While less noticed than the troubled Mediterranean economies, Hungary -- once one of Central Europe's great economic success stories -- has been facing its own brand of financial turmoil. Since coming to power in the summer of 2010, the conservative Fidesz party has pushed through a program of austerity cuts and political reforms -- including a new constitution that will go into effect next year -- aimed at curbing the country's crippling debt.
Despite these measures, Moody's downgraded Hungary's credit rating to junk status last week, and the forint has fallen to historically weak levels against the euro. Amid rising borrowing costs and fears of a default, Hungary's government has entered talks with the IMF over possible future assistance. The country received an IMF bailout in 2008, but has not yet asked for new funds.
Hungarian President Pál Schmitt is visiting Washington, D.C. this week and sat down with Foreign Policy to discuss the crisis, Hungary's future within the EU, and the rise of the far right.
Foreign Policy: It's obviously been a difficult month for the Hungarian economy with the recent Moody's downgrade and the forint being historically weak. Do you anticipate your government will require more assistance from the IMF? And what steps are you taking to restart economic growth?
Pál Schmitt: At the inception of this government, we formulated certain goals that we are not going to give up. The first thing is that our current GDP indebtedness, which is 80 percent of the GDP, we are trying to gradually curtail and cut down. This is so important that we actually incorporated it into our new constitution -- the government cannot take on more debt until this percentage is reduced to 50 percent of GDP.
The other issue, as with the entire world, is that if we want to have any growth, we have to create new jobs. There are two problems in Hungary in this regard. Relatively few people are working the employment level is low to begin with. More precisely, it's 57 percent, compared with 65 in Europe. This is the number one target, to increase this level. Secondly, we have a 10 percent unemployment level, which is mostly among the younger generation. So we have to create new job opportunities aimed at this group. Obviously, there are serious economic steps we must take to achieve these goals.
At the same time, the world economic outlook, both financial and economic, didn't exactly go as we had hoped or forecast. Our currency, the forint, has been significantly weakened. Our indebtedness, however, is denominated the dollars and euros. So due to the devaluation of the forint, we have not been able to pay off our debts at the dynamic level we had hoped for earlier. Not only that, but because of the bad exchange rate, the money we have to pay back has increased.
Obviously every country has a natural partner in the IMF. Of course, we can also turn for help to our own family -- the European Union. It seems to me that countries that experience difficulties are usually helped in tandem by the two organizations. We have perceived that we will not be asking for additional IMF help, but will be able to stand on our own two feet. Let's not forget, however, that the IMF helped us significantly a few years back.
It appeared that some of these steps have not convinced the markets or those who are evaluating our work. As a result of this, we want to restrengthen ourselves. We will start a new round of negotiations with the IMF in January. I'm sure they're going to have expectations from us as well. It's self-evident that we have to play with an open deck and show them the details of our budget and see exactly where we stand.
FP: Do you believe that the Moody's assessment of your country's credit rating was an accurate view of the Hungarian economy?
PS: I am not in the position to either evaluate or criticize the work of ratings agencies. Obviously, it doesn't help us much if they put us in a category that will reduce investor confidence. The only sing;e answer I can give to this is that we have to come up with new answers so that we can live up to expectations.
Allow me to give you an example from my childhood. I was a fencer [Schmitt was a two-time Olympic gold medal-winner in fencing.] but I also raced horses in the 1950s. And our trainer told us that just before you are jumping with the horse, if you see that his legs might be unstable or about ready to crumble, the best thing is to really just trim it a little bit with your heel.
In other words, even in difficult times, maybe it can be productive to speed things up.
FP: Do you still believe that Hungary will join the eurozone?
PS: This is not 100 percent up to us. When we joined the EU, we agreed that when the criteria are fulfilled, we will join the eurozone.