The collapse of the communist regime was one of the most important positive developments of the twentieth century, a century full of crises and tragedies. For Hungary, as for other communist countries including the Soviet Union, this represented a great opportunity as well as a serious challenge.

The challenge can be summed up in simple terms: how to build a stable democracy and a prosperous market economy on the ruins left by an oppressive, inefficient and corrupt political and economic system. This challenge was amplified by the legitimate desire of the populations of the former communist countries to catch up as rapidly as possible with the prosperity of the countries of the free Western world – a world that they were finally able to join.

József Antall, the first freely elected Prime Minister of Hungary, was fully aware of this opportunity and of the challenge that it represented. He was aware of the unique historic responsibility of his office and of his government. This sense of responsibility was one of the hallmarks of his statesmanship – a statesmanship recognised by all the leaders of the established democracies who came to know him. It was also the sense of responsibility that he wanted to leave as his legacy, after his untimely death, to his successors and fellow politicians, and to the Hungarian people.

More than two decades after the collapse of the communist system the experience of the economic policies of the Antall government is of more than historical interest. This experience is relevant for the debates about the current economic situation in Hungary and about the policies adopted by earlier post-Antall governments. The lessons from the Hungarian experience of the early 1990s are relevant also in a broader context as political leaders and experts in Europe and in the rest of OECD area are seeking a way out of a profound fiscal, monetary and economic crisis.

Much has been written about Antall and the “Antall years”, perhaps not enough by those who had been close to him and who were familiar not only with the quality of his political thought but also with his unique ability to steer Hungary through the exciting but difficult years of the “regime change”.

There is no doubt that the policies of the Antall government were far from perfect. The “trial and error” approach, the struggle of the governments of the rich and “established” democracies to overcome the consequences of the financial crisis, and the repeated errors of commission and omission of the leaders of the Western market economies are proof enough that economic policy and economic reform are not easy tasks even under normal circumstances – i.e. when no change of system or “regime change” is involved.

Yet the main conclusions are positive. They can be summed up in three points.

In the first place, with the passing of time, the objectives and policies in the economic area of the Antall government look better and better each year in the light of the record of the various post-Antall governments and the current situation of the Hungarian economy.

The second point is that, contrary to a widely held misconception that the Prime Minister was not interested in economics, Antall was very much aware of the importance of economic policy. The thrust of the government’s policies reflected his values and convictions and analyses, shared by key members of his government and by his close advisers. He had a clear sense of objectives and priorities, and he was the leader and initiator also in this field. While many brandished different views at the time, the Antall government had a consistent and balanced concept and approach both in the short-term crisis management of the economy that had been left on the brink of bankruptcy by the preceding regime, and with respect to long-term reconstruction and the development of the market economy. This basic concept and approach continued to inform the legislative program and the policies of the government throughout its four-year term.

Finally, some initiatives by Prime Minister Antall and by his government, even if they did not succeed because of the lack of domestic or external support, went without question in the right direction. Over the years it has become increasingly clear that the break with this balanced concept and approach, by the successive Socialist–Liberal coalitions, has created more serious problems for the Hungarian economy than the policies pursued during the initial four years of “regime change” between 1990 and 1994. This became especially evident in the wake of the outbreak in 2008 of the worldwide financial crisis.

Three examples are discussed in the rest of this article to support and to illustrate the above conclusions: (1) the economic and social model (“the social market economy”), (2) the issue of the external debt, (3) the strategy of bank privatisation.

Other major relevant topics, such as the role of the Working Group on Economic Strategy (GAM), the overall record of privatisation and the assessment of the “economic and social legacy of 40 years of the communist system”, a project that was undertaken on the personal initiative of Prime Minister Antall in 1993 and was completed only after his death, will be discussed in a later article.


The model chosen by the Hungarian Democratic Forum and its leader József Antall for the transformation of the socialist economy into a modern market economy was that of the “social market economy”.

The choice of this model was easy to understand. The “social market economy” had been by far the most successful model of reconstruction and economic transformation after the Second World War. It combined growth and stability, social progress and competition and efficiency. Nevertheless, Hungary turned out to be the only former communist country (in addition obviously to the German Democratic Republic) that attempted to adopt “the social market economy” as the model for its future economic and social order.

There was little understanding for this choice among “international experts” – not only in the US or Britain, but even in continental Europe. In the international organisations that claimed economic policy expertise, there was neither knowledge of, nor interest for what the “social market economy” was about. These included the IMF, the IBRD, the UNCTAD, the OECD and the European Commission. This was also true for the European Bank for Reconstruction and Development that was created specifically to help the “transition” of former communist countries towards a “European-type” market economy. Strangely enough, even the German Minister of Finance, Theo Waigel, argued that the social market economy was not an “export model”.

