By Andrea Hossó

PUBLISHED: 05:23 EST, 10 April 2012 | UPDATED: 05:24 EST, 10 April 2012

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Andrea Hossó is an economist. She was born in Hungary, gained her MSc in finance in London and has worked in the City for over ten years.

Something grave is happening around Hungary.

The Council of the EU is threatening the suspension of one third of the country’s cohesion funds while the European Commission starts intrusive infringement procedures for a variety of questionable reasons.

The European Parliament, meanwhile, is conducting session after session of frenzied attacks on the legitimately-elected Hungarian prime minister, calling his country undemocratic and dictatorial.
Hungary has recently become subject to international condemnation

Hungary has recently become subject to international condemnation

The Venice Commission is issuing scathing criticism on a raft of new laws and the new constitution passed by a democratically-elected parliament replacing the one concocted by the communist dictatorship propped up by occupying Soviet forces.

Analysts are grimly advising the market to play against the Hungarian currency to put pressure on the Hungarian government to conclude negotiations with the IMF about a new credit package that many hope will tie its hands with economic conditions deemed proper by foreign investors.

The world press is loud with criticism from all walks of life bordering on the absurd from a US professor complaining of Hungarians’ bad manners to a Dutch radio host heaping unimaginable insults on the whole country.

The European Handball Federation wants to fine a Hungarian team because its fans sing the Hungarian national anthem before a game.

There is no end to the bewildering mantra from all corners deploring Hungary’s 'descent into the abyss' and its lack of 'European values'.

Who could blame the unsuspecting reader for believing that some horror is shaping up in the bosom of the European Union? The picture is indeed frightening even for someone familiar with Hungary, but for quite different reasons.

The first doubt in the objective observer’s mind is the legitimacy of the accusations. What democratic ideals can unelected Brussels bureaucrats who fear nothing more than referenda hold up for others? What kind of disinterested moral judgment can we expect from a bureaucracy that condemns Hungary for failing to conform to 'European' values but remains silent in the face of serious discrimination against ethnic Hungarians in other EU countries?

The EU finds nothing objectionable in Slovakia’s stripping ethnic Hungarian citizens of their Slovak citizenship if they apply for Hungarian citizenship, although Slovakia generally recognizes double citizenship for all other citizens.
Frenzied: The European Parliament has attacked Hungary's democratically-elected government and prime minister

Frenzied: The European Parliament has attacked Hungary's democratically-elected government and prime minister

It has nothing to say about Slovakia’s language laws that punish ethnic Hungarians for using their native tongue, or Romania’s erasing centuries-old Hungarian tombs in cemeteries.

Amazingly, the EU found no reason to worry about European values in 2006 when the then Socialist government in Hungary ordered police to attack peaceful civil demonstrators who were beaten up, tortured and imprisoned with a brutality redolent of the vilest dictatorships.

Hungarians cannot help noticing the double standard applied to their country in every aspect. The EU wants to suspend cohesion funds for Hungary, one of the very few EU countries that actually kept its deficit to GDP ratio at 3% in 2011 and is likely to keep it so in 2012.

Recently Spain got approval from the very same EU to increase its 2012 deficit to 5.3% from the targeted 4.4%.

The punishment seems cynical in the midst of a protracted economic crisis where for years now EU governments and the US have been applying countercyclical measures keeping interest rates very low and pumping ample liquidity into their economies. Yet, the EU insists that Hungary keep its deficit under 3% by way of imposing further austerity on a population whose living standards have fallen to levels last seen in the 1970s.

The besieged government would like a standby credit agreement with the IMF to calm the markets agitated by the constant stream of bad news and be able to access the markets on less than punitive terms. After all, the ECB has injected over a trillion euros of liquidity into eurozone banks to reassure markets and prop up ailing eurozone sovereign bonds.

However, the IMF whose mandate is purely financial and economic refuses to negotiate with the Hungarian government until it has complied with the EU’s political demands regarding laws and constitution. Even then, it is unwilling to provide Hungary with a mere credit line as requested but insists on the country accepting a credit package, of course, with strings attached. One of the most important economic policy conditions is the lifting of the special levies imposed on some sectors.

We are now getting closer to the real reasons of the furore surrounding Hungary.

In order to better understand the picture it is necessary to look back into the economic history of the past twenty years. The economic transition of Central Europe from planned to market economy has been hailed a great success. Uncontrolled privatization went nowhere farther than in Hungary. Successive governments heeded the advice of foreign advisers and international organizations deeming the speedy and often very cheap sale of assets to foreign companies the best way to 'catch up' with Western economic development.

Looking around twenty years later Hungarians find a bizarre economic landscape dominated by a handful of big foreign companies and huge shopping malls with barely a single local name or product. Whole sectors have been wiped out and quite a few remaining ones are almost wholly foreign-dominated. Unemployment is high, the huge external debt inherited and inexplicably taken over from the Soviet era is ballooning fed by intercompany loans from Western companies to their Hungarian subsidiaries. Economic growth is languishing, foreign companies’ profits are repatriated and little is recirculated into the local economy.

When the current government came into power in 2010, it found a country in tatters with a dramatically increased external debt burden and huge swathes of the population sinking into inexorable poverty where families – educated, working people – have difficulties paying their utility or dental bills.

In its efforts to reduce debt and thus vulnerability, the government decided to introduce some measures designed to return the economy to growth. Amongst these measures is the temporary windfall tax on the financial, retail, energy and telecoms sectors, which had been exceptionally profitable. Such taxes are not without precedent, and banking sector taxes have since been introduced in various European countries.

However, nowhere have they fallen mostly on foreign shoulders because nowhere else is foreign ownership as dominant as in Hungary. Both the IMF and the EU mention Hungary’s 'unorthodox' move taxing mostly 'foreign' companies but fail to mention that these foreign companies have literally taken over almost whole economic sectors. It seems that it is not so much the imposition of windfall taxes but the fact that foreigners have to pay these that they find objectionable.

The rarely mentioned fact is that foreign companies in Hungary have got used to generous tax holidays and financial incentives, and a generally lax operating environment. The special taxes have raised the spectre of a new situation where these privileges and the usual level of excess profits might be reduced.

Thirteen foreign companies in Hungary wrote to the EC in 2010 demanding sanctions against Hungary of the special taxes. Their countries support them and use the EU’s institutions to put pressure on Hungary to lift these burdensome taxes and return to the status quo.

Hungary is vulnerable through its heavy indebtedness. It has never been granted debt forgiveness as Poland in 1991 or Greece now. Some financial analysts have recently commented that improving market conditions would be unwelcome as Hungary could then commercially finance itself and would not have to agree to the IMF’s conditions. This, in turn, would also lift the urgent need to comply with the EU’s political demands which often verge on open interference with Hungarian sovereignty.

This particular configuration is a unique opportunity for the EU to show that small member states have no right to pursue any measure of political or economic independence.

A sweeping offensive of pejorative news and punitive measures is creating an atmosphere where financial markets become inaccessible and the country can be forced to return to the status quo: economic conditions favouring foreign capital and a political environment preparing the abolition of nations states.