ANOTHER FINE MESS: LOOKING BACK ON 2007; FORWARD

C O N F I D E N T I A L SECTION 01 OF 03 BUDAPEST 001956

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E.O. 12958: DECL: 12/10/2017
TAGS: PGOV PREL KDEM ECON HU
SUBJECT: ANOTHER FINE MESS: LOOKING BACK ON 2007; FORWARD
TO 2008

REF: A) BUDAPEST 1774 B) BUDAPEST 1486 C) BUDAPEST
1756 D) BUDAPEST 1877 E) BUDAPEST 1818 F)
BUDAPEST DAILY DECEMBER 10 G) BUDAPEST 1831
H) BUDAPEST 1794 I) BUDAPEST 1885

Classified By: P/E COUNSELOR ERIC. V. GAUDIOSI; 1.4 (B) AND (D)


1. (C) Summary: Parliament's December recess will bring to a
close a fractious fall and a frustrating year. 2007 has seenmore motion than forward movement. The embattled Gyurcsany
government has been able to take the initiative only
episodically, but the opposition has been unable to force
them from office despite continued dominance in opinion
polls. Political gridlock is likely to continue despite
"islands of consensus" on key foreign policy issues, but
economic trends are moving ( and in the wrong direction.
End Summary.

THE SATURATION POINT?


2. (C) For the Prime Minister, 2007 has lived down to
expectations. Protests have continued, while the focus has
shifted from Gyurcsany's lying to the appropriateness of the
social contract, specifically health care. Although all
parties have decried the use of violence, demonstrations have
been punctuated repeatedly by violent clashes (ref A). The
crippling debate over Health Care reform has produced a
"compromise" barely acceptable to the coalition, barely
comprehensible to the public and barely attractive to
potential private sector participants. Recent strikes by
teachers and transport workers may presage further
demonstrations, and the government will likely soon face a
referendum organized by the opposition on key elements of its
reform agenda (ref B). The emergence of the extremist Magyar
Garda has been an international embarrassment. With a
restive party considering alternatives, a contentious
coalition partner weighing its options, and bad economic news
accumulating at year's end, Gyurcsany may approach what one
MSzP MP called "the saturation point" for bad news.


3. (C) But if he is going, it is not quietly. His
government has continued to table legislation (albeit
increasingly at the risk of overt rifts with MSzP MPs),and
there have been more rumors than credible rivals within the
party thus far, despite heated rhetoric from traditional
Socialists, including Parliamentary Speaker Katalin Szili
(ref C). Opposition staffers joke that they're doing "such a
good job that no one wants to sit in the hot seat," and
conservative Political Scientist Tibor Glant assesses that
the MSzP has "a discredited Old Guard but no viable Young
Turks."


4. (C) Nonetheless, Gyurcsany still has any number of
enemies to keep close. As the Austrian publication Der
Standard observes, many in the MSzP are "sawing the legs off
the Prime Minister's chair ... without providing any
alternatives." The PM has taken a more active role )
supported by a more active staff - in rolling out projects
funded by EU development assistance, most recently including
the renovation of tourist sites and the development of a
logistics hub along the Ukrainian border.


5. (C) The PM continues to put on a bold face, reminding his
staff that he is "amarathon runner" and commenting recently
in a controversial (and subsequently disputed) quote in an
interview in the international press that he is
"irreplaceable." This continues the clear distinction
between his comments for international consumption, including
his pledge in the article "not to go half-way on reform,"
with his repeated comments within Hungary that "the period of
austerity is over."


6. (C) After a period of relative isolation, Gyurcsany has
also been more visible on the international scene through the
fall (though not, we understand, without some of the missteps
that have characterized his past trips). Russia policy
remains an exercise in triangulation, with Gyurcsany
flip-flopping between support for Nabucco, Blue Stream, and
South Stream. He is clearly enamored with Putin, but at the
same time, fearful of provoking the Russians, and mindful of
the commitment Hungary has made to the West (ref E). Even
so, the GoH can claim the Strategic Airlift Consortium's
decision to base its C-17s at Papa Airbase as an important
accomplishment. Similarly, its upcoming deployments of an
OMLT and Special Forces to Afghanistan, its acceptance of
Cuban refugees, its assumption of responsibility as the
eastern border of the Schengen Zone, and its continued
resolve on Kosovo have won strong multi-partisan consensus.
(Note: Pal Dunai, outgoing Director of the MFA's Foreign
Policy Institute, believes Kosovo in particular is an issue

BUDAPEST 00001956 002 OF 003


where the government's policy is the result of a conscious
effort to repair trans-Atlantic ties. End Note.)

THE FREEZING POINT AS FLASH POINT?


7. (C) But his activism has not gone past lip service in
response to the growing concerns of international investors
regarding transparency, competitiveness and the increasingly
weak economic conditions. Moreover, the government's foreign
policy record will mean very little to the average Hungarian
if the average temperature drops. Although the winter recess
generally lowers the volume of political debate, lower
temperatures could force the government to choose between
raising heating subsidies and risking its deficit reduction
plans.

AND THEN THERE'S RUSSIA.


