Daily Archives: February 8, 2012

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.

The new constitution that was rammed through parliament last summer took effect on January 1. In response to these developments, the European Court of Justice initiated an infringement procedure due to concerns over central bank governance, judicial independence and data protection, while the European Commission is looking to suspend the country’s cohesion funds on Wednesday. Rebukes have been forthcoming from among others, including Hillary Clinton, US secretary of state, and Human Rights Watch. Yet the EU’s moves will do little, if anything, to rein in the government’s push to centralise and consolidate power.

Viktor Orbán, Hungary’s prime minister, will formally respond to these concerns this week. But the markets and the international political and civic 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.

Once agreed, the new EU-IMF programme will shore up Hungary’s financial position and provide a mechanism for the EU and the IMF to oversee (and where necessary, undo) economic policy and institutional measures that have hurt confidence. But this package will remain limited to economics and will do nothing to address the wider erosion of democratic governance.

The Fidesz party has pushed through vast changes since it took power. For example, a multitude of seemingly minor quasi-technical changes hailed as key to reforming Hungary’s electoral system serve to entrench Fidesz at the expense of smaller parties. And as discussed in our previous piece, the independence of each and every state institution has been systematically compromised, including the public prosecutor, the head of media board, state audit office and fiscal council. The central bank has been far from immune. The government’s recent “stability law” now entrenches basic elements of fiscal policy into the new constitution, which will require a two-thirds majority to change.

It is true that the EU institutions have now engaged. But the response is late and far from perfect, which speaks to the union’s limited arsenal for managing political miscreants once they are admitted to the club. Even with a EU-IMF programme in place, many of the key legislative pieces of Mr Orbán’s agenda will go unaddressed. In fact, it is Mr Orbán’s awareness of the EU’s futility that is impelling him to strike a deal in the first place.

Perhaps counter-intuitively, a final agreement between Budapest and the EU-IMF will only make the bigger political concerns in Hungary that much harder to combat. Here is why: 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, such as sustained pressure from heads of state or representatives in the European parliament, have not yet been leveraged as effectively as they could or should have been.

And don’t look to domestic political opposition. Despite a slide in support for Fidesz, this has not improved their opponents’ prospects. They remain internally divided and have incoherent policies. Furthermore, Fidesz’s waning popularity has not generated fissures within the party: Mr Orbán has handpicked MPs and party leaders. They remain faithful, continuing to believe the country’s problems stem from the corruption and mismanagement of previous socialist governments, the debt crisis and an international conspiracy to undermine a strong and independent Hungary. While a new civic movement is certainly emerging, no opposition political party has yet stepped up to officially carry its voice.

So, this government will continue to be erratic, even with an EU-IMF programme in place and more oversight from European institutions. The underlying character of this government will not change. At most, the concessions it offers will amount to a tactical defeat for Mr Orbán. But they are unlikely to stop him seeking to entrench Fidesz’s longer-term influence.

This article was co-written with Mujtaba Rahman, a Europe analyst at Eurasia Group. Ian Bremmer is president of Eurasia Group and author of ‘The End of the Free Market’

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