Illiberal Democracy: How Hungary’s Orban Is Testing Europe

Illiberal Democracy: How Hungary’s Orban Is Testing Europe
Hungarian Prime Minister Viktor Orban delivers his speech during a ceremony to mark the 57th anniversary of the 1956 uprising in Budapest, Hungary, Oct. 23, 2013. (AP Photo/MTI, Tibor Illyes).

“A nation on the verge of ceding its sovereignty to a neo-fascist dictator, getting in bed with Vladimir Putin,” Sen. John McCain called it, addressing the United States Senate earlier this month. McCain was talking about a NATO ally, a European Union member state and an enthusiastic member both of President George W. Bush’s Coalition of the Willing in Iraq and the international force in Afghanistan: Hungary.

What has gone wrong? Most of Hungary’s growing band of international critics lay the blame squarely at the door of Prime Minister Viktor Orban. A former liberal opponent of communism, Orban now stands accused of changing the constitution to centralize power in his hands, seeking to control the media and adopting economic policies that have driven out foreign investors in favor of a group of oligarchs around him.

But to his supporters, he is restoring the country that was brought “to the economic and moral brink” by his predecessors and finally purging the toxic elements of the communist past. They see a proud, independent and economically successful country that is built on the foundations of Hungarian values, culture and historical exceptionalism. They point out that Hungary’s economy currently outperforms those of most EU member states and is a magnet for investment from Germany in particular. They also correctly point out that Orban’s Fidesz party has won three substantial electoral victories this year alone: parliamentary, European and local.

Compared with many of its neighbors, Hungary was seen as a relative success story emerging from communism, having adopted a degree of mixed-market reform. A historical antipathy to Russia made it a natural ally for the West. But a drift toward authoritarianism and a willingness to do business with Russian President Vladimir Putin, even in the wake of the annexation of Crimea and the conflict in eastern Ukraine, have left even erstwhile supporters and mentors of Orban frustrated. “Bizarre things are going on here,” says one long-time observer of Hungary.

Particularly worrying for many observers was a speech that Orban made to a gathering of ethnic Hungarians at Baile Tusnad in Romania on July 26, in which he suggested that Hungary should become an “illiberal state” and listed Russia, China and Turkey as states that had succeeded without liberal democracy. Combined with moves to curb the activities of nongovernmental organizations, pressure on the media and the centralization of power, the speech raised international concerns about Hungary’s direction.

“It’s now very well known in the international media that we’re on a very dangerous track toward a more and more authoritarian regime,” says Istvan Hegedus, a former Fidesz MP who has become a vocal critic of the Orban government. “The terms used by McCain were not perfect, but show how the U.S. looks at Hungary currently, with what distrust, and how much Orban personally has isolated himself from the West.”

Orban is currently in his third term as prime minister. His Fidesz party won a landslide in the April 2014 parliamentary election, on top of its similarly convincing win in 2010, when it took more than two-thirds of the seats. Orban’s previous spell as prime minister, from 1998-2002, was considerably less controversial internationally and saw Hungary join NATO while undertaking fiscal tightening. However, even then, Orban’s abrasive approach and centralization of power, as well as constraints on media independence, received considerable internal criticism.

The Historical Roots of Orban’s Appeal

Some of the shape of today’s Hungary comes from three 20th century traumas. One, communism, is shared with most of Hungary’s neighbors. In its later years, Hungarian communism was actually more economically and politically liberal than that of most Warsaw Pact countries. Hungary was relatively well equipped for post-communist transition, which can partly explain its relative success over the past 25 years.

However, the communist era also saw the crushing of Hungary’s 1956 revolution, a nationwide uprising against the government and its Soviet patron following a period of liberalization and an attempt to obtain greater independence from Moscow. The revolution and its aftermath not only pitted Soviets against Hungarians, but Hungarian nationalists and reformists against hardline communist compatriots, a nuance that is sometimes overlooked. Some see the revolution at the root of current deep political divisions in Hungary.

Another event that still rouses Hungarian nationalists, and even many moderates, is the 1920 Treaty of Trianon, which dismembered the Hungarian part of the Austro-Hungarian Empire, reducing Hungary to less than a third of its previous size and leaving a third of ethnic Hungarians outside the country’s borders. Orban’s government has launched a program of offering Hungarian passports to the diaspora, with which the party has cultivated links. Much of the far right in Hungary is openly irredentist.

How Electoral Success Shaped Fidesz

In the April 2014 general election, Fidesz and its Christian Democrat allies took 44.54 percent of the votes and 133 seats in the 199-seat parliament. The opposition “Unity” bloc, led by the Socialist Party (MSZP)—essentially the heir to Hungary’s Communist Party—took 25.99 percent of the vote and 38 seats. Most ominously for some observers, the third-place party was the far-right Jobbik, seen by many as unashamedly thuggish and scarcely concealing its anti-Semitism. Jobbik, which gains substantial traction by blaming Hungary’s large Roma population for the country’s ills, took 20.54 percent of the vote and 23 seats.

