Identifier
Created
Classification
Origin
08BUDAPEST83
2008-01-24 16:32:00
CONFIDENTIAL
Embassy Budapest
Cable title:  

SLEDDING UPHILL ... AND SLIDING BACK DOWN: THE

Tags:  PGOV ECON KDEM HU 
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VZCZCXRO0170
PP RUEHFL RUEHKW RUEHLA RUEHROV RUEHSR
DE RUEHUP #0083/01 0241632
ZNY CCCCC ZZH
P 241632Z JAN 08
FM AMEMBASSY BUDAPEST
TO RUEHC/SECSTATE WASHDC PRIORITY 2420
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE
C O N F I D E N T I A L SECTION 01 OF 02 BUDAPEST 000083 

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DEPARTMENT FOR EUR/NCE; PLEASE PASS TO NSC FOR ADAM STERLING

E.O. 12958: DECL: 01/12/2013
TAGS: PGOV ECON KDEM HU
SUBJECT: SLEDDING UPHILL ... AND SLIDING BACK DOWN: THE
PROGNOSIS FOR REFORM

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

C O N F I D E N T I A L SECTION 01 OF 02 BUDAPEST 000083

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DEPARTMENT FOR EUR/NCE; PLEASE PASS TO NSC FOR ADAM STERLING

E.O. 12958: DECL: 01/12/2013
TAGS: PGOV ECON KDEM HU
SUBJECT: SLEDDING UPHILL ... AND SLIDING BACK DOWN: THE
PROGNOSIS FOR REFORM

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


1. (C) When Parliament returns from recess to begin its
spring session in February, debate will return inevitably to
the Gyurcsany government's reform agenda. Although Prime
Minister Gyurcsany has pledged "smooth and steady progress"
and is reportedly preparing legislation on party financing
and public procurement, observers predict that the MSzP will
tolerate minor modifications of the tax structure but no
major new initiatives. Indeed, the business community is
increasingly concerned that the government will spend the
proceeds from its revenue enhancement efforts on social
programs designed to court voters in the run-up to the public
referendum March 9. For its part, the public appears far
from convinced that the question is how best to undertake
reforms. For some, the question is whether reform is
politically possible; for many others, whether reform is
necessary.

UN-CHANGE AGENTS


2. (C) Few here are talking about better mousetraps - much
less building them. Junior coalition partner SzDSz has
unveiled a public campaign to drum up support for tuition and
medical fees in preparation for a spring referendum, now
scheduled for March 9. But the party's members argue
privately - and often publicly - that the government has
undermined the right idea with the wrong approach. Ferenc
Juhasz, who will organize the MSzP's efforts to prepare for
the referendum, has indicated that the party's hopes lie in a
low turn-out.


3. (C) Although our own election campaign remains a source
of great fascination, there is little competition here over
the title of "change agent." The reflex of Gyurcsany's
critics - within his own party and beyond - has been to
reduce speed or to reverse direction entirely on reform.
Party Praesidium member Attila Mesterhazy tells us that the
party has circled the wagons around Gyurcsany, but made clear
that "we do not want to start new reforms but to finish what
we've already started." Although he indicated that "minor

modifications" of the tax code are possible, he sees no
immediate prospect of reducing the size of government or of
taking on longer-term issues such as pension reform - issues
they regard as well beyond the public's stress tolerance.
Although we understand from industry reps that the government
is preparing legislation on both party finance reform, public
procurement, and public administration, Mesterhazy gave no
indication that the party is ready for further steps.

DENIAL ON THE DANUBE


4. (C) Indeed, we are constantly struck by the extent to
which contacts across the political spectrum remain in
denial, ignoring the economic imperative of reform and
focusing on the political priority of "solidarity." In
returning the government's Health Care reform legislation
back to Parliament, President Solyom leveled a series of
objections, among them that the plan could not be
"guaranteed," as referred to in the Constitution.


5. (C) Even the PM's supporters privately concede that the
referendum will likely succeed, and government spokespersons
have alluded to "finding fees from other sources" to replace
education and medical fees. While the referendum does not
compel new elections, the opposition continues to cast it as
a de facto vote of confidence in the Gyurcsany government,
hoping to mobilize their own supporters and potentially
motivate Gyurcsany's rivals within the MSzP. They are also
moving toward a second referendum - this one on the
government's health care reforms - later in the year.

