László Csaba, Member of the Hungarian Academy of Sciences, expects a smaller decline but a slower recovery in Hungary than in Western Europe, and believes that the duration of the jobseeker’s allowance could be extended from the current 3 months to 9 months. With regard to the EU recovery package, he says he cannot see the source of the 750 billion euros; and joint debt issuance is without precedent, though a rescue package is definitely needed "because we are in the very last hour".
Several significantly different forecasts have been published so far about the outlook for the Hungarian economy this year, the latest being one by the EU. What do you think about that?
As usual, the Commission is a little behind the events: although it is July now, the mood of the economic forecast for the summer is more in line with the situation at the end of April and in May. If we consider the 12 months of this year, then it is clear that a significant downturn is expected in Western Europe, primarily in the United Kingdom, France and Germany. In the Central European region, the decline will be much smaller.
We will also have a downturn, but it will not be dramatic – we can see that data for the first two quarters are not so bad; and the service sector will recover much sooner than we think. Personally, I don't see a chance of the 10 percent decline predicted by my colleague Zsolt Darvas, either: with the growth we reached in Q1, this is unthinkable.
What is clearly visible, even now when data are not yet fully available is that services - not only tourism but also health care, for example - are slowly returning to their own path. The V-shaped curve describing the economic recovery, which the National Bank talks about, is a more optimistic scenario,
however, I expect a U-shaped recovery instead, in our region - a smaller decline and a slower recovery, which is due to the fact that various activities cannot be pursued because the crisis is debilitating smaller players the most, who are short of capital, who are on the edge.
And then we haven’t mentioned yet what will happen if the easing of the restrictions comes before the virus goes away, as it happened in the United States. Apart from the growing number of infections, this would have a number of other adverse effects, and the withdrawal of the easing measures would definitely have a negative impact on the economy.
In contrast with what the government communicated and what was said about their strategy, they launched a rather dynamic fiscal stimulus program. By now, a budget deficit of 8 percent was reached in the course of 5 months, which is five times the planned amount. This confirms that the expansionary fiscal policy has become even more expansionary. However, there is no problem with this, since even EU regulations allow fiscal easing in the event of a downturn.
What are your expectations about the decline in Hungary this year?
I consider the 7% decline in the EU to be too pessimistic for Hungary. It can work out for the whole of the EU, but in southern Europe, for example, tourism has restarted, which doesn’t end in the middle of August; pensioners from Scandinavia have been visiting Greece in the autumn period for decades.
Tourism and tourism-related activities will help to mitigate the crisis; and wage subsidy schemes, in countries where they operate, also have a crisis-reducing effect because they help to sustain consumption.
In line with the general view shared by analysts, I expect a decline of 5 percent or slightly higher, a budget deficit of 5 percent, and a single-digit unemployment rate of no more than 6-7 percent.
As far as unemployment is concerned, we have to take it into account that a significant part of those who drop out of work will be inactive, i.e. they will not appear in unemployment figures - so the real imbalance is bigger than mentioned above.
What is your view about the government's stimulus measures?
The government has dynamically continued investments and supported them with EU and domestic funding. This is one part of the classic anti-crisis policy. The second part is about budget transfers, and there’s a third part: job protection measures. It is arguable whether its rate is sufficient or not, but
in my opinion, increasing the duration of the jobseeker's allowance from 3 to 9 months would be manageable.
The fact that people were not laid off should be appreciated. Retaining jobs has always been a government priority, because people who can keep their jobs will earn money and consume. As a result of all this, the market seems to be coming back to life: even the construction industry did not collapse, although industry leaders feared the worst. In summary, as far as I see the government’s policy is stimulating. State consumption has not decreased either, which is also important, as in the previous crises it was the state itself that started a saving policy, but today the pace of public spending is unchanged, which is also a stabilizing factor.
What do you think about budget transfers?
Budget transfers are definitely important, since, for example, the amount that was spent on health care was consumed, not built into a stadium. I do not think - as Gábor Oblath, a former member of the Budget Council explained in a longer analysis - that unless they create additional demand, the government will not stimulate the economy. Budget transfers have a stimulating and consumption-boosting effect. We have pursued an expansionary fiscal policy in recent years, and increasing it would lead to the overheating of the economy. I agree with the idea that also the Ministry of Finance represents that it is preferable to use budget transfers instead of extra spending, when fighting a crisis. Despite all the efforts, it is clearly visible that there has been extra spending, as the budget deficit is significantly higher than 3 percent.
How do you see the proposed EU recovery package?
It is definitely true that the 750 billion euro fund and the seven-year budget must be negotiated together. As for the 750 billion, I can’t see the explanation or the source of it, in particular. Part of the amount would come from separate own resources. It’s questionable whether the Commission has the authority to do so - according to Karlsruhe (the German Constitutional Court) and those who read the Treaty on the European Union, it hasn’t.
Ideally, they should come to an agreement about the whole package as soon as possible, as we have no time to waste in this regard.
In my view, the measures themselves, and the fact that the Commission would have the right to raise additional own resources from carbon taxes and other sources for example, is a significant innovation.
The idea of joint debt issuance is also unprecedented, and it is not currently possible under the EU Treaty.
The legal aspects of the proposal could also be discussed, but what I consider important is that there is no agreement among the member states apart from the consensus that a budget is necessary.
Member states do not agree about the size of the recovery package, either. At the moment, the 750 billion is just a preliminary number that is absolutely not set in stone. In addition to the four frugal countries, Finland, Slovakia and the Baltic States are not enthusiastic either about joint borrowing or the amount itself, which is much higher than previously calculated. It is also not yet clear who exactly could benefit from this fund and under what terms.
Let me give two examples. Italy says that the amount is too little; more should be spent on crisis management, and practically without prescribing any conditions. In contrast, the Austrian position is that conditions are needed, such as linking the payment of money to the rule of law. The Hungarian Parliament recently voted that the rule of law cannot be examined, and set a special condition for the negotiations. If an agreement is reached, it still has to be ratified. Many member states share the Austrian view. In the EU, however, the devil lies in the details.
It makes a difference whether the recovery fund is administered by the Commission, i.e. it can suspend cohesion payments in Hungary on technical grounds if it finds irregularities in the independence of the State Audit Office or the Public Prosecutor's Office, for example; or whether the fund is distributed by the Council by qualified majority, i.e. ministers of the member states agree on the details between themselves. Unlike analysts who have already calculated how many billions of euros Hungary would receive from the fund, I personally believe that Hungary will not [automatically] receive anything. It all depends on what decisions are made regarding the points I mentioned before.
(The interview had been made before the agreement on the EU recovery package)