The following month, Fidesz scored an even more crushing victory at the elections to the European Parliament, taking 51.48 percent of the vote, albeit on a lower turnout. Jobbik finished second with 14.67 percent, with the MSZP, which once had the country’s most formidable electoral apparatus, slumping to a humiliating 10.5 percent. Fidesz repeated the feat in October’s local elections, winning all of Hungary’s 19 counties, with its incumbent mayor of Budapest, Istvan Tarlos, also re-elected. Most cities and smaller units also went to the governing party, with some exceptions.

Locating parties on the political spectrum is often difficult in post-communist Central and Eastern Europe (CEE)—and increasingly in the West as well, with the rise of forces like France’s National Front. Clear-cut left-right definitions do not quite apply. Fidesz started life in 1988 as Fiatal Demokratak Szovetsege (the Alliance of Young Democrats), seen as a liberal, even libertarian movement defined by its opposition to authoritarian communism, as well as its youth—members could not be over 35 years old. Since then, it has become known as a conservative party, partly because of its increasingly conservative social policies and the instinctive cultural conservatism of its base; partly because it once pursued fiscally conservative policies; and partly because its opposition to the nominally social-democratic MSZP made “conservative” a convenient label.

Many of Europe’s nominally socialist parties would indeed balk at some of Orban’s current economic policies, including bank taxes that appear specifically designed to push some foreign lenders out of the market. Fidesz is also accused of using “dog-whistle” language and policies to appeal to a xenophobic and even anti-Semitic element in Hungarian society, partly as a response to Jobbik’s rise. Similar accusations have been made of other center-right parties in Europe as they face rising nationalist and populist rivals, but the relative size of Hungary’s nationalist right and the country’s unusual 20th century history make these allegations particularly worrying.

Orban seems to have undergone a transformation from a young liberal to an authoritarian with occasional demagogic outbursts. One theory embraced by some critics and sympathizers is that, when out of power from 2002-2010, he became enraged with the Socialists’ handling of the country and decided that if he were returned to power, he would need to purge the system entirely.

Pressuring Media and Rewriting the Constitution

Thanks to Hungary’s electoral system, Fidesz took just over 50 percent of the votes in the 2010 election, but ended up with the two-thirds parliamentary supermajority needed to change the constitution and sweep through other legislation without substantial checks from popular opinion or parliamentary opposition.

One of the earliest red flags was the Media Act of December 2010. The act created a National Media and Communications Authority (NMHH), which tightened government control over the broadcast sector and extended regulation to print and Internet media, as well as a parallel Media Council. Both were stuffed with Fidesz appointees and headed by the same former Fidesz politician. The law specified a number of vague offenses, such as failure to “provide balanced coverage” or coverage that insulted “public morality,” while stressing “family values.” The authorities were given the right to fine and even suspend media.

Some of the provisions of the law were amended by the government and the Constitutional Court, with a set of changes passed in May 2012. However, these fell far short of the overhaul demanded by the EU and Hungarian journalists and civil society organizations; only 11 of the 66 recommendations made by the Council of Europe were implemented. In June 2012, Neelie Kroes, the EU commissioner for the digital agenda and vice president of the European Commission, told the Budapest weekly Figyelo that the media law was “embarrassing.”

The legislation still allows the Media Council to fine media for “inciting hatred” against groups, nations or individuals, while the NHMM can regulate “unbalanced reporting” and suspend broadcasting rights, according to Freedom House. The council can also block international media if the content concerns Hungary.

State media have also felt the chill of Fidesz control, according to an extensive report by Reuters published in February. The reporter, Marton Dunai, documented a clearing out of experienced senior executives and hundreds of other staff, theoretically as part of a reorganization. But many maintain that they were purged for their political views. Television scripts have allegedly been altered to make them more pro-government, while Orban faces only soft questions during his regular appearances on state radio. While the same practices admittedly occurred under Gyurcsany as well, they have been exacerbated under Orban.

Individual media organizations also claim that they have been targeted, and journalists have been sacked and threatened with arrest for publishing articles that have displeased the government. One of the most widely reported examples is that of Klubradio, a liberal talk-radio station, which had its frequency rights revoked in December 2011. The station fought a lengthy battle with the Media Council and was forced into rolling two-month contracts to renew its frequency, a costly process that also made attracting advertising difficult. The council ignored court rulings in favor of Klubradio, objecting on spurious grounds, according to Human Rights Watch. But the station finally won in March 2013, and now hopes to sue the regulator, which has denied any wrongdoing.