Yet today there is a broad consensus throughout Europe, inside and outside Germany, that the current deep crisis could have been avoided if the principles of the social market economy had been followed more systematically by the members of the European Union.

Neither economists nor policy makers seem to have noticed or they have forgotten that the German model is already enshrined in the basic objectives of the EU. According to Article 3 of the Lisbon Treaty: “The Union shall establish an internal market. It shall work for the sustainable development of Europe based on balanced economic growth and price stability, a highly competitive social market economy, aiming at full employment and social progress, and a high level of protection and improvement of the quality of the environment.” (Emphasis added.)


Among the former communist countries in Eastern Europe, Hungary had the highest per capita external debt and the highest annual debt service. The heavy external debt burden represented one of the principal constraints on the new government’s policy options. It was rightly seen as a brake on both investments and on private consumption. It was also one of the sources of the macro-economic imbalances in the Hungarian economy and of the recurring refrain: we not only need conservative fiscal and monetary policies, but we also have “to love austerity” in order to avoid provoking nervous reactions by creditors, which increase the financing costs and the debt burden.

The large external debt that Hungary had accumulated by the end of the 1980s (a number that was a state secret – and the Western governments, international organisations and banks obliged the Hungarian communist government by keeping the information secret) reflected the mismanagement of the Hungarian economy and had a snowballing effect since during the 1980s a significant part of the debt service was turned into principal.

The super-salesman of Hungary’s creditworthiness was János Fekete, the long- serving Vice-President of the Hungarian National Bank under the Kádár regime, who was ad personam a member (the only one from the communist world) of the Group of Thirty, a select group of international monetary and financial leaders. Fekete could speak as fluently and convincingly the jargon of the Wall Street international bankers and reassure the markets about Hungary’s commitment to market reform, as he could speak the language of the senior communist apparatchik (that he was) to reassure not only the Head of the Hungarian Communist Party, János Kádár, but also the leaders in the Kremlin about the solid future of communism in Hungary.

Indirectly, the size of the Hungarian debt was also the result of the so-called “Volcker shock” which reversed the American inflation and the downward slide of the US dollar of the 1970s. This was compounded by the way “the international community” decided, following the Mexican crisis of 1982, to shift most of the burden of dealing with the “international debt crisis” on the shoulders of the borrowers instead of effectively sharing it with the equally responsible lenders (the international banks) and their home governments (and the international organisations, like the IMF, which had been applauding during the 1970s the “successful recycling of the petrodollars”).

The recipe was a combination of rescheduling of official or officially guaranteed debt and putting pressure on the debtor countries to adopt austerity policies and to carry out “structural adjustment programme”. In many respects these were overdue, but the idea that the debtor countries should bear alone the consequences of the irresponsible “recycling of the petrodollars” was short-sighted both from an economic and political point of view. There was no trace of an effective burden- sharing in the programmes that carried the name of two Republican Secretaries of the Treasury: the Baker Plan and the Brady Plan.

For the Antall government the external debt was one of the most visible but also one of the heaviest parts of the legacy of 40 years of communism. Should the debt inherited from the Kádár regime be repudiated? Should the government ask for a moratorium, for a debt reduction or should it even declare an outright bankruptcy? What were the costs and consequences of such a measure? What were the possible alternatives?

Prime Minister Antall and his team were convinced of the need to try to obtain a reduction of the debt burden, both in the servicing of the debt and in the principal. They were, however, also aware of the risks, for both the international position of Hungary and the domestic situation, in the case of a unilateral move on the debt issue.

Clearly the risks were judged to be higher than the benefits that could be expected even under a “best case scenario”. This conclusion was correct not only in the light of the record of the “international debt crisis” of the 1980s and of the outcome of the Baker and Brady Plans. It has also been proven correct by events posterior to 1990: the outcome of the Polish and the Yugoslav financial and monetary crises and collapse, as well as the international financial crises of the last 20 years, including the latest ones, Greece and Cyprus.

There was a consensus within the Antall government that if a financial collapse was to be avoided, Western governments ought to share the responsibility for a move on the debt issue, and this should be backed up by a clear commitment to assume the burden of debt reduction. Without such a guarantee Hungary would have been facing its creditors without the least hope for a rapid negotiated settlement. Yet, the negotiation of such a settlement would have had to be rapid and conclusive in order to avoid a financial panic. This would have affected not only the domestic and external value of the forint but also severely constrained the financing of imports and the very functioning of an already fragile economy.

