Orbán and the Economy: A Tool for Staying in Power

András Szabó, Patrik Galavits, András Pethő (Direkt36)
Photo: Viktor Orbán's Facebook page 2024-11-14

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Although Viktor Orbán has amassed considerable knowledge of economics over the decades, he sometimes shows serious shortcomings. Now he is acting as the prime architect of economic policy — and creating a system in which it is difficult to give feedback to him when there is a problem with an idea. The final part of the Direkt36 series of articles on the Hungarian economy is the behind-the-scenes story of Orbán’s economic policy.

Viktor Orbán isn’t nervous when he has to speak behind closed doors to members of the Hungarian parliament. It’s less pressure than speaking in public. Orbán regularly holds such meetings before the EU summits. MPs call these sessions with Orbán the “EU Grand Council.” In these meetings with Hungarian parliamentarians, the prime minister briefs senior members of parliament, including several opposition MPs, on what to expect at the next meeting of member state leaders in Brussels.

One such “grand council” met in March 2023. At this particular meeting, according to sources, Orbán spoke at length about economic issues. Seated in front of the ornate podium in Parliament’s Delegation Hall, he explained how the Germans, with Hungarian help, were trying to loosen an EU agreement to ban the marketing of internal combustion engines starting in 2035.

The prime minister explained that they planned to finesse an exception for engines powered by synthetic fuels that do not emit harmful substances. Orbán added, with some pride in his voice, that one of his former ministers, László Palkovics had “conspired with the Germans to smuggle a half-sentence into some document” that would allow for the exception. 

Orbán noted here that the development of synthetic fuels had been previously advocated for by Adolf Hitler, but the subject was dropped after Hitler lost World War II.

The prime minister went on to say that whatever the fate of the 2035 ban, the government must do everything in its power to preserve the Hungarian car industry. “I cannot imagine how it would be possible to replace it, at the same scale, with other industries at the moment,” Orbán said. Car factories constitute a major contribution to Hungary’s GDP and exports while providing 300,000 jobs.

Orbán said that since the 2035 ban could not be overturned, the only way to preserve the automotive industry in Hungary was to start producing electric cars components like batteries.

 Hungary is struggling with a labor shortage but Orbán had ideas about how they would source the necessary workers for battery production. According to the prime minister, Hungary has an untapped labor force of 200-300 thousand people concentrated in the eastern and southern regions of the country, where battery factories are being built. “There is still enough workforce here, we just need to train them. There are many gypsies among them, no question about it,” Orbán said. 

He added that he also saw women as potential workers. Especially “if we could somehow do this part-time employment program more skilfully. It is very difficult for Hungarians to accept.” He regretted that “women are not responding very well to it yet, and our regulations are too complicated.”

He also said that he would also count on Hungarian nationals from neighboring countries coming to fill the open positions. “I don’t see anything wrong with Hungarians from Satu Mare coming over to us when there is no Hungarian workforce,” Orbán said.

The prime minister also addressed critics of his plan who argued the economy should be developed through higher-skilled sectors rather than battery factories. Orbán swept this off the table, saying, “I cannot imagine a society without people with oily hands and people with dirty hands.” He said it was not worth talking about how skilled a particular worker was, and better to encourage the lower middle class.

“There is no shame in picking up trash. Why should there be? It has to be paid properly and it has to be done,” 

the prime minister said. He said that if these types of jobs are not incentivized, then Hungarians will not want to do them, and then “we will be pressured to bring in all kinds of foreigners.” Orbán said that this could lead to “social distortions familiar from Western Europe.”

Orbán has strong ideas on fundamental economic issues, from the car industry to the labor market to vocational training. According to sources who have known the prime minister for a long time, economic policy is another area – like foreign and domestic policy – where he is the government’s main decision maker.

While earlier in his political career he would listen to qualified economists he admired, from 2013 onwards, the range of professionals he consults with has gradually narrowed. Political interests became more important to him than technocratic opinions on his planned economic decisions. Although Orbán has made personal efforts to educate himself in economics and is surprisingly familiar with certain technical concepts, the economists who meet with him often notice his shortcomings.

