Kclever monetary policy draws the short straw against unwise economic policy. This is impressively shown in Hungary. The central bank there has been fighting inflation and the weakness of the national currency, the forint, for a year and a half. But the monetary authorities’ efforts were thwarted by the national-conservative government. This is now leading to a showdown between the Magyar Nemzeti Bank (MNB) and the cabinet of Prime Minister Viktor Orbán.
His former favourite, György Matolcsy, the president of the MNB, is unusually sharp in public. Most recently, Matolcsy criticized the inappropriate economic policy in parliament and spoke of faulty crisis management. “We have to face the fact that the Hungarian economy is in a near-crisis situation,” said the top regulator.
Inflation will be 8 to 15 percent next year. The reason is the energy price boom and food inflation. The chief banker also noted that Hungary has the second lowest agricultural productivity in the EU after Bulgaria. In addition, the economic policy coordination between the government and the central bank is disrupted and this is costing many dearly. Hungary is the only country using more gasoline and gasoil than before the energy crisis, Matolcsy said.
Hungary lacks significant EU funds
He also described the 2021 state budget as a “malpractice”. The MNB had already tried in vain last year to persuade the Orbán government to abandon numerous investment projects. This year, the small Central European country will achieve new debt of around 6 percent of economic output, twice the EU average. The total debt burden is around a quarter and thus less than the EU average. But Hungary is missing significant EU funds because of a dispute over the rule of law. The country is one of the largest net recipients in the community.
Hungary’s twin deficit is the second highest in the EU after Romania. In 2023, however, Hungary will even be the “leader” here, predicts Matolcsy. He named the lack of investment in energy efficiency and the lack of preparation in agriculture for the climate crisis as the most important problems. This must have priority, because energy efficiency is the key to the way out.
The finance minister reacted defensively to Matolcsy’s criticism. He wrote on Facebook that while the governor of the central bank was right that there was a problem, the problem affected everyone: high energy prices were driving economies across Europe into recession. As a result of the crisis management, economic growth in Hungary has so far remained comparatively high and unemployment low.
Opposition is directed against the central bank governor
Ironically, one reaction to Matolcsy’s criticism was a complaint by the opposition party MSZP against the governor of the central bank because of the weakening of the forint exchange rate. As her co-chairman Imre Komjáthi recalled, Matolcsy told the parliament’s economic committee that Hungary was on the brink of a crisis and was among the four or five most vulnerable countries in the world. “In doing so, he invited the speculators. Not only has he sent the forint plummeting for the umpteenth time, he has exposed our country to a threat the likes of which we have never seen from a central bank governor. This is a crime of economic history.” The MSZP hopes that the Attorney General will hold Matolcsy accountable for the consequences of his testimony.
Hungary’s government is now fighting a recession. The measures of their 11-point action plan and the new “Factory rescue” guarantee and loan program could ensure Hungary avoids recession while maintaining full employment and protecting families, Economic Development Minister Márton Nagy said at an event of the Guarantee facility Garantiqa Hitelgarancia Zrt.
These include support for energy-intensive SMEs, the continuation of the Széchenyi card program, the rescue of factories, a longer interest rate freeze, the creation of a national capital holding company, the credit moratorium for agricultural companies, the tourism action plan, lowering utility costs , keeping food price caps and interest rate freezes for households, and freezing interest rates on student loans.
In the long term, he believes a new economic strategy model is necessary, as the geopolitical tensions and the energy crisis have presented Hungary with challenges that could only be addressed with a new model.