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on or face the prospect of legal action and possible suspension from the eu under article 7 of the eu treaty budapest on the other hand has been full of conciliating words but the key point is we have yet to see anything meaningful in terms of action brussels now has issues pending with budapest on a number of fronts in the first place hungary has been tried and found wanting in relation to its compliance with the conditions of the eu excess deficit procedure to which it has been submitted for some time now this issue is important in its own right since it was with the balooning of the fiscal deficit in 2006 that all the recent political problems really began the current deadlock with budapest on the deficit front has added importance in the present context since the eu is in the process of formulating a new treaty whereby states using the euro will be compelled to bring their debt and deficits into line with eu regulations or face sanctions all of this will sound very hollow if hungary which is not in the euro but is bound by the excess deficit agreements already in the treaty cannot be brought to heel the issue is a complex one in the hungarian case where many of the underlying issues are interconnected like the decision to change the constitution and the appropriation of assets worth about 9 75 of gdp from the private pension fund since without the constitutional change those having their assets effectively expropriated would have had recourse to law on the issue what the eu are concerned about is the credibility of their policy and in this case the key question is the sustainability of the hungarian debt and deficit since one off measures like money from the sale of private pension fund assets do not reduce the underlying structural deficit the country has as the eu statement says hungary has not made sufficient progress towards a timely and sustainable correction of its excessive deficit the eu executive proposes to move to the next stage of the excessive deficit procedure edp and recommends that the council of ministers decides that no effective action has been taken to bring the deficit below 3 of gdp in a sustainable manner this is a bit of beaurocrat speak but what it effectively means is that the european disciplinary procedure is being put to work on the country and that one of the consequences may be the application of a sanction involving the withholding of eu structural funds estimated to be equivalent to 1 7 of gdp subject to this council decision under article 126 8 of the eu treaty the commission will then propose to the council new recommendations addressed to hungary under article 126 7 of the treaty with a view to bringing to an end its excessive government deficit prime minister orban is very proud of the fact that the deficit came in at under 3 of gdp in 2011 for the first time since the country joined the eu in 2004 in fact the country had a budget surplus estimated to be between 2 and 3 of gdp but this surplus is entirely due to juggling with revenues that come from appropriating the private pension funds as the eu commission put it in their autumn forecast following a deficit of 4 2 of gdp in 2010 the general government balance is expected to turn to surplus thanks to one off revenues linked to the elimination of the obligatory private pension scheme the official estimate for this year s surplus has been revised up from 2 of gdp contained in the april 2011 convergence programme update cp to 3 9 of gdp in the autumn notification the larger surplus is mainly due to i higher one off revenue stemming from the elimination of the obligatory private pension scheme now amounting to 9¾ of gdp i e ½ of gdp higher than previously assumed ii an intention not to assume the debt of the public transport companies 1 4 of gdp and not to buy out selected ppp projects 0 7 of gdp contrary to earlier plans and iii additional measures of 0 4 of gdp adopted in september 2011 the eu commission calculate that the underlying deficit in 2011 that is the deficit stripping out the one off cash injections was around 6 of gdp and while the budget promise for 2012 is under 3 of gdp there are lots of factors like lower gdp growth higher interest costs and higher expenditure from automatic stabilsers that could easily mean the real number continues to be over 3 so enough is enough with unorthodox fiscal policies is what the country is now being told but the fiscal deficit is only one small part of the problem as far as the eu is concerned of much greater concern are the recent changes in the constitution and the independence of the countries institutions like the central bank the eu is now studying whether parts of the constitution violate the fundamental eu treaty and hungary has been given until tuesday to present changes to the constitution which would comply with eu membership requirements if the commission decide the unchanged constitution does violate the treaty legal action against the country will surely follow and it is not to be entirely ruled out that the country could be temporarily suspended from the eu under the terms of article 7 of the treaty details of which can be found here as commission spokeswoman pia ahrenkilde hansen told the press a legally stable environment based on the rule of law including respect for media freedom democratic principles and fundamental rights is also the best guarantee for citizens trust and confidence of partners and investors ahrenkilde hansen told journalists this is particularly vital in times of economic crisis so the question now posed is that someone here is going to have to back down and to do so significantly the question really is is orban ready and willing to do so friends and acquaintances of mine in hungary had been warning me for some time that this kind of confrontation would almost inevitably come orban had gone one bridge too far and it would be hard for him to turn back over the last few days a close acquaintance who has been becoming increasingly concerned about the situation has sent me a number of e mails on the topic below i reproduce a selection of extracts just to give a feel for how some perceptive and sensitive people inside the country see the situation as far as finding a way out is concerned i am very very sceptical given the super majority in parliament and the trenchwarfare between left and right except for a full blown revolution or the landing of us paratroopers both eveidently extremely unlikely the only way to topple orban is to have a revolt within parliamentary group of fidesz this is also very unlikely as orban is a very charismatic and ruthless leader with an uncanny ability to get through to people and to preserve his leadership moreover all fidesz mps are personally selected by orban and only god knows what kind of documents are existing in orban s hand with which he could blackmail them there ought to be a good deal given the widespread corruption in the hungarian political system it seems that nobody either could or would be ready to challange him even i could safely say reading the right wing press and speaking with supporters of orban that a decade of gradual shift towards a radical and anti capitalist and anti eu empire position has created a mindset which may even accept a break with eu in order to save freedom independence and national goals and reduce foreign capitalist exploitation thus i don t really see the internal force which could stand up to