However, when US Treasury officials of the (first) Bush administration were asked whether a different approach from that of the 1980s could be adopted for the former communist economies (in the light of the major contributions of some of these countries to the collapse of the communist system), the reactions ranged from suggestions that the best solution was a unilateral suspension of payments (which would lead to a temporary reduction of Hungary’s debt service but not of the principal), or as was the case with Secretary Brady, a simple refusal to hear the question and to discuss the issue.

The reluctance of the Antall government to adopt a unilateral debt strategy was also reinforced by the lack of support that such a strategy would have received from the bureaucracy of the Ministry of Finance and of the National Bank of Hungary or from the bureaucracy of the IMF or the World Bank.

In the light of the poor performance of the international financial institutions during the 1970s (recycling of the petrodollars) and the subsequent debt crisis of the 1980s, little economic understanding and political sympathy could be expected from the IMF or from the World Bank – two organisations that claimed leading roles in guiding the “transition process” in Eastern Europe.

In countless discussions at the level of the “working staff” and of the members of the governing bodies of these two institutions there was a systematic refusal to discuss the “resource shortage” in the former communist countries and how this resource shortage was being aggravated by the international banking and financial system. International bureaucrats systematically argued that “private capital could do the job”. They showed no knowledge or acknowledgement of the historical precedents of the successful reconstruction experience in Western Europe and in Japan after the Second World War, nor a willingness to discuss the one exception in the wake of the collapse of the communist system, i.e. the burden-sharing involved in the process of German reunification – not only between the “old” and the “new” Länder of the Federal Republic, but also between the EC/EU and Germany.

The direct and indirect aid from the EC/EU granted to the 17 million citizens of the former German Democratic Republic was more than the total direct aid to all the other former members of the COMECON. The short-sightedness and the cynicism of some of the international civil servants can be illustrated by the comment of one of them on this discrepancy: “Sonderfall Deutschland” – “Germany is a special case”. To this arrogant statement this official (who happened to be German) added “At any rate, a country like Hungary could not absorb any significant official resource transfers to help build the market economy”(!).


The question “could Hungary hope to receive a non-debt-creating transfer of resources (other than through privatisation)”, as finally and belatedly occurred once it became a member of the EU, was never off the agenda of József Antall and of his close staff and advisers. This was not only an economic and financial issue but also a political and moral one. The Prime Minister felt that he and his government owed it to the Hungarian people not to give up trying.

With bankruptcy discarded because of its direct and indirect consequences and the multilateral road blocked by both “conventional wisdom” and the international bureaucracy, the one remaining option to be explored was the bilateral one.

The first attempt took place in the immediate aftermath of the “taxi blockade”. The paralysis of virtually all traffic and as a result of the entire economy by a coordinated blockade by taxi drivers following an adjustment of the price of gasoline created considerable concern in Western and in particular European capitals.

In Bonn Chancellor Kohl feared that this extremely-well coordinated anti- government action would destabilise the Hungarian government and the new democracy, especially at a time when the Prime Minister was hospitalised, undergoing major surgery and post-surgery treatment. The threat of a government crisis was also increased by a speech and by the behind the scenes agitation of President Göncz. The President made the government’s task more difficult by taking the side of the organisers of the blockade, urging the authorities to cancel the increase in fuel prices and suggesting the creation of a “grand coalition”.

Chancellor Kohl decided to send to Budapest a large delegation of German officials to offer political, psychological and material help to the “beleaguered” Hungarian government, and also to take the pulse of the political actors. The German delegation was led by Otto Schlecht, State Secretary in the Ministry of Economics, who had been for many years a close collaborator of the late Ludwig Erhard, the “father of the German economic miracle”.

At the plenary meeting of the two delegations made up of Hungarian and German officials, the head of the Hungarian delegation went straight to the point: if the European countries wanted to strengthen the political support of the market economy, among the Hungarian population, they would have to make a concrete gesture to ease the costs of transition from communism to the market economy. A realistic number would be $3 billion over a period of three years (one billion per year, beginning in 1991). This transfer would be used under the supervision of the donor countries for modernising infrastructure, social investments, loan consolidation, etc.

Over dinner, this proposal was discussed with Schlecht, who was probably the Western high official who knew most intimately from both the 1948–52 period and from the generous transfers into East Germany, how much such a gesture would have given a boost to democracy and to the market economy, and how much it would have been compatible with the tradition and the spirit of the social market economy. Schlecht listened politely. Early next morning the German delegation left for Bonn and there was no response to this Hungarian proposal, except for relatively modest credits to finance the shipment of brown coal from East Germany that could no longer be used in Germany because of the more stringent environmental controls in the Federal Republic. For Hungary it was deemed to be good enough.

