Vienna Rising inflation rates, and of all things before the April 3 elections: the past few weeks could hardly have gone worse for Hungary’s Prime Minister Viktor Orbán. In February, inflation accelerated to 8.3 percent. As everywhere else, those consumers who only earn a low income suffer most from this. They are hit particularly hard by rising food and energy costs. And precisely these sections of the population belong to Orbán’s electoral base.
The Prime Minister, who has been in power since 2010, has therefore reacted for weeks in the same way as many authoritarian politicians do when it comes to their political survival: They intervene rigidly in processes, including economic ones. But whether Orbán will be successful is uncertain. His approach is associated with many risks.
Orbán is currently trying to counter rampant inflation with price caps, for example on a few staple foods or on petrol. By regulation, a liter now costs 480 forints (1.3 euros). However, this has consequences. Small gas stations in particular got into trouble because of the price cap. Your selling price is fixed, but in wholesale you have to pay the higher market price. The petrol station owners came under additional pressure because the low price for Slovaks in the border region created an incentive to fill up in the neighboring country.
Hungary’s partially state-owned mineral oil company MOL has already had to react: filling stations can now also purchase the petrol for 480 forints per liter. In accordance with the laws of the market economy, upper price limits are always “hanging” in the value chain.
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Orbán, however, has his back against the wall. His re-election is by no means certain. In polls, the governing party Fidesz has a small lead over the opposition alliance, but this is not meaningful. “The balance is shifting almost daily,” says Julia Kiraly, financial specialist and former deputy governor of Hungary’s central bank.
Opposition is very heterogeneous
Orbán’s trump card is that, despite the economic situation, the opposition appears rather weak. “Do the majority of Hungarians trust the opposition to govern?” asks Kiraly. She is addressing the heterogeneous spectrum of the united opposition. It consists of six parties from left to right, which makes finding a consensus challenging.
>> Read here: How Viktor Orbán fuels inflation with election gifts
The opposition is at least trying to appear united, for example on the national holiday of March 15. The speeches by the opposition representatives were well coordinated, says Kiraly, who supports the opposition.
Economically, Hungary is not only struggling with inflation. On the contrary, the problems are piling up shortly before the elections. The forint fell to a record low against the euro in early March, government bond yield spreads soared and the trade balance has been negative for several months.
This is also related to the automotive sector. In Hungary it has a lot of weight, mainly thanks to the German producers Mercedes, Audi and BMW. But the automotive industry is currently struggling with problems; the demand for new vehicles is brisk, but certain parts, such as chips, are missing in assembly.
>> Read here: Cuts in EU funds for Poland and Hungary could be a long time coming
This also affects Hungary’s economy. As long as the difficulties in the auto industry persist, Hungary’s exports will not grow dynamically, writes economist Janos Nagy from Bank Erste Group.
When Orbán came to power for the second time in 2010, he certainly made a name for himself in the years that followed. The prime minister managed to restructure the state budget, which had gotten into trouble in the wake of the 2008 economic crisis.
Orbán’s economic record is weak
However, the upswing in the world economy has also helped him in this regard. Above all, however, the country benefited greatly from the transfer payments from the EU. Their share of the gross domestic product (GDP) is around four percent. The money has enabled Hungary, for example, to expand its infrastructure. This helps in international location competition, in which the country has to assert itself against competitors such as Romania, Bulgaria or Slovakia.
Despite the transfer payments, Hungary is in some respects no better off than it was in 2010. “Orbán’s economic record is not positive,” says Sandor Richter from the Vienna Institute for International Economic Studies (WIIW). One indication of this is the national debt. It accounts for around 80 percent of GDP, a similar level to 2010, when Orbán’s current government began and the country was in deep trouble.
Fiscally, the Prime Minister recently opened the floodgates. In order to get the upper hand in the election campaign at the last moment, Orbán distributed election gifts to young and old. Beginning this year, people under the age of 25 will not pay income tax, families will receive a tax refund and retirees will receive a 13th month’s pension. There were wage increases for police officers (ten percent) and health workers (21 percent), among others.
Orbán’s critics also recognize that certain grants are justified. The economist Kiraly, for example, thinks that the wage increases in the hospital system are appropriate and that some pensions are in fact barely enough to live on. However, Orbán has distributed the financial contributions with the watering can. This puts a heavy strain on the state budget; moreover, the additional money hardly alleviates the plight of those Hungarians who earn little. Inflation rates are simply too high for that.
Judges from the WIIW also accuse Orbán of having centralized economic decisions. “That doesn’t correspond to a modern economy,” he says. It is fitting that Orbán has gathered a circle of 10 to 15 business people around him. Istvan Janos Toth of the Budapest Corruption Research Center describes this system as favoritism. A striking number of public contracts went to people close to Orbán. They now dominate large parts of domestic industry.
The war in Ukraine is causing Orbán additional difficulties
However, the governing party Fidesz does not see anything disreputable in this, but rather a kind of development policy concept. According to pro-government intellectual Andras Lanczi, the creation of a “patriotic cohort of entrepreneurs” strengthens the base of Hungary’s economy.
With the war in Ukraine, Orbán’s position has become even more difficult. Although Russia is of limited importance for Hungary when it comes to trade, there are close ties in the energy sector.
The country gets around 90 percent of its natural gas from Russia, and eight years ago Orbán and Vladimir Putin signed a contract that provides for the modernization and expansion of the Paks nuclear power plant.
Orbán’s proximity to Putin fills many Hungarians with resentment. “The prime minister worked on the disintegration of Europe, and that was in Putin’s interest,” says Gabor Polyak, professor of communications at the University of Pecs.
Now Orbán is maneuvering. Although he supports the EU’s sanctions against Russia, he does not want arms to be delivered to Ukraine via Hungarian territory. Orbán doesn’t want to hear anything about a boycott of Russian gas. Finance Minister Mihaly Varga recently said that those who extend the sanctions to the energy sector want the Hungarian people to pay the price for the war.
The EU is once again being used as a scapegoat for many things in Hungary. Varga sees the reason why the forint is so weak in the sanctions against Russia. As an economist, he is well aware of the true context: In times of crisis, capital flows into dollar investments, and the currencies of small, economically unstable countries suffer.
Hungary’s central bank is trying to combat the currency weakness and inflation with a tight monetary policy. At the same time, Orbán introduced interest rate caps on mortgage loans. That, too, is one of the paradoxes of his economic policy.
More: EU summit struggles for a clear stance on Russia – but promises more weapons for Ukraine