Hungarys Drift Away from Liberal Democracy A Case for EU/IMF Action

By Matthew Stenberg Research Intern

March 2012

Introduction While academics, politicians, and a great number of Hungarian citizens have voiced their concern over Hungarys turn away from liberal democracy under Prime Minister Viktor Orbn, international organizations have not developed a cohesive position on the issue. The European Union has been against several of the reforms pushed through by Fidesz, the ruling party, after it obtained a majority of parliamentary seats in the 2010 elections, but it has not developed mechanisms for encouraging Hungary to return to more democratic practices. Hungary has also been engaged in contentious two-year negotiations with the IMF over bailout terms to stimulate the Hungarian economy. Hungary has responded to European overtures by challenging interference in its domestic affairs. Contention with the EU has covered a wide range of issues since the 2010 elections, not limited to changes to fundamental legislation in the new Hungarian constitution, new laws in finance and banking, and bills curbing freedom of expression and the press. These changes are representative of many of the policies pursued by Fidesz. The EU must safeguard the rights of its citizens across the continent, and it must develop a coherent strategy for negotiations with the Orbn government to ensure those rights in Hungary. 2010 Elections Prime Minister Orbn and Fidesz came to power democratically in the 2010 parliamentary elections; however, there is little indication that voters actively sought the degree of reform that Orbn subsequently put into practice. The Socialist MSZP which won the 2002 and 2006 elections was revealed to have lied about the national economic situation to ensure electoral success.1 As a result, the MSZP and its coalition partner, the Free Democrats, were no longer viable nationwide candidates in the 2010 elections, with the former reduced to being a small minority while the latter failed to get any seats in the National Assembly.2 Votes for Fidesz were not grounded in policy, but instead served as a protest vote against the MSZP.3 Indeed, Fidesz understood the nature of popular discontent against its opposition and avoided making any concrete policy proposals in its campaign.4 This tactic was successful, with Fidesz gaining 68.14% of the seats in the National Assembly, giving the party a big enough majority to push through reforms

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Inter-Parliamentary Union, Hungary: Last Elections, PARLINE, http://www.ipu.org/parline/reports/2141_E.htm 2 Erin K. Jenne and Cas Mudde, Can Outsiders Help? Journal of Democracy 23:3 (July 2012) 152. 3 Agnes Batory, Election Briefing No. 51: Europe and the Hungarian Parliamentary Elections of April 2010, European Parties Elections and Referendums Network. 4 Ibid. 1

without opposition. Hungarian election laws resulted in a Fidesz supermajority despite the party only receiving 53% of the popular vote.5 Orbn was not the only beneficiary of disdain for the previous ruling parties. Jobbik, a far-right nationalist party, was also able to take advantage of the electoral opportunity to get 47 seats in the National Assembly the third most of any party. Of course, in practice Fidesz needs no coalition partners to push any measures through parliament; however, the rise of Jobbik indicates a general dissatisfaction with the open, liberal values that the European Union purports to represent. It also represents a change at odds with the previously accepted boundaries of Hungarian democracy, as the main parties had previously banded together to create guidelines that might exclude extremist parties from parliament.6 That said, the success of a far-right movement in Hungary is not without historical precedent and takes advantage of long-held popular grievances stemming from the end of World War I. The Treaty of Trianon ended the war between the Allies and Hungary; much like the better-known Treaty of Versailles did to Germany, Trianon exerted strong punitive measures against the defeated. The continued disillusionment with the results of that treaty most notably the reduction of Hungary to a third of its original size at the hands of the (predominately Western European) Allies provides the cultural basis for Jobbiks support and underscores the historical underpinnings of Hungarian skepticism regarding the motivations of older EU member states.7 Hungary and the European Union Since Prime Minister Orbn took office, the European Union has been at odds with several policies enacted by Fidesz. These disputes have included laws ranging from those governing individual freedoms (the media law) to economic regulation (banking laws) to fundamental protections (changes to the constitution). These disputes are not the only battles that Orbn and the EU have stoked, but they are representative of the range of issues on which Fidesz has been shifting policy since taking office. Constitutional Changes A constitutional power grab by democratically elected representatives would be troubling no matter where it happened, but the maneuvering by Fidesz was especially concerning because it happened in Hungary. Since 1989, Hungarian politics had followed a consensual ethos, with the main parties refraining from manipulating the structural

