TCS Daily


Another Hungarian Uprising?

By Vlad Signorelli - September 22, 2006 12:00 AM

In 1956 Hungarians revolted against the yoke of communist domination from Moscow. In 2006, it appears Hungarians are revolting against the yoke of austerity from Brussels by demanding that the EU-leaning Socialist Prime Minister Ferenc Gyurcsany step down. Already suffering in the polls with the worst popularity ratings of any Hungarian Prime Minister in the last seven years because of his recent austerity package, Gyurcsany has so far refused to resign in the face of public outrage over the release of his taped admission that he lied to voters in order to win the April elections. The revelation, along with the Prime Minister's stubbornness, has provoked demonstrations and protests, which quickly became violent, reportedly involving nearly 10,000 rioters on the streets of Budapest.

The riots are just as much anti-austerity riots as they are anti-Gyurcsany riots. Gyurcsany's popularity was not this bad only a year ago when he appeared to be the right kind of socialist leader, looking to cut taxes and encourage economic growth. Indeed, given his speeches and pro-growth rhetoric it seemed Hungary's prospects were looking bright last year.

But this was before Europe's deficit fetish spread to Budapest. This past June, concerns over Hungary's public finances came to head given Euro currency adoption requirements, which stipulate a budget deficit of no greater than 3% of GDP. Hungary's deficit is expected to be 10% of GDP this year. As a result, an austerity package aimed to please Brussels at the expense of Hungary's growth outlook was pushed through parliament. The package, which raised taxes and cut spending, was passed in July and Gyurcsany's popularity has been on the decline ever since. The tax increases included an introduction of a 20 percent capital gains tax, the introduction of a bank tax, along with hikes to the VAT, personal income tax and corporate tax rates. Meanwhile, the administration cut social welfare spending and ended free public education. The policy combination was a political double whammy for Gyurcsany.

Fortunately, the conditions for a turnaround on economic policy look ripe as elections in October may allow pro-growth party Fidesz to make enough gains to turn back the austerity dial. At this point, the best thing Gyurcsany could do politically would be to renounce his austerity package -- which has become effective this month -- and propose a plebiscite on Euro adoption. Throughout Europe there seems to be this grassroots distaste for joining the monetary union which seems to bring along with it austerity and economic stagnation. The move would allow him to back out of a bad set of policy options while claiming to listen to the voice of the people.

Hungary's problem is really Europe's problem. As one government after another has felt the blowback from austerity, it is becoming clear that Europe's deficit obsession is emerging as the Achilles heel of the Euro. The political dialectic often repeating across Euroland is this: a government comes into power campaigning on pro-growth tax cuts. Then officials from Brussels begin to talk about the country's deficit and how all tax cuts must be deferred until the budgetary requirements have been met. As a result, the tax cut plans are watered down to a thin gruel or tabled completely, meanwhile cuts to the social safety net are made and growth continues to muddle along at sub-par levels. This dialectic has contributed to the electoral defeats of Aznar in Spain, Schroeder in Germany and Berlusconi in Italy. Cuts to the social safetey net in Euroland should be no problem politically in a booming economy that was adding on jobs and widening opportunities. But to arrive to that positive backdrop, changes in tax policy are required first and Brussels continues to insist on things being the other way around.

The best way to fix a deficit problem is to grow out of it. Russia understood that and instituted a 13% flat tax. The resulting economic growth and bumper revenues has allowed authorities to reduce social spending and yet, Putin's popularity remains well over 60%. If only Brussels could understand that and relax their focus on deficits. Even the "Godfather of the Euro," Professor Robert Mundell, has mentioned that he would have de-emphasized the concern with deficits in formulating the creation of the Euro.

Although Euro adoption has traditionally been seen as a top priority for many pro-business Eastern European political parties, the current unrest may be causing policymakers in Eastern Europe to undergo a rethink on Euro adoption. If Euro adoption continues to require austerity measures amidst economic stagnation, the issue will become a political non-starter. Whether Gyurcsany stays in power is uncertain, but the shockwaves of the current Hungarian uprising is offering a public rebuke to policymakers in Brussels, just as the 1956 uprising delivered one to Soviet Moscow.

Vlad Signorelli is Global Research Analyst at Bretton Woods Research.

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3 Comments

nonsense
First of all, Aznar was dumped because Spaniards were upset about being draged into the Iraq war against their will. The Madrid bombings were the final drop into the bucket that made Spanish patience ease. Secondly, the Russians are doing well because of the high oil price. Thirdly, if the problem is the Euro, how come that Finland will grow some 6% this year?

Aznar and ETA
Another reason Spaniards were p***ed off was because Aznar immediately blamed ETA for the bombings without any evidence whatsoever. Despite the fact that there have been huge demonstrations against ETA in regions outside the Basque country, no-one with even a passing knowledge of ETA strategy and tactics would point the finger of blame at them.

I'd say that as much as it was FOR withdrawing troops from Iraq it was AGAINST politicians cynically exploiting a massive human tragedy to make political mileage against ETA. And that from people with no particular love for ETA!
The Socialists were the beneficiaries of a cynical electorate (not untypical in the West) seemingly having been proved right about their unprincipled government.

nonsense is excluding fiscal policy from the discussion
Had Aznar and Berlusconi followed through on their tax cut promises, which were key to their electoral victories, it's more likely they could have weathered the fallout from their Iraq policies. Certainly, it is easier to make such a case to the people when the economy is growing strongly.

Russia is more than just about oil. Since Russia's flat tax system was implemented in 2001, Russia has had an average growth rate around 6 percent, interrupted. If you're looking for a growth story that's basically only about oil, you'll have better luck with Venezeula.

I haven't looked at Finland all that closely, but we've seen examples of smaller countries with competitive tax rates benefit by being a part of the EU, for example, Ireland. I imagine Finland benefits from the commodity boom of recent years, but at the least, it's good to see that Finland's top marginal rate on personal income of 32.5% is superior to Germany (42%), Italy (43%), Spain (45%) and France (around 48%). The same goes for its corporate tax rate of 26%.

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