Analysis

A new Governor for a new era?

Hungary’s Prime Minister Appoints a Controversial New Central Bank Governor. Lili Bayer assesses the Governor-to-be.

Gyorgy Matolcsy, photo courtesy of kormany.hu under creative commons lisence.

Gyorgy Matolcsy, photo courtesy of kormany.hu under creative commons lisence.

Even Eurozone Finance Ministers would probably concede their sympathy to András Simor, the outgoing governor of the Hungarian Central Bank. Over the past six years, Mr Simor has had to face the Euro crisis engulfing Hungary’s largest economic partners, while trying to maintain price stability and establish the Forint as a strong and reliable currency. For the past three years, he has also had to endure the government of Prime Minister Viktor Orbán implementing a variety of ’unorthodox‘ economic policies and taking steps to limit Central Bank independence.

Mr Orbán’s Fidesz party would have changed the institutional structure of the Central Bank, creating a new post of ‘president’ and relegating the Governor to the position of vice-president. Moreover, the Monetary Council would have been enlarged, with Mr Orbán retaining the power of patronage and with it the ability to isolate the Governor.

The European Central Bank responded to the government’s plans with a warning that the changes constitute a breach of EU laws regarding Central Bank independence. The European Union and International Monetary Fund stopped negotiations with Hungary regarding a new credit line and demanded that the government respect EU rules. Finally, in July 2012, the government agreed to amend the law, though some original stipulations, such as the enlargement of the Monetary Council, remained. While these assurances quelled the worries of international institutions, they did little to guarantee the Central Bank’s long-term independence.

This week, Mr Simor’s term as Governor ends. The Prime Minister’s choice for his replacement is György Matolcsy. Mr Matolcsy is an experienced civil servant who served as an economic advisor and minister under successive center-right governments. Mr Orbán has called him his ‘right hand’ and most analysts consider him a devoted member of the ruling Fidesz party. Mr Matolcsy has often criticised both international institutions and Hungary’s cautious monetary policy. Most recently, he claimed the Central Bank’s forecast of possible future growth in public debt was ’unethical, immoral and harmful.’ In the eyes of some investors, Mr Matolcsy intention may be to inflate away Hungary’s public debt with policies aimed at a weaker Forint.

The Hungarian economy is expected to experience negative growth this year, and negotiations with the IMF have broken down. The government is under pressure to prove it can create growth. In the context of the Hungarian economy, however, monetary easing may have negative consequences. The Hungarian economy is small and heavily indebted. Much of Hungarian debt is in foreign currencies. For example, about 55% of private sector debt is in either Euros or Swiss Francs. Hungarians are already struggling to pay back foreign currency loans; by weakening the Forint, monetary easing would exacerbate the problem.

With the 2014 parliamentary elections coming up soon, the temptation to use monetary policy for political gain is increasing for Mr Orbán’s friends in the Central Bank. Foreign investors are aware of Mr Matolcsy’s political allegiances and becoming wary. Once appointed, Hungary’s new Central Bank Governor must choose his path. He can either continue in Mr Simor’s role as the guardian Central Bank independence, or, as most analysts predict, govern the bank as a political institution and ultimately be forced to face the consequences.

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