HUNGARY'S GOVERNMENT TREADING UNCONVENTIONAL PATHS.

• Position: Editorial

An erratic leader is something Europe can ill afford, The Financial Times wrote in an editorial comment in December 2010, aiming at Hungary as it takes over the rotating EU Presidency. To what extent is Hungary an "erratic" partner on the European and international scene?

There is no doubt Hungary's new centre-right government led by Viktor Orban, in power since June 2010, is pursuing unconventional paths. The strong verbal rejection of restrictive economic policy, the windfall taxes in four specific sectors, such as banking and utilities, and the one-off measure of switching the private, but compulsory, pension fund into state control, raise concerns among investors and international organisations. Moody's has recently downgraded Hungary's state debt to just one phase above junk status. In November, a Commission spokesman openly criticised the country's economic policy making.

The perception of the economy, however, is worse than its actual state. The country's macroeconomic fundamentals have greatly improved since the first half of 2009. The sustainable fiscal consolidation began at that time, under the one-year transitional and technocratic government of Gordon Bajnai. Now, Hungary's relative position in the region and in comparison with the eurozone periphery has improved considerably. The majority of EU countries well exceed the 3% Maastricht criteria ceiling in terms of budget deficit. Ireland's figure is projected to be a massive 32%, in Greece it is 15%, Spain and Portugal above 8% and in Poland and Slovakia around 8%. But Hungary's figure will be around 4% this year.

Even if Hungary plunged into a severe recession of 6% in 2009, recovery is on track. The growth rate is estimated to be over 1% this year, and around 3% in 2011. It has been rather reassuring for Hungary that its main trade partner, Germany, is actually booming.

The core of the Hungarian government programme from summer 2010 is income and corporate tax cuts, and, since it was not allowed by the EU and the IMF to finance this by a higher deficit, the Orban government chose unusual and controversial devices. The policy has to resolve the tension between two goals: to guarantee financial stability and stimulate the post recession economy. The two do not necessary imply the same means.

Hungary is captured partly by its past. Although the 1990s proved to be, in some respects, a success story, in the first decade after 2000, the country's macroeconomic position declined...