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Austerity stifles growth

March 9th, 2012

Writing in a right-wing daily, the economist László Gazdag criticizes the austerity measures of past Socialist governments and thereby expresses implicit criticism of the strict fiscal policies pursued by the present government.

“We would need to add 100,000 Forints to all ( monthly) salaries to boost the Hungarian economy,” László Gazdag writes in Magyar Nemzet. He argues that, in contrast to Greece and other southern European countries which have fallen victim to the crisis, Hungary’s economic difficulties are the result of low wages.

Gazdag points out that the austerity measures introduced in 1995 and in 2008 by the Horn and Gyurcsány governments reduced real incomes, which resulted in lower economic growth and higher inflation. According to Gazdag, the years between 1998 and 2008 could be described as a successful era – thanks to policies of the first Orbán and then the Medgyessy government.  Incomes rose, which boosted demand and thereby productivity. In 2004, Hungarian real incomes amounted to 40 percent of the EU average, while today they amount to only 22 percent.

Gazdag also notes that the current debt crisis is the result of past austerity measures. As Hungarians earnt less, they had little choice but to take up huge loans denominated in foreign currencies in order to buy apartments and cars.

Without a significant salary increase, the Hungarian economy will not grow, Gazdag warns. Moreover, low incomes will force thousands of well-qualified Hungarians to leave the country. According to Gazdag’s calculations, the departure of 1,200 people costs the country 100 billion forints a year in human capital.

A salary increase could be implemented without taking out further loans, Gazdag argues. He notes that after the 2002 elections, PM Péter Medgyessy increased wages in the public sector by 50 percent, but neither inflation, nor the public debt increased as a result.

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