Hungary’s former Prime Minister called a series of national summits, where leaders of all political parties, financial experts and social partners gathered to discuss the effects of the global economic crisis on Hungary. The objective of the top-level negotiations, held between September 2008 and January 2009, was to reach consensus on a package of wide reforms in key areas; however, strong divisions emerged between the social partners on ways to avert the crisis.
Political and economic background
In October 2008, Hungary was strongly hit by the financial crisis due to the country’s level of indebtedness – including high-level debts amassed by the population, mainly in Swiss Franc, and the sudden collapse of consumer demand. The popularity of the Swiss Franc denominated loans was partly due to the monetary policy of the Hungarian National Bank (Magyar Nemzeti Bank, MNB), which maintained relatively high base interest rates of the Hungarian Forint (national currency) for a while, so that the foreign currency-based mortgages and other consumer loans were cheaper.
The so-called ‘credit crunch’ first led to an unprecedented devaluation of the Hungarian currency, which threatened a ‘bankruptcy of the state’, similar to the situation in Iceland. In order to avoid further devaluation of the Hungarian Forint, on 22 October the Monetary Council of MNB raised the base interest rate to 11.5% from 8.5%. In November, Hungary agreed relatively quickly on a substantial credit line of approximately €20 billion with the International Monetary Fund (IMF), the European Union and the World Bank. The loan agreement envisioned only relatively soft restrictions on budget expenditure – for example, abolishing the 13th month pension and 13th month salary for public service employees. In the meantime, the major political opposition party, the Alliance of Young Democrats – Hungarian Civic Party (Fiatal Demokraták Szövetsége – Magyar Polgári Szövetség, FIDESZ-MPSZ), continued to question the legitimacy of the government and demanded early elections.
Despite the crisis, the government initially sought to reduce the budget deficit to meet the Maastricht criteria. However, afraid of generating social discontent, the government retreated from introducing any major reforms and even partially revoked the cancellation of the 13th month pension and public sector salary. In January 2009, the IMF Director, Dominique Strauss-Kahn, expressed concern about the government’s commitment to the programme on a visit to Hungary. He also remarked that the reduction in reserves significantly raised the risk of failing to meet the targeted fiscal adjustment.
The crisis also exposed the structural weaknesses of Hungary’s economy. Despite achieving a high level of integration through foreign direct investment (FDI), Hungary remained extremely vulnerable to an economic downturn. Parallel to the devaluation of the Hungarian currency, manufacturing industries experienced rapid contraction. December 2008 saw a 23.3% drop in industrial production compared with the situation a year earlier.
National summit called
The then Prime Minister, Ferenc Gyurcsány, called a national summit for 18 October 2008 to address a number of issues, most notably to devise:
- an itinerary for joining the eurozone;
- a medium-term agreement on wage development;
- an accord on financing pensions;
- recommendations for reforming the welfare system;
- measures for the long-term development of education and training.
Mr Gyurcsány invited political party heads and leaders of their parliamentary fractions, along with the president of the Constitutional Court (Alkotmánybíróság, AB), Péter Paczolay, representatives of both the employer organisations and trade unions represented in the National Interest Reconciliation Council (Országos Érdekegyeztető Tanács, OÉT), heads of economic chambers and municipality associations, the President of the Republic, László Sólyom, the Speaker of the Parliament, presidents of the Hungarian Academy of Sciences (Magyar Tudományos Akadémia, MTA), as well as former presidents of the latter institutions and previous prime ministers. The majority of the 64 people invited participated in the summit, except for President Sólyóm and Mr Paczolay of AB, both of whom declined the invitation, referring to the obscurity of the summit’s mandate and the principle of the ‘division of power’ (trias politica).
Strong divisions arise during talks
The summit was held at the premises of the MTA, with national television channels showing live coverage of the event. However, the meeting, which had been organised with a view to establishing national unity, ended without any real outcome. While leading figures of the Hungarian Socialist Party (Magyar Szocialista Párt, MSZP) called for a unified stand, FIDESZ continued to blame the allegedly irresponsible governance of MSZP for the economic hardships.
Employer organisations and business leaders strongly opposed the possibility of a tax increase and highlighted the unsustainability of maintaining the present wage level even in nominal terms. Trade unions spoke out against moves to place the burden of the crisis entirely on workers and criticised the government’s ‘outdated’ methods of crisis management, which they claimed only favoured creditors and resulted in, among other outcomes, job cuts in the public sector. They called for a new approach focusing on job creation and bolstering the economy. For instance, businesses could be helped to access their usual ‘revolving assets’ credit lines at banks, as many businesses have faced difficulties in financing their ongoing production given that commercial banks have tightened their credit policies’ criteria since the beginning of the crisis.
Further top-level talks
In a further move, on 30 October 2008, the then Prime Minister Gyurcsány met with public sector trade unions to ‘seek their understanding’ for the public sector wage cuts. However, the trade unions refused to accept the cuts and initiated negotiations to moderate the impact of the measures. Elsewhere, the prime minister participated in the board meeting of the Hungarian State Holding Company (Magyar Nemzeti Vagyonkezelő, MNV), where he proposed cutting approximately 40% of remuneration for the top managers of all state-owned enterprises.
On 19 November, the prime minister also participated in a meeting of the National Development Council (Nemzeti Fejlesztési Tanács, NFT). The council, whose seven members are delegated by the Economic and Social Council (Gazdasági és Szociális Tanács, GSZT), endorsed the plan of the Ministry of National Development and Economy (Nemzeti Fejlesztési és Gazdasági Minisztérium, NFGM) to reallocate resources from the 14 operational programmes of the New Hungary Development Plan (Új Magyarország Fejlesztési Terv), which is co-funded by the EU, to support businesses to preserve their jobs and market shares. On 13 November, the OÉT also negotiated, among other ongoing issues, the government’s plan for a policy package seeking to boost the economy and employment in an effort to prevent the deepening of the economic crisis. (HU0812029I).
Parallel to the exceptional crisis management meetings, the OÉT carried out its customary task of negotiating the national minimum wage for the following year and issuing recommendations for the annual wage hikes (HU0905019I). On 27 November, the president of the MNB consulted with all employer organisations and trade unions participating in the OÉT and reviewed the current economic situation, paying special attention to inflation. Subsequently, the MNB presented its view on the interactions between wage development and monetary policy.
Commentary
The government launched a series of high-level consultations in an attempt to overcome its legitimacy crisis. Analysts argued that the ‘credit crunch’ and the economic slowdown presented the prime minster with the new role of crisis manager; indeed, in the beginning, he seemed to use the situation to help restore his own credibility.
Despite numerous top-level negotiations, no consensus was reached between the government, opposition parties, employers and trade unions concerning the management of the economic crisis. Interestingly, the major economic decision of raising the IMF loan was not on the agenda of the meetings. Although ‘national unity’ and a ‘social pact’ became a recurrent theme in the rhetoric of the prime minister, concluding agreements – even in the routine wage bargaining rounds – was far more difficult than in previous years and their outcome has less regulatory force in the private sector. As a side effect, a rise in peak-level negotiation forums has become evident, especially due to an increase in ad hoc summits convened without appropriate legal background, a definite agenda, representative participants and a clear mandate. Such summits developed into widely publicised ‘talk-shows’, failing to achieve any concrete resolution; as a result, they may contribute to a ‘hollowing out’ of the functioning of national social dialogue forums.
András Tóth, Márk Edelényi, László Neumann, MTA PTI