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Kim Lane Scheppele, Hungarys Constitutional Revolution, The New York Times, December 19, 2011, http://krugman.blogs.nytimes.com/2011/12/19/hungarysconstitutional-revolution/ 6 Anna Seleny Communisms Many Legacies in East-Central Europe, Journal of Democracy 18:3 (July 2007), 159. 7 Richard Wolin, Ghosts of a Tortured Past, Dissent 58:1 (Winter 2011), 58. 2

boundaries of Hungarian politics and competing on a level playing field.8 This contrasts with other new Central European democracies, where the partisan capture of state institutions through rule manipulation had been more common.9 As such, the maneuvering following the 2010 election was not merely a regression to weaker tendencies that emerged following the fall of the communist regime, but a new phenomenon that represented a weakening of liberal democracy after twenty years of relative stability. Fidesz first took advantage of a loophole provided by differing requirements for supermajorities to amend or initiate a new constitution. Previously, the 1989 constitution required a four-fifths majority to initiate a new constitution, but only a two-thirds majority to amend. Fidesz voted as a bloc to remove this amendment, allowing for the creation of an entirely new constitution with only a two-thirds majority.10 Fidesz also amended the constitution to remove constraints on the appointment of judges that required a majority of parties to reach consensus on nominees.11 Now, with a two-thirds majority, Fidesz also had the power to elect the Hungarian President, Supreme Court chief justices, Constitutional Court jurists, and ombudsmen, giving them the ability to pack institutions with loyalists to get legal cover for any potentially troublesome policies that they might choose to enact.12 They also increased the size of the Constitutional Court while decreasing the scope of its jurisdiction, minimizing potential interference in the implementation of any legislation that Fidesz may pass.13 Finally, they altered the traditional rules governing the appointment of seats to the Election Commission, which approves any referenda submitted to voters. These changes allowed Fidesz to propose a new constitution to replace the existing document entirely.14 The new constitution incorporated those amendments that Fidesz had pushed through on the 1989 constitution while also making further changes in the new document. The new constitution was introduced as an individual member bill by a Fidesz MEP; this tactic minimized public debate and consultations with other parties, making it harder for any coherent opposition to arise.15 The new document further weakened checks on power, building on those changes made to the Constitutional Court in amendments, including: allowing individuals to only challenge laws directly applicable to them; more politicized selection of judges, increasingly long terms for Fidesz appointees to independent agencies in charge of investigating, budgeting, and auditing; the expansion of laws8 9

Seleny 158-160. Ibid 160. 10 Laura Ymayo Tartakoff, Religion, Nationalism, History, and Politics in Hungarys New Constitution, Society 49:4 (July 2012), 363. 11 Mikls Bnkuti, Gbor Halmai, and Kim Lane Scheppele, Disabling the Constitution, Journal of Democracy 23:3 (June 2012), 139. 12 Kriszta Kovcs and Gabor Attila Tth, Hungarys Constitutional Transformation, European Constitutional Law Review 7 (2011), 186. 13 Bnkuti, Halmai, and Scheppele. 14 Ibid, 141. 15 Ibid, 141-142. 3

