Hungary and the Eurozone – the Need for a More Systemic Approach

Abstract

This contribution purports to illustrate why a more systemic approach is needed when it comes to considering the Eurozone accession in case of Hungary. The paper first dwells on the issue of macroeconomic instability in case of Hungary from a regional perspective by devoting attention to its ‘lagging behind’ phenomena which call our attention to the necessity of a more holistic approach in supporting the Hungarian Eurozone accession. Then it emphasises that the challenges we are facing today imply that the role of governance and the quality of state are heavily appreciating; and we argue that Eurozone accession needs good governance which incorporates the issue of public-sector innovation in a more dedicated way in tackling old and new challenges in supporting sustained growth and development as prerequisites of Eurozone accession as well.

Key words:

• Hungary
• Eurozone
• Central and Eastern Europe
• ICEG European Centre

Acknowledgements

This research was realized in the frames of TÁMOP 4.2.4. A/2-11-1-2012-0001 ‘National Excellence Program – Elaborating and operating an inland student and researcher personal support system’. The project was subsidized by the European Union and co-financed by the European Social Fund.

Notes

1 Imposing big taxes on the banking system as well as crisis taxes on certain sectors like the pharmaceutical industry, nationalisation of private pension funds, etc. As Csaba (2011) sensitively illustrated:

Interventionism is detectable in every corner, from micromanaging the consequences of the environmental catastrophe in Transdanubia to the highly differentiated application of crisis taxes, by the sector and by the market players. Capping the remuneration of public officials across the board, no matter how popular, rewrites long term contracts, and so does the nationalization of private pension funds. Re-tailoring taxes accruing to local municipalities was yet another case in point.

2 A lesson learned from the current European crisis management is that eschewing public debt can be as harmful as letting debt-to-GDP ratio to grow since austerity could not pervasively resurrect investors' confidence in certain countries due to the fact that expenditure cuts triggered GDP declines leading to increase in public debts (Kovács, 2013a).

3 See: European Central Bank, historical data. Available at http://www.ecb.europa.eu/stats/exchange/eurofxref/html/eurofxref-graph-huf.en.html (accessed 12 December 2013).

4 Due to the shift, the economic growth will go through a dampening process, which is now the case. This is completely in line with the results of Barry Eichengreen and his co-authors emphasising that economies tend to slow down as they reach the 17,000 dollar per capita income level (Eichengreen et al., 2012). It can be anticipated by 2015, in case of China. Another potential repercussion will be the change in the European import structure, and the price-moderating effect of the cheap Chinese products will also be lower.

5 Apart from the fact that softening the Stability and Growth Pact was equal to worsening credibility, particularly by the early 2000s when two non-complying countries (Germany, France) were not sanctioned, we argue that EMU framework acted as a mechanism which was on the one hand benefiting for core countries like Germany and France, and it was a counter-incentive for such countries like Portugal in implementing necessary fiscal adjustments and structural reforms. Since the indebtedness in southern Europe, helped by Germany and France, fostered their imports, a contrario, it also triggered the German exports; and thus this system appeared to be a desirable one. Therefore, the well-documented design failure (De Grauwe, 2013) was not only the result of human action, but to a certain degree also that of human deliberation. Nonetheless, the surplus cash stemming from strengthening exports was being to a large extent re-allocated to the southern countries in the form of loans. The reason for the EMU not serving completely as an external enforcement framework is that the German and French governments would have blocked the flow of increasingly risky loans to the peripheral countries, but their interest groups would not have left it without a word because this would have led to additional economic slowdown determined by a decline in demand and workforce layoffs. For this reason, the creditor countries were not interested in the break-up of this status quo and therefore closed one of their eyes to the fiscal indisciplinarity.

6 As Temin and Vines (2013) repeatedly reaffirmed, in the absence of a hegemonic power, global governance seems to be a desired but not realistic option. Even the World Economic Forum has just recently played down a scenario for global governance without clearly specifying its feasibility. See Nye (2013)

7 As the Austrian economists ravelled out long ago, this cannot be the case. von Mises (1929|1996) argued that interventionism even at national level generates unintended negative consequences, i.e. generates uncertainties. Hayek (1945) associated this issue to the shortcomings in utilising information when it comes to coordination (i.e. to have all the necessary knowledge to overlook the process of interventions).

8 In an era of growing uncertainties, certain firms are more likely to postpone their R&D and innovation activities; however, as economic history suggests, some firms consider the crisis as an opportunity and innovate and spend on R&D in a more emphatic way if external finance is provided (Stone & Stein, 2012). It was documented in the Great Depression by Mowery and Rosenberg (1998) as well as Field (2003, 2011). It seems that scarcity together with more constrained conditions serves as an enforcement mechanism of new or significantly improved goods and services and processes, ultimately that of innovation and imitation. Plastic and television were also invented during the uncertainties of the 1930s (Nanda & Nicholas, 2013). Crisis is always an opportunity to be seized. Business cycle analyses also confirmed that inventions are often brought to life during downturns (Kondratieff, 1935).

9 See for instance: Downs (1957), Niskanen (1971) and Tullock (1980).

10 EPSIS Report is available at http://ec.europa.eu/enterprise/policies/innovation/files/epsis-2013_en.pdf (accessed 10 December 2013).

11 According to the model of ‘radical efficiency’ coined by Gillinson et al. (2010), significant service-quality improvement can be reached with substantial (approximately 20–60%) cost savings. This requires the recognition that new insights, the re-conceptualisation of customers and their roles in public service delivery, and last but not least new resources are needed.

12 A potential approach towards reinvigorating trust through PSI is the well-known participatory budgeting which gained momentum not only in Brazil (Porto Alegre) but also in more and more European cities (e.g. Eindhoven, Seville, etc.) which is able to increase the trust base of citizens by engaging them in expressing their opinions on urban development-related priorities.

13 The document is called Investment in the Future – National Research and Development and Innovation Strategy 2013–2020. Available at http://www.nih.gov.hu/download.php?docID=25559 (accessed 10 December 2013).