlled by those same transnational companies.  The government is trying to introduce a transactional tax and this will only cause more conflicts with Brussels in the future.
In conclusion, I would say that Hungary should build a strong national economy based on its own resources - land, water, knowledge, agriculture, tourism, food.  Hungary should diversify its economy and its markets and find strategic partners outside the EU.  It must reject unfair treatment by the EU and at the same time utilise opportunities which the EU undoubtedly offers.  It must also build a strong cohesive society which values national traditions while of course remaining open-minded, innovative and optimistic.