In June 2014, the government passed a tax on media companies’ advertising revenue at a rate of up to 40 percent. This will affect those outlets primarily funded by advertising: in other words, private ones outside the state’s direct control. Hungary’s most popular television channel, German-owned RTL Magyarorszag, is expected to be hit disproportionately. In protest, many newspapers left front pages blank, and many broadcasters suspended programming for 15 minutes.

For the EU, just as worrying are constitutional changes that even the United Nations has said weaken checks and balances on the executive. In April 2011, Hungary adopted a new constitution, the Fundamental Law, that critics said was rushed into place without proper consultation. The government said that the new constitution would enshrine fiscal prudence and help the country throw off the remaining shackles of communism, as the existing document, dating from 1989-1990, was largely based on the communist-era framework.

However, clauses limiting the power of the Constitutional Court to rule on budgetary measures and substantially increasing the number of judges on it—thus allowing it to be filled with more sympathetic members—raised concerns about the undermining of an independent institution. The new constitution also allows the president to dissolve parliament; Orban is thought to be eyeing the presidency in the future.

The constitution was also criticized for its overt reflection of Fidesz’s social conservatism. It protects the fetus from the moment of conception, potentially opening the door to tightening abortion laws, and defines marriage as only legal if heterosexual, while implying that only families based on marriage are protected by the state. The constitution states that Christianity has a role “in preserving nationhood,” though the majority of Hungarians do not regularly attend religious ceremonies of any sort.

In March 2013, the government passed a set of constitutional amendments in the face of U.S. and EU opposition. Particularly concerning was a measure that ruled that the Constitutional Court could only overrule constitutional changes on procedural grounds and not on content. This allows the government to pass legislation without court scrutiny by enshrining it in the constitution. The changes included several measures that the court had previously rejected, such as limiting election campaign advertising to the state-owned media—a measure that both trims the incomes of independent media outlets and increases the power of state-owned media during elections.

Other moves that have benefited Fidesz’s influence are term extensions for public offices including president and governor of the central bank—both posts now held by Fidesz figures close to Orban—and the forced retirement of nearly 300 experienced judges under new retirement-age legislation. The government asserts that many of its controversial reforms are a belated necessity to purge corrupt communist elements that have slowed the country’s transition.

“The government’s point of view is that it is the legacy of communism that is the biggest problem for the country, and like it or not, it is very difficult to get rid of the moral and other legacies it left,” says Zoltan Kovacs, a government spokesman. “Communism destroyed Hungarian society’s traditional structures. It was an illusion on the part of the West that simply by installing Western-style institutions here, the problems would be sorted out very quickly.”

Kovacs asserts that many in the opposition who are crying foul over Orban’s policies were either part of the communist elite or have allied or aligned with it at some stage. “There is an ongoing cultural struggle in the background, a struggle of values. Of course we strongly believe that it is we, rather than the other side, who represent the real values of system change and bringing down communism. It’s a very fierce ideological struggle.”

In many of Hungary’s neighbors, communist-era structures and personalities have retained considerable influence and power, even two-and-a-half decades after the fall of the Berlin Wall. Poland and Bulgaria are among the countries to have launched so-called “lustration” programs to purge officials with suspect communist-era backgrounds. Michael Taylor, a senior analyst at Oxford Analytica, compares Fidesz’s belief that communism has yet to be uprooted in Hungary to that of the Kaczynski brothers in Poland, who launched a campaign against those with suspected ties to the old regime.

But many feel that Orban’s “reforms” go considerably further. “These new developments, political measures, constitutional changes and regulations undermine political democracy,” says Hegedus.

Orban’s Baile Tusnad address was, for many, the moment when the prime minister at last admitted the direction in which he is leading Hungary. No more talk of ensuring that democracy was enshrined and uprooting communism—Orban was making it clear that he saw a more authoritarian system as the answer. One observer says that Orban believes that he is ahead of his time in Europe, and that in the next two decades, more and more countries will start to adopt more authoritarian models of government and interventionist, nationalist economic policies.

Orban’s supporters say that he has been misinterpreted and that his comments have been taken out of context. Even some critics point out that he made references to respecting “freedom” and “democracy.” Kovacs says that the address was absolutely not a repudiation of democracy itself, but rather of social liberalism and economic neoliberalism associated with the global economic crisis and perceived European cultural decay.

It was also a call for greater leadership and action. In this interpretation, the Tusnad address was also intended to call on Europe to see where countries like Turkey, China and Singapore have succeeded and to acknowledge that the Western view of a liberal democratic model is not universal. But the idea of importing Russia’s system to Hungary is “nonsense,” says Kovacs.

