The Creation of a New Europe

The backdrop to the Orbán government can be traced to two intertwined processes, which are still too often viewed separately: the integration of Eastern European countries into a globalized capitalist system and the establishment of the EU’s neoliberal architecture during the 1990s. By the time the Berlin Wall fell, the neoliberal turn was well underway in Western Europe. As the “end of history” dawned, Eastern Europe emerged as a new frontier for capital. Willing local elites, intervention by international monetary institutions, and a shifting global landscape, all combined to enact a radical transformation that would simultaneously determine the fate of the EU and the former Eastern Bloc.

The 1992 Maastricht Treaty establishing the EU effectively constitutionalized the free movement of capital and labor — while simultaneously reducing states’ fiscal flexibility by setting hard rules for budget deficits and sovereign debt. “Disciplinary neoliberalism“ — a commitment to low inflation and fiscal discipline — was hardwired into the treaties at the heart of the EU and central banks were in effect “de-nationalized,“ becoming key institutional nodes in the spread of an increasingly financialized system. They were key actors in establishing commercial banks’ subsidiaries in Europe’s southern and newly opened eastern peripheries. In Hungary, as in its neighbors, these subsidiaries were hardly incentivized to boost domestic production, allowing them to engage in increasingly high-risk activities, with yields channeled back to the Western financial core.

This integration process in the East provided a fix to the crisis of wage-led growth that had been ongoing in Western Europe since the 1970s. Coupled with EU structures that insulated economic decisions from democratic oversight, it created new accumulation models for the Western economic elites who increasingly determined institutional policies. Under the guise of integration, the EU engaged in extensive institution-building in countries seeking membership. This “Europeanization” included not just the transfer of legislation on minority rights or administration-building, but also the enforcement of austerity measures mandated by the Maastricht Treaty in preparation for EU entry.

These conditionalities were accompanied by market reforms pushed by the European Community (later, the European Union) that deepened existing structural inequalities and path dependency. This drove a race to the bottom for Central and Eastern European countries to offer the most favorable conditions to predominantly Western multinationals. This transformation was heavily influenced by Germany’s powerful manufacturing sector and export-driven growth model, which incorporated Eastern European economies as de facto satellites. This is especially evident in Hungary, where Germany remains the largest trade partner, accounting for nearly a quarter of its total foreign trade.

Hungary’s “Lost Decade”

By 1989, much of Hungary’s technocratic state-socialist elite had already been converted to the free market, with thousands of foreign companies operating in what was already a largely marketized economy. It was thus unsurprising that in 1994 Hungary became the first former Warsaw Pact member to officially request EU membership. A decade would nevertheless pass until it joined the Union, together with several neighboring countries.

EU institutions played a key role in determining Hungary’s trajectory even before it joined. Strict membership conditionality reshaped domestic policies and the structure of the Hungarian state. “National investment promotion agencies,” funded by the EU and the European Bank for Reconstruction and Development (EBRD) played crucial roles in opening local economies to international investors. When Hungary’s conservative government attempted to favor domestic bidders during privatizations in 1993–94, the EU, EBRD, and International Monetary Fund (IMF) condemned the move and suspended scheduled financial aid. (Funds were finally released in 1996, after an IMF bailout mandated extensive privatization, a reduced state apparatus, and a restructuring of the tax system.)

By the end of the 1990s, key industrial assets as well as much of the banking, telecommunication, and energy sectors had been transferred to foreign ownership. Foreign takeovers of state-owned enterprises (SOEs) downgraded capacity in many sectors. To prevent unwanted competition, many former SOEs were either broken up or simply killed off. Others were penalized by a system that effectively favored foreign investors through cheap loans, tax cuts, and subsidies. As Hungary’s economy was restructured around export-led specialization, only about one-quarter of existing domestic companies survived.

