Hungary is currently in a unique position within the European Union. The country is carefully balancing between the EU and Russia, relying on the former for financial support, yet looking for the friendship of the latter. As Russia substantially defines energy policy in the region, it is an important aspect of the decision making process. Whereas in many of the post-Eastern Bloc countries some sort of impersonal distancing from the previous overlord may be observed, in Hungary not only has the government declared the so-called “Eastern Opening” of its foreign policy, but also followed that declaration in the wake of the previous regime’s briefly discontinued anti-capitalistic measures. Thus when researching the Hungarian energy reform, three main factors must be taken into account: the general anti-capitalistic sentiment among people; the government’s regulatory and restrictive measures (in many cases regardless of the public attitude) and Hungary’s relations with Russia and the EU.

Recent energy reforms in Hungary made the country dependent upon Russia what in the midst of the current EU-Russia relations strongly affected by the escalating tensions makes the situation of Hungary more difficult. The general anti-capitalist tendencies of the public intertwined with the populist measures of the government, such as aggressive price reductions, nationalization and over-regulation, further weaken the already volatile economy of Hungary, making the country even more dependent on foreign aid.

Anti-free market tendencies in Hungary¹

Although Hungary was in a relatively fortunate position even during the communist era, what enabled the country to regain a well-functioning economy, starting from the early 1990s the trend of progress has been reversing mainly due to the interventionist government policies augmented by the anti-capitalist position of the general public. These anti-free market notions have in turn been capitalized on by populist parties, further increasing the distrust of free economy.

Society is disappointed with the free economic changes which took place in the country after the fall of the socialist regime. And this disillusionment resurfaced after Hungary joined the European Union. Because the economic situation did not change overnight.

The economic regression of the late 2000s caused the rise of historically anti-capitalist far-right ideologies. Conspiracy theories became more and more popular putting the blame on others, rather than claiming responsibilities. Nationalist tendencies that highly oppose a globalized, free market and progress struck the economy hard.

Nowadays, the government fulfills the need of a strongly paternalistic state that saves the people from international corporations, foreign inventors, banks and the globalized market. With an absolute majority, the government went into a rampage of nationalizations and regulations, making the situation in Hungary highly unpredictable, dissuading foreign investors from enterprising in the country. The rise of ultra-nationalistic groups also damages the economy, halting progress and thus stopping substantial economic growth.

Anti-free market tendencies in society

After the democratic changes of the early 1990s, the free market aspirations turned into a state capitalist system. The transparency of the privatizations was not sufficient and many institutions got into the hand of cronies. As a result, the political echelons and the private sector became entangled and many policies started to be aimed at making certain companies richer. This naturally caused a deep distrust in both public and private sector and made the word “free market” synonymous with state capitalism.

A dichotomy ensued in the society – people required a stronger intervention from the state, while at the same time wanting the state to interfere less in their private affairs. A study conducted by the European Values Study (EVS) shows that the Hungarian population is divided between the line of individualism and egalitarianism.

Individual freedom versus social inequalities (%, 2008)

 Source: EVS 2008

Society as a whole, paradoxically, wants more state intervention at the same time hankering after more personal freedom. The results of the study do not differ significantly if the question of state versus individual is asked of each party’s voters.

One of the reasons for this controversial perception of the state can be the high degree of distrust amongst the citizens towards each other, as shown by many studies. Since individuals do not think much of other people, they are turning towards the state to improve their situation. In the Eastern-European countries, despite of the officially collectivist ideologies, the decades-long state socialism did not result in greater social cohesion. Insane individualism, greater distrust, lesser cohesion are more inherent in these countries than in Western Europe. The majority of the Eastern-European voters, Hungarians included, do not trust the state but they trust other people even less and this paradoxical set of mind makes them paternalists.

The word “paternalist” usually describes those who require a more intensive intervention and regulations from the state but at the same time they are aware that this entails sacrifices and limitations of freedom on the level of the individual, which are accepted for the beneficial results of the state intervention. In Hungary, however, paternalists want the benefits of state intervention, for example greater security, smaller social inequalities, but they don’t accept the individual consequences, such as higher taxes or limited personal freedom.

Ranking of countries by the main component of paternalism

In 2010, a flat tax system was implemented, what made the issue of taxation and redistribution relevant. Opposing this measure, studies show that in 2009 half of the population in Hungary strongly agreed that the state should narrow the differences between incomes, putting Hungary at second place, right after Greece, in the ranking of EU countries. Similarly, nearly half of the population supported a progressive taxation.

The state should narrow income inequalities (rate of those who completely agree)

People don’t accept wide income gaps even ifwhen they reward talent and hard work. In relation to meritocracy, Hungary is lagging far behind other countries. There is a huge confusion regarding income inequalities and redistribution in the country and people think that it is the responsibility of the state to lower the inequalities – but on the other hand, taxes should be lowered as well.