Why MSZP Owned the Financial Crisis

To a significant extent, Fidesz’s current political dominance is due to the incompetence of the previous Socialist-led government and the hopelessness of the MSZP and other groupings in opposition. It is a pattern that can be seen in a number of European countries: Kleptocratic governments dominated by an elite are swept aside by populists with an authoritarian streak, who then seek to reshape the nation. The populist leader speaks the language of the people and seeks to change institutions that he says have been corrupted and are preventing change, but in doing so is accused of undermining checks and balances and media independence. The opposition cries foul but is discredited by its poor economic record in power, a history of corruption and an association with an out-of-touch urban elite. A successful economic performance is often another trump card for the new populists, even if that rests on shaky foundations.

Orban shares similarities with Turkish President Recep Tayyip Erdogan in particular, along with Serbian President Aleksandar Vucic, Macedonian Prime Minister Nikola Gruevski, Bulgarian Prime Minister Boyko Borisov and Romanian Prime Minister Victor Ponta, as well as populist leaders in other parts of the world.

In Hungary, as in Macedonia and Bulgaria, the main opposition is tainted by its communist past. But economic incompetence and duplicity are a more compelling argument against them. In the case of the MSZP, the ineptitude and dishonesty was starkly highlighted by a remarkable leak that made headlines worldwide.

In an expletive-laden speech to the party’s MPs the month after the MSZP had retained power at the April 2006 election, then-Prime Minister Gyurcsany said that his own “bone-headed” government had “screwed up” and, perhaps most damningly, had “lied throughout the last year-and-a-half, two years. . . . We lied in the morning; we lied in the evening.”

“You cannot quote any significant government measure we can be proud of,” he said. “If we have to give account to the country about what we did for four years, then what do we say?”

Gyurcsany later posted the recording on his blog, adding to suspicions that he approved the leak in order to prepare the country for painful reforms that had stalled. But the speech did little good to the MSZP or the reputation of politicians in Hungary as a whole, and led to street protests in which tens of thousands of demonstrators called for his resignation and hundreds were arrested when violent clashes with police broke out. In the end, Gyurcsany clung on as premier until his unexpected resignation in April 2009 amid the financial crisis.

The global economic crunch that gained momentum from the second half of 2007 hit economies around the world, and particularly in Europe. But Hungary was particularly badly affected, due to public and private sector factors. The government had already been running a large budget deficit before the crisis—one of the failures to which Gyurcsany had been alluding. The deficit reached 9.1 percent of GDP in 2006, with government debt worth around two-thirds of GDP.

When the international crisis hit, Hungary was already implementing austerity measures, including tax increases and spending cuts, to address the results of its previous budgetary laxity. The country was locked into what is known as pro-cyclical economic policy: When the going was good in the mid-2000s, with the global economy buoyant and confidence in Hungary as a new EU member strong, the government played fast and loose with its budget, stimulating growth and inflation. When the crash came, and some government spending would have been useful to keep the economy moving or at least alleviate some of the recessionary effects, the coffers were empty, and the government was already forced into enacting measures that crimp economic activity. Pro-cyclical policymaking was common across Europe, from the United Kingdom to Romania, but Hungary’s budget deficit was particularly high even before the crisis, and the international bailout required was particularly large.

Problems in the banking sector, meanwhile, were caused by rapid loan growth and particularly lending in foreign currencies. When the crunch came in 2008, many Hungarian households and businesses were unable to service their debts. This problem was exacerbated by the drop in the value of the forint, Hungary’s currency, as investors took flight. The depreciation meant that those earning income or revenues in forints but with foreign currency-denominated debt saw the relative value of the latter rise. The untrammelled lending in foreign exchange became one of Hungary’s biggest economic problems, as even many commercial lenders now admit.

In October 2008, the International Monetary Fund, EU and World Bank stepped in with a $25.1 billion rescue package to prop up the Hungarian economy, with the government agreeing to substantial spending cuts and measures to support the banking sector in return. The IMF made no bones about the potential consequences should the package not be put in place: a possible run on Hungary’s debt and currency markets, with ruinous implications for the wider economy.

Against this backdrop, Fidesz’s landslide in 2010 seems more understandable, and its economic performance since superficially impressive. In August 2013, the Orban government paid off its outstanding 2.15 billion euro per year debt ahead of schedule and called for the IMF to close its Budapest office. The move was intended to demonstrate the government’s fiscal rectitude and, more important, its independence from foreign influence.

Renewed Growth—but Concerns for Investors

Hungary is expected to rack up GDP growth of 3.3-3.5 percent in 2014, according to Erste, a regional bank. This would be one of the fastest rates in the EU, following a 2.7 percent expansion in 2013, the economy’s best performance for seven years. This is still below the level achieved in 2000-2007, when growth averaged 4 percent and sometimes reached 6 percent, but it is still a highly respectable figure given factors weighing on the region’s economy—the eurozone slowdown most of all, but also the cooling of some of the world’s larger emerging markets.