The second major attempt at “bilateral persuasion” was prepared from early 1991 onwards (with the full approval of the “Economic Cabinet”). A detailed note was prepared to illustrate the “resource shortage” in Hungary and how a transfer of $3 billion could facilitate the success of the Hungarian transformation. This was important because there was a tendency to underestimate the costs of transition and the difficult conditions in which Hungary was left after the collapse of the communist regime.

Prime Minister Antall accepted to take this message to Chancellor Kohl with the request that he submit it to the members of the G7 prior to their London summit. After the Antall–Kohl meeting there was no more news about this request than there had been about the previous one.

Beside praise for the IMF and for the World Bank and congratulations for the creation of the EBRD, the economic problems of the new democracies received scant attention at the 1991 summit meeting of the G7. The final communiqué had this to say:

“We salute the courage and determination of the countries of Central and Eastern Europe in building democracy and moving to market economies, despite formidable obstacles. We welcome the spread of political and economic reform throughout the region. These changes are of great historical importance. Bulgaria and Romania are now following the pioneering advances of Poland, Hungary and Czechoslovakia. Albania is emerging from its long isolation. (We recognise) that successful reform depends principally on the continuing efforts of the countries concerned…”

For the record it should be mentioned that the Clinton administration was no more perceptive about the economic situation and problems in Eastern Europe than its predecessor, the Bush administration. Thus, for example Larry Summers, at the time number two in the US Treasury (later to be promoted to the position of Secretary of the Treasury) declared at the 1994 Annual Meeting of the EBRD that all the former communist countries ought to take Albania as their model for its allegedly deep commitment to the principles of the modern market economy. (This exhortation was made not long before the virtual collapse of the Albanian economy as a result of a Ponzi scheme.)

The conclusion that the Fall 1990 initiative and the Memorandum for the G7 governments were not naïve “fishing expeditions” can be supported by at least four strong arguments: (1) the record of the 1948–1952 American aid programme to help reconstruction (“Marshall Plan”), (2) the size of the direct aid transferred from the “old” to the “new” Bundesländer, (3) the enormous costs of the failure of “regime change” in former Yugoslavia and parts of the former Soviet Union not only for the population of the countries but also for Europe and the Western World as a whole, and finally (4) what should have been the realisation of how much was at stake in the success or failure of the regime change. Even before having lived through the Yugoslav nightmare, it should have been clear to European (and also American) leaders, both from logic and from historical experience, that prevention of failure is less onerous and more rewarding than trying to deal with the aftermath of economic and financial collapse.

German statistics (just like EU or American statistics) are not very transparent when it comes to foreign aid and even for transfer payments within the same country. It is always politically safer to provide lower figures and to hide some transactions under headings that are relatively difficult to interpret. This is also clearly the case with West Germany’s (and of the other EU members’) direct or indirect payments for the reconstruction of East Germany. Still, the total amount over a 15 year period is reliably estimated to have exceeded DM1500 billion (or roughly the equivalent today of $1.5 trillion). The net debt accumulated by the German privatisation agency alone amounted to more than DM200 billion after four years of activity.

The Antall government’s debt strategy also had some positive aspects and consequences. First and foremost it helped avoid an international and domestic financial crisis. The economic and social consequences of such breakdowns were illustrated by the case of the Yugoslav economy – prior to the country’s break- up –, Poland as well as the Russian Federation. Also, this policy contributed to encouraging private direct investments and the modernisation of Hungarian industry and service sectors. Lastly, Hungary was in principle better equipped to deal on a more equal basis with the experts and the high officials of the IMF and the World Bank and the newly created EBRD (which suffered from the same myopia as the two principal Bretton Woods institutions). That the Hungarian governments that followed the Antall government were not always very skilful in using and preserving this moral and monetary capital was their fault and not the fault of Prime Minister Antall and his government.


The last issue to be mentioned briefly in this article is the Antall government’s strategy of bank privatisation.

It should be mentioned here that among the former communist countries Hungary under the Antall government adhered most closely to the principle of market privatisation. For Prime Minister Antall it was important, for economic, political and ethical reasons to avoid the “mirror image” of what happened during the nationalisations in the 1940s, i.e. the wasteful expropriation of private assets. This time it would have been the wasteful distribution of public assets without payments. Market-driven privatisation meant selling to both Hungarian and foreign investors. The two principal criteria were (1) the price that could be obtained and (2) the outlook for modernising the privatised companies and improving their competitive position on the domestic and international markets.

