Hungary On The Brink?

As Eastern European governments fall victim to the global financial crisis, the issue of social and political instability gets injected into what is already a Gordian knot of an economic crisis. The specter of economic nationalism and sovereign defaults haunts the international system. While the G20's steps to shore up the financing of the IMF undoubtedly mark a positive step in the direction of global stability, the question of what to do with countries such as Ukraine and Hungary that cannot or will not enact IMF fiscal austerity measures still looms. This concern is even more acute given that Hungary's prime minister stepped down a few weeks ago, amidst the political fallout that trying to follow the IMF's spending restrictions generated. From the New York Times:

As for Hungary, the $25 billion agreement it signed with the monetary fund last year has put it in an awful policy vise. Mandated to squeeze its budget deficit below 3 percent of gross domestic product, the government is in no position to stimulate an economy estimated to sink by as much as 6 percent this year.

There is no painless path to recovery.

“Hungary has an uphill struggle, but we know that,” Gordon Bajnai, the economy minister, said in an interview in late March. “We need a reform-minded government.”

On Monday, Prime Minister Ferenc Gyurcsany, the former Communist who has led the country since 2004, appointed Mr. Bajnai, a 41-year-old former businessman, to lead that effort as his successor.

But furious opposition from Hungary’s right wing — which has called for elections — may limit the scope of his ambitions.

Lajos Bokros, a former finance minister, says that the alternative to not meeting the monetary fund’s conditions is bankruptcy. He worries that the forint will fall even further amid the political uncertainty — a concern underscored by downgrades of Hungary’s credit rating by Standard & Poor’s and Moody’s this week.

The social dimensions of this crisis are only beginning to be felt. Hopefully this climate of political and economic fear will not usher in a new era of extremism.