Hungary's Latest Isolationist Step

3 MINS READJul 16, 2013 | 15:18 GMT
Hungary's Latest Isolationist Step
Hungarian Prime Minister Viktor Orban at the EU headquarters in Brussels.
(JOHN THYS/AFP/Getty Images)

Hungary has called for the International Monetary Fund to shut down its office in the country, marking new tensions between Budapest and Western institutions. With this latest move, Prime Minister Viktor Orban wants to emphasize that he will not allow outsiders to dictate his policies. Orban also likely intends to fuel nationalist sentiment ahead of Hungary's 2014 elections. These actions risk harming the Hungarian economy, which is dependent on foreign investment and has been weakened by the European economic crisis. Orban probably will try to compensate for the deteriorating ties with the West by strengthening ties with Russia.

On July 15, the Hungarian Central Bank chief Gyorgy Matolcsy, in a letter to International Monetary Fund head Christine Lagarde, called upon the organization to close its office in Budapest. Matolcsy said there is no need for the International Monetary Fund's presence in Hungary anymore, and that Budapest aims to pay back its loan from the fund before the scheduled end of its payback period in 2014. The International Monetary Fund reportedly accepted the decision and probably will close the office in August.

Hungary got aid from the International Monetary Fund in 2008 after the outbreak of the global financial crisis. The fund provided $15.7 billion of a $25-billion aid package put together by the International Monetary Fund, the European Union and the World Bank. Since Orban came to power in 2010, however, the fund and Hungary have had a contentious relationship. Once in office, Orban resorted to special measures to get the government's finances in order and avoided measures the International Monetary Fund demanded. Orban essentially nationalized the pension system, introduced exchange rates that harmed foreign banks to reduce the risk of defaults on foreign currency-denominated debt and introduced special taxes on large companies. Hungary negotiated further aid with the fund in 2011, but that aid was never extended due to disagreements and because Hungary managed to raise money on international financial markets as its economic situation improved slightly.

Orban's demand for the closure of the International Monetary Fund office may be part of his election campaign. Ahead of the vote, which is likely to be held in April 2014, Orban intends to spur economic growth in the country and highlight the government's resistance to outside influence in order to capture the growing nationalist voter base.

However, the government has little room to maneuver, considering the bleak economic outlook in Europe and growing distrust of Hungary among foreign investors. According to Eurostat, Hungary’s economy contracted by 1.7 percent in 2012 and is only expected to grow at 0.2 percent in 2013. Investment during the first quarter of 2013 dropped by close to 9 percent compared to the same period in 2012 — reportedly the largest decrease since the fourth quarter of 2009. Investment in the energy and manufacturing sectors in particular dropped. A report by the International Monetary Fund released in March also highlights that the Hungarian banking sector has been weakened considerably over the past years due to weak growth and an increaseing rate of nonperforming loans.

Besides enacting a number of populist measures that will probably hurt foreign companies, Orban is likely to try consolidating power through policies that will exacerbate tensions with the European Union. Over the past years, the bloc has criticized several policies Orban has implemented, such as constitutional changes or measures by the government to gain greater control over the central bank. On some issues Orban has backtracked to appease the European Union, but overall the pressure from Brussels did little to change Orban’s course.

Russia likely welcomes Hungary's growing isolation from the West. Moscow sees an opportunity in the European crisis to strengthen ties with Eastern and Central Europe. As Western investors likely become more antagonized, Budapest will turn eastward to attract investment. For example, Russian investors in past years have shown interest in the Hungarian banking and energy sectors.

Hungary’s distancing from the European Union shows how disillusioned Eastern and Central European countries are regarding the prospects the bloc offers. The chances for economic prosperity through strong institutional ties to Western Europe are increasingly outweighed by the often unpopular demands for reforms and austerity coming from Brussels and organizations like the International Monetary Fund.

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