Orbán’s belief in his own self-sufficiency has also played a role in Hungary’s subpar economic performance over the last decade and a half. Although the Hungarian economy has improved in many respects, it has, contrary to government propaganda, underperformed compared to other countries in the region. A number of statistics show that Hungary’s neighbors, including Romania, which has long been looked down at by Hungary’s elite, have benefited more than Hungary from the largely favorable global economic environment of the past decade and from ample EU support.

Direkt36 has published a three-part series of articles on the evolution of Orbán’s economic policy. In the first two articles, we described how Orbán’s relationship with his former top economic adviser György Matolcsy evolved. We also covered the rise of Márton Nagy, the prime minister’s new favorite minister, and detailed how he came to be Matolcsy’s replacement. This, the third and final part of the series, is the story of how Orbán came to be the primary decider of economic policy and made the economy into a tool for staying in power.

We sent a detailed list of questions to Viktor Orbán’s office about his non-public speech in Parliament and the information relating to him in this article, but we received no reply.

I. OPENNESS

Viktor Orbán held an unusual meeting in September 2011. The prime minister decided to invite a few economists to discuss issues facing the country, a break from his normal practice of adopting economic measures without any consultation.  

A total of eleven guests were invited to the meeting, which was held in a chamber of the parliament. Among those seated around the table were well-known economists who had previously supported or sympathized with the Fidesz party in some way, such as Zsigmond Járai, who served as finance minister during the first Orbán government; Ákos Péter Bod, who was head of the central bank during the Antall government; György Szapáry, who worked as chief economic adviser to Orbán; and László Csaba, a professor at CEU.

According to several participants, all economists were free to express their views during the meeting, which lasted more than three hours. Although György Matolcsy, then the minister of national economy, and Péter Szijjártó, then the prime minister’s spokesman, were present in the room, Orbán was essentially the only person from the government side who spoke. “It was clear that Orbán was interested in what was important to him, and he went deeper into things there,” said one participant, who said Orbán not only listened, but sometimes even took notes.

Orbán mostly asked the economists about opportunities for the Hungarian economy. While the economists answered questions about the future, they also commented on decisions the government had taken in the past. By the time of the 2011 meeting, the Orbán government had introduced a number of controversial economic measures. One such measure was a single-rate personal income tax for higher-income earners with several children, which the government hoped would boost economic growth.

Orbán, according to one of the sources present, called it “honest” and “fair” that everyone is taxed at the same rate, but several economists in the room criticized the one-rate tax. They said that, in addition to “horizontal fairness” – according to which all wealth classes are taxed at the same rate – there is also “vertical fairness,” whereby lower incomes are disproportionately hit harder by the single rate. 

According to those present, Orbán neither responded nor tried to convince the economists of his own correctness, and instead merely listened to the criticisms in a polite and respectful manner. The prime minister was still interested in hearing opinions from traditional economists on whom he relied heavily at the beginning of his political career.

In the mid-1990s, when Orbán was preparing to govern, he surrounded himself with experienced economists. Among them were Attila Chikán, professor of economics, and László Urbán, who worked for several financial institutions and played a key role in the development of Fidesz’s first economic programmes. Among the others Orbán regularly consulted was György Surányi, who headed the central bank in the early and mid-1990s.

He chose a similar group of economists when forming his government following his electoral victory in 1998. For example, he asked Chikán to be minister of economy. He eventually dropped Urbán, who had long been considered a contender for running the finance ministry but had proved too self-serving, and chose Zsigmond Járai, who had a background in banking and the stock market.

However, it became clear relatively quickly that Orbán was frustrated by the thinking of economists. According to a source close to the prime minister at the time, Orbán said 

“I don’t like economists, because they always tell me what I shouldn’t do. I was elected to do things.” 

According to the source, this criticism, which the prime minister later repeated, was primarily directed at Chikán, whom he dismissed from the government in December 1999 after a year and a half.

