The Tempest in Budapest

It seems Hungary’s Prime Minister Viktor Orban (who’s been showing some fairly authoritarian stripes of late) has done an about face. Following talks with European Commission (EC) and ECB officials earlier in the week, Hungarian officials announced Tuesday they’ll back off legislation seeking to merge Hungary’s central bank with its financial regulatory body—a move potentially diminishing the bank’s independence and opening the door to ill-guided and politically motivated monetary policy.

The measure violated EU covenants and put Hungary at odds with EC officials holding the purse strings to a possible aid package, including a ~$25 billion credit line from the IMF. And Hungary needs the aid as it’s facing stagnating growth, a jump in inflation, disenfranchised foreign companies and onerous yields on its long-term debt, which have risen to 9.13% in recent days. Many of Orban’s misguided policies have exacerbated these problems.

After months of thundering over what he considered the meddling of the “international left,” Orban likely realized EC officials were calling his bluff. Other EC leaders likely had little patience for his nationalistic political posturing to curry voters’ favor while seeking foreigners’ money. In many cases, other elected eurozone officials have already sacrificed their own standing among their constituents to push through unpopular measures to keep the euro intact and prevent the disorderly default of any eurozone member. Putting more political capital at risk for Orban may not be high on their agenda. Perhaps Orban simply realized his country’s economy (and populace) would suffer without EC support—thereby undermining the popularity he sought to boost.

Hungary still has other EU policy infringements to amend should it want to right its economic ship and avoid some nasty EU Court of Justice proceedings—including a plan to force 274 judges’ early retirement (allowing Orban to pack the judiciary with his supporters) and seizure of the data protection authority (allowing Orban to effectively control the media). An independent judiciary and freedom of the press are critical to democracy (and hence, properly functioning capitalism).

So good for Orban, for now, for resisting the urge to sacrifice fiscal sanity to bolster his popularity. Of course, Orban’s government has made similar promises before only to back away when the fiscal situation improved a bit, lessening the necessity for IMF aid. However, as we’ve said, so long as Hungary is part of the European Union, it’s unlikely the EC sits idle should Orban continue ignoring European law.