A number of factors have helped Hungary achieve these growth rates, including higher government spending on construction with an eye on the elections this year, accelerated use of EU funds and two consecutive strong years for agriculture, says Gergely Urmossy, an analyst at Erste Bank Hungary.

Hungary has also done well to leverage its competitive advantages as a manufacturing center feeding into Western European markets, particularly Germany. Audi, Mercedes and Suzuki have all opened or expanded facilities in Hungary in recent years and have ramped up production.

Monetary policy from the National Bank of Hungary (MNB) has also supported growth. Interest rates have fallen to all-time lows as inflation, once a bugbear of the economy, has dropped—indeed, Hungary has experienced deflation in 2014. In 2013, the bank started the Funding for Growth Scheme (FGS), which allows commercial banks to borrow from the central bank for free in order to lend to small and medium enterprises (SMEs) at a rate of no more than 2.5 percent. By November 2014, banks had drawn on more than 500 billion forints.

But many of these factors will start to fade, says Urmossy. The government’s pre-election splurge cannot continue, given its debt and deficit targets; if agricultural output returns to average levels, the sector will shrink; and as automotive plants reach full capacity, their contribution to growth will fall, though they will remain economically important. Meanwhile, the FGS has only stalled a sharp decrease in the corporate loan stock.

Erste forecasts a medium-term growth trend of just 1-2 percent, assuming no serious external shocks. Another crisis in the eurozone would drag growth lower, though on the other hand, higher domestic consumption and the recent fall in oil prices in the medium term could push it higher. More worrying for foreign investors are the “sectoral taxes” that the government has introduced. These have been levied on the financial sector, telecoms and mining, parts of the economy in which foreign ownership predominates.

Following Fidesz’s success in the local elections, Orban promised that banks would be “held to account”—a statement that may refer to more measures to make banks accept further discounts on troublesome foreign currency loans, which could cost lenders 3 billion euros, the Financial Times reported. This followed a windfall bank tax introduced in 2010 and a financial transaction tax imposed in 2014, and enforced compensation of borrowers for “unfair” conditions imposed on foreign currency credit. The EU has criticized Hungary’s imposition of sector taxes as “distortive,” but in 2013 the European Commission dropped a legal challenge to a tax on outgoing telephone calls and messages imposed the previous year.

The government has also cut energy prices for households on three occasions, with the cost being borne by mostly foreign-owned utility companies. Measures like these are expected to have a detrimental effect on future foreign direct investment.

“If you have a look at the real economy, the decisions made by the government have been rather discouraging,” says Urmossy. “In our view, on the one hand, those companies that are already in Hungary and carrying out their long-term strategy are expected to remain, since exit from Hungary would be too expensive. But on the other hand, new capital inflow is not expected to pick up due to the discouraging effects of government measures.”

The governor of the Central Bank, Gyorgy Matolcsy, who is close to Orban, has made no secret of his desire to see some foreign banks leave the country, accusing them of failing to lend and acting as a block on economic growth. There is little doubt that the government’s policies on banking are popular, with foreign exchange debt in particular a very sensitive political and economic issue.

The government maintains that banks have taken more than 1 trillion forints “illegally” from the Hungarian people using interest rate manipulation and other fees. Kovacs argues that foreign exchange loans were “destroying the lives of more than one million people” as well as putting a heavy burden on Hungary’s external debt, thereby forcing the government to step in.

Kovacs says that the measures are not a vengeful attack on foreign investors, but an attempt to spread the burden of fiscal adjustment to those companies that have made the most profit in recent years, rather than increasing the tax burden on citizens’ incomes.

He adds that the Fidesz government has an excellent record on fiscal rectitude following the budgetary disasters of the MSZP administration, with the deficit below 3 percent for three consecutive years and sovereign debt down from 85 percent of GDP in 2010 to 77 percent in 2014. Unemployment has reached a 20-year low of 7 percent, down from the 11 percent that Fidesz inherited in 2010, and labor force participation, once one of the lowest in the EU, has risen.

The government now plans to overhaul and improve education, health care and social security. Kovacs insists that Hungary still welcomes foreign investment, but is aiming for a “patriotic economic policy” that helps Hungarian companies to develop. The government will focus on developing SMEs, including through public procurement, and channel a substantial part of the 21.91 billion euros of EU “cohesion” funding allocated between 2014 and 2020 toward supporting enterprises at a local level. The creation of a “national bourgeoisie,” as Hegedus describes it, has parallels with the rise of conservative Anatolian businessmen in Turkey who have formed part of the core support of Erdogan’s AK Party.

Orban is officially above the messy affairs of business, aiming instead to create a framework in which Hungarian enterprises—and approved foreign investors—can thrive. There is a substantial group of middle-class businesspeople who are keen to demonstrate their loyalty to the premier and who are seen as being “close” to the government, but the network and connections among them are fluid. However, for companies, supporting Fidesz does no harm, and individual Fidesz supporters have been placed at the helm of a number of government-owned companies and financial institutions.

