Last December, Angela Merkel brokered a controversial deal for the EU, resolving the crisis that Hungary’s and Poland’s veto against tying EU funds to rule-of-law generated. The deal unblocked the budget, including the Next Generation EU funds, a crucial step for countries devastated by the pandemic’s economic impact. However, it also let Orban off the hook, allowing him to continue down the illiberal path.
Though Merkel’s deal allows for sanctioning the violation of the rule-of-law — an important step ahead — it also clarifies that the rule-of-law criteria do not include most things we would typically associate with the rule of law. Orban’s attacks on civil society, the freedom of the media, his takeover of independent institutions can continue. The deal only concerns corruption related to EU funds. Furthermore, it will not be applied for the next two years, greenlighting Orban’s illiberal politics for the upcoming 2022 elections.
Merkel’s deal made it clear that the EU is, first of all, a project of economic cooperation. It is willing to protect European financial interests — like it also did when it put down the Greek government’s democratic effort to end austerity in 2015 — but upholding democracy is secondary. Though EU membership brings many benefits, democracy is not one of those. Countries and people interested in maintaining the power of the people have to secure democracy for themselves.
Thus, is it is all the more important to understand how Hungary’s democracy collapsed and draw the lessons for the fight against authoritarianism. This is the central topic of my recent book, The retreat of liberal democracy (Palgrave, 2020).
Businesses and illiberals supporting each other
Despite the frequent misunderstandings, domestic and transnational elites are crucial pillars of Orban’s regime. International media often reports about corruption in Hungary. Indeed, the wealth of Orban’s friends and several members of his family is growing fabulously. However, the beneficiaries of Orban’s national-populist neoliberalism go beyond the corrupt cronies: the upper-middle class, national capital, and transnational corporations in the export sectors profit from it.
German carmakers are the key engine of Hungarian economic growth, contributing to the government’s legitimacy. Together with their Hungarian suppliers, they account for 10 percent of Hungary’s GDP. Orbán does everything to keep them satisfied. Based on the subsidies in proportion to jobs, Audi, for example, has received four times as much aid from the Hungarian government as from the German state in the 2010-2014 period.
Just a few days after Merkel announced her controversial deal last December, the Hungarian government revealed that it will cover 30% of the costs of a new Mercedes car plant in the country. The same week, the government also trumpeted that it will build one of Europe’s most modern military factories manufacturing German Lynx tanks in Hungary. Hungary has been one of the most important buyers of German military exports under Orban.
Analyzing the direct financial subsidies allocated through the government’s discretional fund, I found that it primarily benefits transnational corporations. Between 2004 and 2010, these discretional subsidies’ total value was $626 million; this doubled to $1.28 billion in the 2011-2018 period under Orban. The total value of the subsidies allocated to transnational corporations also doubled, making up 76 percent of the subsidies’ total value.
On top of these financial subsidies, the government introduced a flat 9 percent corporate tax in 2016 — the lowest in Europe — effectively transforming the country into a tax haven. Due to tax reliefs, they pay even less tax. The actual corporate tax paid by the 30 largest companies on their income was 3.6 percent in 2017.
Orbán clashed with foreign investors in the banking, media, and energy sectors, where he saw fit to make more room for national capitalists. However, the government has also signed Strategic Partnership Agreements to pacify tech-intensive transnational manufacturing corporations. Orbán’s hard-handed approach to the budget, implementing widescale austerity and social divestment, also pleases businesses.
Besides showering them with money, Orbán’s government also invests heavily into maintaining excellent connections with influential German business circles. Klaus Mangold, a former top manager of Daimler, is a crucial ally of Orbán. Guenther Oettinger — a CDU member — also plays a crucial role in German-Hungarian business diplomacy. Nominated by the government, he recently became the co-chair of Hungary’s new National Science Policy Council.
Thus, it is no wonder that the European People’s Party (EPP) — the chief political instrument of European economic elites — has been vital in preventing real sanctions against Orban, sheltering him throughout the last decade. Upon her recent visit to Hungary in August 2019, Angela Merkel praised how EU funds were spent in Hungary: ‘If we look at Hungarian economic growth rates, we can see that this money has been well invested by the country, that it benefits the people, and Germany is happy to be able to participate in this growth by creating jobs in Hungary.’ She talked about Hungary, the country by far with the most financial irregularities related to EU funds.
Orban is also very conscious of securing the domestic bourgeoisie’s support by also showering them with money. Orban redistributes resources to the top of society through tax cuts, subsidized loans, increased public investment, and new pro-natalist policies targeting high-income families. Orban wants to create a new economic elite through the embourgeoisement of the upper-middle class. An essential tool to achieve this is the flat personal income tax, 15 percent since 2015.
Orban forged a new alliance with disgruntled domestic capitalists, who were dissatisfied with the neoliberal policies favoring transnational corporations and the lack of effective domestically-oriented industrial policies in Hungary in the 1990s and 2000s. Orban offered national capitalists new opportunities through a closer fusion of political and economic power, and used it to renegotiate the pact with transnational capital. Transnational corporations in the productive export sectors are still welcome, but domestic businesses receive more support than before.
