Hungary - a decade after the crisis and consequences are still serious

20.09.2018 08:21|Marcin Lipka

"It's been 10 years since the Lehman Brothers bankruptcy, which has been recognised as the contractual start of the global financial crisis. There has definitely been less turbulence in central Europe, although there was a black sheep - Hungary. How is this country coping now and what made Budapest apply for large sums of aid to international institutions?" explains Marcin Lipka, Conotoxia Senior Analyst.

One of the main causes of the global financial crisis was the property bubble and the inadequate valuation of many derivatives, which have become virtually worthless overnight.

In the case of Hungary, the global disruption of the financial market was only a catalyst for the start of the economic catastrophe. The main reason for the economic collapse in Hungary was the completely irresponsible economic policy of the socialist team and the constant battle within the government.

Total dependence on foreign countries

Since the beginning of the new millennium, Budapest has been confronted with deep economic imbalances, including a very serious current account deficit (an average of 7.5% of GDP per year between 2002 and 2008) and budget deficits, which in 2003 and 2006 even exceeded 9% of GDP in some quarters (an average of 7% per year between 2002 and 2008).

These data alone show that the country lived beyond its means (a giant hole in public finances) and, at the same time, was not competitive in the international market (current account deficit).

Apart from the strongly growing debt and dependence on creditors, Budapest has focused on financing itself with foreign capital. According to the CESifo think-tank data in "The Hungarian Crisis" study, foreign debt in relation to the private sector GDP increased from about 8% to 30% in the analysed period (in Poland, it only slightly exceeded 10% in 2008). In the case of Hungarian households it reached 65%. In Poland it also increased, but reached half of the Hungarian values.

13th pension and fatal labour market

Six years ago, CESifo also drew attention to the disastrous condition of the labour market. The average level of the labour market participation rate in 2000-2010 was the lowest among the countries surveyed by OECD, regardless of the respondents' age range.

The unwillingness to participate by the Hungarians in the labour market was, in turn, dictated by extremely high, for a developing country, employment costs (taxes and social security contributions), which in the years preceding the crisis exceeded 50% of wages (it was 37% in Poland). The low percentage of employees, on the other hand, resulted in higher operating costs of the state.

High taxes were transferred to the public sector, where expenditure on pensions or salaries significantly exceeded the average values observed in the other three countries of the Visegrad Group. This is clearly visible in Professor Julius Horvath's "2008 Hungarian Financial Crisis” study, available on the CASE think-tank website.

Horvath also emphasizes that the 2002 election campaign can be blamed for fiscal madness. Populist slogans (13th month pension instalment, 50% increase in salaries for public sector employees, state subsidies) sealed high budget expenditures. The ineffective operation of national monopolies was also cost-intensive.

IMF and European Union assistance

Irresponsible fiscal policy (Hungary has been in the EU excessive deficit procedure since joining the EU) and dependence on foreign capital led to the collapse of the Hungarian economy. The country did not take advantage of the boom years to build a financial cushion and improve competitiveness. This caused the country to lose liquidity practically overnight.

The international institutions (IMF and EU), which lent a record 25 billion dollars to Hungary in 2008, had to come to the rescue. In addition, after four years, when the sovereign debt crisis began to hit the eurozone, Budapest was a step towards requesting further financial assistance. Moreover, the economic situation that stood in front of Prime Minister Orban's team, which was due to take over the government, was compared to that of Greece.

Belt tightening and poor productivity

Pre-crisis distribution had to be paid for. The debt-to-GDP ratio increased from 52% to 82% between 2002 and 2010. The functioning of the economy became more expensive due to the lowering of Hungary's creditworthiness (junk rating).

Only in the last two years has there been a gradual decrease in debt in relation to GDP (currently 73.9%). In addition, Hungary may enjoy a current account surplus (about 3%). The labour market also looks much better, where the participation rate is currently at the level of 71.2% (69.6% in Poland).

However, the austerity measures forced by the fiscal situation and the foreign capital, which had been inflowing before the crisis, "overeating", still have negative consequences on the economy. IMF data from 2018 (Article IV Consultations) show that over the last decade, the GDP per capita in Hungary has increased by about 15%. In the case of Poland, it was over 35%.

Savings and shortages in foreign capital caused by the crisis also translated into a slow increase in productivity. According to OECD data, Hungarian labour productivity increased by only 4.9% in 7 years. In the case of Poland, however, in the corresponding period there was an increase of almost 20%.

Even the next generation may pay for mistakes

Irresponsible fiscal policy, the lack of labour market reform, unnaturally high social benefits or the lack of national capital is an invitation to the crisis. In the case of Hungary, the populist actions of the socialists at the beginning of the century may still take revenge in years to come, despite the introduction of many necessary reforms by the Orban team.


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