The Politics of CrisisThe Politics of CrisisBeyond OrthodoxyBeyond OrthodoxyGábor ScheiringVédegylet

What has happened?What has happened?2008 October: major drop in the

value of forint2009 March: another major drop

◦1 € = 317 HUF (a year before it was around 245)

◦Rumors that if it reaches 320 mass loan defaults will happen and the government is going to freeze bank accounts

Complete freeze at the market for government bonds - bankruptcy

5 year sovereign CDS 5 year sovereign CDS ((bps)bps)

Crisis management: Enter Crisis management: Enter IMFIMF25 billion loan

◦IMF: 15,7 billion $◦EU 8,1billion $◦WB 1,3 billion $

In return◦Constant monitoring from IMF◦Reducing wages of public servants by

7,5%◦Reducing pensions by 3%◦Keeping budget deficit below 2,5%

Political responsesPolitical responsesGovernment (Socialists)

◦Cuts in personal income tax and social security contributions to boost competitiveness

◦Raising VAT◦But – lack of confidence, lack of

parliamentary majority◦Gyurcsány resigns as he cannot get

through his proposal

Political responsesPolitical responsesReform Allience (HAS + leading capitalists)◦~ 1000 billion HUF, 3,3 billion € cut in

expenditures◦Tax and social security contributions cuts◦„Rationalizing schools”, cutting social spending

Free Democrats and Democraric Forum◦~ 2000 billion HUF, 7 billion cut in expenditures◦Far reaching tax cuts and restructuring of welfare

services, decreasing the number of local governments, closing universities, privatization of health care and the pension system

Bad macroeconomic Bad macroeconomic management?management?

Premature Welfare State?Premature Welfare State?

LessonsLessonsNo direct relationship between

crisis and budget deficitNo negative relationship bw.

economic development and redistribution

What then?

Semi-Peripheral Semi-Peripheral IntegrationIntegrationPrivatized and unregulated

banking sector◦Short term speculative money◦Early warnings: IMF, BIS◦Euro/Frank loans

Long term consumer loans financed through short tems cross border loans

Although international rates were dropping, Hungarian interest were on the raise

Continue to make substantial extraprofit

Semi-peripheral Semi-peripheral integrationintegrationDualistic economy

◦ FDI not able to solve employment problems if not networked well into the local economy

◦ Direct state subsidies and tax exemption disproportionally favor FDI at the expense of local economy

◦ Liberalized banking sector allocated money towards consumer loans Current account imbalances and risks Harder to get access to capital for local firms

◦ Reduced the policy space for local counter-cyclical demand management

Ways out beyond Ways out beyond orthodoxyorthodoxyBolstering state capacity

◦ Economic planning◦ Strenthening bureaucracy (higher wages, examinations,

identity)Re-regulating financial sector

◦ Internationally: peripheral countries interest◦ Reduce the possibility of short term speculative

investments Both at currency, capital and commodity markets

Strenghtening local economy◦ Slovenia, Czech Rep.

Self-financing Green New Deals: green collar jobs◦ Energy efficiency of public and privative buildings◦ Renewable energy◦ Sustainable agriculture

Political lessonsPolitical lessonsStrenghtening labor and civil

society◦Carriers of transformation

Strenghtening CEE cooperation◦Braking tax competition

Building capacity◦Breaking the resilience of neoliberalism

needs alternative knowldge Research Institutions

Also the interest of „Old Europe”