It should be noted that there are no significant differences between those who deem themselves right or left wing sympathizers with regard to paternalism, distrust of free market or competition. This shows a confusion as to the ideological spectrum, because traditionally the right wing was more pro-capitalist while the left wing – more for state intervention. In Hungary, the dichotomy of political polarities is based rather on how much emphasis one puts on the importance of national values. In this regard, the self-proclaimed right-wing parties are usually more nationalistic, whereas the left wing is less so.

Studies show four main contradictory views of the Hungarian citizens:

1. The state should have more responsibilities in securing the welfare of the individuals and the control of society, but this should not limit individual freedom and independence, the state should not interfere in their lives (omnipotent ‘night-watch’ state);

2. The state should satisfy the needs of its citizens but should also lower social benefits and subsidies;

3. The state should lower income inequalities, but should also lower taxes and social spending;

4. The amounts of social benefits and subsidies are both too high and too low.

Government policies

In the early 1990s, when the socialist regime failed, Hungary had a relative economic advantage as compared to the other post-communist countries. Hungary joined the EU in 2004. At first there was a rapid growth but it gradually slowed down and the economic regression of the late 2000s hit hard. The mismanagement of the situation by the then ruling socialist party led to a landslide victory of the self-proclaimed central-right party Fidesz at the next elections in 2010. They managed to gain an absolute majority, meaning that they acquired two thirds of the seats in the general assembly, which was enough to implement a new constitution. It came into effect in 2012. Fidesz, which has been in power ever since with absolute majority, fell under heavy criticism for weakening the system of checks and balances and interfering with civil rights, eg. free press.

Although claiming to be a conservative, right-wing party, their economic measures have been predominantly left wing. For example, the government nationalized the private pension funds, set up an agency to exercise a certain amount of censorship over the media, forcefully reduced utility fees causing huge losses in the private sector and now the government is investigating civil organizations for being founded from abroad.

Although the government implemented flat tax, there are many new side-taxes, so even this measure cannot be regarded as purely capitalistic. There is a strong anti-multinational company sentiment, a lot of inventors are complaining about an unjust taxation system which favors national investors to foreign money. A lot of sectors are heavily taxed, eg. the financial and communication sectors.

There is also a strong anti-EU sentiment in Hungary, although the rate of euro-skeptics is close to the average within the EU. Despite the fact that the country is heavily subsidized by the European Union, because of the lack of transparency and possible embezzlements the beneficial effects are not immediately apparent to the public. The government is currently opposing Brussels on issues like the EU’s concern with new legislations and regulations the EU wants to implement.

Many foreign investors perceive the situation in Hungary as unstable and unpredictable because the government, with an absolute majority, is passing laws too quickly. And many of those laws are not in favor of the free market but of a strong state intervention and heavy taxation.

The far right and anti-capitalism

The far right historically opposed liberal values. It has always been against individual freedom, free market and globalization. Its collectivist views are in stark contrast to the capitalist set of values which emphasizes the importance of an individual rather than a nation or an ethnic group.

Comparison of the set of values of capitalism and the far-right

The anti-free market tendencies in Hungary proved to be a hotbed of the populist far-right ideologies. It is a common phenomenon that political extremities resurface at the time of economic regressions, when people feel the need to find a scapegoat.

The far right of Hungary, mainly embodied by the Jobbik party, which has 20% of the popularity rate, opposes both individual and economic freedom, but its views also contain the same controversies as those of the general public.

In the program of the party appear the following elements of the far-right ideology:

• The idolization of the state, thus expanding its powers and its influence on the economy;

• Ethnocentric views, resulting in the rejection of foreign investors;

• A xenophobic attitude towards foreign capital, fear of clandestine interest groups;

• Aversion to big businesses;

• Limitation of free competition based on national values and human weaknesses such as selfishness and avarice;

• Prioritizing the duties rather than the rights, the supremacy, the establishment and the maintenance of order;

• Strong aversion to the elite, discrimination of certain economic groups.

The agenda of Jobbik includes some more paradoxes as well: exercising a strong and wealthy government is an impossible task when at the same time it wants to reduce public charges. Jobbik also opposes foreign capital, except for investments from the East.

The far-right’s aversion to free markets is also strengthened by a set of anti-Semitic conspiracy theories. Many people believe that Jewish interest groups are trying to weaken Hungary, buy (and thus, using their discourse, steal the lands), and they control the market and the trend for globalization. A staggering 42% of the Hungarian population thinks that a shadow organization is controlling the government.