These macroeconomic choices had a drastic effect on social policy. The crunch in savings, pensions, and real wages was not an unforeseen consequence of mismanagement, but the logical corollary of the EC, IMF, and EBRD blaming “excess demand” for distorting the market. As the state’s welfare capacities declined, facilitating citizens’ access to private credit increasingly became a means to reduce social tensions. By the turn of millennium, real wages had fallen by a quarter, the national pension fund had lost one-third of its value, and both agricultural and industrial production fell by over 30 percent. Over one million jobs had been lost and organized labor practically ceased to exist. The public housing stock was almost entirely privatized.

None of this was inevitable. Hungary might have had an outstanding amount of public debt even compared to its neighbors, but its abandonment of industrial policy and its adoption of no-strings-attached privatizations were political choices. Hungarian elites’ short-sightedness, naivety, and self-interest were important factors. But these were not solely internally driven decisions — they required the active intervention of European institutions.

“Returning to Europe”

After the “lost decade” of the 1990s, Hungary’s accession to the EU in 2004 sparked a degree of optimism: the country had “finally returned to Europe,” as premier Péter Medgyessy put it. For the first time since the transition, the early 2000s saw Hungary experience several years of sustained economic growth. Under the surface, however, the deep fissures caused by the transition had only been papered over.

About one-third of Hungarians remained at risk of poverty; the population had steadily declined since 1989. The EU’s Common Agricultural Policy — plus the large-scale privatization of land — proved disastrous for most cooperatives and many small- and medium-scale farmers. Hungary’s economy became more vulnerable to international capital flows and increasingly dependent on (predominantly) German-owned car manufacturing. Despite significant foreign direct investment (FDI), there was little technological transfer or improvement in Hungary’s global value-chain position. A similar asymmetry defined the highly unregulated financial sector: by 2005, over 80 percent of bank assets in Hungary were held in foreign banks. After government housing loan subsidies were reduced, these banks flooded the market with foreign currency-denominated loans.

Faced with an increasingly untenable financial situation, austerity measures were introduced by the nominally center-left government in 2006–7; shortly thereafter, speculative attacks against the Hungarian forint resulted in dramatic depreciation. Hundreds of thousands of indebted households were suddenly confronted with exponentially rising mortgages and debt. The number of those living in precarity exploded, and homelessness and emigration rose sharply. Evictions became a common sight.

In autumn 2008, a troika of the IMF, the European Central Bank (ECB), and the European Commission stepped in to stem Hungary’s economic free fall. Each institution advocated for different, even contradictory policy directions, with the commission emerging as the most hawkish decision-maker of the three, demanding immediate budget rectifications, a strict 3 percent deficit target for 2010–11, and a radical pension reform beyond what the IMF requested. This process was further deepened through the “Vienna Initiative,” involving Eastern European national governments, EU institutions, and Western banks with subsidiaries in the region. Instead of disciplining the actors whose predatory lending had led to the “subprime moment,” the agreement effectively bailed them out. In return for the banks’ promise not to quit the region, national governments pledged further austerity. Prefiguring the EU’s catastrophic reaction to the Eurozone crisis a few years later, these interventions pioneered a form of joint fiscal governance by Western banks, EU institutions, and the IMF.

The strings attached to these bailouts and interventions included massive cuts to pensions and wages. Amidst a global recession, exports fell by nearly 20 percent and public debt continued to rise. These measures left Hungarian society poorer, more divided, and more unequal than at any point since 1989. Decision-makers in Brussels and Frankfurt labeled it a success all the same.

Orbán’s Second Coming

During its time in opposition in the mid-late 2000s, Orbán’s Fidesz party had slowly rebuilt its base, amplifying the grievances of foreign-currency debtors and an anxious middle class while forging alliances with segments of domestic capital that felt left out of the country’s FDI-driven growth model. Orbán’s first term (1998–2002) was no great departure from the path taken by previous governments. But the political landscape in which he achieved a two-thirds majority in 2010 was wildly different.