MORE SENSE OF ENTITLEMENT THAN COMMON SENSE


6. (C) Gyurcsany's opponents increasingly open fire from the
left on economic issues by casting his actions as attacks on
Hungary's social compact. And with considerable effect.
Among Hungary's aging population, nostalgia for the perceived
security of the communist system is widespread and unease
with free-market competition tangible. But even younger
Hungarians can be remarkably hidebound, often regarding
education, health care, and an expansive array of social
services as not just free goods but free goods in infinite
supply. Many assert "we already pay with our taxes" (itself
a dubious claim given the extraordinary rates of tax
evasion),and few see the connection between Hungary's
bloated welfare apparatus and its anemic economic indicators.
They are, as one student group leader admitted, "not against
anything but the government." Even FIDESZ leader Viktor
Orban, who has privately suggested that young voters will

BUDAPEST 00000083 002 OF 002


give his party "a permanent majority," laments that Hungary
remains "a land of no responsibility and no consequences."


7. (C) For their part, reformers have done themselves few
favors in practice. The Gyurcsany government's approach has
left it vulnerable to questions of competence and to charges
of corruption. The Prime Minister's personal wealth has
reinforced the popular suspicion that behind every fortune
there is indeed a crime. His management style - described by
some even within the government as "indecision followed by
imposition" - has compounded the problem, leading to
legislation that one legal scholar describes as "always
hurried and often flawed." This invites the public to equate
reform with directives rather than genuine debate even as it
undermines confidence in the government's fundamental
competence. The government's public relations efforts have
been consistently behind the curve in framing issues for
voters, and their focus has often been on limiting damage
rather than the even harder job of making its case. As
Mesterhazy conceded, "the government has forgotten how to
speak to the people."

"CONSIDER THE SOCIAL CONSEQUENCES ..."


8. (C) This leaves the government, in the words of one
AmCham executive, with little public support as it "avoids
one iceberg but steers toward another." With the success of
deficit reduction coming largely at the expense of growth and
competitiveness, Hungary risks lagging badly in the regional
competition for foreign investment. In a long and often
uncomfortable meeting January 21, representatives of the
foreign business community warned Prime Minister Gyurcsany,
Finance Minister Veres, Economy Minister Kakossy, and
Development Minister Bajnai that the revenue from enhanced
tax collection should be reinvested rather than redistributed
to the public though new social benefits. That the meeting
was over two years in the offing underscores the business
community's frustration with a government that listens to
their concerns rarely ... and responds even less frequently.


9. (C) According to corporate reps attending the meeting,
Gyurcsany acknowleged their point but underscored the need to
"consider the social consequences." The PM was similarly
ambivalent at the WEF in Davos, reportedly conceding that
Hungary's growth rate could dip below 1 percent in 2008 but
maintaining that the country needs "no new austerity - only
discipline." Our contacts left their meeting with the PM
concerned that the government will feel the need to resume
spending to win over the public as the March referendum
approaches, risking the economic gains they have made to date
in pursuit of uncertain political advantage.

COMMENT: DEATH OF A SALESMAN - AND A SALE?


10. (C) The Prime Minister's travails will make future
reforms harder and may well make future reformers even harder
to find. Gyurcsany's departure - which most here see as
inevitable before the next elections - will likely clear the
way for the MSzP to take a "great leap backward" on reform.
Although the "Gyurcsany package" may prove too heavy a burden
for the PM to carry, he alone has not given reform its bad
name. Even if the MSzP grows further disposed to dispose of
Gyurcsany, a change at the top is unlikely to represent a
fresh start for reform. Quite to the contrary. Their
"nothing new" strategy is nothing surprising, and the party
may revert to form by prematurely spending the proceeds of
its revenue enhancement. No matter who the salesman is, the
concept will remain a hard sell with a Hungarian public that
looks backward more easily than forward. Polling already
shows that Parliament is now less than half as popular as the
postal service: that may well give the future reforms
Hungary needs less than half a chance. End Comment.


FOLEY