Even though the Hungarian government is now tacitly conceding its fiscal plan has failed, the European Commission is threatening the country with sanctions. Far-right activists are exploiting the conflict.
Hungarian newspapers aren't mincing their words in their coverage of the conflict raging between government leaders in Budapest and the European Commission in Brussels.
"This slap in the face means there is no third option," the left-of-center Hungarian newspaper Nepszabadsag wrote. "The game is over."
The pro-government, conservative Magyar Nemzet newspaper attacked what it called the "soulless Brussels bureaucrats," claiming they not only aim to "bring the Orban government to its knees but also to clamp all Hungarians to the torture bench - with no exceptions."
An unprecedented move
The most recent conflict in Hungary is not about democracy but about the country's budget deficit. Last Wednesday, European Commissioner for Economic and Monetary Olli Rehn threatened to cut subsidies from EU funds to Hungary by half a billion euros on January 1, 2012. It would be the first time in the history of the EU that the Brussels-based Commission has ever taken such dramatic action against a member state.
Specifically, the Commission is accusing the government of Prime Minister Viktor Orban of using fiscal and accounting tricks to achieve a budget deficit of 3 percent of gross domestic product (GDP). Officials in Brussels criticize the Hungarian government for nationalizing private pension funds in the fall of 2010 and introducing a so-called crisis tax that largely affects foreign banks and companies. They have calculated that without these measures, Hungary's budget deficit would be 6 percent. Rehn has stressed that the threat of losing funding has nothing to do with another feud between Brussels and Budapest over protecting fundamental rights.
During a visit to Frankfurt on Friday, Orban called the unprecedented threat by the European Commission "unfounded and unfair" and complained that Brussels was unwilling to acknowledge the austerity measures introduced by his government.
Just months ago, the prime minister felt comfortable in his role as a vociferous, unwavering national independence fighter. He railed against the EU, the International Monetary Fund and foreign financial capitalism. And he warned Brussels directly against treating Hungary as Moscow once did. At the same time, Orban approached Russia and China for investments and financial aid and was full of praise particularly for the Chinese model, which he believed could be an attractive path for Hungary to pursue.
But financial help from both countries never materialized. Hungary's financial situation worsened dramatically in the fall. For months, the country has been on the verge of bankruptcy. The internal financial resources are largely exhausted, and the government can sell bonds only at record high interest rates. The credit rating agencies have downgraded Hungary to junk status. In November, the government turned to the IMF with a plea for a billion-euro emergency loan. The move was essentially a confession that Hungary's fiscal program had failed.
The program began in September 2010 with the expulsion of the IMF from Hungary. Orban and his two-thirds parliamentary majority of young democrats, Fidesz, refused to accept austerity measures prescribed by the IMF, and his government later ended talks with the institution. Since then, the government has pursued what Economic Minister Gyorgy Matolcsy calls an "unorthodox" fiscal policy. In addition to the nationalization of private pension funds and the introduction of a crisis tax for foreign companies, the Hungarian parliament passed in September a law that allows Hungary to pay back loans secured in foreign currencies through low, government-approved exchange rates.
The law forces foreign banks operating in Hungary to accept significant losses, estimated as a high as half a billion euros. Eight foreign banks and the Austrian government have lodged a complaint with the Commission, which is currently reviewing what action to take against Hungary.
Double standards in Hungary?
The "Hungary versus the EU" conflict has reached a new high point with the threat to cut a half billion euros in subsidies if the country doesn't lower its budget deficit. But the threat could prove to be counterproductive for the EU. Not only do most analysts doubt that Brussels will stick to its word and take such a dramatic step but the Commission could also be accused of double standards: It has also required four other states, Belgium, Malta, Poland and Cyprus, to lower their high budget deficits but without the same threats made to Hungary.
Not only that, the European Commission has threatened less severe sanctions over other issues, such as the country's media law, new constitution, separation of powers and independence of the judiciary system.It was dissatisfied with insignificant changes to the media law.
The domestic winners of the conflict between Hungary and the EU are not Orban and his party. In the end, the head of government, beyond his nationalist and anti-capitalist rhetoric, is still subject to the dictates of the economy. At some point, Hungary will need to pay back its huge foreign debt. That is no easy task. For years, the country has been living far beyond its means, largely because too few people work productively and the public sector is far too bloated.
The Orban government has prescribed a rigid austerity and discipline program for the country's poor. Welfare recipients, for instance, can be forced to work. Such anti-social measures have hurt the popularity of the prime minister and his party. But fear is mounting even among the party's core supporters - small and medium-size enterprises as well as farmers - that the escalating conflict with the EU could further worsen the economic situation in the country and threaten their livelihood.
The winners in Hungary are not the social liberal or green alternatives but rather the right-wing extremists in the "A Better Hungary Movement," called Jobbik. The party, which was voted into the parliament in 2010 with nearly 17 percent of the votes, has emerged as the second strongest political force in the country. It doesn't hide its distaste for gypsies, Jews and foreigners as well the EU, the IMF and foreign capital. Jobbik is currently trying to muster support for Hungary to exit the EU.
Polls and studies confirm that the movement is not a protest club for losers but rather a party comprised of young, well educated middle class citizens - a political force to be reckoned with in the future. The party thrives on the tireless efforts of its activists and parliamentarians with connections extending into the smallest of villages and intensive use of the Internet to reach young people. Although it may seem unlikely today that Jobbik could ever come to power, its leader Gabor Vona made one point perfectly clear in a key speech delivered in January: "It's important for everyone to know - we are not democrats!"
Author: Keno Versek / jrb
Editor: Joanna Impey