Hungary Defence and Security Report 2009

The state of the Hungarian economy was expected to be a key issue in assessing the country’s security and socio-political stability in 2009. Hungary, already heavily indebted, was hard hit by the global financial crisis in October 2008. Faced by a run on the forint, the Hungarian Central Bank sharply raised interest rates (by 300 basis points to 11.5%), intensifying a lack of liquidity throughout the economy. The International Monetary Fund (IMF) and the European Union assembled an emergency financial rescue package worth US$25.1bn. A number of analysts were forecasting a recession in 2009, with the government itself predicting that GDP would contract by 1% and others projecting a larger fall. BMI is projecting a 0.8% GDP contraction. This would make Hungary the worst performing Central & Eastern European economy in 2009, as most of its neighbours were expected to continue growing, although at a slower rate than in 2008. The minority government under Prime Minister Ferenc Gyurcsany was able to get a new budget and tax laws through parliament but was expected to face a range of pressures to increase spending along with protests from trade unions over job losses. The government’s approval rating had dropped to only 20% in November 2008 but Fidesz, the main opposition party, was not faring much better, with an approval rating of 29%. The budget committed the administration to cutting the fiscal deficit from 3.4% of GDP in 2008 to 2.6% in 2009 but in December under pressure from organised labour the administration said it would pay an extra HUF112bn (US$540.2mn) in 2009 as part of a wage offset plan to compensate workers for losing an extra month’s pay as one of the conditions attached to the IMF rescue package. Analysts were concerned that more concessions would be made as the 2010 parliamentary elections approached.

The impact of the domestic economic crisis should not be underestimated but the fact is that it has not had too much of a negative effect on the country’s defence and security fundamentals. It is true that the fiscal squeeze has affected spending in this area but Hungary enjoys a low level of security risk. The country has an implicit interest in the transition and developments in the Balkans, Ukraine and Russia. There are currently no major regional issues, although the security and human rights of Hungarian minorities in neighbouring countries remains a priority. Hungary pursues a policy of integration with regional and multilateral security organisations, achieving membership with the North Atlantic Treaty Organisation (NATO) and the EU and nurturing alliances with global powers. The risk of international terrorist attacks has been greatly reduced since the withdrawal of Hungarian troops from Iraq.

Hungary has one of the smallest defence industries of the Central and East European countries. In order to survive in the long run, defence companies will have to specialise further in niche capabilities and strengthen their role as suppliers for big international prime contractors. Hungary’s moves to modernise its defence forces and achieve full integration with NATO should create procurement opportunities in the coming years. Military expenditure has been drastically cut over the last decade, largely as a result of the strain on government finances from EU membership and the need to reduce the overall budget deficit but is expected to now increase in the long term as the armed forces modernise and acquire new technologies.

Recently, Hungary has been receiving heavy criticism from NATO for falling behind its commitments.

Hungary is pushing through painful domestic reforms with only limited popular opposition. Budapest is improving its relations with Europe and Russia – to the worry of some European analysts – and is extending its focus further away towards China and, of course, to the US. Threats to Hungary have reduced with its entry into NATO and the EU, furthering its military and political stability. Its armed forces are modernising to ensure NATO compatibility and its small defence industry has undergone significant transitions and emerged with an industry that looks very different but still has much to say for itself.