Is there life outside the European Union?

Will Budapest break with Brussels?

Once more Hungary has stolen the limelight. During the start of the financial crisis in 2008, Hungary thrust itself upon the stage as one of the first European Union (EU) member states to crawl to the IMF for help. Just a few weeks ago, comments made by two senior officials of the ruling Young Democrats/Civic Party (FIDESZ) shortly after their landslide election victory – in where the country's economic health was compared to that of Greece - likewise caused a brief sensation and "spooked" the markets; the currency went into quick free fall and has only recently recovered from this shock.

Now, as negotiations broke down between the Hungarian government, the IMF and the EU over the weekend, Budapest has thrust itself again onto the center stage. Following the Hungarian delegation's decision to suddenly walk out of talks on Saturday and return home, the corporate and mass media both within the country and abroad have been bracing their audiences for the expected market backlash. Most observers expect the currency, the Hungarian Forint, to fall sharply as a result. Many expect the bond market to be also hit hard and some don't rule out a sudden rise in interest rates in order to stem the negative tide.

This isn't the first time that Hungary had such problems with the IMF. Indeed, differences between the government headed by Viktor Orbán in the late 1990s and the IMF were such that the government eventually broke off its relationship with the institution, which was only rekindled in 2008 when the country was back on its knees asking for help.

In many respects, what happened over the weekend between the Hungarian government and delegates from the IMF and the EU is not all that unusual. In fact, it's an almost routine occurrence. When similar talks broke down between Hungary and the IMF on several occasions in the 1990s, the news didn't cause much concern because no one knew about it. Then, information on such talks was not forthcoming and both the government and the IMF simply didn't inform the public about what was going on behind closed doors.

Although the precise details of what goes no behind closed doors is still not fully known, pressure on the IMF for more accountability over the past couple of years has now made it easier at least for the public to know when IMF negotiations start and finish – and if they come to an abrupt end. Even so, Hungary's sudden walkout of the talks over the weekend isn't that extraordinary. Talks previously between the IMF and Romania had likewise broken down. These breakdowns are often not that serious; ultimately the parties get back together and hammer out a deal. Thus, most observers believe that Hungary will eventually reach a compromise with the IMF and the EU by October.

Austerity measures or a bank tax

For now, both sides are trying to play down the situation as best as possible. The Economics Minister, György Matolcsy, actually referred to the talks as a success. He noted that the government is in line with the targets that it set for itself for keeping the deficit down. He admitted that differences exist between the government and the IMF but that this was only natural. According to Matolcsy, the talks boiled down to a difference between two options for handling Hungary's deficit: austerity measures, which the IMF recommends, or a bank tax. The government decided to stick with the bank tax.

Naturally, the delegates from the IMF and the EU see the situation a little differently. They also don't regard the sudden break in talks as very serious. However, they claim that the Hungarian government has failed to provide concrete details of the steps they would take in order to fulfill their plans. This is especially so for the next fiscal year as there is no information whatsoever on the government budget for 2011. Most believe that the Hungarian government is simply waiting for the end of municipal elections in October before they will implement the austerity measures that are required.

Often in such circumstances, the truth often lies somewhere in the middle. As can be seen in Romania and elsewhere, governments have had to take drastic measures in order to fulfill the dictates of the IMF. On the other hand, it's unlikely that the IMF and the EU are foremost concerned with the Hungarian government's bank tax. Other countries also have opted to introduce a bank tax, notably among them is the new conservative government in the UK.

What is clear, however, is that the bank tax in and of itself won't be enough to keep the country's deficit down. In fact, this tax appears to be earmarked for fulfilling many of the populist election promises made by the government, such as reopening rural railway lines and investing more into public security. Meanwhile, tax cuts which will lead to a noticeable reduction in government revenue don't seem to be adequately addressed.

Anti-business feeling among many Hungarians, mainly toward the IMF and multinational corporation

While the corporate media have been sounding alarm bells following the failed talks over the weekend, the government can nevertheless count on widespread public support whatever happens. There is a perceptible anti-business feeling among many Hungarians, mainly toward the IMF and multinational corporations. The sudden walkout by the Hungarian delegates on Saturday, therefore, reinforces the image of Orbán and his government of being committed and not allowing themselves to being pushed about by foreign interests.