requiring two-thirds majorities to pass or alter; and significant electoral gerrymandering. Together, these changes make it increasingly difficult for Fidesz to fail to retain power in subsequent parliamentary elections.16 As expected, the new constitution was approved by Fidesz MPs and went into effect on January 1, 2012. The European Union did not offer serious opposition to the new constitution during the drafting stages, though this could be in part due to allegations of mistranslation that may have obscured the meaning of potentially controversial sections.17 The Alliance of Liberals and Democrats for Europe, one of the major parties in the European Parliament, issued a joint statement with several human rights NGOs finding many major concerns with the document, but no agreement in the Parliament as a whole was found.18 Scholars like Jacques Rupnik suggest that the EU may be hesitant to challenge Orbn due to his prominence in the European Peoples Party, the center-right party in the European Parliament.19 This has led to further speculation that Martin Schulz, leader of the European Socialists and Democrats, did not take a stance on the Hungarian constitution, as he needed the support of the EPP to become President of the European Parliament.20 After implementation, EU institutions formulated a stronger response, and the Hungarian constitution received significant media attention. The Commission began infringement procedures on several constitutional changes, including alterations to the Central Bank to be discussed subsequently. Though characterizing the changes demanded by the Commission as mistakes, Fidesz generally conceded on issues that were seen to be in violation of EU laws and regulations.21 Central Bank Independence Viktor Orbn proposed changes to the Hungarian Central Bank in December 2011 to provide the structural basis for those political reforms included in the new Hungarian constitution. The changes included merging financial regulatory structures into the bank to effectively demote the central banker and allowing political appointees more say in monetary policy.22 The law, passed at the end of the month, also expanded the number of

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Ibid. Hungarys new constitution: Family friendly, hostile to gays, EurActiv, March 24, 2011, http://www.euractiv.com/future-eu/hungarys-new-constitution-family-news503455 18 Hungarian constitution: Trojan horse for authoritarianism, EurActiv, April 18, 2011, http://www.euractiv.com/central-europe/hungary-constitution-trojan-hors-news-504128 19 Jacques Rupnik, How Things Went Wrong, Journal of Democracy 23:3 (July 2012), 136. 20 Hungarian constitution: Trojan horse 21 Hungary ready to accept most EU mistakes, EurActiv, February 10, 2012, http://www.euractiv.com/future-eu/hungary-ready-accept-eu-mistakes-news-510699 22 Nicholas Kulish, Hungarian Bill Could Take Power From Central Bank, The New York Times, December 15, 2011, 4

political appointees in the central bank and removed the ability of the chief of the central bank to name his own deputies, further politicizing the structure.23 The European Union quickly came out against the Hungarian legislation and aspects of the constitution pertaining to the Central Bank. The Commission began formal accelerated infringement procedures in January 2012 while focusing on other constitutional changes.24 The Hungarian government dismissed the concerns brought by the EU regarding the Central Bank.25 The Commission responded by entering the second phase of infringement procedure by issuing a reasoned opinion against the Hungarian government.26 This second phase of the infringement procedure was significant enough that Orbn passed new legislation ensuring greater independence for the Hungarian Central Bank; the EU dropped its infringement case following its passage.27 Conflict over the Hungarian Central Bank emerged again later in 2012. The National Assembly passed a new financial transaction tax on all banks in Hungary, including the central bank, in an effort to reduce its deficit to the 3% threshold required by EU regulations. This would allow taxation on central bank transactions, creating a mechanism by which the central bank could be seen to be transferring money to public finances by pursuing a great number of transactions, a possibility that the European Central Bank considered to be undermining the independence of the Hungarian Central Bank.28 In the end, Budapest again conceded to EU pressure on taxing the central bank, exempting the national bank from a financial transaction tax that would still affect other institutions in the country. Economy Minister Gyrgy Matolcsy specifically noted that the decision by the European Commission to flag the law for possible infringements on

