Hungary reforms hobbled by coalition's end

By Thomas Escritt in Bucharest
Published: Mar 31, 2008

Hungary was on Monday night heading for a minority government after members of parliament from the junior coalition partner voted in favour of withdrawing its ministers from the centre-left government.

The decision, expected to be ratified by the Free Democrat party's executive committee on Monday night, is likely to leave the Socialist-led government of Ferenc Gyurcsany, prime minister, unable to push through a deeply unpopular restructuring of the country's state sector.

A weak minority government would also call into question Hungary's ability to maintain the reforms prescribed by the European Commission and the IMF if it is to join the eurozone.

Although Mr Gyurcsany's government has made painful and unpopular cuts to public spending and increased taxation over its two years, analysts say there has been little progress on fundamental structural reforms and that a minority government would have even less chance of pushing such reforms through.

Eszter Gargyan, an economist at Citi, said that, though the government had managed to bring the budget deficit down from 10 per cent in 2006 to closer to 3 per cent today, much of this had been "trimming".

"The current situation means that sustainable further spending cuts aren't going to happen now. These budget items could easily rise again," she said.

Nothing had been done to place Hungary's macroeconomy on a secure long-term footing, she added.

The Free Democrat MPs voted to withdraw their ministers following the prime minister's sacking on Monday morning of Agnes Horvath, the health minister whose reform agenda was rejected by voters in a referendum two weeks ago.

Janos Koka, the president of the Free Democrat party, on Monday accused the prime minister of abandoning the reform process. "We entered a coalition to carry out reforms together," he told parliament. Since Mr Gyurcsany's government was re-elected in 2006, the junior coalition party has been a keen advocate of unpopular healthcare and education reforms that would introduce the private sector into areas of life that Hungarians are accustomed to seeing as the province of the state.

Markets had already priced in much of the political risk following the March referendum, and the forint fell by less than 1 per cent to Ft259 against the euro over Monday. Bond yields rose more substantially. "The forint is surprisingly strong, partly because the risk premium for forint assets is already priced in and partly because of the national bank's 50 basis point rate hike [to 8 per cent on Monday]," said Ms Gargyan.

While Mr Gyurcsany faces tougher political times without a parliamentary majority, his government could cling on to power, say analysts. The opposition Fidesz party does not command enough votes on its own to unseat a prime minister, and polls make early elections an unappealing prospect for both coalition parties.

Viktor Orban, the former prime minister who leads Fidesz, said: "Early elections are the only solution."