Hungary Risks Image at EU Helm as Orban Increases Power Over Courts, Media

The European Union’s charter calls for respect for the rule of law, human rights, economic progress and media freedom. Some in Brussels are wondering whether Hungarian Prime Minister Viktor Orban, whose country takes over the rotating EU presidency on Jan. 1, has read it.

In the seven months since Orban came to power with a two- thirds parliamentary majority, he has implemented retroactive taxes in violation of the constitution, curbed the Constitutional Court’s power, effectively nationalized private pension funds and put ruling-party allies in charge of at least four independent institutions, including the audit office.

The measures have been criticized by the Brussels-based European Commission, the EU’s executive body, as has a media law approved this month empowering a new council -- appointed by the ruling party -- to fine or shut down media outlets. The government’s moves to cut the salary of Magyar Nemzeti Bank President Andras Simor and prohibit him from naming outside members to the Monetary Council “raise concerns” about central bank independence, the European Central Bank said Dec. 13.

“The government needs to act now to correct the blot on the country’s international reputation,” Tamas Vahl, president of the German Chamber of Commerce in Budapest, which groups such large investors in Hungary as Audi AG and Robert Bosch GmbH, said in a telephone interview. “Any news that makes investors question their faith in the rule of law in Hungary is dangerous.”

‘Unstable Conditions’

More than a dozen companies wrote to the EU commission expressing concern about “unstable conditions” for foreign investment in Hungary after the cabinet imposed retroactive taxes on the energy, financial, retail and telecommunication industries, Annett Urbaczka, a spokeswoman for German utility company RWE AG, a signatory, said in a Dec. 27 phone interview from RWE headquarters in Essen.

Magyar Telekom Nyrt., controlled by Deutsche Telekom AG, another signatory, will cut dividends because of the taxes, Chief Executive Officer Christopher Mattheisen told a conference in Budapest on Dec. 7. “Uncertainty” about the duration of the so-called crisis tax poses challenges to longer-term investment decisions by management, he said.

The government says the tax is needed to meet budget deficit targets, with the aim of reducing the shortfall to less than 3 percent of gross domestic product next year from a targeted 3.8 percent this year.

Ratings Downgrade

Revenue from pension-fund and industry taxes will provide only a one-time boost, Fitch Ratings said on Dec. 23 as it joined Moody’s Investors Service in downgrading Hungary’s credit to its lowest investment rank. Fitch, Moody’s and Standard & Poor’s all have negative outlooks on Hungary, meaning they are more likely to cut the rating to “junk” than keep it stable.

Since Orban, 47, took office on May 28, Hungary’s credit- default swaps, the price investors demand to insure government debt against default, have risen more than in any other country except Spain and Portugal.

Lajos Kosa, deputy chairman of Orban’s Fidesz party, threw markets in turmoil on June 3 by saying the Hungarian economy had a “slim chance” of avoiding a Greece-like economic crisis. A day later, Orban’s spokesman, Peter Szijjarto, said Hungary was in a “grave situation.”

The comments, less than a month after officials in Brussels had assembled an EU-led rescue package for Greece worth about $927 billion, fed concern that Europe’s debt crisis was spreading and caused the forint to drop to a four-year low against the euro.

Further Enlargement?

Hungary plans to use the six-month rotating presidency to emphasize further EU enlargement and to focus on the issue of the Roma, an impoverished minority group that faces discrimination in Europe. In addition, Orban wants to strengthen the bloc’s ability to respond to the economic malaise, according to the country’s EU presidency website.

The presidency, though, also puts Orban in an international spotlight. The media law could have a “chilling, self-censoring effect on free expression,” according to a Dec. 16 report by the Vienna-based Organization for Security and Cooperation in Europe. Germany called on Orban to “accommodate criticism” from the OSCE, government spokesman Christoph Steegmans said on Dec. 22.

“This could ruin Hungary’s PR during its presidency,” Piotr Maciej Kaczynski, an analyst at the Centre for European Policy Studies in Brussels, said in a phone interview. “It can always turn nasty, but there is no reason for it to turn nasty because there are legal mechanisms to ensure Hungary complies with European norms.”

Voting Rights

Such mechanisms may include taking an issue to the European Court of Justice or suspending a country’s voting rights. The commission probe into whether the media law is in line with European norms is a first step, Kaczynski said.

“You can’t in the role of the EU presidency shake someone’s hand and turn around and tweak some of the most fundamental rights,” Luxembourg Foreign Minister Jean Asselborn said in a Dec. 27 phone interview. “This is about the essence of EU values, the freedom of opinion and expression.”

Hungarian Nepszava news daily and weeklies Elet es Irodalom and Magyar Narancs ran blank cover pages to protest the new Media Council. Its five appointees, all picked by the ruling party, Fidesz, have the power to regulate all media, including newspapers and Internet.

“These decisions, which violate the spirit of democracy, risk making Hungary the black sheep of the union,” Laszlo Kovacs, a former European Commissioner and member of the opposition Socialist Party, told reporters in Budapest yesterday.

No Power Abuse

The Media Council won’t abuse its powers and its fines will be “proportional,” Laszlo L. Simon, a Fidesz lawmaker and head of Parliament’s Culture and Press Committee, told MTI news service on Dec. 28.

Orban says he won’t compromise, echoing his defiance in July of International Monetary Fund recommendations to cut spending and his days as a student leader in 1989, when he called for the exit of Soviet troops from Hungary.

“We are not even considering” changing the media law, Orban told HirTV in a Dec. 23 interview. “I’m not willing to respond to parliamentary debates or Western opinion with shaky legs.”

Orban says his policies will boost the economy, allowing Hungary to “outgrow” its debt burden, the highest at 79 percent of GDP among the 10 central and eastern European countries that have joined the bloc since 2004. And they will help raise Hungary’s employment rate, the second-lowest after Malta at 55 percent.

Constitutional Court

The policies include the curbing of the Constitutional Court’s powers to prevent justices from striking down industry taxes. The court posed a “dramatic risk” to the country’s goal of reducing the budget deficit, Economy Minister Gyorgy Matolcsy said on Nov. 5.

An ultimatum the cabinet gave to 3.3 million people with private pension funds to move their accounts to the state budget by the end of next month or lose their government pensions also serves to cut the debt and the deficit, the government says.

The overhaul is denting Orban’s popularity, though his party retains three times the backers of the biggest opposition party. Fidesz had 33 percent of support among eligible voters in December, down from 37 percent in November, according to a Szonda Ipsos poll taken from Dec. 8-15. The Socialists had 11 percent. Results have a 2.5 percent margin of error.

“Success is the ultimate arbiter,” Orban told reporters in Bratislava on Dec. 14. “If the country achieves its goals, than the decisions that led to that were good ones.”

That doesn’t convince Peter Pataky, leader of the National Association of Hungarian Labor Unions, who says Orban is “sweeping away” independent institutions.

“The problem is not that they have so much power,” Pataky said. “It’s that they’re abusing their power. This is what’s making people afraid.”

To contact the reporter on this story: Zoltan Simon in Budapest at zsimon@bloomberg.net

To contact the editor responsible for this story: Willy Morris at wmorris@bloomberg.net

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