This is a tale of two countries in Europe.
Both got in trouble after decades of corruption, sloth, and wasteful spending.
One took the advice of the European Union, the International Monetary Fund, and its richer allies and creditors. It’s now more of a basket case than ever, with a 16% unemployment rate and an economy expected to shrink 3.5% this year.
The other country told the would-be foreign nannies to shove off, and opted for a radical and homegrown remedy. It’s the one that just reported better-than-expected growth of 2.4%, and can boast that its stock market has outperformed every other in the emerging—and developed—world, year-to-date.
The weak sister in this comparison is Greece, and it appears to have sealed its fate by adopting the austerity prescribed by foreign dignitaries. Predictably, tax collections missed estimates as the last vestiges of growth curdled, but the government is now doubling down on the pain to secure a second bailout it has no realistic hope of repaying.
In contrast, Hungary’s center-right government rejected the austerity program prescribed by the IMF. Instead, after winning a landslide election victory a year ago, it embarked on a radical plan widely panned in the West. It included:
- the introduction of a flat income tax
- tax breaks for small businesses
- surcharges for banks, utilities and telecoms, some of them foreign-owned
The Fidesz party, led by the popular (and controversial) prime minister Viktor Orban, also nationalized private pension assets to get by without the IMF’s help.
And, borrowing a page from Franklin Roosevelt, it created a public employment scheme for the long-term unemployed. Hungary has high unemployment too—though it should be noted that, at 11.4%, it’s more than three percentage points below Greece’s.
In This Case, the Ends Justified the Means
Now, we can quibble about how much Hungary’s reprieve owes to the export boom in neighboring Germany...probably quite a lot, I think. We can question if the bounce it’s now seeing will prove sustainable. But there’s no arguing that it’s in a much better place than Greece, and has a much better chance to save itself.
Don’t take my word for it: Budapest now feels confident enough to pitch its plan as a global alternative to austerity in The Wall Street Journal.
Despite all the complaints that the pension grab and the tax surcharges would drive foreign investors away, nothing of the sort has taken place.
In fact, the US State Department notes that investors have welcomed the recently unveiled plan for deep structural reforms, to the point where “by May 2011, the country had already met its foreign currency financing requirements for 2011 through two large dollar and euro bond issuances.”
When Hungary offered €1 billion worth of eight-year notes last month, the offering was four times oversubscribed. The rate was 6%. In contrast, the market is now demanding 25% from Greece for a two-year loan, by which it means, “Fuggedaboutit.”