Chikán was replaced by György Matolcsy, who won Orbán’s trust by tending to depart from the then mainstream pro-market economic thinking and being more open to state intervention (too much so, according to his critics, as the first part of our series of articles showed). According to a former government official, Orbán argued in one of their one-on-one conversations that he needed an economy minister who had ten different ideas a day, nine of which could be terrible so long as there was one he could implement.

While Orbán drew the vividly imaginative Matolcsy close, he continued to rely heavily on Zsigmond Járai, his more conservative finance minister, who was wary of excessive interference in the market. “Zsigmond Járai was his god,” said a former government official. The trust was mutual. Járai wrote in his autobiography that Orbán, a sharp-witted lawyer with little knowledge of economics, had a knack for getting to the heart of the matter. According to Járai, Orbán approached economic issues very soberly, in a frugal and measured manner. 

This duality – Orbán’s attentiveness to economic advice that was both conservative and unorthodox – would characterize the prime minister’s policy for a long time to come. 

II. FIGHTING FOR THE SOUL OF THE FIDESZ PARTY

After Fidesz’s landslide election victory in 2010, Matolcsy, who was appointed minister of economy, was one of the most important economic decision makers, but he was not the only one in charge. Orbán has created a complex system for devising economic policy. University professor László Csaba, who was one of the economists Orbán met with regularly at the time, says that after 2010, a circle of experts offered advice on economic and political policies. Orbán decided which expert to listen to on every specific measure.

The best known figure in the political camp was Matolcsy, who represented the unorthodox line, often infusing it with populist ideas. Other experts were economists with conservative economic views, such as Zsigmond Járai, who was chairman of the Fiscal Council starting in 2011. This state body oversaw the transparency of the state budget. Other members of the expert group included György Szapáry, who became Orbán’s chief economic policy adviser from 2008, and Péter Ákos Bod. 

According to László Csaba, government economic policy in the years after 2010 was characterized by the different mentalities of the experts offering input: 

“unorthodox tools” were used to achieve “orthodox goals.” 

In other words, after the 2008 economic crisis, various extraordinary measures were taken to achieve conservative goals such as maintaining solvency, reducing public debt, and independence from international financial institutions. 

According to László Csaba, while making various economic policy decisions, Orbán held separate, informal consultations with members of the circle of experts and economists he formed in September 2011, who joined together for the meeting at which  some participants criticized the introduction of a single-rate tax. The government made these meetings public, and Orbán met the eleven economists again in November 2011.

However, in July 2012, the prime minister met with a group of just six people. According to the government’s statement at the time, the members of this select group were Zsigmond Járai, Péter Ákos Bod, László Csaba, György Surányi, Károly Szász, the then-president of the Financial Supervisory Authority, and Péter Gottfried, who was Orbán’s senior adviser on EU affairs. Unlike in the past, the heads of several financial institutions were not invited to this meeting. According to a source outside the circle of invitees, this could have been because the prime minister did not like the criticisms voiced by former invitees.

The political and professional circles around Orbán also competed with each other. According to a former government official, Orbán used his meetings with economists to create competition for Matolcsy. At the November 2011 meeting, for example, István Hamecz, then CEO of OTP Fund Management and one of the founders of Fidesz, said that international investor confidence could only be regained if there was a “change of personnel” in economic governance, indirectly calling for Matolcsy’s firing. According to one participant, Matolcsy, who was present in the room, “turned red as a beetroot” as Orbán listened to Hamecz’s comments on the subject, but did not comment. 

During this period, “there was a fight for the soul of Fidesz”, said László Csaba. There were disputes on not only economic matters, but also foreign policy. In foreign policy, the people vying for influence were, among others, foreign minister János Martonyi and Péter Gottfried, who was the chief adviser on EU affairs. According to Csaba, the stakes of this battle were the extent to which unorthodoxy would prevail and whether the country would move towards an illiberal system.

These questions were settled by 2013, when most of the economists around Orbán had been cut out, and the consultations ceased. Járai, for example, resigned from his post as chairman of the Fiscal Council in early 2012, and days later said that an economic policy turnaround was needed because “Matolcsy was pretty worn out in the market.”

