Storm in a Teacup?
Hungary is slowly but surely slipping into the abyss
A week last Saturday the Prime Minister of Hungary, Ferenc Gyurcsany, called a "national summit" in order to address the financial crisis facing the country. Leading members from the political and business class were all in attendance. Oddly enough, while the purpose of this summit was to bring together all stakeholders in order to exchange ideas on how to best face the global financial crisis, many were not invited. Non-governmental organisations (NGOs) and civil organisations were noticeably absent as well as leaders from Hungary's Roma minority. In essence the government felt that these groups weren't important when it comes to major issues facing the country and that they have nothing to offer in terms of input.
Aside from this, it quickly became clear that the national summit was nothing more than a photo-op for the present government and an opportunity for political parties to score rhetorical points and further their own agenda. As some foreign observers later noted, the national summit showed to the world everything that Hungary could offer with the exception of unity.
Yet unity in itself is not essential for a country to constructively deal with the present financial crisis. At this point in time innovative ideas are needed on how to deal with an imploding economic ideology called capitalism -- not fancy speeches. Sadly, the national summit in Hungary was full of such fancy speeches. The ideas tossed about were shallow and lacked any imagination. Most were simply the stale phrases of the past that sounded nice in theory but in practice signified little or nothing at all.
Generally speaking, the left in Hungary represented by the ruling Socialists and the so-called Liberals stressed the need for unity and solidarity. While Gyurcsany noted that the financial crisis was global in scope, his former junior coalition partner reminded everyone that capitalism is still a great system and that we should not lose faith in the workings of "the market". Instead, what was needed now more than ever was to control government spending.
What is ironic about the so-called Liberals in Hungary is that for two decades they have preached and practiced a neo-liberalist philosophy that praised the market and criticised government for being too big and intrusive. But now that this philosophy has shown itself for what it really is and had plunged the world into an economic crisis of epic proportions, these same so-called Liberals are now looking to the government for help in cleaning up the mess they had made. In particular, no mention has been made of the policies that were implemented over the past six years which put Hungary in such a vulnerable position that it threatens to drag down the entire European Union along with it.
The political right, meanwhile, seized the opportunity at the summit to take petty shots at their rivals. The main opposition FIDESZ noted that the financial crisis was mostly the result of greed. Viktor Orban, the head of the FIDESZ, faulted the government for the crisis. He added that the general public weren't to blame for what was happening but those at the top. His solution was for tax cuts that would help reinvigorate the economy and lift the burden off individuals, especially those with large families. The conservative MDF, on the other hand, criticised both the government and the FIDESZ for not taking the bold and brave steps required to deal with the crisis. Accordingly, they felt that a freeze on wages and pensions was needed in order to help reign in government spending.
Tax cuts and freezing or increasing wages?
While what both the FIDESZ and the MDF had said contained a certain amount of truth, their analysis of the problem and subsequent solutions were too simplistic. Tax cuts almost always benefits the wealthy at the expense of the poor. In addition to this, when governments are in desperate need of revenue to help fund financial rescue packages and provide financial guarantees, tax cuts creates an unnecessary burden. Moreover, as businesses face the prospect of recession, the extra money saved through tax cuts would be simply used as extra profit and wouldn't be reinvested in the economy. In effect, tax cuts should only be used when an economy is recovering and as a mid to long term strategy and not a quick reaction to a financial crisis.
As for the idea of freezing wages and pensions, a strategy which has subsequently been adopted by the government, the problem with this is that it will not only lengthen the crisis but also make it deeper. At the heart of the problem is the difficulty of people paying back loans that they had irresponsibly taken on for whatever reason. By freezing wages and pensions, the purchasing power of individuals decreases when inflation is taken into account. This means people will find it even harder to pay back loans that they have been having difficulty with in the first place, and which lies at the very heart of the present financial crisis. Hence, a drop in real wages means that more people will most likely default on their loans, exacerbating the situation even further.
As uncomfortable as it may sound, what is needed at this point is not for wages and pensions to be frozen, but for them to be increased. This may mean cutting into the profit margins of businesses, but business leaders must realise that the people on whom they are putting the squeeze are the very same consumers that drive a consumer economy. By killing off the consumer, they are in effect killing off their business. Only by reinserting billions from ill-gotten profits so that people will be able to consume again is there any hope of avoiding an economic depression.
Business leaders in Hungary, however, don't appear able to fathom this or are unwilling to take on such a bold and brave move. While conceding that tax cuts are not needed at this point, they are in favour of wage freezes. In addition to this, they warned the government to be prepared to accept job cuts of up to 100,000 in the coming weeks and months.
Despite the best efforts of the Hungarian government to make it look as if the country was coming together in order to proactively deal with the financial crisis, events of the following week demonstrated how futile these efforts really were. Indeed, when at the beginning of the week stock markets around the world pointed upward, the Hungarian stock market continued to drop. Later on, when stock markets reversed course and headed lower, the Hungarian market led the way, dropping faster and lower than their counterparts.
Nevertheless, Hungarians were given a bit of respite last week due to a holiday in where the stock market was closed for the last two days of the week. On the other hand, in the past when a sharp downturn occurred on world markets and the Hungarian stock market was closed, the following week the Hungarian market was then hit especially hard. Thus, there is some concern that history will repeat itself and that the coming week will be a bloodbath for investors on the Hungarian stock market.