Behavioral Finance

Can the EU Save Hungary?

Hungary's proto-fascist government has once again threatened the rule of law, but EU officials can help restore freedom.

Confession: I pick on the EU political construct a lot. With its largely unelected institutional leadership, it's an easy target for a freedom-loving democracy advocate like me. But there is one area where the EU's institutions can do a world of good: safeguarding the rule of law in member states. That might just save Hungary. Again.

For those who haven't followed the tempest in Budapest, the saga began in 2010, when Prime Minister Viktor Orban's Fidesz party won a two-thirds majority with its center-right platform. Soon after the election, however, Orban's true colors showed. Center-right morphed to neo-fascism, and Orban began systematically dismantling legal protections and consolidating power within the Prime Minister's office. His government revoked the broadcasting license of the radio station supporting the opposition Socialist party, passed new laws expanding the central bank's governing council and giving Parliament control over all appointments and some policy decisions, nationalized private pension assets and slapped foreign businesses with high surtaxes. They also drafted and passed a new constitution, which forced many judges' early retirement (allowing Orban to stack the courts with his supporters), placed the data protection authority under state control, further limited media freedom and issued messages with seemingly anti-semitic undertones. This, along with the central bank law, was supposed to take force on January 1, 2012.

But the EU intervened, citing myriad Lisbon Treaty violations, and forced Orban to U-turn on the judiciary, media and data protection provisions—or else Hungary would have had a nasty date with the European Court of Justice and faced heavy sanctions. And the IMF, from which Hungary sought an emergency line of credit, refused to negotiate unless Hungary dropped the central bank changes and ensured the institution's independence. With the Hungarian forint near all-time lows, the domestic economy suffering under Orban's harmful policies and debt financing looking shaky, Orban relented.

Unfortunately, relief proved short-lived. Shortly after Parliament amended the offending laws, Orban's assault on the rule of law resumed—this time in the form of one-off bills tabled by individual members of Parliament (MPs). Orban acknowledged that the measures controverted EU treaties and his agreements with EU authorities, but, he argued, in a parliamentary democracy like Hungary, MPs have every right to table whichever bills they choose, and Parliament has every right to vote on them. And it would be undemocratic of him to put the kibosh on it.

Sneaky, sneaky.

And so freedom eroded once again. Last month, Parliament passed a law requiring all media providers to pay a "weather service" fee of 0.5% of advertising revenues—whether or not they report the weather. That's a blatant tax grab on opposition media sources. Meanwhile, then-Economy Minister Gyorgy Matolcsy again rewrote the central bank's charter, this time giving the Governor complete control over hiring, firing and salaries (stripping Deputy Governors of their power), banning Deputy Governors from representing the bank publicly, and handing broad powers to a new Chief Director, who answers only to the Governor. One day after the new charter was released, Orban installed Matolscy as the bank's new Governor, replacing the outgoing Andras Simor and ensuring the bank will be under Orban's control.

And then, yesterday, Parliament passed the worst of it: A ghastly package dubbed the "Fourth Amendment," which reintroduces all the measures struck down last year ... and more. Among other things, the law bans political broadcasts on non-state run channels—putting political discourse under the government’s thumb, requires students who receive state aid to stay in the country for a certain time, strips the Constitutional Court of its ability to strike down laws based on their content, and bans the court from striking down any law passed with a two-thirds majority and enshrined in the constitution. In other words, it effectively prevents a future, more liberally minded government and court from restoring Hungary's freedoms—given how fragmented Hungary's political scene has become (Orban's approval rating is down to 25%, but many of those supporters have shifted to the far-right and outright fascist Jobbik party rather than the Socialists), it's unlikely a liberal government can capture two-thirds of the chamber.

It's a dismal situation, and Hungarians are once again demonstrating en masse—it's been 23 years since Communism fell, and citizens don't want to lose that precious freedom. That's likely even true of those who support Jobbik—their aim is more to protect Hungary's sovereignty within the EU than to install fascist dictators (not unlike Austrians who support Geert Wilders and French people who support Marine Le Pen—the rise of the far-right is an unfortunate side effect of EU bureaucracy).

But here's where the EU can help: It can restore the democratic institutions Hungary now lacks. I suppose one could quibble that this violates member-state sovereignty, but remember the EU's original intents: To ensure freedom and the rule of law in Europe and prevent a repeat of early 20th century turmoil. Bureaucracy, political integration and too-powerful institutions only came later. All member states signed treaties ensuring certain freedoms within their borders, and when governments renege on these commitments, it's entirely within the EU's right to go after them. This intervention is for the good of the people—much different than Brussels' usual bureaucratic meddling, which doesn't always serve individual Europeans' best interests.

So it's with much joy that I've seen the huge outcry from EU leaders over Hungary's latest changes—the European Commission, European Council and several European leaders have warned Orban these changes are unacceptable, and they will intervene. Not just with angry letters (an EU specialty), but with subpoenas and sanctions—not what cash-strapped Hungary needs. At some point, in my view, Orban will have to demur once again—otherwise he risks getting expelled from the EU, heading an international pariah state, and losing all international financial lifelines (Russia, one widely assumed benefactor, has been less than forthcoming with aid and support). That's not what Orban wants—in fact, for all his thunderous anti-EU rhetoric, he still hopes to join the eurozone and has started laying out plans for currency convergence. Funny how economic need and good sense can trump even the strongest nationalism.

Of course, Orban won't back down quietly—he'll cling to these schemes and try to save face for as long as he can. He may spend months playing chicken with EU leaders. But in time, I strongly suspect he'll cave—financial markets, which don't respond well to the loss of freedom, likely give him no other choice. The economic fallout won't be easy on Hungarians, but over time, if economic turmoil fosters a freer society, they'll be much better off.

So spare a thought for our Hungarian brethren in their hour of need, and send a word of thanks to the EU's freedom watchdogs. Goodness knows they could use it.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.