It seemed that, in the battle for the soul of Fidesz, the representatives of the previous policy had lost. For Orbán, this change was made easier by the evolution of international politics.

III. THE ORANGE THREAD

Orbán arrived in Brussels on 30 January 2013 with high hopes, despite the fact that his relations with the European Commission were not smooth. The body, led at the time by the Portuguese José Manuel Barroso, was very critical of several economic measures taken by the Orbán government, such as extra taxes on different industries.

Orbán wanted to ease tensions with the visit. He wanted the European Commission to lift an EU measure against Hungary. The EU had launched the so-called excessive deficit procedure against Hungary because the country’s budget deficit had exceeded the EU’s requirements for several years. The situation was so serious that Hungary was in danger of having part of its EU funds frozen by Brussels.

At the meeting, Orbán seemed to have convinced Barroso that the Hungarian government was serious about the path of austerity it had embarked on in recent years and that it was working hard to correct its deficit issues. The fact that the two politicians held their joint press conference after the meeting in a friendly atmosphere, laughing, was a sign that a page seemed to have been turned. Orbán spoke of a “very good meeting,” while Barroso said he was pleased by the open and friendly cooperation with the Hungarian government.

In the months that followed, the Hungarian government did its utmost to meet the deficit target. A series of austerity measures were successful and Hungary was lifted out of the excessive deficit procedure in June 2013. Orbán claimed this as a huge success, saying shortly afterwards that “never since we joined the EU have we been on such solid ground.” 

But Orbán’s joy was about much more than he revealed to the outside world. According to economist László Csaba, who was still in contact with government politicians at the time, the Commission praised the Hungarian government’s handling of the crisis after 2010 during the Brussels talks in 2013. The European Commission appreciated that Hungary was able to manage the crisis on its own and, unlike Greece, did not need a financial rescue package.

According to Csaba, the European Commission had rewarded this success by essentially telling the Hungarian government “do whatever you want to, we don’t care” by ending the excessive deficit procedure. According to the economist, this gave Orbán a free hand in managing the Hungarian economy. 

“This was the start of a policy-driven economic policy,” 

the economist said. From then on, political considerations became more important in economic decision making.

One example of this was the government’s order to lower utility tariffs for the public from 2013 on. In the years that followed, the reduction of utility bills became one of the government’s most important political products and played a major role in Fidesz’s two-thirds electoral victory in 2014. However, the government no longer paid attention to the longer-term effects of the cuts. As a result of these measures, Hungarian society was later caught completely unprepared for the energy crisis of 2022, when gas and electricity prices skyrocketed.

The reduction in utility prices is just one example of the many economic policies made purely for cultivating political power. Over the past decade and a half, there have been a number of government measures that have put businessmen close to the government or Orbán personally in advantageous positions, from Lőrinc Mészáros to István Garancsi to the prime minister’s son-in-law István Tiborcz.

According to a former government official who has known the prime minister for decades, these decisions showed that there was an “orange thread” in Orbán’s thinking. By using the color of Fidesz’s logo, the source implied that Orbán was treating the economy as a tool to achieve his power goals. Thus, according to the source, 

the prime minister has always subordinated long-term economic considerations to his current short-term political and personal priorities. 

According to people familiar with the matter, this does not mean that Orbán ignores economics. Many argue that the prime minister, originally a lawyer by training, has accumulated considerable knowledge of economic policy over the decades. But this knowledge has its limits.

IV. SHORTCOMINGS 

Here are some of the limitations of Orbán’s economic knowledge that economists experienced at meetings between 2010 and 2014. 

At these meetings, the prime minister put forward several ideas on how to increase the competitiveness of the Hungarian economy. On one occasion, he argued that US manufactured goods are more competitive than Hungarian products because energy is cheaper in the US. If energy prices were lowered in Hungary, the Hungarian economy could also benefit, the prime minister argued, according to one of the participants in the meeting. 

The economists, shocked by the suggestion, tried to explain to Orbán that this goal could not be achieved by state intervention in energy prices. They told him that Hungarian products could be made more competitive by producing industrial goods that require less energy and by trying to perform better in sectors for which the country has the right capabilities.

