EU "will sabotage Hungary's economy if Budapest blocks fresh aid to Ukraine"

[Stone]

Orban Hits Back After Secret EU Plan 'To Sabotage Hungarian Economy' Revealed

ZH [slightly adapted] | JAN 31, 2024

"Hungary does not allow blackmail," Hungary’s minister for European affairs, Janos Boka, has lashed out in response to the FT-reported secret document showing the EU stands ready to inflict intentional damage to Hungary's economy if Orban's government persists in rejecting more funding for Ukraine. "The document, drafted by Brussels bureaucrats only confirms what the Hungarian Government has been saying for a long time: access to EU funds is used for political blackmailing by Brussels," Boka emphasized on X.

EU leaders are expected in Brussels on Thursday (Feb 1st) in an effort to salvage and pass the €50bn four-year aid package to Ukraine which Budapest has been blocking. But if Orban doesn't back down, EU leaders are reportedly ready to say 'enough is enough' - per Financial Times' reporting, which openly uses the word "sabotage" to describe what other bloc members will seek to do to the Hungarian economy. Yet ironically enough, it remains officials in Brussels who are instead openly accusing Budapest of using blackmail related to Ukraine funding.

"In a document drawn up by EU officials and seen by the Financial Times, Brussels has outlined a strategy to explicitly target Hungary’s economic weaknesses, imperil its currency and drive a collapse in investor confidence in a bid to hurt "jobs and growth" if Budapest refuses to lift its veto against the aid to Kyiv," FT writes.

It appears the nuclear option of final threats. Continues FT: "If he does not back down, other EU leaders should publicly vow to permanently shut off all EU funding to Budapest with the intention of spooking the markets, precipitating a run on the country’s forint currency and a surge in the cost of its borrowing, Brussels stated in the document."

Viktor Orban's office said in reaction to the revelation in the FT article, "Now it’s crystal clear: this is blackmail and has nothing to do with the rule of law. And now they’re not even trying to hide it! Whatever happens, change is needed in Brussels!"

FT has cited the draft secret document directly. It declares that "in the case of no agreement in the February 1 [summit], other heads of state and government would publicly declare that in the light of the unconstructive behaviour of the Hungarian PM …  they cannot imagine that [EU funds would be provided to Budapest]."

While this is perhaps shaping up to be the most "overt" example of Brussels trying to force Budapest into line by targeting its whole economy, it's certainly not the first time blackmail style rhetoric has been deployed, hearkening back to 'rule of law' issues and debate over "LGBTQ+" and other supposed 'democratic backsliding'.

European Commission data indicates intra-EU trade accounts for 78% of Hungary’s exports, with a mere 3% going to the US and 3% to the UK. The EU plan cited in the report points out that "growth and jobs … depend to a large extent" on foreign money, including substantial EU funding. As news of the secret plan leaked the Hungarian currency, the forint, depreciated by 0.7% on Monday.

Interestingly, amid Hungary's perceived intransigeance on the Ukraine funding issued (though it should be remembered it's the Hungarian side saying the EU won't compromise), some EU diplomats have begun to complain Europe is "starting to look weak".

Orban on Tuesday has been reported as being ready to soften his stance, per Reuters: "Hungary is ready to participate in the solution of the 27 (EU member nations) if you guarantee that each year we will decide whether or not to send this money. And this annual decision must have the same legal basis as today: it must be unanimous," the prime minister was quoted as saying, which is being widely seen as an opening toward significant compromise.

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Below, Philip Pilkington of the Multipolarity podcast dissects some of the underlying assumptions of FT's reporting, and looks at the question of 'weakness' ...

The most obvious is the idea that Hungary has “very high inflation”. In reality, after being very high previously, inflation in Hungary has come down rapidly, and is now just above 5% and is beating expectations. Errors like this suggest whoever put together the ‘strategy’ probably isn’t a very, shall we say, data-oriented economist. More likely a lawyer vaguely remembering FT headlines from 6 months previous that are now out of date.

It also highlights Hungary’s public deficit. Hungary’s public deficit is large because of energy subsidies, but this is the case across Europe. The Hungarian public deficit is currently 5.9% of GDP. Compare that to the Italian at 8% or the French at 4.8%. Hungary is somewhere in the middle. And it has a low public debt at 74% of GDP. France’s is 112%, Italy’s is 142%. This suggests that the authors just did a quick Wikipedia job trying to get scary numbers without contextualising them.

But more egregious is the lack of basic macro understanding. Whoever wrote it seems to think that if EU funds are withheld from Hungary, the Hungarian currency, the forint, will collapse. This is the only really meaty threat in the piece. But the forint is determined like most other DM currencies: by Hungary’s relative inflation rate and the central bank interest rate. Throughout the previous inflation, the central bank managed the forint’s adjustment pretty well.

My guess is that there’s some projection going on here. The lawyers that wrote the ‘attack strategy’ are aware that Ukraine’s currency relies on foreign aid - the foreign aid that Hungary is disputing - and simply assume Hungary’s does too. Basic lawyer brain.

Maybe the Brussels crowd can convince the financial press to weaponize their headlines against Hungary - this seems an increasingly common tactic at certain outlets, which are haemorrhaging credibility doing so - but it likely won’t make a difference. FDI flowing into Hungary is being deployed by investors that are aware the country is a ‘black sheep’ and are fully used to interpreting headlines through this lens. You can just about get away with weaponising headlines against China, playing on peoples’ unfamiliarity with the statistics and low-key racism but if you start doing this to a country whose statistics are published by Eurostat you’ll just look ill-informed and idiotic.

All in all, the EU ‘attack strategy’ is unserious. It was very likely not devised by economists or market-adjacent people. More likely by lawyers whose macro understanding comes from half-remembered newspaper clippings. It all looks a bit desperate, to be honest. A tale, told by an idiot, full of sound and fury, signifying nothing.