The Hungarian Free Market Foundation created a damage calculator which provides a monthly calculated index, denominated in the Hungarian currency (forint), which gives an estimate of the quantified, indirect damage to Hungary, caused by the internationally published pessimistic articles on the activities of the Hungarian extreme right. By calculating the damage, the PR values of the articles, the decreasing touristic incomes due to the negative reports and the decrease of business investments are being taken into consideration. Every second about 30-forint (approximately 0.132 USD) damage is caused.²

Populism and paradoxes

In Hungary, most of the people favour the individual liberty aspect of capitalism as long as they are the individuals in question, but they don’t care about others. On the other hand, people find inequalities unjust and they think it is government’s responsibility to reduce the gaps.

The increasing number of supporters of the far right is against every aspect of free market values, both economically and on the levels of civil liberties. They believe in strong nation-states and collectivism.

Paranoia and distrust are a major problem and contributing factors of the socio-economic views of the people. They think that the state should provide greater security by exercising greater powers over others. The society’s economic and social perception is paradoxical in nature and its priorities contradict each other.

The populist parties are capitalizing on the paranoid anti-capitalism of the people and are seeking to implement interventionist measures.

Energy Policies

It is a commonly understood that direct government interventions into the economic processes, although in the short term may lead to successes, in the long term are unsustainable and cause more harm than bring benefits.Going against the European trend of liberalizing the energy sector, Hungary is working towards more state control.There are three main measures in which anti-free market tendencies manifest within the energy sector. These are: price reduction, nationalization and foreign policy.

Price Reduction

In general, the European Union endeavours to limit price regulations in the field of production since the liberalizations of the 2000s. The European Commission requested Hungary to end long term power purchase agreements in 2008 on the grounds that free market will provide better opportunities.³ This trend to deregulate prices is present in the policies of all the member states, except for Hungary, where every household, every small business up to a limit of consumption and every public institution is entitled to gas and electricity on a regulated price. Such extent of centralization is unique in the European Union.

International Practices

A review⁴ of the Council of European Energy Regulators (CEER) revealed that about half of the member countries still regulate prices, however, most of them plan to abandon this practice. This will happen faster in the electricity sector, although only a few countries have precise strategies on doing so.

As for the gas sector, changes will be slower but the overall trend within the EU is moving towards transferring prices to the hands of the free market, as regulations in the long term do more damage than good. Unfortunately, however, while the most countries intend to abandon price regulations, they mostly lack a roadmap on how to proceed.

Hungarian Practices

In the mid 1990s, Hungary privatized most of the electricity and gas services, but the real opening of the markets started in 2003. This period, which lasted until 2008, is called the “dual market”, because whereas the industrial consumers enjoyed the benefits of a relatively open market, the private consumers were provided for by service providers enjoying monopolies and under strict regulations. In 2008, when the market truly opened, this duality seized to exist. State intervention concerning industrial consumers was limited to setting tariffs and taxes. This was still a significant portion of the full price (more than 50%) so the market was still not exempt for state intervention.

Source: www.mavir.hu

In 2010, a new trend started to bloom opposing the liberalization efforts with the change of political parties in power. The National Energy Strategy 2030⁵ clearly sets a new direction: “The presence of the government is currently rather moderate on a market-oriented, liberalised and highly privatised energy economy. The government is primarily able to assert its priorities through regulatory instruments, in accordance with the rules of the European Union. In itself, the ensuring of the coherence of legal and economic conditions is insufficient in order to efficiently vindicate public good and national interests. While in the electric power sector, the government continues to have a substantial direct potential to influence the market through the state-owned MVM Zrt. (Hungarian Power Companies Ltd.) and the Paksi Atomerőmű Zrt. (Paks Nuclear Power Plant Ltd.), a similar potential should be established in the natural gas and oil sectors, with particular regard to the expiry in 2015 of the long-term natural gas contract between Hungary and Russia. This may include the granting of new authorizations to the MVM Zrt., creating a new state-owned natural gas trading company or acquiring a controlling interest in a company with a high market share.”

One of the manifestations of this new direction are the price reductions in the prices of utilities. In 2013 there was a 20% energy price cut, and in 2014 – as per the third wave of regulations – the price of gas was reduced by a further 6.5%, electricity by 5.7% and district heating by 3.3%⁶.

Energy service providers not owned by the Hungarian state, which were hit hard by the reductions, took matter to court, and they won, but in the meantime the Hungarian Energy and Public Utility Regulatory Authority (MEKH) was given powers to issue decrees which couldn’t be pursued in court. The government plans to extend the forced price cuts to the industrial sector as well.

The Impact of Price Reductions

The new set of economic measures of the Hungarian government project a paternalistic, protectionist image, which many voters found appealing. The price reduction was more of a populist political move than a well considered economic measure, all the more so, because the Hungarian electricity and gas prices were not – as the government propaganda led people believe, extremely high compared to other EU member states. True, they were high compared to the wealth of the people, but, even so, the sound solution is not lowering the prices, but raising the welfare of the people by opening and liberating the market. Price reductions only generated losses for the companies⁷, so in the long term they will either go bankrupt (which will soon be the case in small businesses in the utility sector) or they will have to cut wages and reduce employment.