8. (C) Its overwhelming dependence on Russian energy
supplies renders Hungary vulnerable to pressure from Moscow,
and long-term solutions are still years away. Hungary's
confusing positions on competing pipelines is the most
obvious sign of this dilemma. At least for the near term, we
can expect continued oscillation from Budapest to make their
actions and their statements palatable to both Eastern and
Western audiences. This attempt, however, has amplified
concern among the opposition that Hungary is growing too
close to Russia in a misguided effort to be a bridge between
East and West. They charge Russia is reviving its
political/security/business networks while courting Hungary
with veiled threats and promises. In Budapest this month,
Russian Prime Minister Zubkov noted "Hungarian-Russian
cooperation has been elevated to a new level and could bring
a growing number of investments..." Not exactly good news
for those who believe Russia's presence in the economy brings
business practices better left at home. But during the same
set of meetings, both Prime Minister Gyurscany and Foreign
Minister Goncz raised concerns about the Russian elections
and the lack of true democratic process proceeding them.

REFORMS


9. (C) With key groups such as students, pensioners,
farmers, and public sector employees already protesting the
government's reforms, the MSzP appears intent on avoiding any
further political fall-out with the public. If faced with a
choice between maintaining its deficit reduction targets or
being targeted by irate voters, the betting among our
contacts is that the government will blink.

DELAYED GRATIFICATION FOR THE OPPOSITION (


10. (C) The opposition has cause for both optimism and
frustration. With high poll numbers and a high degree of
confidence that the government will invite further attacks
with future missteps, FIDESZ enjoys negative control over the
political landscape. By combining conservative values and
populist economics, they are making inroads among traditional
Socialist supporters such as labor unions. Their rhetoric )
most recently Party President Orban's dismissal of the
Gyurcsany government's reforms as "pigs cleaning the pig sty"
and charges of "Gyurcsanist dictatorship" in Parliament )
continues to keep the government on the defensive.


11. (C) But the 2010 elections are still a distant prospect
and the government is unlikely to commit assisted suicide
with early elections. FIDESZ insiders still recall "losing
bigger leads," and Glant predicts "the dirtiest campaign in
Hungarian history." FIDESZ will likely move to court the
uncommitted ) and increasingly apathetic ) center, which
some polls put at 45 percent of the electorate (ref F).


12. (C) A more substantive platform to "prove their
readiness to govern" is a key element of FIDESZ's approach.
Their "Stronger Hungary" strategy ) developed in
coordination with the German Christian Democratic Party and
British Conservative Party - addresses issues ranging from
foreign affairs to job creation (ref G). The strategy
promises to restore government services, reduce taxes, and
roll back elements of the Gyurcsany government's reforms.
This will likely prove an appealing combination, but there
are already questions from the business community as to how
FIDESZ has done its math. Foreign investors will pay
particular attention to any return to rhetoric directed
against the "privileges" of international corporations.


13. (C) This issue highlights FIDESZ's fundamental dilemma:
its move to a more centrist and substantive approach risks
losing the presumptive support of traditional,
ideologically-driven supporters on the right of the political

BUDAPEST 00001956 003 OF 003


spectrum (ref H).

AND NO GRATIFICATION FOR THE SMALLER PRTIES


14. (C) This leaves little oxygen for the smaller parties
(ref H). The SzDSz in particular has become all but a
statistical nullity in recent polls, and more philosophical
members of the party talk about "having fulfilled our
historic mission." Confronting the question of whether to
remain in an increasingly dysfunctional coalition or to risk
political irrelevance by departing, SzDSz MP Matyas Eorsi
laments that he "doesn't know which finger to bite." Even
with Party President Janos Koka stepping down as Minister of
Economy to focus on re-energizing the party, their electoral
prospects remain dim. From our perspective, progress on
energy security and transparency will be more difficult with
Koka absent from the Ministry of Economy/Energy.

COMMENT: DAYS OF WHINE AND DOZES


15. (C) For the second year in a row (or, as many Hungarians
would joke, the second millennium in a row),2007 ends with
both disappointment and deadlock. Polling continues to show
Hungarians disillusioned with the present and disturbed about
the future, leaving them, in the words of one observer, "in a
bad mood, poor health, and a terrible fix" (septel). With
initial reforms under attack and subsequent steps facing a
steep incline, our contacts hold out little hope for dramatic
progress next year, especially with elections "only" two
years away. As one corporate executive warned, "I don't want
to say that we're in a crisis ... but we're definitely at a
crossroads."


16. (C) Indeed, an economic reckoning may not accommodate
the electoral schedule. The government's reliance on revenue
enhancement has reduced the deficit but precipitated a
decline in growth (ref I). The government is clearly betting
on its distribution of EU development funds to provide a
much-needed infusion of both capital and confidence. But
there are also negative external forces at play, with higher
food and energy prices driving up the cost of living and
taxes driving some foreign investors - including major
players such as General Electric - to reconsider their
long-term position in Hungary.


17. (C) National Bank President Simor believes the Prime
Minister appreciates the gravity of the situation, but
believes that "what is necessary economically is not possible
politically." Hungarians are maddened but seemingly not
motivated by falling behind neighboring states, and contacts
in the business community see little energy coming from the
political class. The prognosis for next year remains
politically uncertain and economically unpredictable. As
Dunai concluded, "we Hungarians are losing time. You
(diplomats) can afford to laugh ( because you can afford to
leave."

FOLEY