Hungary: Dancing On A Volcano

When the global financial and economic crisis struck in fall 2008, Hungary appeared to be particularly vulnerable, burdened by high levels of external and public debt resulting from years of overheating. These macroeconomic imbalances were a cause for concern, so much so that international lenders had to intervene. The fact that the IMF was called upon to rescue a Member State of the European Union constituted a rare event.

In the case of Hungary, the processes of macroeconomic adjustment needed in order to reach a sustainable exit from the crisis have been complicated by the rise to power of the Fidesz party in the spring of 2010. By implementing unorthodox policies, which affect foreign investors and the banking sector, the government aims to consolidate the fiscal situation while preserving households’ standard of living. This is not a risk-free strategy; it even burdens medium-term growth prospects so much that it appears to be counterproductive.

Lacklustre growth

Difficult exit from crisis
Hungary entered a weaker pattern of GDP growth in 2007 in the wake of fiscal tightening. As the vulnerabilities of the country were exacerbated by the global crisis, it experienced a severe recession in 2009 (-6.8%), and went through a lacklustre recovery in 2010 and 2011 with GDP expanding by 1.3% and 1.7% respectively. During this short-lived recovery, the main engine of the economy was the export sector, while domestic demand kept decreasing.

Hungary is one of the most open countries in Central Europe in terms of international trade. The openness ratio came in at 189% in 2011, very similar to Slovakia’s and significantly above those of the Czech Republic (155%) and Poland (93%).


Exports were affected by the contraction of the global demand in 2009 but then recovered steadily. They represented 98% of GDP in 2011. More than half of them are directed to the euro area, with Germany being by far the most important destination (25% of the total). The automotive sector accounts for about 20% of exports, but Hungary also is increasingly attractive to Western European firms for administrative and logistic services.

By Alexandre VINCENT

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