In Hungary's election it is war versus wallets

Welcome back. Hungary's parliamentary election on April 12 is the most important election in Europe for a long time. It will have direct and fairly immediate consequences for Ukraine's defences, for the ability of Russia and China to wield influence in Europe and for the effective functioning of the EU itself. If prime minister Viktor Orbán is defeated after 16 years in office it will deprive illiberal democrats across the world of an ideological trailblazer and role model. Orbán's nemesis Péter Magyar has channelled anger at rampant government corruption. Magyar erupted on the political scene in 2024, railing at the self-enrichment of Hungary's governing elite, of which he was once part. The FT has documented the Orbán system of crony capitalism and political control in a series of pieces which you can catch up on here. Magyar's anti-corruption message has resonated because he has connected it to a stagnant Hungarian economy, low wages and poor public services. While Orbán has once again centred his campaign on foreign interference, this time by Ukraine which he alleges is trying to drag Hungary into war with Russia, Magyar has mostly concentrated on pocket book issues, health and education. "It is war versus wallets," says Zselyke Csaky of the Centre for European Reform. You can contact me at [email protected]. Who will pay for Hungary's economic slowdown? A senior figure from Magyar's Tisza party put it like this in Budapest last month: "If I can pick one reason why Fidesz will lose it is because of the economic environment and high inflation of the last few years. It has drawn people's attention to other problems in the country. This is a crucial change. People can no longer ignore democratic backsliding and corruption if their standard of living is no longer rising." Hungary's growth performance since the last election in 2022 has been grim. A global inflationary shock in 2021 was supercharged in Hungary by Orbán's pre-election giveaways including income tax refunds and additional pension payments. This was followed by botched government attempts to control prices and a precipitous slide in the value of the Hungarian forint against the euro. Core inflation surged to 25 per cent in early 2023, the highest in the EU, and averaged 18 per cent for the whole year. The central bank hiked interest rates to 13 per cent to bring price rises under control, choking economic activity. Recession in 2023 was followed by two years of weak growth, although a recovery is expected to take hold in 2026. The Fidesz government has failed to address rule of law shortcomings for which the EU has suspended some €20bn in post-pandemic recovery funds, missing out on investment which could have lifted growth. Hungary's process of economic catch-up with the rest of the EU has also petered out. Per capita GDP has risen from 65 per cent of the EU average in 2010 to 76 per cent in 2023, better than Slovakia but considerably worse than Poland or Romania. Hungary remains a low-wage economy with salaries the third lowest in the EU. Average monthly net earnings stood at €1038 compared with €2351 for the EU as a whole. Fidesz has tried to rebut opposition claims of falling living standards (in a document released by the government -- a small example of how Orbán's party misuses state resources for electoral ends). It argues correctly that nominal wages have risen faster than prices since 2021. Still, Hungarians lower down the income scale will suffer more from higher prices, especially when increased housing costs are factored in. There's also the question of how sustainable wage rises on this scale can be when productivity growth is flat and when government finances are tight. Unemployment rose at the end of last year to 4.9 per cent, a 10-year high, a sign that employers may be shedding expensive labour. Average wages grew by a remarkable 26 per cent in January, but the number was heavily distorted by a one-off bonus worth six months of salary awarded to military personnel and police in what looks like an extraordinary pre-election bung. In fact, the Fidesz government has handed out pre-election tax and spending benefits to favoured groups worth 2.2 per cent of GDP this year, according to the Fiscal Council, an official watchdog. Election giveaways have put the public finances under severe strain. The Fiscal Council has warned that the next administration will have to cut spending or raise taxes worth 1.7 per cent next year to hit EU deficit reduction targets. Although Hungary's debt to GDP stands at 75 per cent, below the EU average of 82 per cent, its debt servicing costs at 6 per cent of GDP are the highest in the EU. Hungary spends almost as much on debt interest as it does on public healthcare and almost twice what it spends on education. Magyar has made underfunded public services one of his big campaign themes. Orbán won power in 2010 because the then governing socialists had made such a mess of the economy following the global financial crisis. The situation may be less dire today, but Tisza and some independent economists say Hungarians are paying the price for a nationalist economic model that has reached its limits. Orbánomics is a blend of nationalist industrial policy, aggressive sectoral taxation and openness to cheap Russian energy and large-scale Chinese industrial investments. It was designed "to foster a self-reliant domestic capitalist class and insulate the nation from Western volatility", writes Mario Holzner, executive director of Vienna Institute for International Economic Studies. In reality, Hungary has underperformed its neighbours and may actually be more susceptible to external shocks than the rest of the region, he concludes. Ilona Gizińska of the Centre for Eastern Studies in Warsaw says Hungary is caught in a middle income trap. It is dependent on foreign capital and on low-value-added manufacturing. Over the 16 years of Orbán's rule, there has been no significant narrowing of the productivity gap between domestic and foreign companies. "The oligarchisation of the economy, a clientelist system of public procurement, and the politicisation of institutions have further weakened competition, innovation, and the country's ability to move up global value chains," she adds. More on this topic Marton Dunai profiles Péter Magyar, Orbán's nemesis Pick of the week Laura Pitel on the German state trying to break free from Microsoft