But Orbán is not easily persuaded by such arguments based on long-established economic principles. According to one government official, the prime minister tends to give more credit to those who come up with innovative ideas than to those who are more conventional in their economic thinking. Orbán believes that his government can change the status quo and “that there is an opportunity that no one but us can see,” the official said.

This does not mean that Orbán is only interested in ideas that seem irrational. “His economic knowledge far exceeds that of the heads of government of neighboring countries,” said one government source. Several people familiar with the prime minister’s economic affairs pointed out that he is also “quick-witted” and understands the context almost immediately, although he often looks for “the impact of certain things on his personal power.”

However, those more knowledgeable can easily notice that he has not had any formal training in economics. According to an economist who used to regularly consult the prime minister, Orbán is less at home with intangible issues such as financial markets or the functioning of the banking system.

An advisor connected to the government provided additional examples of the prime minister’s economic shortcomings. According to the source, the prime minister appeared particularly unaware of the details of the unorthodox measures introduced after the change of government in 2010. 

“He did not have important information, his briefing was very one-sided,” 

said the source. Orbán had only learned about the damage that certain planned measures could cause from a bank’s analysis, not from the relevant government apparatus working for him. The bank’s analysis had an effect on Orbán, who had reconsidered some of the planned measures and mitigated their impact.

Similar shortcomings became even more prevalent later, especially after his 2018 electoral victory, when Orbán further centralized his power.

The prime minister took more tight control of the organization of government bureaucracy. It was then that an office directly under Orbán was created: the Prime Minister’s Government Office. According to a source close to the government, this office informs Orbán about what issues and proposals are being worked on in the various ministries. Orbán also uses a different office, called the Cabinet Office, to ensure that his specific decrees will be passed through the government bureaucracy. 

Political governance coordinated by Antal Rogán, one of the prime minister’s closest allies, operates separately. Rogán, who heads the Prime Minister’s Cabinet Office, implements the current political directions and the most important messages for the political state secretaries of the ministries and the Fidesz parliamentary group. According to the source, the government offices are taking over more and more tasks from the local governments. Back in 2018, they were still supervised by Bence Tuzson, the state secretary for civil service of the Prime Minister’s Office.

“The whole system is about pushing through the political will,” the source close to the government said. However, the source said, feedback within the system does not work well, with those at lower levels not always daring to say when they disagree with a decision or when they are experiencing negative consequences. As a result, some information, such as the unintended consequences of decisions on health care and education, does not reach the prime minister quickly enough.

A similar process took place when the government committed itself to building battery factories. 

V. BRING ON THE CAPITAL

In early autumn last year, nearly a dozen people gathered for an important technical meeting in the Hungarian company MOL’s former headquarters, which is now the Ministry of Energy in the 11th district of Budapest. Some members of a panel of the Hungarian Academy of Sciences explained to minister Csaba Lantos and his colleagues what they thought about the government’s battery factory construction program. 

Although it was a controversial issue, the Presidential Committee on Sustainable Development of the Academy of Sciences tried to be very careful. One source familiar with the workings of the panel said that when they were working on their position paper on battery production, they “really chewed over every sentence” to try to ensure complete accuracy.

Despite its cautious wording, the draft drawn up by the committee contained serious criticism. The members of the committee were concerned that it was not clear to the public or the scientific community how the huge energy and water needs of factories would be met. The committee also warned the government to be careful, explaining that it is far from certain that electric cars will dominate transport in the future. They raised the question of “whether it is appropriate to base an economic development program of this scale on a single technology.” 

Once the staff had compiled this paper, it was sent to the Ministry of Energy prior to its publication. Lantos then invited some members of the committee to meet and discuss the paper with him. 

According to sources familiar with the details of the meeting, the minister was surprisingly receptive to the criticisms. In general, he said that he believed that electric cars and their batteries were the future, but he did not contest what was written in the document. After the committee members took the minister’s requests into account, they published their position on the Academy’s website on October 10 last year.