The government retained the right to define special conditions and strategies for the privatisation of key sectors of the national economy. One of the principal examples in this category was the strategy of bank privatisation.

The detailed bank privatisation strategy was adopted in the spring of 1992. Two key points from this strategy were:the requirement that the balance sheets of the banks had to be cleaned up before privatisation could start and that the cost of this cleaning up could not be charged to the banks’ current and future clients; leading international banks were to be sought as strategic partners in the large Hungarian banks, but “at the same time it (was) important to avoid that the Hungarian banking system should come under foreign control”.

The timing of the strategy would have allowed that at least one or two, or even three of the large Hungarian banks could have concluded a strategic partnership with major international banks well before the end of the mandate of the government. Yet this strategy suffered serious delays for a number of domestic and international reasons virtually from the start.

A first factor was the systematic opposition by the Ministry of Finance (and by some of the Hungarian bankers, most prominent among whom was the head of the Budapest Bank, who later became Minister of Finance in the Horn government) and their delaying tactics to the creation of a loan consolidation fund, which was necessary to clean up the banks’ balance sheets. Since there was no hope for official external financing, the projected fiscal impact of this policy was a useful pretext for those who rejected the strategy from the start, essentially because it was coming from the Antall government.

The second major problem was the desire or even the explicit insistence of foreign governments (in particular of the US and the UK) and of the EU Commission and the World Bank that they should have a direct involvement in and virtual control of the Hungarian bank privatisation process. When it was made clear to them that the bank privatisation process was the exclusive responsibility of the Hungarian government, the EU Commission, the US AID and the British government immediately went back on their earlier commitments to help finance the costly process of bank privatisation (it was understood that this would have paid the bills of the Western investment banks who would advise the Hungarian government). There were few more blatant examples of interference with the sovereignty of the Hungarian government by Western countries and organisations during the years of the Antall government.

As a result, no major banks were privatised during the term in office of the Antall government. Thus, the second requirement of the strategy mentioned above, i.e. the “finding of major strategic partners for the large Hungarian banks without allowing the Hungarian banking system to come under foreign control” was never put to a true feasibility test. Of course, if this strategy (international opening but no foreign domination of the banks) had been upheld by subsequent Hungarian governments, it might have run afoul of an ideological veto from Brussels, and, as the case of Italy shows it even could have led to criminal prosecution of the officials trying to implement this strategy.

Many people remember the case of the unfortunate Antonio Fazio, long-serving and highly respected Governor of the Italian central bank. (It should be noted that the officers of the Banca d’Italia were internationally known as being highly professional and the least corruptible in Italy.) In 2005 Fazio had to resign because of criminal charges (based on wiretaps), that he was using his position to prevent the takeover of an Italian bank by a foreign bank. In fact, it had long been suspected that Fazio was not sufficiently enthusiastic about the ideology and practice of the merger and take-over mania that prevailed in the banking sector in Europe and in the world at large, and that he was not happy with the prospect that this trend could lead to “foreign control of the Italian banking sector”.

The foreign bank in the case that destroyed Mr Fazio’s professional career and personal honour and reputation was the Dutch bank ABN Amro. According to Shakespeare “all is well that ends well”: in 2006, under the governorship of Fazio’s successor, Mario Draghi (who happens to be the current Head of the European Central Bank), ABN Amro obtained what it had sought vainly before the demise of Fazio. But unfortunately the story did not end at this point. This happened to be especially unfortunate not only for ABN Amro, but also for the Dutch, British and Belgian taxpayers and savers and for the entire European banking system. In fact, ABN Amro – the second largest Dutch bank – shortly after its Italian adventure became involved in a much bigger and much more complex M&A operation where it came under the ultimate control of the Royal Bank of Scotland.

And this was still not the end of the story. Virtually “before the ink was dry” on the signatures of the legal documents and well before the complex structure of the new European mega bank became fully operational and could deliver on the traditional optimistic promises of future gains of synergy, efficiency and profitability contained in the merger documents, the world was hit by the international financial crises.

As everyone knows by now, the case of “Royal Bank of Scotland & ABN Amro” became one of the prime examples and symbols for all that had been wrong with mega mergers among banks, with rootless banking giants and their contempt for ordinary commercial borrowers (and savers), and ultimately with their false sense of security that they are “too big to fail” and for the official policies that had encouraged and condoned these trends.

With all this hindsight and in the full knowledge of the consequences of the financial crisis and with widespread concern about what may still lie ahead, is it not fair to say that the prudence shown both in the bank privatisation strategy of the Antall government and in the preoccupations of Governor Fazio was to a large extent justified even if it went against the Zeitgeist, the spirit of the time?

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