13/03/2013 09:16 GMT | Updated 12/05/2013 06:12 BST

Hungary to Destroy European Economic Recovery and EU?

Orban v democracy

Hungarian lawmakers on Monday overwhelmingly (265-11) approved a long amendment to the constitution which threatens democratic checks and balances. The biggest opposition party, the Socialists, boycotted the vote. The bill enshrines in the constitution policies that were previously struck down as unconstitutional by Hungary's highest court. Among other things, it curtails the independence of judges, it wipes out 20 years of jurisprudence by banning the court to refer to rulings given while the previous constitution was in force, a law requiring students who received state scholarships to work in Hungary for years; a prohibition on political campaigns in private media; and a law allowing local authorities to fine or jail homeless people living on the street.

The New York Times quoted a very worried Peter Hack, a leading professor of constitutional law at ELTE University in Budapest: "We are not yet North Korea, but this amendment is extremely alarming because it removes constitutional control and checks over the legislature. It is a bald and dangerous power grab."

Europe losing soft and hard power

It looks like PM Victor Orban and his Fidesz party are prepared to take on the whole European Union (EU) in trying to transform Hungary into an authoritarian state. If Orban succeeds in his plans, this will not only harm the Hungarian people and economy, but also the 'European project'. The EU has already lost lots of economic power and prestige because of the Great Recession and even before that its military/hard power was not at all commensurate with its economic and historical heft. This has translated into critical assessments of Europe's power in the world. The European Council on Foreign Affairs wrote in February on publishing its yearly European Foreign Policy Scorecard: "Yet again the euro crisis has eroded Europe's image, soft power and capacity to pursue its interests on the world stage."

A couple of months ago, Judy Dempsey wrote for the Carnegie Endowment for International Peace: "The EU, however, professes to make soft power its guiding principle for dealing with conflicts, both because it likes the image that this philosophy confers, and because it is shy of using hard, or military power. Yet it has made a hash of most of its soft power missions". Right now, the image the EU confers is of a divided union adrift that is overwhelmed by the financial crisis turned economic crisis turned political crisis. It's global ambitions have been necessarily amped down.

The credentials of the EU will suffer a further major blow if Orban succeeds in creating a kind of dictatorship while being a member of the EU (the EU in many respects lacks effective ways to intervene in member states where democracy is weak). I am not sure the EU will survive the (geo)political, economic, social, and democratic storm that is blowing inside and outside the union and isn't likely to calm down anytime soon. One thing is for sure, the EU will lose heaps of credibility and soft power if Hungary becomes an authoritarian state.

Should markets worry?

As for the implications for the markets, the Forint has plunged to nine-month lows against the euro. The yield on 10-year sovereign notes rose only one basis point, or 0.01 percentage point, to a one-month high of 6.50 percent. If Orban continues its policies which include trying to take over the Central Bank by appointing an ally of him as governor, the Forint could weaken more and bond holders could start worrying about inflation (because of monetary financing of debts) and even the creditworthiness of the government.

For European markets, more success for Orban and rising tensions between Brussels and Budapest could give the impression that the EU progressively has more difficulties with getting its house in order. What's more, Orban epitomizes the anti-trend in politics that we recently referred to in our Global Political Analysis: populism where anti is the magic word: anti-globalization, anti-capitalist, anti-European. The developments in Hungary draws attention to other worrying developments in the region. Among other things, the fall of the Slovanian, Moldavian, and Bulgarian prime ministers. They all had to deal with public anger over austerity, corruption, unemployment and worsening living standards.

The most fundamental question the markets should ask themselves is: are events in Bulgaria, Slovenia, Hungary, but also in Italy (success Grillo), Portugal (large protests) and Greece (dangerously high rising social tensions) proving that the austerity and reform course of the EU isn't working? And if so, is it too late and will tensions, insecurity, frustration, anger etc. on the local, national and European level make it impossible for politicians to make a turnaround and save the day for Europe or is there still time for changing course and implementing a political, fiscal, and economic sustainable way out of the mess?