While I'll Be Smiling Through the Coming Apocalypse

Despite the weather's nice turn last week the skies over Hungary remained dark with clouds of negative economic premonition. Indeed, never in the half-decade that I have been sticking my fingers into the business breeze in Budapest have I sensed such dread and foreboding, and the general feeling that everything is about to go horribly, horribly wrong. So this week I'm going to try to offer everyone a bit of encouragement. Not, of course, by denying that all hell is about to break loose - it is - but by explaining why the coming economic deluge will not last forever, and should actually be welcomed like the first great rains of spring.

The most obvious sign of severe weather approaching is the thunderous dupla-nems from French and Dutch voters in those country's EU referendums, which will likely result in Hungary and other accession countries getting on far less money from the EU kitty than was previously expected.

This should not come as a great shock. For the past several decades, the EU's financial operations have largely consisted of France and the poorer members of the "original" EU15 guilting money off of Germany and other relatively richer members. And even before May 29, German had long gotten tired of saying "sorry" to France for whooping its ass fair and square back in the big WWII, while the Dutch didn't say nee just to protect their right to dress in drag while smothering their lightly-fluish grannies. So when France, Spain and Greece get cut off, you can be absolutely certain that they will insist that Poland, Hungary and anyone else who joins the EU won't be given the chance to get on the eurodole in earnest. Remember, this is Europe: If I have to suffer, you have to suffer, too.

Meanwhile, what looks like an approaching moment of economic truth in Germany and Italy is guaranteed to have dramatic repercussions in Hungary. While most of Continental Europe is in the drink, economics-wise, Germany and Italy are currently teetering on the brink of full-scale depression. This means one of two scenarios: either they take the bitter medicine necessary to get back on their feet (or in Germany's somewhat underappreciated case, continue take more of it) or they simply lie down and die. Unfortunately, even if these an other sickly EU members choose the pain-then-gain path, this will likely lead to some frightening moments for Hungary in the medium-term. And if they don't, well, in Germany's case just consider the old economic maxim about the big country sneezing and its smaller neighbor catching cold, and substitute a bloody cough for the sneeze.

Veres: Time to panic?

Of course, these foreign clouds would not be so menacing if Hungary's own economic skies were a bit clearer. But unfortunately they aren't. Basically, the state is broke and in hock up to its neck, and no one remotely near the levers of power has any idea how to turn the situation around. The week before last, János Veres, the country's new finance minister, met with a group of analysts to try to convince them not to panic, and no sooner had he left the meeting than the forint had declined another few ticks. There is every indication that the government will spend the upcoming year engaged in an interest-group bidding war with the opposition in advance of the elections next spring. Meanwhile, the country's patronage- and resentment-driven political culture gives no reward to those who try to do the right thing, certainly not in the sphere of economics. The government's recent decision to focus on getting its hands on more of the gray economy rather than trimming some of the rotting flesh off of the its own grotesquely bloated, gangrenous administration is for many the final indication that the patient may need to be forcibly restrained before it can be saved. The situation, as the doctors say, is grave.

Meanwhile, it's not only the government that is playing with economic fire. Over the past few years, Hungarian households have been accumulating debt at a rate that would make even some Americans nervous, and increasingly in foreign currencies. Some of these currencies, such as the Japanese yen, are not even vaguely linked to the forint, meaning that were the forint to significantly depreciate, we can expect to see large numbers of personal bankruptcies, or at least people who should by all rights be bankrupt.

So when are these storm clouds going to break, and what kind of misery will rain down when they do? A few years back, the former head of the International Monetary Fund's mission to Hungary - he was booted out by the previous government - told me that he thought there was a 10% or 15% chance of Hungary suffering a classic external shock. I'd say that the odds are currently twice or three times those.

If you don't remember this chapter from the international economics crisis handbook, it's pretty straightforward. As interest rates are eased to prevent the economy from slowing to a halt (like they are being now) the foreign money that has been propping up both the budget and the forint - when a country goes on a borrowing binge, it has the perverse effect of making the debtor's currency appreciate - edges every closer towards the door. And the first time someone really yells "fire" much of it will bolt, preventing the government from plugging its perpetual budgetary gap, and sending the forint crashing back to earth. Then, as the shock of rejection by the foreign markets seeps through the system and the monetary authorities are forced to re-hike interest rates to stanch the bleeding, domestic demand (the willingness of people to buy things they don't need) collapses, and the prices of most tradable assets (like houses and stocks) collapses as well. At a minimum, this means that most of the poor foreigners who have been buying flats in Budapest hoping for massive gains are going to be sorry they didn't just spend these extra euros at Marilyn's, or on overpriced real estate in their own countries. Everyone else will just be out of a job.

At this point you're probably wondering when I'll get to the good news. Well, as far as I'm concerned, the above scenario is good news, and not because I get pleasure out of others' pain. (Plus, I am sitting on a piece of real estate twice as big as the average Irish punter's.)

Instead, I'm looking forward to the coming crash because I think it may be the best hope that Hungary has for breaking the bad habits that have prevented it from reaching its potential as a modern and affluent society, not least the continuing public tolerance of a predatory, Balkan state that eats half the national income while offering little in return other than political circuses so superficial and cheesy they would make the average ancient Roman wince with embarrassment. If nothing else, a paring down of the billions in EU "mad money" currently expected to flow into Hungary's state coffers over the coming decade might lead some of the hungrier members of the country's political/industrial complex to actually go out and get real jobs, rather than spending their time milking the government for handouts and subsidies.

Basically, Hungary today is on the path to a economic decline like the ones Germany and Italy are on, though without having first created and banked (or inherited) the wealth necessary for going to the dogs in style. A nice brisk little economic storm could wake the country up, and give it another chance to take the path offering the first generation of post-communist Hungarians a prosperous, happy future - or at least the opportunity to blow it on their own terms.