BOKROS AND SIMOR: A "GEEK CHORUS" FOR ECONOMIC

C O N F I D E N T I A L SECTION 01 OF 02 BUDAPEST 001143 SIPDIS DEPT FOR EUR/CE, EB/OMA, INR/EC; USDOC FOR SAVICH; TREASURY FOR ERIC MEYER, JEFF BAKER, LARRY NORTON; USEU FOR HAARSAGER E.O. 12958: DECL: 11/26/2013 TAGS: ECON EFIN PREL PINR HU SUBJECT: BOKROS AND SIMOR: A "GEEK CHORUS" FOR ECONOMIC REFORM IN HUNGARY REF: A. BUDAPEST 1139 ¶B. BUDAPEST 1059 Classified By: ACTING DCM ERIC V. GAUDIOSI; REASONS 1.4 (B) AND (D) ¶1. (C) With the minority socialist government stuck in the refrain that it is pursuing "all the economic reforms the public is willing to accept," and the leading opposition FIDESZ party often resorting to populist rhetoric rather than practical alternatives, there is a vacuum of prominent Hungarian voices to lead the chorus calling for greater structural reform. In recent weeks, however, some new "old" voices have begun to make themselves heard. LAJOS BOKROS - THE RETURN OF THE REFORMER ¶2. (SBU) Lajos Bokros, currently professor and COO of the Central European University, is perhaps Hungary's best known economist because of his controversial "Bokros Package" austerity measures enacted during his tenure as Finance Minister in 1995-96. Although extremely unpopular at the time, in recent years his reform package has come to be viewed as "necessary medicine" to help stabilize the Hungarian economy. After leaving the Hungarian government in 1996, Bokros joined the World Bank where he provided policy advice on banking and financial reform issues. ¶3. (C) Having returned gradually to public life in the past years, Bokros has become increasingly vocal in recent weeks both about the need for fundamental economic reform in Hungary, and about his doubts that it will take place. Like many economists, he sees the root of Hungary's problem as a vicious circle of high taxes, low payment rates, and poor services which have increased indebtedness and undermined competitiveness. ¶4. (C) Commenting on his own reform record, Bokros noted "comprehensive reform was carried out in Hungary, including reform of the pension system." Since then, he argues, "there were anti-reforms rather than progress." In his view, a succession of "profligate governments" risked "making Hungary a banana republic every four years" as spending surged before each election. Recent reform efforts, according to Bokros, have been "timid" and even those efforts to "do the right thing" have been met with strong public opposition. He accuses the current government of being "unable to correctly diagnose the disease" and thus "incapable of finding the right treatment." ¶5. (SBU) But Bokros also believes that Hungary's situation is also the result of "problems we imported." In public comments, he has characterized the global financial crisis as a "huge government failure on the part of the United States." He blames former Fed Chairman Alan Greenspan for a "misguided" monetary policy that kept interest rates too low for too long and fueled cheap borrowing, overconsumption, and overinvestment. He maintains that the problem is not necessarily too little regulation in the U.S., but that regulation and oversight is "fragmented," and is "lacking in key areas." For example, he notes that both Fannie Mae and Freddie Mac are heavily regulated, but argues they lack sufficient regulation in the area of risk management. Similarly, he argues that greater regulation over investment banks and international aspects of insurance is needed. He sees the current situation as a "global breakdown of common sense" and argues that global coordination of financial system regulations is urgently needed. He has also suggested that other EU member states should do more to "prevent Hungary from failing." ANDRAS SIMOR - WORKING FROM THE INSIDE ¶6. (U) Another advocate of greater structural reform is Central Bank Governor Andras Simor. Prior to assuming his post in 2007, Simor served as Chairman of the Budapest Stock Exchange, and was Chairman of Deloitte Hungary. He began his professional career at the National Bank in 1976, and is now often mentioned as a potential Prime Minister should Hungary consider a government of experts. ¶7. (SBU) Together with Finance Minister Veres and Economy Minister Bajnai, Simor led negotiations of the IMF/EU/World Bank stabilization package. During this period, he defended the agreement's lack of specific conditions for structural reform, maintaining that "structural reforms take time," and that Hungary "does not have the luxury of time." BUDAPEST 00001143 002 OF 002 ¶8. (C) Since then, however, he has increasingly exercised his independence as Central Bank Governor. His recent message has been that the IMF package helped "reestablish stability" and "buys time" for the government to enact structural reforms. He expressed hope that the financial crisis will help "speed up the most important structural reforms in Hungary." ¶9. (C) A pragmatist with open channels to both the MSzP and FIDESZ, Simor is fully cognizant of the political realities impeding reform. But he has been urging the government to move beyond "crisis management mode" - often to the vocal displeasure of Socialist officials. In an interview with the daily Napi Gazdasag, he argues that "the measures of the next 12 months should be (focused on) how to improve the growth outlook without chasing dreams." Simor notes that "wrong incentives", such as "generous early retirement and maternity leave schemes," and a very high tax wedge are "hindering the labor supply," and need to be scaled back "in order to foster potential growth and stabilize public finances." ¶10. (C) Comment. Most observers believe there is little chance in the current political environment for economic reforms beyond those proposed by the government to meet IMF-imposed deficit reduction targets. Indeed, most are resigned to waiting until after the 2010 elections. Seeing the risks of further inaction, Bokros and Simor are helpfully keeping attention focused on the issue, at a time in which many consider the past weeks to be the result of a foreign conspiracy rather than the market's logical reaction to bad policy. While it is important that Hungarian voices carry this message, it is unclear whether Bokros and Simor's modest success in focusing public attention can be translated into public policy. Simor is circumspect about his chances for success in the near term, commenting publicly that "scaling back the overly generous welfare state is painful and the political willingness to do so is not so strong." He has gone further in private, admitting that his efforts to motivate the government "are failing." Bokros is even more pessimistic, warning that there is "no prospect" for Hungary to "grow its way out of the problem" - or even to meet "more than one of the Maastricht criteria" - before the expiration of the stabilization package. In his view, it is a "certainty" that Hungary will need to renew the stabilization package, if only to provide the security it needs to maintain access to capital markets to continue rolling over government paper. That will likely mean few reforms in 2009, and quite possibly an extension of the stabilization package in 2010. End comment. Foley