http://www.nytimes.com/2011/12/16/world/europe/hungary-moves-against-its-centralbank.html 23 Bloomberg News, Hungary Passes Central Bank Rules Despite Risk to Bailout, The New York Times, December 30, 2011, http://www.nytimes.com/2011/12/31/business/global/hungary-passes-central-bank-rulesdespite-risk-to-bailout.html 24 European Commission launches accelerated infringement proceedings against Hungary, European Commission, January 17, 2012, http://ec.europa.eu/economy_finance/articles/governance/2012-01-18-hungary_en.htm 25 Hungary ready to accept most EU mistakes 26 Commission tightens the noose for Orbn, EurActiv, March 8, 2012, http://www.euractiv.com/future-eu/commission-tightens-noose-orban-news-511376 27 EU to drop Hungary bank case, uphold action over judiciary, EurActiv, April 25, 2012, http://www.euractiv.com/euro-finance/eu-drop-hungary-case-uphold-acti-news512350 28 Gergely Szakacs and Krisztina Than, ECB slams Hungarys financial tax, IMF talks seen tricky, Reuters, July 24, 2012, http://www.reuters.com/article/2012/07/24/ushungary-rates-idUSBRE86N1DT20120724 5

the fundamental Treaty of the European Union spurred the removal of provisions on taxing the Hungarian Central Bank.29 At present, the EU has been laying the groundwork for another debate on Hungarian central bank independence. Andras Simor, current head of the Hungarian central bank, ends his term in office in March 2013. The Economy Minister has suggested that Orbn will seek to name someone to the post that will pursue economic stimulus, and sources have suggested to the media that the new central banker is expected to be a Fidesz loyalist.30 In Budapest in December 2012, ECB head Mario Draghi made public statements to note that a lack of independence would remove credibility from the Hungarian central bank, attempting to influence who Fidesz might name to the post.31 Media Law The first changes to Hungarian media laws stemmed from constitutional changes in June 2010.32 In December, Orbn escalated the situation further by passing legislation that allowed government control over public news and permitted fines for private broadcasters.33 With the latter laws, European leaders began to speak out against the passage of the legislation, with German Chancellor Angela Merkel suggesting that the law tarnished the image of the European Union and Luxembourgish Foreign Minister Jean Asselborn arguing that Hungary might not be worthy of leading the EU.34 The outcry against the media law was not limited to public statements from national leaders. Neelie Kroes, the Dutch EU Commissioner for the Digital Agenda, sent Hungary a letter outlining European concerns in January 2011, less than a month after the laws went into effect; the letter threatened the beginning of EU legal procedures if no Hungarian responses were given.35 Hungary began to back away from the laws,29

Daniel Hinge, Hungarian government abandons central bank transaction tax, Central Banking, October 5, 2012, http://www.centralbanking.com/centralbanking/news/2215133/hungarian-government-abandons-central-bank-transaction-tax 30 Krisztina Than and Sandor Peto, Orban to use Hungary central bank in battle for growth, Reuters, January 10, 2013, http://uk.reuters.com/article/2013/01/10/uk-hungarycbank-insight-idUKBRE9090TF20130110 31 Krisztina Than, Hungary government, central bank in alliance from 2013, Reuters, December 15, 2012, http://news.yahoo.com/hungary-government-central-bank-alliance2013-224104575.html 32 Key Resources: New Media Laws in Hungary, Central European University: Center for Media and Communication Studies, 33 Reuters, Hungary passes law boosting government control of media, Reuters, December 21, 2010, http://www.reuters.com/article/2010/12/21/us-hungary-mediaidUSTRE6BK6KF20101221 34 A.L.B., All eyes on Orbn, The Economist, December 23, 2010, http://www.economist.com/blogs/easternapproaches/2010/12/hungarys_media_law 35 Stephanie Bodoni, EU Has Serious Doubts About Hungarian Media Law, Commissioner Kroes Says, Bloomberg, January 24, 2011, 6

