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Hungary – Orbán Tests EU’s Patience

The conservative populist government made up of Prime Minister Viktor Orbán’s Fidesz and its tiny ally, the KDNP, remains remarkably stable, despite growing tensions in Hungary’s relationship with the EU. Although the latest battle stems from the Orbán government’s rejection of the EU’s plan for distributing refugees among the bloc’s member states, Hungary has been at loggerheads with Brussels since Fidesz was returned to power in 2010, the result of Orbán’s adoption of unorthodox fiscal policies, which included the imposition of special taxes on foreign-dominated sectors of the economy, and the implementation of illiberal political reforms that failed to meet the EU’s standards for democratic governance.
Given their weakness and ideological incompatibility, there is little chance that the largest opposition parties, the center-left MSZP and the far-right Jobbik, might pose much of a threat to Fidesz’s dominance. As such, Orbán has no obvious political incentive to adopt a more cooperative posture toward the EU.
Even the staunchest supporters of the European project will be reluctant to take steps that might provoke the departure of another EU member at a time when the ongoing Brexit negotiations are already creating uncertainty about the bloc’s long-term future, but the regime in Budapest has overtly challenged the authority of EU institutions on multiple fronts, and the credibility of the bloc’s commitment to the rule of law will be jeopardized if Hungary is permitted to do so with impunity.
Against the backdrop of rising tensions with Brussels, the government has taken overt steps to reduce its dependence on its EU partners for trade an investment. Russian loans will provide the main source of financing for the expansion of the country’s nuclear power plant in Paks, and Hungary was the first European nation to endorse China’s One Belt One Road initiative. Here, too, the Orbán government’s strategy has run up against EU rules; construction of a Chinese-funded high-speed railway connecting Budapest to Serbia’s capital, Belgrade, has stalled as the EU investigates whether Hungary failed to fulfill a requirement to put contracts for its part of the railway out for public tender.
Real GDP growth surged to 4.2% (year-on-year) in first quarter of 2017, but slowed to 3.2% in the April–June period, as the performance of the agricultural sector was weakened by a base effect created by a bumper harvest last year. Pro-growth fiscal and monetary policies will help to sustain robust consumption and investment in the second half of the year, combining with improved EU funds absorption to produce annual real GDP growth to 3.7% in 2017.
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