Interview: Pál Schmitt

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.

FP: But given the recent difficulties in Greece and Spain and elsewhere, do you still think adopting the euro is in Hungary’s best interest?

PS: Obviously. A strong Europe, and within that a strong Hungary, is in our best interest. Even though we are outside of the eurozone currently, every interest we have indicates that the stability of the eurozone is in our best interest. This is unchanged as far as the Hungarian economy is concerned. We are also trying to do our level best to avoid the situation that the European Union will be evolving at different speeds.

There are already different speeds of course. Some countries are in the eurozone; some are out. Some are in Schengen; some countries out. So there is differentiation already. But we do so support integration 100 percent. But this comes with some criteria, and we are still a way off from those.

FP: So the troubles that Europe has had haven’t damped Hungarians’ enthusiasm about the united European project more generally?

PS: We Hungarians have always considered ourselves Europeans. We did not enter Europe; we returned to Europe. We are one of the oldest Christian countries in Europe, and the country was founded more than 1,000 years ago. Hungarians were not so naive as to think that everything would be steak and onions and just a fantastic new deal when we entered the European Union.

Of course, people are impatient. We have significant poverty, not just in Hungary, but also among the 10 new states in the EU. Elderly people draw very small pensions. Very few children are being born. The rate of production is very low. In Hungary, approximately 7 percent of the population is of Roma background, and we have to treat that also as a special issue.

In response to your question, I think the Hungarian people are welcoming of further European integration. 

FP: You’ve recently met with your counterpart, Chinese Premier Wen Jiabao, and China has announced plans to purchase some of Hungary’s debt. Going forward, what role would you like to see China playing in Central and Eastern Europe?

PS: The philosophy of Hungarian foreign policy has changed. We have opened toward the East, not only China, but including India, the Central Asian countries — recently I visited Uzbekistan, Turkmenistan, Azerbaijan, and Turkey — so our focus of interest is wider now. Of course, China could be a natural partner for us, and I want to establish some investment and institutions in Hungary in order to have a gate for Europe.

Of course, there is a more or less united foreign policy of the European Union, and we have to follow that. You can see that even the EU is reaching out to China.

FP: Are you worried that the crisis could fuel the rise of far-right extremist groups? A lot of people internationally have been watching the growing influence of the Jobbik party with concern. Are you concerned that this kind of sentiment is growing?

PS: Every Hungarian person will worry if extremists or extreme types of views spread. We have learned throughout our history how seriously we have to take extremism, whether it comes from the left or from the right. In my view, most of the right-wing political parties that have gained some space during the last few years have done so because of populism and because of their exclusionary policies directed at immigrants.

In Hungary, Jobbik has built on the anti-Roma sentiment of some individuals. Their share of the last election was approximately 10 percent. The remainder, the two-thirds majority that the government has, is able to balance and handle this well. I find it very important to tell you that in our new constitution we put an emphasis on democratic rights and human rights. We have zero tolerance for intolerance toward anyone.