Getting Hungary’s Economy Back on Track

COMMENTARY Europe

Getting Hungary’s Economy Back on Track

Jun 24th, 2020 3 min read
COMMENTARY BY
James M. Roberts

Research Fellow For Economic Freedom and Growth

James M. Roberts' primary responsibility is to edit the Rule of Law and Monetary Freedom sections of Index of Economic Freedom.
Hungarian President Viktor Orban talks to media during a special European Council summit on February 21, 2020 in Brussels, Belgium. Thierry Monasse / Contributor / Getty Images

Key Takeaways

Responsibility for Hungary’s lackluster performance can be laid squarely at the doorstep of European Union bureaucrats, who control many economic decisions.

Before the virus-imposed lockdown, the biggest threat to continued economic growth and economic freedom in Hungary was an excessive level of government spending.  

So far, Orbán’s Hungary has not lost any economic freedom, while solidifying a greater say about policies within its own borders.

The Heritage Foundation’s latest Index of Economic Freedom once again rates Hungary’s economy as “moderately free.” Greater economic freedom -- and the stronger economic growth associated with that freedom -- would boost Prime Minister Victor Orbán’s efforts to carve out a more distinct and independent role for Hungary as a member of the European Union. 

For more than a decade, Hungary’s overall score in the think tank’s annual Index has hovered between 66 and 67 points [out of a possible 100.] That rating places the country in the bottom third among European countries. Hungary’s failure to improve its rating is problematic, given the strong correlation found in the Index between growth in economic freedom and more rapid economic growth.  

Responsibility for Hungary’s lackluster performance can be laid squarely at the doorstep of European Union bureaucrats, who control many economic decisions from Brussels, but also must be shared by Orbán, who has been in office since 2010. Orbán won reelection to a third term in 2018, and his populist, center-right Fidesz-Hungarian Civic Alliance won two-thirds of the seats in parliament.  

Orbán’s government has clashed repeatedly with the European Union, particularly over migration issues and social policies that Orbán believes the EU has attempted to impose on Hungary through strings on its economic assistance.  In Orbán’s view, many EU policies reflect a toxic mixture of extreme liberalism, cultural Marxism, and centrally-planned, statist economic mandates that work to the detriment of Hungarian families.   

Orbán’s conservative-nationalist and populist approach to economic management also set Hungary somewhat apart from its neighbors, although the current government of Poland shares many of his concerns about the EU. Critics allege that Orbán and his Polish counterpart, Jarosław Kaczynski, leader of Poland's populist Law and Justice party, have displayed some disturbing authoritarian tendencies. While that may be debated, it is certainly true that Orbán and Kaczynskihave formed a sort of tag team within the EU, watching each other’s backs and blocking any potential European Commission or European Parliament moves against them that would require unanimity.

Until the pandemic struck, Hungary’s GDP growth had been excellent. As the Financial Timesnoted last month, “Hungary has enjoyed one of the highest rates of economic growth in the EU and unemployment has plummeted (prior to the pandemic).” Growth has been led in recent yearsby strong consumer demand, industrial activity, and construction. 

Before the virus-imposed lockdown, the biggest threat to continued economic growth and economic freedom in Hungary was an excessive level of government spending.  

Now, of course, Hungary and the rest of the world are& facing the imperative of additional spending to help the economy rebound. According to Reuters, Orbán is battling Brussels over the fairness of the EU’s latest proposed bailout offer.

The Economist Intelligence Unit (EIU) reports that the “outbreak of the coronavirus, and the accompanying restrictions on the movement of people and goods, will lead to a substantial reversal of economic activity in 2020” in Hungary.  The forecast for GDP is a contraction of 5.5 percent, with the budget deficit rising to 5.8 percent of GDP, and public debt ballooning to 78.6percent of GDP.

That drop in economic output mirrors the global level of contraction, which the World Bank predicts will be 5.2 percent in 2020. 

As the Hungarian economy slowly recovers, the government should take additional steps now to improve economic freedom.  As the 2020 Index notes, these areas for improvement include strengthening the independence of the judiciary and vigorously attacking public sector corruption and cronyism.

Prioritizing robust improvements to the rule of law at home would be an excellent lead-by-example strategy for Orbán, who is well known for his efforts to reintroduce the Judeo-Christian ethic into Hungary in particular and a secularized Europe in general.

The United States is in a position to help Hungary during this difficult period, through the two countries’ participation in the Three Seas Initiative (3SI).  As Heritage reported recently, the goal of 3SI is to accelerate the development of cross border energy, transport, and digital infrastructure in the region between the Baltic, Black and Adriatic Seas. Austria, Bulgaria, Croatia, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, Slovakia and Slovenia all are involved. The initiative aims to spur economic growth, reinforce economic resiliency and energy security, and deepen regional connectivity, including with Western Europe. 

Orbán has put Hungary on a separate, but largely parallel track within the EU, seeking greater economic growth while insisting on more national independence. That is understandable, too, since (as Heritage’s Mike Gonzalez has noted elsewhere) the Hungarian language is Asiatic in origin, not Indo-European, and its Christian culture is& distinct among the Christianity-rooted cultures of other European countries.

So far, Orbán’s Hungary has not lost any economic freedom, while solidifying a greater say about policies within its own borders.  To gain even greater economic clout, now is the time for Hungary to catch up to the higher levels of economic freedom enjoyed by European countries to its west.

This piece originally appeared in RealClear World