A Populist's Lament
Viktor Orban has made Hungary a ripe target for doubters.
For most European governments, the stigma attached to being on the Brussels dole may no longer be what it once was, what with the queue now reaching from Athens to Dublin to Lisbon. But for Hungarian Prime Minister Viktor Orban, whose government has now formally requested EU-IMF lending, the embarrassment is likely to be intense.
Mr. Orban's relationship with Brussels and the Fund has been fraught. After his center-right Fidesz party took office last year, he very publicly terminated a 2008 emergency lending arrangement in order to "regain Hungary's lost economic sovereignty." By walking away from the €20 billion in remaining rescue funds, Mr. Orban declared that he could pursue a "patriotic economic policy" free of external meddling. Hungarians cheered.
We don't blame Mr. Orban for being wary of the Fund's notions of economic rectitude. But his "patriotic" alternative has turned out to be an economic goulash, mixing sound ideas with populist bunk.
Budapest took steps to slash red tape and reform hiring and firing restrictions. But it also levied windfall taxes on industries like energy, retail and telecoms, which are dominated in Hungary by foreign corporations. A flat personal income tax of 16% came into effect this year. But an onerous financial-sector tax, which the IMF had recommended modifying as a condition for receiving emergency credit, has lingered. Mr. Orban also nationalized the Hungarian pensions system, which has provided extra revenue in the short term but could prove disastrously costly. Hungary's is among the EU's grayest populations.
Today the Hungarian economy is growing, though not as briskly some of its Central European neighbors. Budapest is carrying debt worth 82% of GDP—not quite in Greece's league, but worrisome all the same. But a crisis-weakened forint is making that debt, which is increasingly denominated in foreign currencies, harder to pay off. And credit agencies' recent downgrades of Hungarian paper cite the "unpredictability of policy" as a main source of concern. With problems in the euro zone intensifying, credit markets are suffering bouts of nerves. Too bad Mr. Orban has made Hungary a ripe target for doubters.