Hungary and the Euro

There was general consensus among all the parties and economic analysts in 2002, when the first Orbán government was still in power, that Hungary could and should introduce Euro as her currency in 2007.  Then  MSZP-SZDSZ came and their catastrophic economic policies utterly destroyed the chance for this.  They increased the public debt of Hungary from 54% of the GDP in 2002 to around 80% in 2008 and Hungary  “de facto” defaulted when the global economic crisis hit. This manifested itself  in the  IMF giga-loan in 2008 .  The leftliberals and IMF carefully timed the repayment of this 25 billion euro loan between 2010 and 2014,  as a kind of booby-trap, knowing well Fidesz would win the next elections. (Such SBA agreements usually have a seven year repayment period.)

What was seen to be a bad thing at that time  seems to turn out to be more and more of an economic advantage for Hungary now. The Euro has had quite a few victims so far in Europe, these are commonly mentioned as the PIIGS countries (Portugal, Ireland, Italy, Greece and Spain) and  Slovenia is going to be the next one:   “Euro-area dynamics did the rest. As banks have to be saved by individual member states, Slovenia found itself in a catch-22. It needed to raise more money but due to soaring costs of debt refinancing, the country found its access to international financial markets barred at a time it was most needed.”  PIIGSS!

Let’s note that Prime Minister Orbán, who is very likely to be re-elected in 2014,  has ruled out Hungary’s joining the Euro zone any time soon:  “When we think of joining the eurozone, we do not speak of next year, but about the next decade or two decades or three decades. If the euro still exists by then”  He also added that if Hungary had been a member of the euro zone in the past three years then it would have been unable to take unorthodox economic measures. And those economic measures now do seem to work. (See also my earlier posts on  the Hungarian economy.)

An American commenter (“Southerner”) pointed out in a comment to this post:    “from my Western perspective the EU currency creation was the beginning of conflict the likes of which are no different in the intended outcome and objective than in WWI & WWII. That is; Germany in control but not responsible for the economies in the EU. And from that perch, will ally with other historic partners to dominate larger and larger regions. None of this is evil, just good business.”

So let’s see what introducing Euro means for a peripheral European economy (such as Hungary, the PIIGS countries or Slovenia):  you lose the freedom to control two important  macroeconomic variables at the same time:  the monetary base and the base rates set by the national bank of the peripheral economy.  Apart from controlling inflation, the major task of a central bank is providing fiscal stimulation in times of recession and providing fiscal control in times of economic booms.  What do the peripheral economies get in return for losing their ability to influence their own business cycles?  Strong coupling  to the business cycles of the central economy (Germany), which may not mean  synchronization!, and a significant loss of economic freedom.  In fact German Chancellor Angela Merkel herself admitted  openly that  the European Central Bank “should  really increase the base rate now if they considered only Germany’s interests”, that is she observed the conflicting interests of the core economies and the peripheral economies. Removing the economic options of devaluing one’s currency in order to boost exports and inhibit imports or inflating debt away is really a huge blow for the latter ones.   It will inevitably result in the peripheral economies being endebted to the core economies  as we could already witness this.
A common currency for countries with vastly different economies, where there don’t exist such cohesion forces such as a common language and common culture, is a surefire recipe for increasing political tensions both domestically and internationally. People will say  “Why should we pay for those lazy bastards out there?” in the core economies and they will say “Those rich bastards are colonializing us!” in the peripheral economies.  This will show eventually on the international scene as well:  Germany may not be able to oversee always that there should be a docile political leadership in Greece.   There are some cracks visible even already on the German-French “tandem”!

In the long run and from a global perspective, there could be two outcomes: either the political considerations will prove to be stronger than the economic ones and this will eventually drag down Germany, too. (Assuming Germany would have the political will and means to force their ways, of course. One must still  keep in mind that Germany doesn’t have the military projection power at all the US has which still keeps the US dollar afloat despite their exponentially growing debt and their huge trade balance deficit.) This will result in a less and less significant Europe in global politics.  If Hungary manages to ride the waves then this will mean a relatively stronger Hungary though.

