As Europe’s debt crisis continues to demand undivided attention, the patient that is Europe has revealed a new wound: Hungary, where a slow burn political crisis has finally come to a head. In recent weeks the forint has nosedived, stocks plummeted and debt yields spiked as markets sent an overwhelmingly negative message in response to the government’s willingness to jeopardise a potential European Union-International Monetary Fund safety net.
Viktor Orbán, Hungary’s prime minister, will formally respond to these concerns this week. But the markets and the international political community are a little late to this party. Since his Fidesz party won an overwhelming parliamentary majority in 2010 it has been cementing its longer term influence. The renewed market discipline is welcome, yes, but much of the damage in Hungary has already been done. It will take much more to undo than investors and EU technocrats seem to appreciate.
Perhaps counterintuitively, a final agreement between Budapest and the EU-IMF will only make the bigger political concerns in Hungary that much harder to combat. It is because market scrutiny is Europe’s best remaining weapon. But the sooner a deal is struck, the sooner market pressure will recede, and the more likely Mr Orbán will feel once again emboldened to pursue his agenda. Softer policy tools, which ironically have sharper impact, have not yet been leveraged as effectively as they could or should have been. Continue reading »