Within years of regaining power, Orbán had defied neoliberal orthodoxy more than most recent left-wing governments in Europe — or worldwide. In 2011, he publicly refused further cooperation with the IMF, calling for an “economic freedom struggle.” From 2013, his government worked hand in hand with a re-politicized National Bank, granting it economic leeway forsaken by most administrations. The central bank introduced 0 percent lending rates to boost domestic investment. Sovereign debt was reduced and largely (re)domesticated. Key sectors like energy, telecommunications, and banking were nationalized, with banks imposed special taxes and fixed-rate agreements with many foreign-currency debtors. During the COVID-19 crisis, price controls were introduced for certain basic products.

In breaking with key elements of neoliberal doctrine, Orbán’s government has shown the European left that challenging EU diktats is possible. It has also provided an early example of the so-called “return of the state” in the wake of the pandemic. That said, this state intervention is not directed toward an egalitarian or redistributive vision but rather warns us that seemingly progressive means can be used for reactionary ends.

Orbán’s economic policies have been accompanied by increasing government control over media, education, and the judiciary, blurring the lines between party and state. The fanning of culture wars and the incessant hate speech spewed by pro-government actors have also allowed Orbán to distract from his tenure’s dismal social record: while Hungary’s GDP has grown, it has been increasingly decoupled from social welfare, with low social mobility and declining public spending on education and health care. Enrollment in higher education has dropped nearly twenty points. Facilitated by a 15 percent flat tax rate and the highest VAT in Europe (27 percent), wealth has been consistently siphoned upward. The government’s much-publicized “pro-family” policies have mostly benefited the middle and upper classes without reversing demographic decline.

Following EU Orthodoxy

Belligerent anti-EU rhetoric has played a central role in Orbán’s strategy. But — despite regularly expressed concerns — the structure of the EU has played a key role in enabling his rule. Some of Orbán’s more “unorthodox” measures have caused alarm in Brussels, but the Hungarian leader proved to be a reliable partner when it came to the EU’s fiscal and economic policy through much of the 2010s. Having included a mandatory debt brake in his 2011 constitution, he supported the EU’s 2012 Fiscal Compact that further constitutionalized austerity. Domestically, the government’s Economic Stability Act hardwired fiscal discipline down to municipal governance, both tightening government control and neoliberal policymaking.

Orbán’s first years in power benefitted from a more favorable global conjuncture, quantitative easing, and an uptick in industrial investment. But his economic project has also been highly dependent on the direct inflow of EU funds, which only started pouring into the country in a substantial way after 2010. Constituting around 4 percent of total GDP, they have fueled government-engineered housing and construction booms. Distributed with little oversight, they have also allowed the ruling party to centralize power: in addition to widespread cronyism and corruption, vertical relations of dependence have been institutionalized at every level.

The Orbán government’s reliance on EU money was exposed when cohesion funds were frozen amid rule-of-law disputes with Brussels. This led to a sharp decline in the forint’s value, halted construction projects countrywide, and forced the government to borrow at unfavorable rates, increasing the sovereign debt it had taken such pride in reducing.

Deepening Dependence

Despite boisterous claims about national sovereignty, Orbán has in effect overseen a deepening of Hungary’s dependent integration into global supply chains, facilitating and profiting from the expansion of (predominantly German) manufacturing to the region during the 2010s. Pliant local governments, subsidies, low labor costs, and EU funds earmarked for local infrastructure development have allowed a significant ramping-up of nearshored production, with firms such as Audi profiting from direct Hungarian government support.

This has profoundly reshaped labor relations, with the number of temporary work agencies exploding, increasing obstacles to strikes, and the 2018 “slave law,” which permits up to four hundred hours of overtime and up to three years’ delay for salary payments. These changes are not purely homegrown: they are the outcome of an overall framework pioneered and enabled by the EU, which primarily caters to Germany’s export-led economy. In this system countries such as Hungary serve primarily as disposable manufacturing sites, and as the providers of a “flexible” and mobile labor force.