Orban’s Ties With the Kremlin

This year the spotlight has fallen particularly harshly on Hungary’s foreign policy, and specifically the Orban government’s ties with Russia. At best, Hungary is guilty of mixed messages, with the government condemning Russia’s illegal seizure of Crimea and support for rebels in eastern Ukraine while happily continuing to make large, strategically sensitive deals with Moscow. Hungarian Foreign Minister Peter Szijjarto called for “pragmatic, mutually beneficial cooperation between Europe and Russia” as recently as November, as the situation in Ukraine continued to deteriorate.

In January, Hungary signed a $12 billion deal with Russia for the construction and maintenance of two reactors at the Paks nuclear power plant in central Hungary. The loan will come from the Russian state and cover 80 percent of the construction cost, while the contractor is a subsidiary of Rosatom, a Russian government-owned company. The contract award was finalized on Dec. 9, despite rumors that Budapest was starting to get cold feet on the deal—though there is still a chance that the increasingly cash-strapped Russian state may not be able to find the cash to execute the project.

The Paks agreement was controversial, as many saw it as increasing Russian control over Hungary’s energy sector. The two existing reactors at the plant are both Russian-made. More to the point, Hungary imports 70-80 percent of its natural gas and oil from Russia, which in recent years has been willing to use its energy resources as a geopolitical tool.

Orban’s government has also been a staunch supporter of the South Stream pipeline, which would redirect Russian gas destined for Central Europe through the Balkans, bypassing the current route through Ukraine. Supporters see the project, majority-owned and driven by Gazprom, as a way of securing supply by circumventing a geopolitically unstable region. But opponents say that South Stream will merely increase Europe’s dependence on Russian gas. The EC has said that the pipeline contravenes its competition rules in its current form, bringing it into yet another conflict with Hungary, as well as Bulgaria and EU membership candidate Serbia.

Earlier this month, Putin unexpectedly announced that Russia was dropping South Stream, a decision that reportedly took Budapest by surprise. The EC’s opposition and the cost of the project were two reasons cited for the about-face.

However, the pipeline may be far from dead. The day Putin made the announcement, Gazprom signed a deal that would effectively redirect the pipeline to Turkey. Most of the gas would then be sent to a new storage facility on the border with Greece—whence it could be delivered via existing networks, or even a completed South Stream pipeline, to Central Europe via the Balkans.

Orban’s response to the South Stream cancellation was to lambaste Brussels, rather than Moscow. Hungary understandably has concerns about its energy supply, given the lack of progress on alternatives to Russian gas, such as the U.S.- and EU-backed Nabucco pipeline that was on the drawing board for a decade. And South Stream was backed not only by former Eastern Bloc states like Hungary, Serbia and Bulgaria; Austria and Italy were active partners.

Hungary’s third apparently pro-Russian energy move was the September decision to halt reverse-flows of gas to Ukraine—again against EC demands. Hungary and its neighbors came under pressure from Russia, which said that it would cut off gas to those countries re-exporting it to Ukraine.

Despite repeated statements that it supports Ukraine’s territorial integrity and opposes the annexation of Ukraine, some of Hungary’s language on its eastern neighbor has struck an odd note. In August, Orban condemned EU sanctions on Russia, saying that they were harming Europe more than Russia, and said that he would do his “utmost” to encourage a rethink.

While this was perhaps another statement of economic realism, Orban’s call in May for political autonomy and dual citizenship for the 150,000-strong ethnic Hungarian community in Western Ukraine struck an uncomfortable note at a time when Russia was waging a proxy war in the east of the country in support of ethnic Russians.

The reasons for Hungary’s Russian policies are manifold. The first certainly is practicality: As well as being Hungary’s main energy supplier, Russia is its biggest non-EU trading partner. As Kovacs points out, many EU countries trade heavily with Russia, including Italy and Germany, which had no qualms about constructing its South Stream equivalent, Nord Stream, to ensure security of supply from Russia.

Second, Orban’s pivot to the East, including China and the rest of Asia as well as Russia, reflects the need for new sources of investment and new markets at a time when the eurozone is either growing sluggishly or lapsing back into crisis. Countries across CEE, and indeed beyond, are doing the same.

But there is also a degree of geopolitical calculation. Orban has no desire to see Hungary ruled by Brussels, but nor does he want it to be a Russian satellite. As he has said, “We are not pursuing a pro-Russian policy but a pro-Hungarian policy.”

By remaining in the EU while campaigning for it to be less centralized, and maintaining close ties with Russia and China, he may hope to “triangulate,” enhancing Hungary’s independence and his own freedom of action within the country.

