Pulling Hungary back from the precipice

When he entered office, his country was on the brink of bankruptcy. A year later, Hungarian prime minister Gordon Bajnai’s job is done.

Sitting in his Budapest office, the Hungarian prime minister, Gordon Bajnai (42), looked like a Wall Street yuppie lost in a baroque costume drama. The business-like prime minister, sporting short-cropped hair, receives his guests in a stately chamber filled with dark tables and heavy chairs under a richly decorated ceiling.

Gordon Bajnai Gordon (György) Bajnai (42) studied international relations in college. Starting in 1991, Bajnai worked for several investment firms involved in the privatisation of Hungary’s national industries. Bajnai was a member of a organisation for socialist youth shortly before the revolution in 1989, but apart from that he is not affiliated with any party. In 2006, Bajnai began his career in politics when he became chief of a government body charged with the allotment of European funds. A year later, he joined the country’s cabinet. In April of 2009, the Hungarian socialist party asked him to succeed its previous and extremely unpopular prime minister.

Outside the building, which also houses the country’s parliament, tourist were dazzled by Budapest’s splendour. Inside, Bajnai, who amassed his fortune as an investment and market analyst before coming to highest office, was busy implementing some very austere policies. In his words: “A life-saving operation.”

The free fall of the Hungarian currency, a staggering budget deficit and rapid loss of faith in the country’s ability to repay its loans, incited fears that Hungary could become the first EU country to be bankrupted by the credit crisis. In October 2008, it was spared that fate when the IMF, EU and World Bank lent the country 20 billion euros. It was evident there would be no escaping cutbacks and reform. But the country’s politicians were divided and unable to take decisive action.

Bajnai rose to the occasion. He became prime minister for one year, for the symbolic salary of a single forint. This month, the country will elect a new parliament and his job will be done. Bajnai is not a member of any party and he will not be a candidate.

The millionaire was able to deliver some real results. Even though the Hungarian economy is expected to shrink somewhat this year, following the 6.7 percent decrease in 2009, growth rates of 3 to 4 percent have been predicted for 2011. This is considerably higher than the lacklustre growth the country knew before the crisis.

Bajnai worked by the book. “Most of the painful decisions were taken during the first 100 days of my government,” Bajnai said. The measures included raising taxes, reducing benefits and welfare payments and raising the state pension eligibility age. Within six months, he managed to present a new budget that reduced government spending by five percent.

Bajnai only assumed office in April 2009 after a majority of parliamentarians had signed a declaration he had drafted, listing the most important changes he wanted to implement. The document contained “all the things you know you should have voted for a long time ago, but didn’t,” he said laughing.

He was able to remain blissfully unaware of party politics and the forthcoming elections. “I could only be successful by keeping a long term view and not looking at opinion polls,” Bajnai said.

It sounds like you were the executive director of a country that was practically run by the IMF.

“No,” Bajnai sighed. “The lay out was done by us. The IMF was the jury, along with the EU, that decided whether our programme was sustainable and credible enough.”

Were you free to spend more if you had wanted to?

“It was clear what Hungary had to do, even if it was not easy politically. The country was on the edge of the abyss. We had to avert bankruptcy or a depreciation of the Hungarian currency that would have left hundreds of thousands on the streets because they had foreign currency mortgages. Ten thousands of small and medium sized businesses would have gone bankrupt, and we would have had a serious banking problem.

“This required painful adjustments from the people. Our challenge was keeping things bearable while simultaneously creating better conditions for stable and sustainable development. We have accomplished that goal.”

“Been there, done that, got the lousy T-shirt,” is what Bajnai told his Greek colleague George Papandreou who recently visited to learn how to deal with scrutiny from both the EU and the IMF. “Confidence in the financial markets is like air. As long as it’s there you don’t realise how important it is. Once it becomes scarce, you start to choke,” Bajnai said.

Bailouts by the international community have given both Hungary and Greece some room to breathe. Bajnai’s encouraging message to Papandreou was: if you use that time properly, the confidence will return.

You have emphasised the similarities between your country and Greece, but there are also many differences between the two. Greece is a euro country and therefore cannot depreciate its currency or turn to the IMF that easily.

“A big difference is that Hungary still has its own currency, not the euro, and there are 1.7 million people who have outstanding debts denominated in foreign currencies. It was very tangible to the population of Hungary what the weakening of the currency meant. Their instalments went up by 10 to 20 percent in one month.”

Did that ensure support for your reforms?

“Understanding. Support is probably a strong word in the case of Hungary. It was clear to a vast majority of the population this would be a very difficult and painful job, but that the alternative would be much worse than the austerity programme itself. This realisation is partially missing in Greece. To the man in the street, who doesn’t understand macro-economic data, these problems are not so evident.”

The Greek crisis has brought the eurozone’s weak spots to light. Does Hungary still want to join?

“I am convinced Hungary should aim to join the eurozone as soon as possible. The euro provides a safety net, stability. Last year, Hungarian families learned the hard way how extremely exposed they are without it.“

“The euro is a long term project. The euro has been a fundamental step towards establishing an efficient internal market. That we neglected to set up certain institutions when we established the euro doesn’t mean the euro project is wrong. It should not be stopped or reduced. It should be extended.”

“Another lesson of the euro project: countries that join the euro without having the necessary competitive environment will suffer after introducing it, because they will lose one of their most important economic tools: the currency exchange rate. Therefore it only makes sense for us to join if we continue our structural reforms.”

What would be a realistic timetable for Hungary to join the euro?

“That is up to the new government to decide. It would require self discipline and a social pact, but I think 2014 is possible. If we continue on the road we have already taken.”

The two parties currently doing best in the polls are talking about raising government spending and renegotiating terms with the IMF.

“This is part of the election campaign, which features all kinds of big promises. In reality there is very little room to manoeuvre. Hungary is under both IMF and EU scrutiny. Most importantly, Hungary still has 1.7 million families with loans in foreign currency that have yet to be repaid. There has never been such a short distance between stupid political statements and the man on the street’s pockets. Before, it may have taken two, three, or even four years before a bad economic policy was felt. Now, it can be only a month before almost half of Hungarian families would start feeling that something has gone wrong, because of the currency.

Do you see a correlation between the country being under IMF scrutiny and the popularity of the extreme-right Jobbik party?

“No, I think that problem started much earlier. The IMF had little to do with it. Besides, the IMF programme is only a consequence of crisis the country ended up in because of this deep political division. That left Hungary paralysed for ten years.”

You want the euro here by 2014. That is only four years from now. A short time for a country that has yet to mentally prepare for capitalism.

“It is still four years from now. Do not forget that Hungary was the leading economy of the region in the second half of the 1990s. We lost our lead to Poland, the Czech Republic and Slovakia, but I think the tide is turning.”

“Perhaps it was because we had no choice, but still. Hungary has already done what any European government will have to do in the following years: reduce its staggering budget deficit. The European Commission has predicted that if the European countries continue the way they are they will have an average debt of 100 percent of GDP by 2014. We are at 78 percent now and going down. We can focus on stimulating growth. We paid a high price to obtain it, but right now, Hungary has the advantage.”