Hungarian PM Orbán lays down foundations of economic neutrality

European competitiveness, economic neutrality

This is the title of the Prime Minister's speech at the National University of Public Service. He began his speech by saying they will introduce the term economic neutrality in the political and economic arenas.

The Hungarian government wants a competitiveness pact

European Affairs Minister János Bóka and his team are preparing to conclude a grand competitiveness pact at a major meeting in Budapest on 7 or 8 November as part of the rotating EU presidency currently held by Hungary. (The event would presumably be the annual meeting of the European Political Community - editor's note).

The Draghi report comes in handy

It is not usual to talk about the decline of European competitiveness in the EU, but Orbán said that the recent Draghi report is a timely opportunity to highlight the problems. The report was "written by an irreproachable Brusselian", a citizen of a founding member state, the Prime Minister said.

Orbán summarised the main points of the Draghi report:

• Europe has lost the opportunity to buy cheap energy, and with it a year's worth of GDP, with electricity and gas prices far higher than those of competing large economies.
• Europe's weight in world trade is declining, and it is falling behind in the technology race.
• Many firms see regulatory barriers in Europe as their biggest challenge.
• A positive net migration balance cannot compensate for a shrinking population, so for the first time the EU is forced to grow its economy without a growing population as a driving force.
• The political objective of the European Green Deal, as interpreted by Orbán, will be called into question by the Draghi report if the European economy, competitiveness and industrial policy will decline. In his view, there is therefore a risk if industrial policy and the green target system are not coordinated. He also sees, based on this morning's Eurochambres discussion, that half of European firms see the level of energy costs as the second main obstacle to investment.
• He states that at the moment the Green Deal is causing unemployment and is not resulting in cheap energy because fossil is setting the energy price level.
• He interprets the Draghi report as presenting the battery industry developments and subsidies promoted by the Hungarian government in a rather positive light, because it recognises that the overall benefits of state aid to such projects are positive.

Orbán stated that János Bóka, Hungary's European Affairs Minister and his team were right to make the topic of European competitiveness and the discussion on it one of the central themes of the Hungarian presidency.

He did not support the federalist solution model advocated by the Draghi report and suggested that it should not even be read by those present.

Overall, he said, the report identifies problems that pose economic difficulties for European member states, industrial policy and competitiveness, and that these factors could cause "intolerable" difficulties for the Hungarian economy.

The world is splitting in two, two financial systems are possible

The West's response to the transitioning world economy is to establish blocs, which also means the creation of power blocs, with a vehemence "sometimes reminiscent of the Iron Curtain", Orbán said.

In his view, it is a return to the logic of the Cold War. It is breaking the world economy in two.

For a while, the East's response was to fight against these developments, for example China was the defender of the World Trade Organisation, confident that the bloc's response could be countered.

He says that the ultimate driver in the East is to build an Eastern system instead of a dollar-based clearing system, then a split world will be created, two financial systems will exist.

He recalled that this summer Reuters published a comprehensive investigative piece on the West's disinformation actions against Chinese vaccines during the Covid period.

He referred to a recent news report that the US will spend $1.6 billion against Chinese disinformation campaigns, and that Hungary will also get some of this money, and that the Office for the Protection of Sovereignty will be watching this.

The transatlantic response and strategic autonomy

In the face of a fragmented world economy, one position is to integrate Europe into a transatlantic economic system, and thus to place Europe under the United States, which still has a competitive advantage.

Another response is what French President Emmanuel Macron is calling for: strategic autonomy. This could even be sympathetic to the Hungarian government, but as it is linked to the concept of a federal Europe, it will not work.

Regarding the concept of a federal Europe, he said that "it is impossible, it is squaring a circle, it is a losing battle in the politics of migration". He said it simply would not work, partly because it would reduce shared prosperity, and partly because the EU would not want to take on a joint credit, but there are member states in the EU, more powerful states outside the EU, for which it would be "economic suicide" to accept it. Therefore the EU can only function as an alliance of nations, he said.

We need a Hungarian answer, which is economic neutrality

Overall, Orbán believes that the EU should argue in favour of strategic autonomy on a national rather than federal basis, but Hungary is in a significant minority on this point.

"I don't hope that the European Union will find a common response to the decline in competitiveness, and that if Hungary shares this response, we will solve the problem of Hungarian competitiveness," he said. Therefore, there must be a Hungarian answer, which is economic neutrality.