tentatively agreeing to changes if they were found to be out of compliance with European law.36 After relatively quick negotiations, Orbn backed away in February and agreed to changes proposed by the European Commission, amending the laws to put them in compliance with EU standards on freedom of expression and broadcasting regulations.37 However, amending the law did not end the issue. On March 10, the European Parliament passed a resolution condemning the Hungarian media law. The resolution also pushed to restore media independence, have a more diverse dialogue about replacing the law, and urging the Commission to take a more proactive stance in pushing for further measures to protect Hungarian press freedom.38 In spite of essentially being given clearance by the European Commission after the laws amendments were passed, the Hungarian Constitutional Court ruled significant aspects of the media laws to be unconstitutional in December 2011. The Court found that the laws infringed upon the freedoms of press and expression and annulled them beginning on May 31, 2012.39 Upon the courts decision to overturn most aspects of the law, controversy over Hungarian media freedom has returned to the limelight. In 2012, Neelie Kroes became more vocal in her criticism of Budapest. In February 2012, Kroes spoke out against the failure of the Orbn government to address the legal issues found by the Hungarian Constitutional Court.40 These positions contrast with her stance in early 2011, when she suggested that the February reforms pushed by the European Commission brought the law in compliance with EU regulations.41 The Council of Europe joined Kroes in issuing a report in March 2012 on the media law as well as other recent Hungarian constitutional changes and legislation that it found problematic.42 The issue remains ongoing, with Kroes continuing to speak out against Hungarian inaction in June 2012, when she stated http://www.bloomberg.com/news/2011-01-24/eu-has-serious-doubts-about-hungarianmedia-law-kroes-says.html 36 Ibid. 37 Hungary agrees to amend media law EU Commission, Reuters, February 16, 2011, http://www.reuters.com/article/2011/02/16/eu-hungary-mediaidUSBRU01131320110216 38 Wendy Zeldin, European Parliament Resolution on Hungarys Media Law, U.S. Law Library of Congress, March 16, 2011, http://www.loc.gov/lawweb/servlet/lloc_news?disp3_l205402575_text 39 Ruling No. 165/2011. (XII.20) AB of the Constitutional Court Summary, Mrtk Mdiaelemz Mhely, http://mertek.eu/en/article/ruling-no-1652011-xii-20-ab-of-theconstitutional-court-summary 40 Constant Brand, Kroes has grave concerns about Hungarian media laws, European Voice, February 9, 2012, http://www.europeanvoice.com/article/2012/february/kroes-hasgrave-concerns-about-hungarian-media-laws/73557.aspx 41 Hungary agrees to amend 42 Council of Europe adds to Hungarys predicament, EurActiv, March 20, 2012, http://www.euractiv.com/future-eu/council-europe-adds-hungarys-pre-news-511601 7

in an interview that Hungary had only addressed a sixth the Councils recommendations for changes to the media law.43 Hungary and the IMF Hungary has been seeking an IMF bailout to stabilize the Forint for several years; however, it has been unwilling to make concessions that the IMF has pushed for in negotiations with Budapest. Much contention in negotiations has been focused on new taxes implemented to stabilize the economy, most notably other banking taxes implemented alongside the previously discussed tax on the central bank. Hungary was hard hit by the Eurocrisis, with the highest debt to GDP ratio of developing member states at 80%.44 Hungarian economic problems, however, began before the European contagion, resulting in the MSZP cover-up in the 2006 elections. Those initial difficulties pushed Hungary into dire straits before most other EU members, becoming the first EU member to receive bailout money. The Hungarian bailout in November 2008 amounted to 20 billion from the EU, the World Bank, and the IMF.45 Hungarys economy is especially vulnerable as much household debt is held in currencies besides the Forint, limiting the ability of monetary policy to impact consumer behavior.46 Hungarys currency has struggled over the past several years, fluctuating widely against the euro, and the Forint was the worlds weakest currency over the last six months of 2011.47 Hungary attempted to reduce its deficit by imposing a 0.5% tax on bank assets in July 2010, hoping to raise more than $800 million in revenue.48 The IMF suspended its plans for a $25 billion bailout five days prior after plans became public in June.49 Over the next

