Hungary Makes a Surprise Left Turn


It all seems so upside-down in Hungary. The young and charismatic Prime Minister, a one-time anti-communist hero who studied at Oxford, was defeated in Apr. 21 parliamentary elections by a coalition led by the former communist Hungarian Socialist Party. A disappointment to investors and Western diplomats? Quite the opposite.

Behind evenhanded official statements, European Union officials in Brussels are relieved that Hungarian voters have dumped Viktor Orban. As for investors, figures from the Budapest Stock Exchange (BSE) say it all: In the two weeks since the Socialists bagged a surprise victory in the first round of voting -- a signal that they were headed for power -- the bourse has jumped more than 7%, to its highest level in 18 months. (A second vote was called for constituencies in which no one candidate received 50% of the vote in the Apr. 7 elections.)

"TRAITORS"? Why the positive reactions? First, there was Orban's fiery rhetoric, which proved to be unsettling to Hungarian markets. Always outspoken, he made a blatant attempt to woo voters from the far right by running a populist, nationalist campaign. One of his deputies called political rivals "traitors" and urged them to "set a good example and hang themselves."

Orban also picked at sensitive historical issues by referring to the Hungarian nation of 15 million people. It's actually home to only 10 million people. The other 5 million are ethnic Hungarians living in neighboring countries. Raising more eyebrows, in the last two weeks of the campaign Orban repeatedly thundered on against "big capital."

That might all be dismissed as campaign rhetoric. But Orban's policies have been troubling, too. His government first annoyed neighbors when it passed a so-called Status Law, extending some employment and Social Security-type benefits to ethnic Hungarians living outside its national borders. The move has particularly rankled voters in Slovakia, fueling the comeback of the authoritarian nationalist politician Vladimir Meciar. Orban even had the brass to threaten to veto Slovakia's proposed membership in NATO if its government didn't let him implement the Status Law there.

Prices of natural gas were controlled, at the expense of Mol's shareholders

Though Orban's government -- despite the "big capital" comments -- has worked hard to attract foreign investors, it has also done much to undermine those efforts. Government tendering grew increasingly opaque and was guided by political patronage in the last four years. Orban also imposed strict controls on the price of natural gas, keeping it well below cost. That would be one thing if the state were subsidizing the loss, but the shareholders of Hungarian oil-and-gas company Mol are paying. Orban's answer to Mol complaints? He launched a plan to renationalize the company's gas division.

AUSTERITY LEADER. Ironically, it'll be the Socialist's Prime Minister-designate, Peter Medgyessy, who'll bury that plan. Not your typical Socialist, Medgyessy says things like, "The state is not a good owner," and "Taxes are too high in Hungary."

Expect him to back up those statements. As Finance Minister under a previous Socialist-led government, Medgyessy, a former banking executive, oversaw an austerity package that rescued Hungary's economy from dangerously high trade and budget deficits.

The country faces no crisis now. Economic growth is expected to be 3% to 3.5% this year. And most analysts see Medgyessy as far less likely to meddle with the markets than Orban did. "Certainly, foreign investors are a little relieved now and are going to be more interested in the Hungarian market in the next couple of years," says Sandor Kantor, director of public affairs for consulting and lobbying firm Weber Shandwick/GJW.

FAIR TERMS. The EU is also counting on smoother negotiations leading up to Hungary's membership, expected in 2004. Certain sticking points, particularly over heavyhanded control of state-run media, should now be moot. More generally, the EU will be dealing with a government that's keen on simply getting into the club on fair terms -- no more fanning nationalist flames when it doesn't get its way. With EU-membership negotiations entering a critical stage for several Eastern European countries and with another round of eastward expansion looming for NATO, Brussels and Washington would like to avoid trouble.

Orban, still only 38, will certainly be back. He has galvanized the Hungarian right. It only remains to be seen whether his slim loss -- he missed a majority by only six seats in the 386-seat Parliament -- will stop his drift toward the far right. With the next Hungarian elections slated for 2006, investors and diplomats have four years to wonder. By Christopher Condon in Budapest


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