the government those lonely voices who criticised orban on grounds of economics have been successfully isolated and there was never any attempt to build up a formal institutionalised form for expressing different policy options within the broad right wing camp we could even find that any measures on behalf of eu against hungary only reinforce orban s stand alone policy and rally behind him the ultra nationalist camp which could be easily as large as 30 of the population given that he controls state administration and the armed forces and taking into account the complete reaoganisation of these branches of the state together with the wholesale nomination new staff he may have enough resources to sustain a populist autocratic order for a long period of time like in belorussia here comes to play also the aging population and the flight of young professionals into other eu states older people typically are not those one who are revolting and those who would revolt may increasingly decide to try and escape in time before the new iron curtain falls down actually to be precise maybe a break with the eu is not an option at this point but once the eu suspends hungary that option maybe more easy to sell we are faced with a charismatic leader who may actually have an agenda and not be only surfing on the current reality trying to get the best for himself launching wwii was huge misinterpreation of their own capacity on the part of germany especially when coupled with barbarossa and was not supported by much of the population and may be even the army and the conservativies had their misgivings but still hitler prevailed and i dont want to say that orban is comparable with that truly evil person but we are facing with a similar charismatic leader with a strong will and with deeply internalised goals and maybe there is not a masterplan a la mein kampf or hossbach notes but the changes the events the steps he is taking sometimes irrationally sometimes rationally are taking him towards this final irrational step he may stop at the last moment but it may happen that fear of loosing power pushes him over the brink and he may choose the completly irrational step i cannot say how the future will happen but i can say that his speeches acts messages belong to a distinct political family of radical right wing views and these inevitably lead to a break with the current eu and his personality traits also suggest a certain kind of personality one who is able to carry out this radical step if the circumstences arise and he feels forced to do so lets just hope that this scenario will not be the real one i think we need to be clear at this point nothing here is inevitable but the usual kind of bandaid kick the can a little bit further down the road solution is not going to be easily available i think it is going to be very hard for orban to back down significantly and especially so in the case of having the constitution rewritten significantly in many ways this is why i used the cryptic headline and final paragraph in my last hungary post what i was getting at there is the thought that this is now orban s great opportunity to go down in the history books possibly even as the man who opened up a chain of events which finally destroyed the euro this is his challenge and his possibility to live eternally i doubt there is any other one he is currently just three steps from heaven so it is comparatively easy for him to get to his intended destination but its also easy for him to get things wrong from his point of view i mean he could do the right thing be a gentleman and back off to make a deal with the eu under which he had to retire from politics i can just see josé barroso now alighting from the plane and waving the critical piece of paper to the delighted press photographers that way of course five years from now no one would even remember orban s name so the question of whether a deal is still possible is the billion dollar issue in all this we have a chicken and rooster situation who will blink first hungary may blink since the country s leaders may not wish to find themselves outside the eu and forced into default or alternately some of orban s advisers may already accept this scenario as an inevitability and welcome default as the only way of getting to grips with the forex debt problem they may even already be thinking in terms of a post euro scenario and assuming that the euro cannot hold together on the other hand the imf under eu pressure are unlikely to accept the forex default and debt restructuring that hungary probably needs to achieve sustainability in the longer term while they are still in the eu the constitution law is probably going to be the real sticking point since if the government needed this to avoid letting the people who had their pension savings appropriated take recourse to the law then unwinding it would probably mean the public finance issue would quickly get bigger and quite possibly right out of control on the other hand while the eu may dig in for a time they may ultimately fear contagion more than they do an unruly hungarian government europe s leaders have basically been motivated by fear of something or other throughout the whole euro debt crisis they have never really been out there in front of the curve no pain today please seems to have been the rule so with the second greek bailout visibly wobbling and much of the rest of eastern europe vulnerable to retrenchment by west european banks fearing the inevitable contagion they may well finally go for a peace in our time deal naturally in this post i have dwelt on the political dynamics and dangers of the current situation and indeed the post contains not one single chart but we should never forget there is a real economic backdrop to what is happening in hungary one in which imf programmes in eastern and southern europe are not working out as planned possibly due to a faulty diagnosis of the problem see my earlier post for explanation in addition it is hard to say at this point whether what is happening in hungary is unique due to its 20th century history or whether it is a harbinger of what is to come along the eu periphery as populations steadily get disillusioned with policy packages which simply don t work to answer this question we will need to see into the future but to see into the future we will have to get there first postscript friday morning in the above post i argued that the imf was very unlikely to open negotiations with hungary before the hungarian administration responded satisfactorily to the eu requests for compliance last night the imf issued a press statement where christine lagarde made plain that this is indeed the stance they are taking i met today with a hungarian delegation led by minister tamas fellegi we had a useful exchange about the latest economic developments in hungary and about how best the imf can assist the country in addressing the current economic situation i indicated that before the fund can determine when and whether to start negotiations for a stand by arrangement it will need to see tangible steps that show the authorities strong commitment to engage on all the policy issues that are relevant to macroeconomic stability support of the european authorities and institutions would also be critical for successful discussions of a new program thus orban s divide and rule strategy isn t going to work on the other hand reading between the lines in his latest speech i don t think orban is gettin...