Recent years have only reinforced this dynamic, as Orbán aims to capitalize on investment in “green industries,” leveraging his relationships with East Asian partners and the EU’s Green Deal framework to move toward a new cycle of accumulation. Hungary is today Europe’s second-largest producer of electric batteries, almost exclusively through East Asian firms. This development largely occurred outside the official remit of the EU’s Green Deal funds, but Western manufacturers have also profited from it — just as their Hungarian factories have profited from subsidized Russian gas or new Chinese-built photovoltaic plants. European companies have also started to catch up, with numerous investments throughout Hungary buoyed by EU funds.

Established without consulting local communities and shrouded in secrecy, these projects have been shown to cause significant harm to local land and water. Working conditions have been described as harrowing, with frequent workplace accidents and even deaths. The factories are increasingly staffed by workers from the Global South employed on fixed-term contracts, making labor organizing — or even oversight — particularly difficult. The EU’s green policies have thus had a triple effect in Hungary: worsening labor conditions, polluted aquifers and soils, and strengthening Orbán’s control.

A Small Country With a Big Blueprint

Two decades after Hungary joined the EU, domestic support for membership remains high. Opposition parties compete to prove their “pro-European” credentials and pledge to introduce the euro as soon as possible. Nevertheless, the country neglected to mark the twentieth anniversary of its membership in any significant way — reflecting a deeper malaise over how integration has unfolded.

But if European integration failed to live up to Hungarians’ expectations, Orbán’s subsequent rise should not be seen as its inverse. Rather, the integration process itself contributed to the making of an unequal, crisis-prone society in Hungary during the 1990s. EU institutions later played a crucial role in the disastrous response to the late 2000s economic crisis, paving the way for Orbán’s unchecked ascent. These institutions have enabled his rule and now promote industrial policies that reinforce structural inequalities, short-termism, and the concentration of power and profit by a small elite.

Hungary’s trajectory cannot, of course, be blamed on Brussels alone — the failure of Janez Janša in Slovenia or the Law and Justice party in Poland to consolidate similar authoritarian control underlines the specificities of the Hungarian case. But that does not mean Orbán should be treated as exceptional.

In addition to providing a blueprint for “illiberal” governance around the world, since 2015 Orbán’s government has been central in shifting the EU’s position on refugees and migration, normalizing the elevation of hate speech to the level of policy. Economically, it has proven that state intervention can be wielded strategically, while leaving the core of neoliberal governance untouched. Meanwhile, Brussels’s condemnation of Orbán’s dalliance with autocrats has little credibility given the EU’s own partnerships with Azerbaijan’s president Ilham Aliyev or Egypt’s Abdel Fattah el-Sisi, while calls for free speech in Hungary expose the EU’s double standards amid crackdowns on pro-Palestinian voices. Even his labeling as a far-right exception loses credence given the newfound acceptance of Giorgia Meloni.

As Germany’s growth has stalled these past years, Orbán’s socioeconomic model has increasingly unraveled, with rising interest rates, spiraling inflation and rising emigration. Widespread dissatisfaction has been reflected in the emergence of former Fidesz insider Péter Magyar, whose upstart Tisza party garnered near 30 percent of the vote in June’s European elections. Yet this does not mean Orbán’s rule is nearing its end or that it does not also contain valuable insights for the Left.

Defeating Orbán and charting a different path for Hungary and Europe will require learning from him. He has understood how to use the state to implement policy on his own terms and defy central elements of EU orthodoxy better than most center-left governments have in recent decades. Developing such tools is crucial in an era of climate shocks and multipolarity. On a domestic level, any movement that seeks to genuinely challenge Orbán’s government must credibly fight for the kind of welfare measures still supported by a large majority of Hungarians.

On a European level, understanding the detrimental role played by European institutions in our current predicament is crucial— but that does not mean breaking out of them offers a ready or desirable fix. Uneven integration has led to Orbánism. Any future left-wing project will need a viable agenda for power at the nation-state level without losing sight of an internationalist horizon. In the absence of that, new Orbáns will only continue to rise.