The Austrian School is a venerable tradition in economics, albeit one antithetical to this blog’s perspective. But it became apparent this morning that we should instead have been studying Hungarian economics.
As far as I can tell, a vice-chairman of Hungary’s right-wing governing party (not a government official) made some loose remarks about public finances being so bad that the country might default on its debt. When asked about these comments, the Prime Minister’s spokesman mostly tried to blame the previous government.
That is a familiar story in many jurisdictions: a new government comes in and bemoans what a mess its predecessor made of public finances. It is just unfortunate that this particular episode of Hungarian politics played out while financial markets were on edge about European public debt.
However, even if we put aside the politics, the economic analogy between Hungary and Greece seems ridiculous for a couple of reasons.
1.) Exchange Rates
A time-honoured technique for countries to manoeuver out of economic and fiscal jams is devaluing the national currency. A major constraint on Greece (and the other PIGS: Portugal, Ireland and Spain) is being locked into the Euro. Greece must navigate between two painful and disruptive options: “devaluing” its domestic economy or pulling out of the Euro altogether.
While Hungary is a member of the European Union (EU), it is not part of Europe’s monetary union. Hungary has a national currency, which it is free to devalue. No matter how bad things get in Hungary, it will not be pulling out of the Euro (because it is not currently in the Euro).
2.) Debt Size
Greece has a national debt (2009) of 273 billion Euros, about 115% of its GDP. By comparison, Hungary’s debt-GDP ratio is much lower, at more like 80%.
Since Hungary’s GDP is also much smaller, its total debt is but a fraction of Greece’s debt. Hungary’s national debt (2009) is 20,421 billion Hungarian forints. That sounds astronomical until you consider that it takes almost 300 forints to buy one Euro.
At current exchange rates, Hungary’s national debt is about 68 billion Euros. So, Hungary’s debt is only one-quarter of Greece’s debt.
The EU has established a “Special Purpose Vehicle” to lend up to 440 billion Euros to member states. Currently, that vehicle is available only to members of the monetary union.
However, the European Central Bank could still buy Hungarian bonds. Even if it bought up Hungary’s entire national debt, that would amount to just 15% of the Special Purpose Vehicle.
In conclusion, Hungary’s debt problem is totally manageable. Hungary and the EU have ample policy tools to address it. We just have to hope that goofy political rhetoric from Hungary’s right-wingers and EU foot-dragging do not turn this molehill into a mountain.
Note: My debt and GDP figures are from this report.
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- Ontario hiding savings from lower interest rates (October 15th, 2012)
- Household debt going from bad to worse (October 15th, 2012)
- Pour en finir avec la dette… (August 24th, 2012)
- Dead Money (August 23rd, 2012)