Obviously the other outcome is the break-up of Euro.  This would mean a turmoil all over Europe which would severely affect Hungary, too, and I don’t  know what the long term outcome for Hungary would be.  Perhaps, in relative terms, Hungary could be still better off.  This break-up could have two forms: either Germany would adopt a dual-currency system or the endebted peripheral economies would.  (A variation on this is less fragmentation, i.e. splitting the Euro into two classes: prime and subprime Euro.) The global implications are less clear but one thing is sure: the disappearance of the Euro would significantly delay the inevitable collapse of the US dollar.

Then, of course, going alone is riskier than tying your boat to a big ship. There is the very real possibility that Hungary would not succeed with these “unorthodox economic measures” and keeping her national currency (Hungarian Forint) would lead eventually to an economic-political crash. This could happen in either cases outlined above as well.  There are hungry sharks and sharp cliffs out there…  I’ll leave exploring the chances of this and the pro-arguments  for the interested reader who disagrees with me about that the Euro  would be harmful for Hungary in  the long run.

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  1. Steve

     /  15/12/2013

    Btw even a two-track Euro would still have problems, Greece for example would scarcely do better under a French-dominated currency say than the (supposedly) German dominated one. Also it is doubtful whether Hungary would be relatively stronger in a divided Europe with a weaker Germany, given the importance of German investment in Hungary and the general links between the two economies, historically when Germany has gone under so has Hungary, even if conditions were different. But smaller nations tend to need big friends (if even at arm’s length), and Hungary is unlikely to be able to rely on the US, Russia or even China to the same degree when it counts, as their interests are simply further from Hungary’s than Germany’s.

  2. Steve

     /  15/12/2013

    It’s not so simple (though you did not simplify as much as some, and avoided strong bias and stereotypes). A small nation has at best very limited economic independence even with its own currency, which can bring other costs (eg higher borrowing rates and debt service costs, higher inflation, and a less well-run economy and government). It may be that Hungary has net-benefited from not being in the Euro so far, but that would only be because of effective management of the economy (ie since Orban returned) which is often absent, and local conditions and culture (eg a good workforce with high education and a solid manufacturing base (substantially via German investment)), a case like Greece is different, it was and still is to considerable degree a ‘basket case’ anyway, reliant mainly on things like tourism. The Euro brings both gains and losses, and the nations that joined did so for concrete advantages at first, even if due to bad choices and the US-UK caused GFC it has turned sour for some. But also Germany did well under the D-Mark, and in fact was already so economically influential in Europe that France especially wanted to tie Germany in to a common currency to maintain more French influence. For the real story of the history of the Euro see David Marsh’s The Euro. If other countries want to return to their own currencies it’s up to them, but that means Germany also can take different economic approaches which may not suit them so well either, it also sacrifices quite a bit for the Euro, eg German savers are now losing money with the very low ECB rates. At any rate, the Euro will likely survive, having done so till now, though perhaps one or two problem cases may leave, but that would only improve rather than weaken the position for the rest. For Hungary the eventual choice will be alignment with a solid bloc around Germany or trying to survive against all vicissitudes largely on its own, perhaps it can work, but geographically and economically Hungary is very close to Germany, and even culturally in some ways, and does not necessarily lose by combining into a common bloc with more coordinated policy, so long as basic political sovereignty is maintained (and of course a nation can leave if it wants even after joining, no German panzers will prevent it). Still it’s up to the Hungarians, but a cheap anti-Germanism should be avoided, the real issues are far more complex.

    • Thanks for your comment, Steve. I tried to avoid too much simplification indeed. I didn’t mean any “anti-Germanism” at all. I only tried to focus on the paradoxes which a common currency means for countries with vastly different historical, cultural and economic backgrounds. Let me draw your attention to that even the historically, culturally and economically nearly homogenous USA doesn’t seem to fit the criteria of being a single optimum currency area!

  3. ZriniIlona

     /  03/12/2013

    PIIGSS 🙂
    I agree, the Euro is a mistake, and every European country that hasn’t joined yet should hold on tightly to their own currency.


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