According to sources familiar with the details of the meeting, the Ministry of Energy did not particularly object to the report in part because several people in the government had already suggested that the installation of battery factories had not been sufficiently thought through. (However, the Ministry of Energy told in response to Direkt36’s request for comment that after the meeting the issued document was “extended with a petition-like summary section” and they disagree with it. The chairman of the committee, evolutionary biologist Eörs Szathmáry, said he was surprised by this because the summary “does not contain anything new compared to other parts of the resolution.”)

Despite the concerns that have been raised, there is little sign that the government is seriously reconsidering its position on factory construction, largely because the prime minister continues to firmly believe that factories like these are key to economic growth.

According to a businessman formerly associated with Fidesz’s senior leadership, Orbán’s thinking is characterized by a lack of interest in various economic indicators. 

“Orbán thinks that capital has to be brought in, because if there is capital, there is growth, and if there is growth, there is wage growth,” 

the source said. 

According to the businessman, the prime minister’s passion for history played a big role in the formation of this belief. According to the source, Orbán believes that the Austro-Hungarian Empire is not remembered by people for the extent of corruption and economic problems it had; rather, he thinks it is seen as a golden age because of how much was built at that time.

Orbán has put this idea into practice. From the moment he came to power in 2010, he advocated an economic policy based on increasing employment and encouraging capital inflows. Over this period, the country has received considerable EU funding and the government has hit its target of creating one million new jobs.

However, this growth model, which economists call “expansionary,” fizzled out around 2018-2019. It is a model that requires more and more capital and more and more additional work every year to maintain economic growth. Around five years ago, however, labor shortages were becoming an increasing problem for companies in Hungary. This was exacerbated by the fact that, in the following years, EU funds dried up as a result of EU proceedings against the Orbán government for violating the rule of law.

Several economists critical of the government argued that this was the right time for the country to start shifting to a different economic model. They argued that, since the labor market in Hungary no longer required the creation of jobs in large numbers, the focus should be on making workers as skilled as possible, thus increasing the value of Hungarian production. This is known as an intensive growth model.

But Orbán has stuck to his original model, despite the circumstances changing. As a result, a succession of increasingly large-scale Asian battery and electric car (EV) investments have been announced since 2021, with the Hungarian government providing billions of forints in funding. However, as there was no available domestic workforce, the labor needs of the new factories were partly filled by foreign guest workers.

“They had to give their own voters something to believe in,” said one economist who has closely followed the government’s industrial policy. In the midst of the economic difficulties following the COVID pandemic, the government has tried to give hope to their voters and pro-government business circles through this industrialization program. 

The economist said that, in many ways, EV factory building seemed logical. There is an agreement on the EU’s climate protection measures, which would ban traditional internal combustion cars from 2035. “The Chinese connection has also been established,” the economist said, adding that the Hungarian government, which stresses the importance of opening up to the East, can show that Chinese EV and battery giants such as CATL and BYD are developing in Hungary. The source also says that a government with a two-thirds majority in parliament can deal with protests against the environmental impact of the factories’ operations.

But the picture is much more nuanced than that, and last year many in government started to see it. By that time, a growing number of respected experts were criticizing the battery factory construction. These included theresearchers from the Academy who published their report last autumn.

Concerns were further heightened by the fact that, by the beginning of this year, sales of electric cars in Europe had fallen so much that the impact was felt in Hungary. By May, battery production in the country had fallen by 32 percent compared to the same month last year. According to a government official with insight into the issue, government leaders have become seriously concerned about the situation and calculated that many of the previously announced electric car and battery investments were likely to be smaller than originally planned.

But Orbán remains determined. This much was clear from his speech in Tusnádfürdő at the end of July this year, in which he said that he still considers the automotive industry to be the driving force of the Hungarian economy. “We must preserve Hungary’s character as a production center,” he declared, “because only here can the domestic workforce find 100 percent employment.”

Bence Széchenyi contributed to the translation of this article.

András Pethő

András Pethő is co-founder, editor and executive director of Direkt36. Previously, he worked for the BBC World Service in London and was a reporter at the investigative unit of The Washington Post. He has contributed to several international reporting projects, including The Panama Papers.