Some Fidesz officials see making deals with Russia as a necessity both for Hungary’s security and to retain the party’s hold on the country. In the first case, the argument is that by making concessions to Moscow in areas that suit Hungary’s national interest, Hungary can ensure that it does not become Russia’s next target. This is not a strategy that has worked particularly well for Ukraine. In the latter argument, Fidesz is trying to shift Russian support within Hungary from its old-time ally, the MSZP. The reasoning is that Moscow has attempted to distort Hungary’s internal politics for two decades by backing the socialists; if a Fidesz government can neutralize this by cozying up to the Kremlin, it is another step to ensuring the old regime is uprooted and can never return.

“I think the response to the vaguely defined ‘illiberal state’ comments was exaggerated,” says Taylor. “Orban is playing one bloc against another. Hungary is fundamentally pretty firmly in the Western camp, but he wants to demonstrate to Hungarians that he can stand up to Brussels bureaucrats, in a manner that is familiar to us from the U.K. There’s a degree of double standards as well, as the rest of Europe is buying Russian oil and gas even though Ukraine is up in flames.”

The Growing Concern in the West

Hungary’s calculation seems to be that Ukraine will be a short- to medium-term crisis, and that in the longer term, relations will return to normal. Alienating Western allies is thus worth the risk. Given the lack of real action on Hungary from the EU over the past four years, this assessment may be a fair one.

“In spite of all the circumstances, the political reality is that Hungary is unlikely to be censured for a number of reasons,” says Samantha Seewoosurrun, head of the Brussels office of Newgate Communications. The EC alone has limited scope to act, unless it uses the “nuclear option” of invoking Article 7 of the Treaty of Amsterdam on human rights breaches, which would lead to Hungary’s voting rights being suspended. Few feel that Budapest has reached this stage. Earlier this year, the EC launched a new mechanism for addressing “systemic threats” that could be invoked as a precursor to the Article 7 procedure, but this is so far untested.

“In terms of the European Parliament, there is a huge amount of criticism but the fact remains that the Orban government is allied to the European People’s Party, the largest political group, which is highly unlikely to support any censure motion. That means that the parliament will end up letting it off the hook,” adds Seewoosurrun.

Finally, and most importantly, there is the straightforward case that Fidesz is democratically elected, albeit in a system in which media freedom has been curbed. With the current Eurosceptic trend in European politics, the question of sovereignty is even more sensitive.

However, there are real signs that while the EU is unwilling or unable to act, the U.S. is losing patience with Hungary. In September, President Barack Obama said in a speech that “from Hungary to Egypt, endless regulations and overt intimidation increasingly target civil society,” bracketing the Orban government with nakedly authoritarian regimes. Obama is thought to have had in mind a June police raid on three NGOs which distribute EU-backed Norwegian grants and had been financing organizations critical of the government.

The following month, relations with the U.S. hit rock bottom after Washington took the unprecedented step of imposing visa bans on six unnamed Hungarian officials over allegations of corruption. All are thought to be members of, or close to, Fidesz. The head of Hungary’s tax authority, Ildiko Vida, has said that she is one of those banned, but has denied wrongdoing. U.S. officials have said that corruption is a sign of the weakening of democratic institutions, but that the bans are not a political tool—a dubious statement in light of known U.S. concerns about Budapest’s relationship with Russia and its internal politics.

The U.S. has also been applying pressure on Hungary over the potential sale of a stake of a strategically important Croatian oil company, INA, to Gazprom or another Russian state-owned energy firm. Hungary’s MOL, in which the Budapest government has a 25 percent stake, owns 49 percent of INA and has been locked in a dispute over the company with Croatia’s government, which has a 45 percent stake in INA. MOL has made no secret that it wants to sell, particularly after Zagreb issued an arrest warrant for MOL’s CEO over corruption allegations. A sale of INA to a Kremlin-controlled company could compromise efforts to diversify energy supply in the Adriatic region, including exploration for offshore oil and gas and a proposed liquefied natural gas (LNG) terminal on the Croatian island of Krk.

As important as U.S. pressure may be, Germany is using its bilateral relationship with Hungary to exert influence on Orban, who has praised Germany’s economic model. German investments have contributed to Hungary’s economic revival, and sources say that Berlin’s hardening stance toward Russia over the past few months have influenced Hungary. Orban’s statements have reiterated Hungary’s commitment to the EU and NATO, and reportedly some deals with Russia may be reassessed.

Internal Weaknesses and the Challenge on the Far Right

Internally, there are also signs that the Orban government is facing increasing opposition. In October, the government made the rare decision to back down over legislation, shelving a proposed “Internet tax” after tens of thousands took to the streets to protest. The tax on data transfers, at a substantial 150 forints per gigabyte, would have been the world’s first, and was intended both to plug fiscal holes and theoretically to extend the existing telecommunications taxes. Despite the fact that the law contained no provisions to limit content, the visuals were bad in the context of previous legislation. More to the point, the tax antagonized large swathes of the population who are regular Internet users, regardless of political persuasion.