It also remains to be seen how deep and lasting the expected market backlash will be. So far the Hungarian government has been able to avoid an extended negative impact. This doesn't mean there isn't cause for concern. The main worry is with the currency. A large number of Hungarians are burdened with foreign currency loans, thus a sharp fall in the value of the Hungarian Forint poses a real threat to many.

Yet even here the Hungarian government has some breathing space. In response to the sudden drop in the currency in June, many leading banks in Hungary voluntarily pledged fix the rate at which their customer's repayments are calculated. Hence, it remains to be seen at how much the currency will actually drop and for how long it will remain weak as the balance sheet of some major western banks could be seriously impacted as a result.

There is no doubt that all parties concerned – the Hungarian government, the IMF, and the EU – will do their best in order to minimize the damage as much as possible. This is because everyone is in one way or another in a crisis and no one can be said to be negotiating from a position of strength. Indeed, the last thing the Euro needs is more controversy surrounding a member state of the EU, even if this member states isn't a part of the Euro-zone.

Without question Orbán and his government are going to use the present situation as a means with which to boost their populist credentials. In many ways, history is actually repeating itself. The common image that the FIDESZ has of itself is that when they were in power from 1998 until 2002 their policies had led to growth and economic prosperity, only to be ruined the following eight years by a Socialist-Liberal government.

Yet this period of "prosperity" is illusionary: this economic growth was foremost due to a relaxing of credit. In retrospect, one can look back at this period as to when the seeds were sown for the present bitter harvest. With easy access to capital, people foolishly over-extended themselves. The rise in consumer spending which drove the economic boom of the late 1990s and early 2000 continued as credit became cheaper through the machinations of foreign currency based loans. It's this recklessness which has now burdened the economy.

The problem with Orbán and his government – both then and now – is that it's not readily apparent as to exactly what his objectives are. As a result, his policies often have an appearance of success when in fact they are not. It's a cunning strategy that is used as a type of "opium for the masses" so that his right wing supporters end up supporting positions that they would otherwise not. Hence, while the present situation actually appears benign (at least for the present) there is a certain amount of unease as to where this will all lead to as it's still not clear exactly what the government plans are for the future.

A prime example of this was during the negotiations of the Nice Treaty which paved the way for EU membership. At the time Orbán noted that "there is life outside the European Union” to express his dissatisfaction with the way in which the negotiations were proceeding. Nevertheless, it was he who subsequently negotiated and signed the seven year moratorium on the foreign ownership of land. It's this moratorium, due to expire next year, which had since been criticized for being too lenient and the one that the present Orbán government is now attempting to deal with.

There is actually no need for Hungary to keep to the deficit targets

The same appears to be now happening in the present. Despite the rhetoric that the government will not be held hostage to economic dictates of Brussels or the IMF, attempts are being made to straitjacket the Hungarian economy in accordance with the EU Stability and Growth Pact even though the country is not a part of the Euro-zone and that of all Euro-zone members, with the exception of one (Luxembourg), none have been able to fulfill these conditions anyway.

Given the supposedly nationalist orientation of the government and the fact that the sovereign debt crisis in Europe has raised serious questions as to whether it's a good idea to even adopt the Euro in the first place, there is actually no need for Hungary to keep to the deficit targets that have been imposed if these same targets, in turn, cause more harm than good. Ironically, these policies are the opposite of the stimulation policies that the IMF recommends for rich countries and that the larger economies of Europe (Germany, France) openly flout.

The 29 point action plan released by the government earlier last month coupled with the promise to make Hungary the most dynamic economy within the region in the next few years, however, appears to point in another direction. There is no doubt that until Orbán and the FIDESZ can fully consolidate their grip on power following the municipal elections in October not much will happen in this respect. Yet the subtlety with which right-wing support is maintained likewise means that after the municipal election in the autumn what the government actually does and how it proceeds won't be so obvious. Apparently, this is what life is like outside the European Union.