In Hungary, Potential Lessons for Greece?

By JUDY DEMPSEY
Published: February 19, 2010

BUDAPEST — Despite the fiscal crisis engulfing Greece and some other Southern European nations, Hungary is more committed than ever to adopting the euro as soon as possible, its caretaker prime minister said this week, even if that means enduring a further bout of austerity to reach the goal.

“If I have a vision, it would be to have the euro by 2014 and have an economy with sustainable growth,” the prime minister, Gordon Bajnai, said in an interview in his spacious 19th-century office overlooking the Danube.

The experience of Hungary, which became a member of the European Union in 2004 but still has a ways to go to meet the conditions for joining the 16 nations of the monetary union, suggests just why the euro retains its allure to so many of the emerging countries of Europe.

Indeed, not just Hungary but also countries like Poland, Latvia and Estonia remain convinced that it is worth going through a lot of pain to build the conditions for a more enduring prosperity.

At the same time, Hungary’s experience points to some of the flaws in the E.U.’s monetary union, which lacks the financial tools to help countries like Greece through a crisis the way the International Monetary Fund helped Hungary during its economic trauma.

In late 2008, with the global financial meltdown ravaging countries that took on too much debt, the I.M.F., with support from the European Union, stepped in to provide €20 billion, or about $27 billion, to bail out Hungary, which was on the verge of default. In return, the I.M.F. imposed strict conditions on the government in Budapest, requiring it to cut pensions, increase the retirement age from 62 to 65, sharply trim the public sector and restructure the public transportation system.

“The package gave us a breathing space,” Mr. Bajnai said. “It bought us time.”

Because Greece is inside the euro zone, the European Union, which comprises 27 countries, has kept the I.M.F. at arms length but so far refused to provide Athens with any sort of similar loan package itself. Nonetheless, Mr. Bajnai said, Greece should take advantage of the moral support Brussels has offered and move ahead with its own austerity program. In the end, he said, that was the only way to build an economy capable of competing with the most successful countries in Europe, like Germany, France and the Netherlands.

Mr. Bajnai said he had delivered that message directly to George Papandreou, the Greek prime minister, who wanted to know how Hungary had managed to restore confidence among investors and clear the way for a resumption of economic growth.

“I met George Papandreou last week,” Mr. Bajnai said. “I have talked to him a couple of times. I told him, I am coming with a T-shirt, with the sign, ‘I have been there.”’

George Soros, the billionaire hedge fund manager who was born in Hungary, agrees that Hungary’s effort should serve as example for Greece, as well as Portugal and Spain.

At the World Economic Forum in Davos, Switzerland, last month, Mr. Soros said that being forced to impose harsh spending cuts in the midst of an economic downturn was “very, very hard.” But Mr. Soros added: “Hungary did it, and in a remarkably short time, re-established itself. So it is doable.”

Mr. Bajnai, the prime minister, is in an unusual position. An independent with no ties to any particular political party, he came into office last April after the Socialist government lost a no-confidence vote and turned to Mr. Bajnai to take charge. With elections for Parliament scheduled for April, he expects to be out of power soon.

The question is whether the policies that Mr. Bajnai favors will endure after a new government, expected to be led by the conservative Fidesz party, takes over. But his stature, the Hungarian public’s commitment to fully embracing Europe, and the need to remain in compliance with the I.M.F.’s austerity program, all suggest that he has started working on an economic overhaul.

“Hungary has to be competitive enough so that the arrival of the euro will not put us in an unsustainable position,” Mr. Bajnai, 41, a former business executive, said during the interview. “That is why these structural reforms are also very important in the coming years.”

“Most Hungarians,” Mr. Bajnai added, “have drawn the conclusion that it is good to be in the euro zone because the euro gives you a source of security.”

In its quest to join the euro, he said, Hungary needed to keep labor costs under control and build an economy more robust than its neighbors. The goal, he said, should be sustained growth of two percentage points above the E.U. average. During the first quarter of this year, growth appears to have resumed, though at a relatively subdued pace. Still, that is a sharp improvement over the contraction of 6.7 percent in 2009.

Improving growth over the longer run, he said, would require maintaining a tight budget leash in a country where Mr. Bajnai, after a long period of heady public spending under the previous government, has presided over a series of politically painful measures.

“It will require a very strict fiscal policy, a continuation of structural reforms for the country,” he said.

Zsolt Darvas, a macroeconomist at Bruegel, an independent economic research center in Brussels, said that he believed Mr. Bajnai has helped put Hungary on the right track.

“The Bajnai government has started to introduce some real reforms,” Mr. Darvas said. Of course, he added, given the constraints imposed by the I.M.F., his government has had little choice.

Mr. Bajnai was put in charge last year mostly because neither the Social Party nor Fidesz, the major opposition party, wanted to call early elections and accept the responsibility for the tough measures demanded by the markets and the I.M.F.

Mr. Bajnai introduced a plan to raise the retirement age from 62 to 65 years. He has succeeded in consolidating the budget, bringing down the deficit to 3.8 percent of gross domestic product this year from nearly 9 percent in 2006.

“He has tried to circumvent political interests,” Mr. Darvas said.

Mr. Bajnai’s predecessor, Ferenc Gyurcsany, began the process of fiscal restraint in 2006, but only modestly and only under pressure from the European Commission after Brussels noticed the spiraling budget deficit and the government’s loose monetary and fiscal policies.

Economists hold Mr. Gyurcsany responsible for the parlous state of Hungary’s finances, which spun out of control after the governing Socialists embarked on a big spending spree to win votes in the 2005 election. Mr. Gyurcsany later acknowledged that he had lied to voters about the true state of the Hungarian economy.

Can Greece, whose finances are in even worse shape than Hungary’s, follow its example, particularly if Athens does not receive any outside help to ease the pain?

“I think what the prime minister of Greece is doing now with the support of the European Commission is a very heavy package,” Mr. Bajnai said. “He is talking about cutting 4 percent of gross domestic product” from the budget deficit this year alone.

With support from the I.M.F., Hungary was successful in accomplishing a similar task. Since mid-2009, it has cut its budget deficit by 5 percent of gross domestic product.

“This is huge, compared to any other country,” Mr. Bajnai said.

Budapest had little choice. When the global financial crisis hit in 2008, Hungary was particularly vulnerable, largely because it had taken on far too much debt but also because it was not under the sheltering umbrella of the euro. During its boom, more than 1.7 million families took out foreign currency loans to finance their mortgages. When Hungary’s currency collapsed, the cost of making the payments on those loans soared.

But now the markets are responding favorably to the government’s efforts. Mr. Bajnai pointed out that Hungary returned to the U.S. market two weeks ago with a $2 billion 10-year bond that was three times oversubscribed.

Mr. Bajnai, who plans to take six months off after leaving office, hopes that Hungarians have learned their lesson. And he suggests that other countries ignore its example at their peril.

“Confidence or trust in the financial markets is like the air that you breathe,” Mr. Bajnai said. “You do not realize the importance of it until you begin to choke.”