Dec 22, 2014 | 10:15 GMT

8 mins read

Hungary Seeks to Avoid International Isolation in 2015

Hungary Seeks to Avoid International Isolation in 2015

Next year will bring a number of complications for the Hungarian government, both at home and abroad. For the first time since taking power in 2010, Hungarian Prime Minister Viktor Orban is dealing with persistent opposition from social groups and trade unions. Budapest is trying to reduce its fiscal deficit and, in pursuit of this goal, will continue to apply special taxes to some sectors of the economy, including supermarkets and tobacco companies, while making spending cuts. These changes will lead to further protests, though they will not threaten the Orban government's hold on power.

Abroad, Hungary's relations with the United States will continue to cool off because of accusations of internal corruption and Hungary's political and economic ties with Russia. Budapest must also deal with its increasingly distant relationship with the European Union, which comes at a time of growing uncertainty over Russia's future moves. Hungary cannot afford to completely sever ties with its Western partners, and its main challenge for 2015 will be to maintain its current domestic and foreign policy trajectories without completely alienating these allies.

The final two months of 2014 have proven particularly difficult for the Hungarian government. Several groups, from civic organizations to trade unions, have taken to the streets to protest a series of government decisions. In late October, a demonstration of around 100,000 people forced Budapest to cancel plans to introduce a tax on Internet use. The cancellation, however, did not appease the groups and protesters broadened the scope of their criticisms to include allegations of corruption and opposition to reforms in education, health care and other areas. Over time the protests began to shrink, bringing out between 2,000 and 10,000 people depending on the issue, but they did not stop. Separate demonstrations mobilized teachers who rejected education reforms and opponents of Budapest's plan to nationalize the remaining funds available in the private pension system.

Trade unions, too, have been active in recent weeks, protesting government plans to phase out an early retirement scheme and to raise taxes on food vouchers for workers. They have also demanded an amendment to the strike law to include constitutional safeguards for protesters. On Dec. 15, workers blocked highways in different Hungarian cities and slowed down traffic. Typically, unions in Hungary are not particularly combative and tend to negotiate with the government. Now, however, many resent the fact that Budapest did not consult its union partners about recent economic measures.

In spite of this opposition, the Hungarian Parliament approved most of the controversial measures Dec. 15. The reason was simple: Budapest needs to increase its available funds to keep the deficit under control. While the nation's budget deficit is still below the ceiling of 3 percent of GDP requested by the European Union, it has risen from 2.4 percent in 2013 to an estimated 2.9 percent in 2014. Next year, Budapest will try to reduce its deficit, and the budget is based on a 2 percent increase in state revenue and only a 0.03 percent increase in state expenditures.

In addition, the Hungarian government predicts that economic growth will slow down in 2015. Budapest expects Hungary's GDP to grow by 2.5 percent next year, down from 3.3 percent in 2014. Several independent think thanks and research groups believe that the country's economic performance will be lower.

The measures planned for 2015 will hurt some more than others. The Hungarian Parliament has introduced higher taxes on media and energy-trading companies as well as investment funds. Foreign-owned retail chains, however, will be among those harmed the most. Most of Hungary's largest retail chains are British, German or French. The budget includes both a hike in fees for food retailers and a shift from a flat tax rate to a progressive tax rate. In addition, Budapest plans to introduce a law requiring that, starting in 2018, retail chains with high annual turnover must close if they do not turn a profit for two years. The government contends that many foreign-owned retailers accept losses to weaken their Hungarian competitors. Representatives from the sector said that, taken together, these policies would first push the retailers into a loss and then penalize them for that loss.

Tobacco manufacturers and traders will also see negative effects as a result of the new laws. They will be required to pay a one-off health care contribution fee, which will be calculated as a percentage of their revenue. Hungary's parliament has also created a state tobacco wholesaler that will act as an intermediary between producers and retailers. Tobacco producers, mainly U.S. and British firms, have said the new rules will lead to job cuts.

At the same time, Hungary's municipalities are still dealing with more than $4 billion in debt in spite of a relief program recently approved by Budapest. As a result, the national government will push local governments to introduce their own taxes in 2015.

