The Hungarian economic crisis can be ascribed to changes in economic situation in particularly fiscal and monetary policies of the country, although the effect of the global financial crisis in 2008 cannot be taken too lightly. Hungary’s desire to become a member of the European Union required the country to embark upon “austerity measures” which further dampened its economic situation. Adoption of the shift to the right ideologies further deteriorate the Hungarian economic situation.
Prior to the economic crisis of Hungary that appeared back in 1989, which saw a fall in standard of living and economic activity due to economic trade liberalization, the country had ...view middle of the document...
Problem Identification & Analysis
There are several factors identified that led to the Hungarian economic crisis and this is the purview of this section. It is worth noting that Hungary has been previous administered as a communist country with government having nationalised the country’s industries and agricultural institutions. However in early 1994, the country became a multi-party parliamentary democracy. The country started implementing economic liberalization policies which created the path for denationalization. Privatisation in Hungary led to a change in the composition of labour demand as demand for skilled workers increased relative to demand for unskilled workers. This was because the country did not use mass privatisation scheme rather state assets were sold on a case-by-case basis to investors, mostly to foreign nationals. As a result of this the country witnessed an increased competition among firms and generated a massive restructuring and a reallocation of resources across different activities and capped in low standard of living and economic activity.
a) Global Financial Crisis
Magas (2010) submits that the global financial crisis of 2007-2009 is a series of shocks of different nature composed of three interdependent and mutually reinforcing crises: a financial crisis (financial institutions suddenly finding masses of nonperforming assets on their balance sheets), a liquidity crisis (the sudden unavailability or dramatically higher cost of credits that previously were routinely granted on reasonable terms), and a crisis in the real economy, that is, substantial declines in output and large increases in unemployment.
The global shocks increasingly affected the volatility of interest rates and other financial indicators in Hungary as well. When the crisis intensified in late 2008, liquidity and capitalization strains in particular in the banking sector shook financial markets. The results in the financial account of the balance of payments for Hungary was a deficit of 5.9 billion Euros in 2009, as compared to a surplus of 10.6 billion Euros in 2008 (Magas)
Hungary’s decision to float the forint due to pressure for devaluation result in rampant loss of currency value which had the effect of making exports cheaper and imports expensive for the Hungarian households. Despite a period of currency appreciation from October 2006 to July 2008, the forint depreciated sharply from August 2008 to March 2009: the rate of nominal depreciation was almost 30 per cent in the eight-month period, and about 19 per cent in just the four months from December 2008 to March 2009.
Coupled with all the problems as highlighted above there was generally a lack of independent fiscal oversight. The Hungarian Parliament passed a Fiscal Responsibility Act in 2008, which established the Fiscal Council, an independent body to act as a watchdog, to evaluate the consequences of the national budget, to prepare macroeconomic and fiscal...