The principles of economic neutrality

"We decide who we do business with".

"We do business with whoever is most profitable to do business with". Nothing can take precedence over economic considerations and competitiveness.

"We negotiate only on our own values". This, he said, would not even need to be stressed, but in the EU and the US there is "bundling practices". He referred to the issue of EU funds, which is a "hornets' nest", some EU money is available, some he said is not because of Hungary's the Child Protection Act.

In July 2022, the European Commission referred Hungary to the Court of Justice of the EU over the aforementioned law which, according to the EU executive, "discriminates against people on the basis of their sexual orientation and gender identity."

The Commission said it "considers that the law violates the internal market rules, the fundamental rights of individuals (in particular LGBTIQ people) as well as - with regard to those fundamental rights - the EU values. The Hungarian law, in particular, singles out and targets content that ‘promotes or portrays' what it refers to as ‘divergence from self-identity corresponding to sex at birth, sex change or homosexuality' for individuals under 18."

The content of economic neutrality

Orbán He also listed the items, some of which he had already discussed in the video of his speech in Kötcse:

• Financial neutrality. By this he means that you cannot only raise funds from the Western credit markets, i.e. you have to be present in the London, Japanese, Chinese and Arab markets. The first steps have already been taken, he said, "by building up credit relations with Qatar and China".
• Investment neutrality. There is no need to be selective about the capital investments coming to Hungary.
• Market neutrality. We sell to whoever buys. Orbán noted the Serbian example is interesting because the country wants to join the EU, but until it does, it has just signed a free trade agreement with China for 15,000 goods. He added that he does not know whether the Serbian solution will work, i.e. as long as it is possible, the manoeuvring room on the market should be exploited to the fullest.
• Technological neutrality. Here he indicated that we should not think of Huawei, but of Paks [nuclear power plant], for example. In his view, it is a mistake to think that this is a Russian investment, as it is an intercontinental investment involving many American and German companies.

The political consequences of economic neutrality

These are in the process of taking shape, but the following is the framework:

Growth is an important target, the EU is stuck in a range of 0-3%, with a rate of around 1% this year. The 0-3% range is not enough for us, he said, adding that "the first and perhaps most important element of the policy of economic neutrality is that we must remain in the longer-term growth range of between 3% and 6%."

Orbán pointed out that he had seen the central bank's GDP growth forecasts for this year and next year, which were lowered sharply yesterday, and smiled a little because he believed that the government's economic policy actions were playing a role in building the growth momentum.

The Hungarian central bank has sharply lowered its GDP forecast for this year to 1.0-1.8% from 2-3% it expected three months ago, while its 2025 estimate was cut to 2.7-3.7% from 3.5-4.5% in June.

However, Orbán said,

I think we can reach the 3 to 6% economic growth band next year, stay there in 2026 and aim for the upper end of the band thereafter.

The MNB projects growth in a range between 3.5% and 4.5% also for 2026, an upward revision from 3.0-4.0% in its June Inflation Report.

We cannot slip back into debt slavery. There is no effective limit to this in economics, but his observation is that once you reach a debt-to-GDP ratio of 90%, you can't go back, said Orbán.

Therefore, Hungary should strive to avoid getting to this point, as after post-Covid debt jump we have successfully brought the debt ratio down to around 70%. He concluded: Hungary is capable of not slipping back to a debt situation of around 90%. He stated that "public debt has to come down, and this requires a disciplined fiscal policy".

We need foreign direct investment (preferably modern technology), which is needed for a growth rate of 3-6%.

We need tax cuts, and to achieve this we need to announce a capital injection programme for the SME sector. They need a comprehensive and substantial capital injection programme, he stressed. Tax allowances for dependent children should be doubled next year, and the credit for skilled workers will also be launched in 2025, he said, setting out the steps already announced, which will be included in the 2025 budget.

Modern technologies are needed, which in his opinion means that the cars of the future need to be produced here, that the cutting-edge green energy technologies need to be operated here, and that digitalisation need to be the most widespread here in the whole of in Europe (e-documents).

At the end of his speech, the Prime Minister asked the big question: can Hungary remain neutral in an economically blocking world? To answer this question, he turned to ChatGPT, which answered yes, it can. He therefore concluded that "if Hungary is determined, it can make the policy of economic neutrality work."

Cover photo: MTI Photo/Prime Minister's Press Office/Vivien Cher Benko