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The chapter examines the cases of Hungary, Latvia, and Romania, which were not euro-zone member states, when they needed a bailout program to overcome the financial crisis. The main question is whether the findings from the euro-zone apply to these countries as well. Low level of trust and weak institutions characterize them similarly to the Mediterranean states. The analysis shows that the three countries represent three different models—while Latvia most resembles the Irish case, Romania shares many similarities with the Mediterranean countries. Hungary is a case by itself—the level of distrust with the international community makes it similar to Greece, but as it successfully avoided a second bailout program, it could follow a populist adjustment path financed by the global markets and EU transfers. The chapter argues that their greater integration into the global economy influenced the success of the adjustment in these countries.
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An earlier version of this chapter discussing the cases of Hungary and Latvia appeared as Győrffy ( 2015).
The following discussion on the path to crisis relies on Győrffy ( 2013): 128–137.
Data: UN ECE ( 2003): 112. The concept of transformational recession originates from Kornai ( 1994), who argues that the shift from communism to a market economy initially triggers a recession for a number of reasons including the disturbances to the coordination mechanisms, the consequences of hardening the budget constraint and the weakness of the financial system. All these factors contribute to a collapse in investment and consumption.
Data: Institute on Statelessness and Inclusion ( 2017) 75.
Data: European Commission ( 2017) 28.
Data: European Commission ( 2017) 58, 160, 164.
Social benefits other than in kind imply social benefits in cash as well as social insurance in cash or kind. Data: European Commission ( 2017) 136.
Data: European Commission ( 2017) 59.
Data: European Commission ( 2017) 59, 29, 161.
This includes subsidized credit for housing, increase in the public sector wage bill, increase in pensions, and other social security benefits.
Writing in 2007 they showed that in the absence of politically motivated spending since 2000, public debt would have been 36.9 percent of the GDP in 2006 instead of the 66 percent.
Data is from Eurostat.
By 2008 the share of foreign currency lending approached 70 percent of total household loans. For a detailed overview about the buildup of these loans, see Hudecz ( 2013): 273–275. I rely primarily on his assessment in the following discussion of the main causes of foreign currency lending in Hungary.
The complete lack of response to the growth of foreign currency lending is unique in the Central and Eastern European (CEE) region as shown by Bethlendi ( 2011: 211). Based on interviews with the participants, the reluctance of the government to constrain the credit boom is documented by Szentkirályi ( 2011). This was especially important, since financial supervision in Hungary is separate from the independent central bank, and the supervisory body (PSZAF) is under the authority of the Ministry of Finance.
Data: European Commission ( 2017) 58, 96.
Data: European Commission ( 2017): 79.
Data: European Commission ( 2017) 29.
These steps will be discussed in greater detail in the next section on the implementation of the program.
This was harshly criticized during and after the negotiations. On the debate and the establishment of the IMF position, see Rosenberg ( 2009).
The detailed conditionality is available in the Memorandum of Understanding ( 2009b).
For a more extensive overview, see the Memorandum of Understanding ( 2011).
As Erdős ( 2012: 121–122) explains, the absence of a stimulation effect of the tax cut is due to the fact that it favored primarily those with high incomes, who are most likely to either increase their savings or spend it on imported goods, which means that there is no demand growth in the domestic economy.
The ratio of non-performing foreign currency loans increased from 7.5 percent in 2010 to 18 percent by 2013 (European Commission 2014: 32).
The explicit objective to build an illiberal democracy instead of a liberal one reversed the trend of liberalization and decentralization, which started in 1968. János Kornai ( 2015) calls it a “dramatic U-turn” in the history of Hungary.
Under the debt rule, public debt cannot be higher than 50 percent of GDP, and above this threshold the Parliament has to adopt a budget, which contributes to the decline of the debt rate. The task of the new fiscal council is to evaluate the conformity of the budget plan to this rule with veto power over its adoption if it does not conform to the rule. However, the council has no ex post power over the budget, and there are also no rules about financing the debt reduction, which made the nationalization of private pension funds an acceptable method. Even more importantly, the debt rule was postponed to 2016 by the Law on Financial Stability in 2011. It is also important that out of the three members of the fiscal council, two are clearly political appointees as the Head of the National Bank of Hungary and the Head of the State Audit Office. For a comparison between the old and the new fiscal council, see Curristine et al. ( 2013): 20–23.
The new law cut the number of parliamentary representatives from 399 to 199 with 100 elected from single-member districts and 99 through proportional party lists. The second round of voting was abolished in the districts, which was extremely advantageous for Fidesz as it was facing a highly fragmented opposition.
Based on the Memorandum of Understanding ( 2009a), the standard and reduced rates of VAT were raised from 18 percent to 21 percent and 5 percent to 10 percent, respectively, along with increases in excise taxes on alcohol, tobacco, petrol, and coffee.
Data: European Commission ( 2017) 96.
For a full list of structural reform measures, see the review by Boc ( 2011).
Data: European Commission ( 2017) 158–159.
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- Crisis Management Outside the Euro-Zone: The Cases of Hungary, Latvia, and Romania
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