Angela Merkel and Victor Orban (European People's Party, CC BY)
The cornerstone of the Hungarian economy are trade relations, mostly with Germany, and subsidies from the European Union budget. Cooperation with Germany would not be possible without membership in the European Union but it is Germany that plays the leading role, as Hungary’s exports to that country stand at EUR25bn a year. To realize the size of Germany’s share in the Hungarian economy it should be noted that the second biggest importer of Hungarian goods is Romania (EUR4.7bn), followed by Slovakia (EUR4.5bn), Italy (EUR4.3bn), and Austria (EUR4.2bn).
Germany is the most important country to the Hungarian economy also in terms of imports. Hungary imports goods from Germany for the total of almost EUR22bn. Then comes Austria (EUR5.4bn), China (EUR4.7bn) and Poland (EUR4.5bn). Exports to EU countries account for 79 per cent of the total exports, while imports is 77 per cent. Apart from the European Union, the top export destinations are Israel and the US. However, Hungary wants to ultimately change these proportions and cover non-EU countries by one third of its trade exchange.
Good German investors
Germany’s huge significance to the Hungarian economy finds also its verbal expression. As it seems, rarely can German Chancellor Angela Merkel hear another European politician, an incumbent prime minister in particular, say the words “Danke Deutschland”. And these were the exact words that Prime Minister Viktor Orbán uttered to the German Prime Minister during her visit to Budapest in February 2015.
Anyway, the Hungarian-German relations are probably the most puzzling case of Realpolitik mingled with political creation. Attacking the government in Berlin for the migration policy is not tantamount to breaking up economic ties with Germany. It is only needed to animate the attitudes of Hungarian voters, since the mutual relations are becoming increasingly closer.
There are over 6,000 German companies and Germany is also the biggest investor in Hungary. The Mercedes factory in Kecskemét and the Audi factory in Győr are the key driving forces in the local regions (there is also the Japanese Suzuki in Esztergom). It is thanks to the Audi factory that unemployment in the Győr-Moson-Sopron county has fallen to just 2.3 per cent. This is one of the reasons why Hungary, one of the few countries in Europe, got so strongly involved in helping Audi when the notorious scandal about diesel engines broke out. Győr could have manufactured even 3 million of them. As a reward for such loyalty, the Ingolstadt-based company is going to transfer the production of the Q3 model from Spain.
Loyalty to the German brand Volkswagen owned by the VAG group can also be felt in the behaviour of the Prime Minister himself, who traverses Hungary in a Multivan, and the brand also sponsors the football academy in Felcsút, the apple of Orban’s eye. It is no doubt that cars build the value of Hungarian exports to the greatest extent.
Laws favourable to entrepreneurs
It is noteworthy that in order to improve the competitiveness of Hungary as a country to invest in, the Hungarian government uses various incentives, including tax incentives and appropriate regulations relating to employee rights. And so the owners of companies bound with the government administration by contracts for the provision of public services can be certain that there will be no strikes in their enterprises.
This stems from the amendment to the law on the resolution of collective labor disputes introduced in December 2010 by the Fidesz-KDNP coalition. For a strike ballot to be valid, 70 per cent of those eligible have to vote, and before a strike action is carried out, its legitimacy is examined by a labor court which – according to trade unions – is totally subjected to the state. In 2011, nine applications for permission to strike were submitted. Seven of them were rejected without citing reasons, whereas two were being considered, but no decision could be delivered.
Things look similar in Hungary’s stance towards the European Union as a whole. Statements questioning the mechanism of migrants’ relocation, to the point of appealing against it to the Court of Justice of the European Union, or setting the Europe of strong national states against a “single superstate” and demanding amendments to treaties can be heard repeatedly in buildings which have been renovated using EU funds.
The fact is that the Hungarian economy relies heavily on subsidies. In the current budget framework, Hungary with almost EUR22bn ranks sixth among the biggest beneficiaries of the EU budget. Its expected revision related to Brexit is bound to hit the Hungarian economy, while GDP growth forecast for 2017 in the budget law at 3 per cent is seen as unrealistic by many economists who think it may not exceed 2 per cent, and recession is looming in 2018 at the latest.
Disputes with EU over law
It is not only Brexit that gives Hungarians sleepless nights. For a few months, the authorities in Brussels have stopped scrambling with Budapest using rhetoric or control procedures of the rule of law. Now they are withholding subsidies for the already accepted projects on a mass scale. This is justified by non-transparent public procurement procedures in Hungary. In the opinion of the European Commission, the Hungarian law is devised in such a way that it fails to ensure transparency and permits friends and relatives of the ordering party to win tenders. This opinion has been strengthened by a recent change in the law, according to which ordering party’s children are allowed to participate in tenders and the only restriction is prohibiting domestic partners from entering procurement procedures.
As a consequence, investments worth millions or even billions of euros are up in the air. The EU permission is still pending for the extension of the nuclear power plant Paks, a flagship project for the implementation of the demand of further reduction of energy prices for Hungarians. The authorities in Budapest have not given Brussels a precise enough explanation why they awarded Russians a sole-source contract in this case and took a loan of EUR10bn from them. The loan has already been disbursed. A year ago Brussels instituted proceedings against Hungary for the project’s non-compliance with community law on public procurement. In February, it ordered the declassification of all the agreements concerning the construction of Paks2 (the project’s official name). For the Hungarian government had classified all the documents for several decades, citing concern for the country’s security.
In search of new markets
The problems discussed above explain why Hungarians are intensely looking for markets and possibilities of cooperation outside Europe. This arises from the need to diversify the markets for Hungarian companies. As a result, the country is opening up in two directions: to the East and to the South. The first was announced three years ago and includes such countries as Russia, Turkey, India, Korea, Thailand, Arab countries, the Balkans and China. A more recent idea is the opening up to the South. It is about economic and diplomatic expansion (opening of new embassies and consulates) in African countries, as well as in the South and Latin America.
The goal is similar in both cases – a search for new markets that, on the one hand, have not been hit so hard by the economic crisis and that, on the other hand, will enable Hungarian entities to take part in global politics. Every now and then, further successes of both economic programs are announced, but no details are revealed about their implementation. It is no use, for example, looking for information on the ratio between the costs of tapping into these markets (dozens of visits of leading government officials) and the profits made in the new markets.
In the Prime Minister’s speech given late February, Viktor Orbán underlined three main reference points around which Hungary’s foreign and hence economic policy is oriented. These are three countries with which Hungary warred in the past, but today are interested in cooperation: Germany, Russia and Turkey. This policy will depend most strongly on the improvement of diplomatic relations between Moscow and Ankara.
The recent referendum in Hungary and its repercussions – hardening the rhetoric towards the authorities in Brussels and submitting the 6th law amending the constitution in parliament – will have no major impact on the country’s economic situation. Migration policy is largely focused on domestic political games and used to reinforce the power of the prime minister and, broadly speaking, the entire coalition. This goal will undoubtedly be achieved. But other factors are much more threatening to the Hungarian economy. Over some of them, such as the outcomes of Brexit, Hungary has no control. Over some, such as the public procurement law, it does have control, but it is doubtful whether it will be willing to make any changes.
The author is a political scientist and Editor-in-Chief of www.kropka.hu, a website on Hungarian politics.