“The Internet tax probably wasn’t an attempt to limit access,” says Taylor. “But the popular reaction is a sign that the even the Hungarian population is getting rather suspicious of Orban, particularly the middle class, which is the sort of constituency he doesn’t want to alienate. It was a very bad PR move, which is why the government gave up very quickly.”

Orban told local media that “we are not communists. . . We don’t go against the will of the people,” a possible acknowledgement that claims that Fidesz is aping the authoritarianism of the pre-1989 regime are starting to stick. In December, two polls were published showing falling support for Fidesz. The first, by Ipsos, suggested that Fidesz had lost 800,000 supporters in just two months, with its approval rating falling to 30 percent from 35 percent, while Jobbik’s climbed to 14 percent. The latter, by Median, saw the government’s approval rating plummet to 26 percent from 38 percent in October, noting the Internet tax and U.S. visa ban as possible factors. The sharp drop in popularity has encouraged Orban’s many detractors and prompted a media response by the prime minister and his team.

But it will take much more than this to dislodge Orban. Fidesz has a huge parliamentary majority, and Orban is the overwhelmingly dominant figure in the party, with no clear successor. There is as yet no appetite for replacing the leader. Outside, the Internet tax may have for the first time galvanized all Orban’s opponents, but they agree on little else.

The parliamentary opposition is divided and either counts on niche support, or is tainted by its past. Gyurcsany is seen as the strongest opposition figure, but even he commands little support outside the party he founded after he left the MSZP.
Orban can characterize the opposition as a rabble, backed by the discredited old elite and foreign forces bent on eroding national sovereignty and identity—in some cases, not without justification.

The real concern is that some of the support Fidesz is losing is going to Jobbik, strengthening the far-right party just when it seemed to be falling from a high-water mark, and possibly encouraging the government to up its nationalist rhetoric.

There is a widespread expectation that Orban will try to follow Erdogan’s model by pushing through constitutional changes to beef up the powers of the presidency, including making it a directly elected post, before moving into the position when Ader leaves in 2017. Much will hinge on how the premier and his party weather the international and domestic currents in 2015.


McCain’s attack on Orban may have been exaggerated, but it reflected real concerns in the U.S. and EU about Hungary’s direction. While Hungary’s progress since 1989 has been far from perfect, the country was a relative success story until the mid-2000s. Continued structural reform and measures to address the wrongs of communism is a normal process involving clashes with vested interests and occasional mistakes. But the body of evidence that suggests that Fidesz aims not just to reform, but to embed itself in the fabric of the Hungarian state, is substantial. The government can capitalize on a divided opposition, popular support, patriotism and the real failings of previous governments, but recent events indicate that it is not entirely impregnable.

That the government backed down on the Internet tax may be a sign that it is willing to moderate its approach. This will come as a relief to the EU, which has proved rather toothless in its response to creeping authoritarianism in an important member state. But if Orban continues on his current course, the future may be rockier, without a credible, united opposition force, and with Hungary’s international partners distracted elsewhere. Talk of dictatorship is overblown, as even most of Orban’s critics acknowledge, but the claim that pluralism has been squeezed seems justified.

The U.S. and Germany have the most leverage. Despite Hungary’s assertion of independence, it can ill afford to alienate its major trading partner and the world’s only superpower, with which it until recently had a robust strategic partnership.

While Orban admires Putin’s Russia, he does not want Hungary to be dependent on its historical foe. Like many countries in Europe, he seeks partnership with Moscow where he feels it suits his country. But a conciliatory stance toward the Kremlin has become very damaging. Orban’s willingness to do business with a belligerent, expansionist Russia may be understandable, but could have long-term consequences for Hungary’s reputation and security.

Economically, even the government expects growth to slow in 2015. Hungary has had success leveraging its competitive advantages in location, cost and government support for manufacturing industries. But with the eurozone slowing again, continued pressure on the budget and the effects of recent investment wearing off, the government’s attitude to some foreign investors may start to look less justifiable, and more like another risk.

By the end of 2014, there are signs that Hungary is starting to shift its geopolitical stance back westward, in the face of growing opposition to the government and disillusionment with its policies. Orban’s rule has had the intended effect of substantively changing Hungary’s politics and economy, if not quite as radically as either the prime minister or his most trenchant critics would suggest. What remains to be seen is whether Orban will indeed be a trailblazer for “illiberal democracy” in Europe, or whether the forces in Hungarian society that he has sought to suppress will reassert themselves to halt Hungary’s drift away from the European mainstream.

Andrew MacDowall is a correspondent and analyst focusing on Central and Southeastern Europe. He has been living and working in the region since 2006.

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