The Foreign Front

The past two months have been complicated on the foreign front for Hungary as well. In October, the U.S. government introduced a visa ban on six unnamed Hungarian officials, most of who are believed to work for the National Tax and Customs Administration. The institution's president, Ildiko Vida, is the only official who has admitted to having been included on the list. But Budapest's public position on the issue is that the United States has not provided enough evidence to back the allegations of corruption used to justify the ban. On Dec. 15, the Hungarian government announced that the U.S. charge d'affaires in Budapest is facing an investigation by Hungary's Central Investigation Bureau based on libel charges brought against them by Vida.

The U.S. push against Hungary over alleged corruption at the National Tax and Customs Administration comes as the result of two factors. First, two U.S. agribusinesses reported that they were losing money because of value-added tax fraud. Between late 2012 and mid-2014, the U.S. Embassy in Budapest formally discussed the issue of valued-added tax fraud with the Hungarian government on several occasions. At the same time, the U.S. government is using these cases of alleged corruption as a way to pressure Hungary into continuing to follow the common European policy of sanctions against Russia. So far, Budapest has reluctantly supported the successive rounds of sanctions, but the United States is concerned about Hungary's recent rapprochement with Russia and joint plans to expand Hungary's nuclear plant in Paks. The United States is also troubled by Hungary's temporary suspension of natural gas flows to Ukraine and, until it was canceled, the construction of the South Stream natural gas pipeline.

Hungary's relationship with the European Union is equally complicated. For some time, Budapest has leveled criticism against the European Union and has demanded that powers be given back to national governments. Hungary's policies under Orban have hurt European companies, targeting Austrian banks, German media companies and others. These policies have left Orban relatively isolated from Western European governments. Orban will have the opportunity to improve ties with Germany in February 2015, when German Chancellor Angela Merkel will visit Budapest. The meeting likely will focus on Hungary's treatment of German companies and its ties to Russia.

Hungary in 2015

Next year will be the most complicated year that Orban has faced since he became prime minister in 2010. Opinion polls show that the popularity of his ruling Fidesz party has dropped and different groups have openly expressed their opposition to the government. Orban's government, however, is not at risk of collapse. Despite falling approval ratings, Fidesz is still the most popular party in the country by a large margin, and Orban's alliance retains comfortable control of the Parliament.

Protest groups will continue to be active in 2015 but have yet to evolve into a coherent opposition. Their differing agendas will make it difficult for a single, large group to form and capitalize on social discontent. More important, no significant elections are scheduled for 2015 in Hungary. However, popular discontent with the government will continue to create fertile ground for the emergence of protest groups.

At the international level, Budapest will struggle to maintain its current policies without completely alienating its partners. Hungary can afford to keep itself at a relative distance from the European Union. It cannot afford, however, to completely sever ties with Brussels — Hungary still needs investment and funding from the European Union and its core member states. More important, the suspension of South Stream will push Hungary to seek cooperation with other regional players to diversify its energy supply, although most projects are still in their early stages.

Budapest is not interested in a permanent conflict with the United States either. While Hungary's domestic policies will continue to irritate the United States and Europe, Orban's administration will be careful not to completely alienate Washington. The Hungarian government will continue using anti-American rhetoric because it plays well to a domestic audience, but it will not lead to concrete action. As the United States desires, Budapest will continue to support the sanctions regime against Russia, wagering that the European Union will ease its stance toward Moscow by mid-2015, when sanctions start to expire and will require unanimity for renewal.

In the wake of the crisis in Ukraine, Hungary sought to balance between an apparently re-emerging Russia and a weakening NATO. This position was part of a broader strategy of balancing between a fragmenting European Union to the west and a more assertive Russia to the east while increasing national control of the Hungarian economy. But U.S. pressure on Hungary, Germany's decision to back sanctions against Russia and Moscow's recent cancellation of the South Stream project have begun to show the limits of Budapest's strategy. In 2015, the Hungarian government's main challenge will be to assuage domestic dissent and prevent its own international isolation.

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