Weak Hungarian economy seriously hit by the crisis

Institute for World Economics of the Hungarian Academy of Sciences
In Hungary, the focus of current public discourses is the country’s critical situation due to economic recession. In fact, Hungary is extremely vulnerable because the economy has already been in bad shape for the past couple of years. Contrary to all other new member states, Hungarian growth, real convergence and gross fixed capital formation has been sluggish since accession; unemployment and inflation as well as interest rates were rising, and public debts have been increasing (diverging from and not converging to the Maastricht limit of 60 percent of GDP). In parallel, a huge public deficit was accumulated in 2006 (above 9 percent) which the government started to cut back via restrictions on the expenditure side but without any major reform on the revenue side. The restrictions and now the effects of the crisis are seriously felt by the majority of the population. Layoffs are reported every day, and the great number of citizens who are indebted in foreign currencies find themselves now in huge trouble, as the exchange rate of the Euro skyrocketed from 230 Hungarian Forint ( in August 2008) to well above 300 in February 2009.
The problem is aggravated by the fact that Hungary has a minority government which already lost a lot of its credibility and legitimacy; moreover, it is unable to find ways out of the crisis. The government took up huge (total of twenty billion Euros) concerted loans from the International Monetary Fund, the World Bank and the European Central Bank which is an additional burden on the country – without any clear strategy how to spend the money (worth one fifth of Hungarian GDP). The law on the budget for 2009 already collapsed in the beginning of January and – although technically it remained in force – since then the key macroeconomic figures necessary for a potential new budget are revised (and deteriorating) nearly every day. The Prime Minister is trying to tackle the situation via a series of consultations with the opposition, the trade unions, the former and present National Bank presidents, etc. Although such consultations strengthen democracy, these moves actually reflect the lack of a clear vision of how to mitigate the painful effects of the crisis and how to find ways leading back to balanced growth, new jobs and better social cohesion.