WIIW The Vienna Institute for International Economic Studies - Wiener Institut für Internationale Wirtschaftsvergleiche

By Sandor Richter

• The peculiarities of the Hungarian election system mean that a victory for the opposition at the general election is possible, provided an agreement can be reached between all the opposition parties.
• However, if a united opposition only won a simple majority, major uncertainty would ensue. Viktor Orbán could use his allies in the legal system to block a non-Fidesz government. The alliance against Mr Orbán is also extremely broad, raising questions about its policy coherence.
• Macroeconomic issues have barely been addressed in the election campaign. The government has focused instead on combating imaginary enemies, while the opposition has highlighted corruption.
• The Hungarian economy is currently growing strongly, thanks to an investment boom helped by EU transfers. However mass emigration, and the neglected health care and education sectors, point to problematic underlying issues.
• With EU transfers set to be lower from 2019, economic growth will lose momentum. A revival of EU funds inflows with the start of the new seven-year financing period in 2021 is far from assured, posing a major challenge for any government in office then.

Hungarians go to the polls on April 8^th for an election that could have far-reaching implications for the country’s political and economic trajectory in the coming four years. The 199 members of the National Assembly will be elected by two methods: 106 will be elected in single-member constituencies by first-past-the-post voting (winner takes all). The remaining 93 will be elected from a single nationwide constituency by proportional representation. While Fidesz is by far the strongest party in any poll, the possibility of a high turnout and an agreement between all opposition parties on a single candidate to run against the person supported by Fidesz in each single-member constituency, has the chance to inflict a defeat on the government.

Hungary’s opposition appears less disunited than at any time in the recent past. However, the coalition ranged against Fidesz is very broad and diverse. The provisional alliance of the opposition parties is more than unusual: it ranges from a couple of small left wing parties to extreme-right wing Jobbik. If this conglomerate got a two-thirds majority (a fairly unlikely scenario) the Orbán regime could be ousted with a few legal steps. An opposition victory with simple majority (which is more likely) would bring about a high degree of uncertainty. Mr Orbán in opposition would be able to break the back of any incoming non-Fidesz government with the help of his (in the medium run) immovable cronies in commanding positions in the Hungarian legal system. To mention only the most prominent ones: the members of the Constitutional Court, the General Attorney, the head of the State Audit Office, and, last but not least, the President of the Republic.

A Fidesz election campaign based on hate and fear…

Macroeconomic topics have been missing from the 2018 election campaign. The ruling Fidesz party’s campaign is organised around combating imaginary enemies, including George Soros, ‘Brussels’, and illegal migrants/refugees. It involves agitation, relying on fear-based hostility toward those ‘enemies’, as well as the opposition parties and NGOs critical of the government. The opposition parties, both left and right, are preoccupied with addressing the government’s increasingly autocratic tendencies, the declining state of health care and education, nonsensical ‘status-enhancing’ projects by the government and, above all, signs of increasing corruption. In recent weeks, the small part of media not yet under direct or indirect government control has released nearly daily information on cases of alleged corruption involving high ranking Fidesz politicians, or members of Mr Orban’s family, or the narrow circle of entrepreneurs known as Mr Orbán’s friends. In most of these alleged cases, cohesion policy resources from the EU and related public procurements are involved. The pace of enrichment of Lőrinc Mészáros, a school friend of Orbán’s and only a few years ago a modest local plumber in the village where the PM was born, is a particularly notable example.

Economy currently in a positive phase

As is the case across much of the rest of Central, East and Southeast Europe (CESEE), the Hungarian economy is growing strongly, which could provide a boost for the government on election day. Real economic growth in 2017 reached 4%, Hungary’s best result for many years. Investment increased by about 17% last year. In 2018, the dynamic increase in wages will continue for a third consecutive year: the compound growth rate of net real wages in 2016-2018 will be around 28%. This expansion was supported by compulsory minimum wage rises in the previous year and this year. The unemployment rate is at a historically low level. Private credit growth and dwelling construction has taken off after a long period of decline.

Next government: Big challenges and gloomy economic outlook

Behind the positive headline numbers, however, the situation in the economy is less good. The decline in the unemployment rate is partly the result of mass emigration of much of the most able part of the work force to Western Europe. Public work schemes also play an important role. Labour shortages are a serious concern and have become a major obstacle to the expansion of firms’ activity. Due to the hostility of the government to immigration, this does not represent a feasible way to ease labour shortages. The education and the healthcare systems are underfinanced and underperforming, while football stadia are built all over the country financed partly from public sources and partly by ‘voluntary’ business sector contributions. The poverty of about one third of the population is a challenge not appreciated by the Fidesz government.

We do not expect the currently strong rates of growth to last for very long. In 2019 or 2020 at the latest, EU cohesion policy transfers will dip, and as a consequence a significant share of aggregate demand will disappear. A similarly low level of EU funds inflows occurred in 2016, leading to a deceleration of economic growth and a steep fall in investment. A considerable difference between the two episodes is that the 2016 event lasted only about a year, and the subsequent continued inflow of EU transfers had already been secured. This time, however, the negative impact will be greater, for two reasons. First, the government has sought to rapidly drawdown EU co-financed resources in the first half of the current seven-year planning period, in order to boost short-term economic growth momentum. Second, unlike in 2016, a revival of EU resources coinciding with the start of the new seven-year financing period of the EU in 2021 is far from assured. Less ample resources after Brexit, possible new spending priorities, dissatisfaction with Hungary’s compliance with EU policies regarding refugees, and last but not least, the issue of corruption may substantially reduce the available resources from the EU budget. That will become a huge challenge to the government, with or without Viktor Orbán as prime minister.

photo credit: Presidential Press and Information Office, Hungary (CC BY-SA 4.0)
http://www.kormany.hu/en/the-prime-minister/photo-galleries/viktor-orban-in-hodmezovasarhely