Thus, it is no surprise that domestic and international capitalists have so far failed to challenge Orban’s illiberal attacks on liberal institutions. According to Budapester Zeitung’s editor, 90 percent of German investors in Hungary would vote for Orban. A nationally representative survey found that the number of Hungarians supporting authoritarianism has slightly increased – but the number increased by far the most among upper-class respondents. Among them, the share of those supporting authoritarianism grew from 6% to 23% from 2015 to 2018.
So much about the rule of law. Europe’s business class is happy with Orban’s authoritarian capitalism.
Legitimizing authoritarian capitalism
To secure the legitimacy of this highly polarizing regime, Orban capitalizes on national-populism. Hungary’s postsocialist transformation brought new economic and cultural opportunities and coincided with democratization. However, the overwhelming majority of Hungarians experienced this global economic reintegration as social mayhem. Relying on fieldwork in Hungary’s rust belt, in my book and in a related article, I show that during the 1990s deindustrialization eroded working-class culture and decreased labor bargaining power, which in turn retarded wage growth and allowed inequalities to increase.
In the 1990s, a massive deaths of despair epidemic hit the country, similar to the one plaguing America’s working-class communities in the last two decades. Deindustrialization and privatization were major economic determinants of premature deaths in the 1990s and inequalities in life expectancy in the 2000s.
However, the economic transformation also hurt many financially. In 2009, two-thirds of Hungarians were in such financial precarity that they could not face unexpected expenses. In the same year, the average real wage was only a little more than 10 percent higher than in the early 1980s: three lost decades of real wage growth. Furthermore, the average hides increasing income inequalities.
It was the Hungarian Socialist Party that implemented the most avant-garde neoliberal reforms. By the end of the 2000s, masses of workers and members of the indebted and weak middle class grew disillusioned. In the lack of a progressive left-wing alternative, they drifted rightward. There was no progressive, left-wing language available to organize people’s disillusionment with the neoliberal transition. Orban could capitalize on this social and economic crisis by exploiting cultural divisions and stoking up neo-nationalism. The social and economic disintegration of postsocialist Hungary provided a robust opportunity structure and allowed Orban’s Fidesz party to mobilize workers against ‘uncaring’ neoliberal cosmopolitans.
Orban’s national-populist neoliberalism brought some limited gains for workers. It allowed employment to rise and reduced the vulnerability of families by curbing financialized consumption and wiping out dubious foreign-currency loans. However, the price of these achievements was an extreme rise in inequality and labor market precarity. Hungary is now the most unequal country in the Visegrad region.
This growth of inequality is not an accident. It is consciously manufactured. Between 2009-2017, the social component of individual incomes – e.g., benefits, pensions, allowances – declined dramatically for the bottom income deciles and increased considerably for the top income deciles. The government also reduced the unemployment benefit to 3 months, which is the lowest in Europe.
Thus, Orban’s national-populist neoliberalism is socially and politically costly. Orban lost a large share of his working-class supporters between 2010-2014. In 2014, Orban’s Fidesz received fewer votes than in 2006, when they lost the election. The 2019 local government elections again showed that Orban’s illiberal hegemony is vulnerable. The opposition was able to take hold of critical large cities, including Budapest, which now has a new progressive mayor.
The stability of Orban’s regime increasingly depends on authoritarian fixes and national-populist chest-beating. The restructuring of democratic institutions aims at pre-empting organized dissent by political parties, trade unions, and NGOs. In parallel, national-populism reframes distributive grievances into cultural hierarchies, thus hinders the emergence of a broad anti-government social coalition. National-populism makes neoliberalism palatable to the masses even if they lose out financially.
The future of democracy
What are the takeaways of Hungary’s descent?
Globalist neoliberalism, with its focus on human rights and multilateralism, is on the decline. However, its alternative is not a post-WW2-type social democratic arrangement. Instead, a new, national-populist neoliberalism — neo-illiberalism — is on the rise. Neoliberalism is bifurcating. The rise of national-populists such as Bolsonaro, Trump, or ‘Brexit-Boris’ befits this new wave of national-populist neoliberalism. The recent pandemic-induced fatigue with populism and reversal to Biden-type centrist liberalism will not break this trend in the long run. Hungary signifies where this trend might lead, combining neoliberalism with an authoritarian state and nationalism.
The liberal strategy of naming and shaming populists will not suffice to prevent the rise of Orban-type neo-illiberals and to beat them electorally once they gained power. The left needs to earn back the trust of disgruntled workers. Centrist liberalism protecting the status quo is not enough for this. Progressives have to embrace the state as the champion of social cohesion.
The answer to nationalist populism is not more neoliberalism. The answer is reinventing the left, a progressive populism. A change in identity and narrative is the first step only. It would be a strategic mistake for the left to accept its role confined to the major cities. Progressives have to work on their organizational structures in small and medium-sized towns, deindustrialized regions that used to be the left’s regional strongholds. This is crucial to forge a social coalition needed for a stable majority to beat national-populism.
Only the organized power of the masses can curtail the power of the elites. Only bottom-up democracy can ensure a social and democratic future for Europe.
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Author: Gabor Scheiring
Gabor Scheiring (PhD, Cambridge), former member of the Hungarian Parliament (2010-2014), is a Marie Curie Fellow at Bocconi University. Utilizing methods and insights from sociology, economics, political science, and epidemiology, he researches the social consequences of globalization and the political economy of health and democracy. His book, The Retreat of Liberal Democracy (Palgrave, 2020) shows how working-class dislocation and business elite polarization enabled illiberalism in Hungary.