The Hungarian Crisis: An Austrian School Explanation

The Hungarian model was heralded as one of the most successful post-socialist way of integration into the globalised world economy and European economic area in the nineties. Currently, Hungary is suffering from a full-blown crisis 1996 onwards. Increasingly large number of Hungarians is losing their faith in political parties, institutions, democracy and in market economy. The government, elected in 2010 by supermajority and still enjoying a broad support despite the deepening recession, condemns the development path taken after 1989 and openly rejects the wrong model of the last 20 years. The government intends to build a new economic model following a model, which one can call a model of economic nationalism as the only way out of the crisis. The paper intends to portray, through the case of Hungary, how economy and politics is interconnected, and why political elites are choosing a credit fuelled development path. The paper intends to portray how a credit fuelled growth was induced by politics and ended up in tears. Moreover, the paper describes the consequences of pro-etatist shift in the public sentiment due to the alleged "market-failure", which was in reality a crisis, at first place, created for political purposes by political means. This article, based on the Austrian business cycle theory, argues that the tragedy of Hungary was that it went through a government inspired spending binge in the first half of the 2000s. The deficit spending of the government was accompanied by the expansion of credit by the commercial banks, mostly denominated in Swiss francs. The combined effect of deficit spending and credit expansion was the build-up of debt and loss of cost competitiveness. The 2008 crisis ended the credit fuelled development path and has started the long and painful period of deleveraging crisis. On the other hand, the Hungarian crisis is a post-Keynesian crisis. It had broken out when the state was already heavily indebted and the managerial state fully developed within the constraints of the capabilities of the Hungarian economy. The paper argues that Hungary has chosen the wrong path by opting for economic nationalism and blaming "markets" for the crisis.