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Andras Gergely, Hungarys Media Law Changes Disappoint, EUs Kroes Tells Figyelo, Bloomberg, June 7, 2012, http://www.bloomberg.com/news/2012-0607/hungary-s-media-law-changes-disappoint-eu-s-kroes-tells-figyelo.html 44 Alen Mattich, Is Hungary Too Big to Fail? Wall Street Journal, January 13, 2012, http://blogs.wsj.com/eurocrisis/2012/01/13/is-hungary-too-big-to-fail/ 45 Christopher Swann and Zoltan Simon, IMF Board Approves $15.7 Billion Loan for Hungary, Bloomberg, November 7, 2008, http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aCX07ao0nxNA&refer=e urope 46 Margit Feher, Hungarys Government, Central Bank Spar on Rates, Wall Street Journal, November 19, 2012, http://online.wsj.com/article/SB10001424127887323622904578129151731580328.html 47 Orbn begs for EU, IMF help, EurActiv, March 16, 2012, http://www.euractiv.com/euro-finance/orban-begs-eu-imf-help-news-511535 48 Edith Balazs, Hungarian Lawmakers Approve Brutal Bank Tax Defying IMF, EU Criticism, Bloomberg, July 22, 2010, http://www.bloomberg.com/news/2010-0722/hungarian-lawmakers-to-approve-brutal-bank-tax-in-defiance-of-imf-eu.html 49 Ibid. 8

two years, negotiations would stop and start numerous times as Orbn attempted to balance his domestic political posturing with the needs of the Hungarian economy. By November 2011, Hungary again sought funds worth 12 billion from the IMF to act as an emergency credit line. However, at the same time, both Prime Minister Orbn and Economy Minister Matolcsy publicly emphasized that they would not allow international interference in Hungarian domestic affairs in statements about the request.50 Negotiations broke down over the December passage of the aforementioned law allowing for more political influence over the Hungarian Central Bank.51 Three months later, in March 2012 after the EU denied Hungary regional funding due to Hungarian inaction on budget deficits Orbn sought to reopen negotiations with the IMF to receive an influx of funds.52 Negotiations finally began in July, but by September no agreement was reached and Orbn publically attacked the IMF for imposing conditions on its aid.53 The backand-forth between Hungary and the IMF can be distilled into two hardened positions: IMF aid conditionality and Hungarian protection of domestic affairs. Ultimately, the lack of flexibility shown thus far on these positions have blocked any substantial agreement for further IMF aid. The IMF also has spoken out against Orbns use of what they see as short-term measures instead of focusing on longer-term reforms to the Hungarian economy,54 suggesting that Hungarian economic policies might provide only temporary relief while adding to the national debt. To that end, the IMF has pushed for budget balancing measures before any deal to bailout the Hungarian economy. These have included cuts to pensions and family benefits and increases to personal income taxes.55 The IMF has also demanded an end to the financial transactions tax implemented in July 2012.56 Meanwhile, Prime Minister Orbn has emphasized the unreasonableness of IMF conditionality in public statements. He has called IMF requirements not in Hungarys interests and a list of horrors while refusing to withdrawrepeal, or amend anything.57 Such over-the-top rhetoric is not limited to the IMF either, as Orbn has also50

Hungary asks EU, IMF for safety-net funding, EurActiv, November 23, 2011, http://www.euractiv.com/euro-finance/hungary-asks-eu-imf-safety-net-f-news-509111 51 Bloomberg News, Hungary Passes Central Bank Rules 52 Orbn begs 53 Orbn slams IMF, unfriends it on Facebook, EurActiv, September 7, 2012, http://www.euractiv.com/euro-finance/orban-slams-imf-unfriends-facebo-news-514675 54 Feher. 55 Gergely Szakacs, IMF seeks tough Hungary spending cuts for aid report, Reuters, September 6, 2012, http://uk.reuters.com/article/2012/09/06/uk-hungary-imfidUKBRE8850BA20120906 56 Andras Gergely and Zoltan Simon, IMF Urges Hungary Overhaul for Growth as Talks Resume, Bloomberg, July 27, 2012, http://www.bloomberg.com/news/2012-0726/imf-urges-hungary-to-overhaul-economy-after-constructive-talks.html 57 Hungary PM Viktor Orban rejects IMF loan terms, BBC News, September 6, 2012, http://www.bbc.co.uk/news/world-europe-19514325; Kester Eddy, Hungary: Orbns 9

