Still Clinging to Austerity After All These Years

Hungary, the IMF and the EU

The more things change, the more they really do stay the same. For a
while after the global crisis, we were told that the IMF had changed its
position with respect to the strict and generally pro-cyclical measures
it had been suggesting to countries in the throes of financial or
balance of payments crisis. Their economists openly accepted the need
for fiscal stimuli and generally counter-cyclical macroeconomic policies
to combat the recession.

According its own internal review in September 2009,
the IMF has really changed in this respect: "Internalizing lessons from
the past, (IMF) programs have responded to country conditions and
adapted to worsening economic circumstances to attenuate contractionary
forces...The stance of fiscal policy in most cases has been accommodative
and adjusted to evolving conditions. Deficits were allowed to rise in
response to falling revenues and, in cases where domestic and external
financing was lacking, this was facilitated by channeling Fund resources
directly to the budget."

Other independent assessments have not been so sanguine and have
generally found that the emphasis on fiscal retrenchment and excessive
austerity in the midst of crisis continues in most Fund programmes. A recent study by UNICEF
found that in 57 out of the 86 countries reviewed, the IMF has
recommended contractions in total public expenditure, as well as in
crucial social expenditure.

The latest sign of the IMF's actual intransigence in demanding even
more stringent austerity measures in the face of extreme economic
hardship comes from Hungary. In November 2008, Hungary signed a Stand-By
Arrangement with the IMF for SDR 10.5 billion, as part of a joint
rescue package worked out with the European Union. Various IMF reviews
found that Hungary complied with all the very severely procyclical
conditions imposed, including a massive reduction of the fiscal deficit
from more than 9 per cent of GDP in the last quarter of 2008 to around
3.8 per cent thereafter. At least partly as a result of this, real GDP
declined by 6.2 per cent in 2009. In fact Hungary did not actually take
the remaining amount under the SBA of around 725 million.

The very harsh economic conditions led to social and political
turmoil, with even policemen going on strike demanding their pay and
arrears. The Social Democratic party implementing these measures was
thoroughly defeated in the elections, which delivered a resounding
majority to the centre-right Fidesz Party that had campaigned on a
promise of less austerity. However, once in power, in June this year the
new government also announced that the fiscal situation was worse than
they expected, and so even more severe fiscal measures would be
required.

There were tax cuts for the wealthy, but more pain for workers and
users of public services. Public sector wages are to be cut (in nominal
terms in an inflationary environment) by around 15 per cent; redundancy
payments are limited to two months' pay, with all other payments subject
to a 98 per cent tax; pensions are to be further cut along with an
increase in the retirement age. Coming on top of nearly five years of
such measures, these policies are likely not only to add to material
distress but obviously prevent or delay any recovery in the economy.

It could be thought that all this would be enough even for the IMF to
be satisfied, but apparently not! In mid-July, the visiting IMF team
actually broke off discussions with the government and returned home,
unhappy that more was not being done on the expenditure side to reduce
the fiscal deficit, so as to ensure the planned 3.8 per cent of GDP for
this year. The IMF demanded privatization of state-owned enterprises and
further reductions in spending. They also objected to something that
would actually help to reduce the deficit - a proposed tax on the
banking sector that is expected to raise nearly $1 billion. The IMF
found this to be "high" and likely to "adversely affect lending and
growth".

So it seems that not all deficit-reduction measures are apparently to
the taste of the IMF! Anything that affects bankers and other forms of
capital is obviously unacceptable, and the belt-tightening should focus
on the public at large, especially workers. But this time, even the
centre-right party realises that it really cannot afford to risk renewed
public anger at even more such measures, at least until the municipal
elections to be held in October.

So whose interests are being served by such demands by the IMF? While
the pro-cyclical proclivities of the IMF are well known, it could be
thought that given the recent past and its own statements, it would at
least be slightly shame-faced about insisting upon them. But it may be
that it is being pushed further along this road by the EU, which has
become increasingly insistent on a combined push towards austerity among
all wayward European economies.

The likely devastation on the real economies of Europe is obvious to
almost all observers, and so such a policy appears inexplicable. The
purpose right now, however, is to somehow save the banking system, which
is deeply implicated in the more fragile economies. Thus, banks from
just five countries (Austria, Germany, Italy, Belgium and France) hold
more than $126 billion of Hungarian public debt. This entire exercise is
essentially to save them from any diminution in the value of their
assets. Already since the breakdown of IMF talks, the Hungarian forint
has slumped to its lowest level in the past two years, and yields on
bonds have risen, even though no "fundamentals" have changed.

Of course such a strategy is counter-productive, as will become only
too clear in the next few months. Meanwhile, within countries, it will
depend on how much more of such macroeconomic nonsense the people are
willing to tolerate.

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