The rate of investments fell in the energy sector and elsewhere as well after the price reductions where implemented, and this, in turn, lead to a decrease in the rate of economic growth. According to the statistics of the Hungarian Central Statistical Office (KSH), since 2010 investors find Hungary less and less favourable. The OECD projects that in 2015 the growth of GDP will only be 1.7% compared to the 2% of 2014⁸.

Nationalizations

The governing party is leading a nationalistic policy, favouring Hungarian ownership over foreign companies. Multinational businesses are directly targeted, and banks with foreign ownership are being bought up. Moreover, due to the reluctance of foreign investors to continue operating in Hungary in such an atmosphere, it is easier for the state-owned providers to acquire businesses. The government has outlined a plan (although the details are constantly being changed) to establish one great, non-profit, public service provider which would incorporate the energy sector as well.

Foreign Policies

The new Hungarian foreign policy directive, called the “Eastern Opening” clearly sets the tone for the country’s relations.In 2014, the Prime Minister Viktor Orbán put forth his idea to establish an illiberal democracy based on the model by Vladimir Putin, which he also started to implement. Euro-scepticism is growing in Hungary not only amongst citizens but on the government level as well. The speaker of the national assembly stated, that if the EU continues along the same line, it is time to back out of it. The EU flag was taken down from the building of the Hungarian parliament.

Since Hungary enjoys the benefits from Brussels a lot – with 6.3% of the Gross National Income coming from EU funding in 2013 and with 95% of all public investments being at least partially financed from Brussels⁹, the country is highly dependent on the EU.

In order to give credibility to the anti-EU and anti-US sentiments Hungary had to find other supporting partners. It turned its glance towards Russia, with its plans to form a Eurasian Union as an alternative to the European Union. Thus Hungary liaised with Russia, increasing its energy dependency on the Eastern country, at the same time endangering the EU-s efforts for energy security in the midst of the currently volatile international relations.

Paks

In 2014 Hungary has signed a deal with Russia to build new nuclear power plants beside the already existing and operating plants in Paks. The deal involved a substantial loan which Hungarians will be paying off for decades to come. The lack of transparency accompanying the agreement raises concerns – the details were said to be revealed 1 year after the planned completion. Hence it is not certain what this deal actually involves, except for the obvious fact that the country’s dependency on Moscow will increase because of it. Allegedly, the new plants will not be owned by Russians¹⁰. The new blow to the Russian economy, however, gives leeway for either Russia or Hungary to back out of the deal, as the former couldn’t afford any more and the latter might find it beneficial for political reason to back out, as the deal came under heavy attacks. However the Hungarian government wants to push forward with the deal nonetheless.

Southern Stream

The other main deal with Russia involves the Southern Stream pipeline, which would transport gas from Russia. The pipeline was against EU laws, because the pipeline as well as and the gas flowing through it would be owned by the same company, Gazprom. However, Hungary created a new law that enables construction of the pipeline despite the concerns of Brussels.

Russia had backed out of the deal because Bulgaria – one of the countries the pipeline would have crossed, abiding by the EU regulations didn’t give the project the green light. This situation, however, has changed since and the future of the pipeline is debated.

Nevertheless, Hungary should limit its dependency on Russia and rather explore its shale gas reserves, which the EU would support as well¹¹. Hungary gains 76% of its gas from abroad, so it is high time to look for alternatives. Such a move would, obviously, benefit Europe.

Conclusions

Hungarians support anti-free market tendencies as long as their own individual interests are not affected in the process. This, the already protectionist and anti-capitalistic populist government, is more than happy to feed.

The domestic energy policy of Hungary goes against the EU trend, and not without a reason. Since it stands on the populist political and ideological pillars rather than on sound economic reason, it is not certain whether it will endure, and may in the meantime cause great losses for businesses and the Hungarian economy.

As for the foreign policy, Hungary plays a dangerous game with its warming to Putin under the “Eastern Opening” directive. The growing tensions between the EU and Russia put Hungary in a delicate position. Instead of going towards the East, Hungary should give precedence to its loyalty to the West, which represents the values Hungarian citizens hold dear. For this reason, Hungary should break ties of its energy dependency with Russia and explore other ways of sustaining itself.

The article was originally published in the second issue of “4liberty.eu Review” entitled “Energy: The Challenges Europe Must Face”. The magazine was published by Fundacja Industrial in cooperation with Friedrich Naumann Stiftung and with the support by Visegrad Fund.

Read the full issue online.