compared EU criticisms of Hungarian legislation to the actions of the Soviet Union.58 Orbn has repeatedly rejected conditions, recently scuttling any chances of any agreement involving cuts to welfare and benefits on October 1, 2012.59 Orbn not only spoke out against IMF conditionality demands on a regular basis, but he also noted his concerns symbolically. In September 2012, Orbn unfriended the IMF on Facebook.60 In the October 9th issue of five leading Hungarian papers, the government took out full page color advertisements to denounce IMF conditions and publicly assure voters that the Hungarian government would not comply.61 This ad campaign is representative of the degree to which Orbn positioned himself against international organizations to shore up his own domestic support. In light of this, recent talks between Hungary and the IMF have broken down once more. In November 2012, Andras Simor suggested that negotiations between the two have gone so badly that the sides were further from a deal than they were when negotiations reopened in 2011.62 The Hungarian government backed away from earlier statements suggesting that they would reduce banking taxes, prompting the resignation of Mihaly Patai, Chairman of the Hungarian Banking Association.63 Instead, they made the provisional bank taxes permanent.64 Without something to alter either sides entrenched position, an aid agreement may prove difficult to reach.

horror show, Financial Times, September 6, 2012, http://blogs.ft.com/beyondbrics/2012/09/06/hungary-orbans-horror-show/#axzz2HzbWD2zw; Keno Verseck, Viktor Orbns Dismal Mid-Term Review, Der Spiegel, May 8, 2012, http://www.spiegel.de/international/europe/hungary-in-crisis-as-viktor-orban-enterssecond-half-of-his-term-a-832071.html 58 James Kirchick, Wrong Way Down the Danube, Foreign Affairs, July 10, 2012, http://www.foreignaffairs.com/articles/137772/james-kirchick/wrong-way-down-thedanube 59 Zoltan Simon, IMF Urges Hungary to Focus on Growth, Not Austerity, Bloomberg, October 4, 2012, http://www.bloomberg.com/news/2012-10-03/imf-urges-hungary-tofocus-on-growth-outlook-not-more-austerity.html 60 Orbn slams IMF 61 IMF? NO! The Budapest Times, October 12, 2012, http://www.budapesttimes.hu/2012/10/12/imf-no/ 62 Gergely Szakacs and Sandor Peto, Hungary further from IMF deal than a year ago: central banker, Reuters, November 27, 2012, http://www.reuters.com/article/2012/11/27/us-hungary-rates-idUSBRE8AQ14620121127 63 Kester Eddy, Hungary: bank chief quits in tax dispute with Orban government, Financial Times, November 13, 2012, http://blogs.ft.com/beyondbrics/2012/11/13/hungary-bank-chief-quits-in-tax-dispute-with-orbangovernment/#axzz2HmGsvmIk 64 Jonathan Wheatley, Hungarys tax reversal: who cares? Financial Times, November 19, 2012, http://blogs.ft.com/beyond-brics/2012/11/19/hungarys-tax-reversal-who-cares/ 10

Policy Recommendations for the European Union and the IMF Separate Rhetoric from Action The EU needs to determine the acceptable range of circumstances in which they will allow the Orbn government to say what it will for domestic consumption while begrudgingly cooperating with European policies. That is not to say that anti-European rhetoric is not damaging to integration as a whole, because it can clearly have a negative impact on popular perceptions of Europeanization; however, it has become a necessary trade-off for actual cooperation. This is not only true in the case of Hungary, but also the United Kingdom, where the Conservative Party seeks to entrench its support by attacking the EU as the source of British cultural, social, and economic malaise. The Cameron government does not actually want to leave the European Union due to the clear economic benefits, suggesting that the domestic stance is about politics, not policy.65 EU institutional representatives have argued against policies proposed by British euroskeptics, but have ignored a lot of the rhetoric of party members as posturing. They should provide Fidesz the same leeway. While it is unfortunate that such tactics are successful in domestic politics, the EU must allow them to a certain extent or else risk more aggressive policy moves against European initiatives. Continue to Challenge on Matters of Policy While the EU should give the Orbn administration some latitude on remarks designed for domestic political consumption, EU Commissioners and other leaders should continue to challenge Hungarian laws and policies that are at odds with European requirements. European leaders should follow the lead of Mario Draghi and push for an independent Hungarian central bank. Outstanding issues remain with not only banking independence, but also election laws and education reforms.66 While Orbn will push rhetorically, he has demonstrated that Budapest will roll back troublesome policies when appropriately pressured, having offered concessions on some constitutional matters, the press law, and most recently central bank independence. Beyond the policy issues, it sets a worrisome precedent by suggesting that binding European laws and regulations can be discounted at will. This could lead to a dangerous erosion of workers protections, individual rights, and environmental regulations in member states with weaker traditions in these areas. The willingness of Fidesz to concede65

Christoph Scheuermann, Cameron Succumbs to Europhobia, Der Spiegel, January 7, 2013, http://www.spiegel.de/international/europe/cameron-succumbs-to-growingeurophobia-in-the-uk-a-876104.html 66 Hungary top court voids election law in blow to Orban, BBC News, January 4, 2013, http://www.bbc.co.uk/news/world-europe-20909038; Palko Karasz, Hungarian Students Decry State Sponsorship Cuts, The New York Times, March 4, 2012, http://www.nytimes.com/2012/03/05/world/europe/hungarian-students-decry-statesponsorship-cuts.html 11

on problematic policies when infringement procedures are opened suggests that they will push only as far as the EU lets them; in response, the Commission should not hesitate to open such procedures when new Hungarian legislation is in violation of EU laws. Come to an IMF Hungary Agreement An agreement between the IMF and the Orbn government should be easier now than at any point during the negotiations. In January 2013, IMF economists confirmed a shift in thinking at the organization on the appropriate policies to pursue in times of economic crisis. They acknowledged that the fiscal multipliers of austerity measures can have greater than 1:1 impacts on a national economy, citing the Eurocrisis as one example of a situation in which the use of austerity as the economic response worsened the situation.67 This change in thinking should remove some of the barriers to an agreement with Hungary. One of the primary measures that Orbn resisted was a reduction in government assistance payments an austerity measure. The IMF has laid the intellectual groundwork to concede on that point and can hopefully now conclude negotiations to provide much needed liquidity to the Hungarian economy. Indeed, the IMF should make it a priority and see it as an opportunity to put their new intellectual position on austerity into practice. Discussions have also begun to reduce the banking tax68 to which the IMF is also opposed for its market distorting effects perhaps providing enough concessions to allow the IMF to save face in negotiations and not look as though it is taking it easy on Budapest. A favorable resolution of Hungarian economic challenges will hopefully encourage Orbn to pursue more positive dialogue with international organizations instead of maintaining his current confrontational rhetoric. Conclusion The European Union must allow Hungary some latitude in domestic affairs; however, the Commission has a clear responsibility to enforce the acquis communautaire in all member states. Hungary under Viktor Orbn has challenged the EU on a variety of issues with a number of concerning policies and pieces of legislation. The EU has taken on some of the most concerning bills, but has not yet done a satisfactory job of protecting the rights of citizens in Hungary. By continuing to apply pressure to the Orbn government when rules are violated and joining with the IMF to come to an agreement to stabilize the Hungarian economy, hopefully both the domestic political and economic situation will stabilize in such a way that allows Hungarians to enjoy all of the personal freedoms that the EU guarantees by law.

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Mark Whitehouse, IMF Officials: We Were Wrong About Austerity, Bloomberg Businessweek, January 4, 2013, http://www.bloomberg.com/news/2013-01-04/imfofficials-we-were-wrong-about-austerity.html 68 EcoMins Pleschinger: Hungary govt could partially forgo bank tax, Portfolio.hu, December 19, 2012, http://www.portfolio.hu/en/economy/pleschinger_hungary_govt_could_partly_forgo_ban k_tax.25322.html 12