A few days ago, in this post, I discussed Romania's economy and the shaky situation of Romania's currency, the leu.
Well, when I arrived in Hungary, I was surprised to find that Hungary is in almost exactly the same situation!
In Hungary, also, people and businesses have been very hungry for foreign goods. So the country has been importing much more than it has been exporting. Thus, Hungary has a current account deficit that is even bigger than Romania's. And so Hungary's currency -- the "forint" -- has begun to fall.
But Hungary's situation is actually even worse than Romania's. Romania's leu is starting to look vulnerable, like a possible target for currency speculators. Hungary's forint is, right now, under attack by currency speculators. The forint has fallen by about 5% in the last ten days or so. It would probably have fallen by more, but last Friday the Hungarian National Bank raised the interest rates to defend the forint.
They raised interest rates by three percent -- from 9.5% to 12.5%. That's a very big increase. And if interest rates stay high for more than a few weeks, this will cause serious problems. "The 3% interest rate increase is the Hungarian economy's obituary," said one opposition party. While that's probably an exaggeration, it's certainly not a good thing.
Still, it should have stopped the speculation. After all, raising interest rates means that forint-denominated investments are more attractive now. So people should start rushing to convert dollars and euros into forints, which should make the forint rise. (I'm simplifying again, but this is more or less how it works.)
And yet, after a short pause, the speculative attacks have started again, and the forint has fallen another percentage point or two.
Right now Romania's economy is doing OK. Yes, there are lots of problems, some of them very serious, but (with one exception) the "macroeconomic fundamentals" look pretty good.
Unemployment has been falling for the last couple of years. Today it is around 7.5%, which seems high to Americans but is pretty good for Europe. (Yes, that's the official statistic, and yes, the real figure is almost certainly higher. But it's clear that unemployment has been falling for a while now as the economy expands.)
Inflation is running around 15 percent per year, which is high but much much lower than it was; it was 45 percent just a few years ago. The currency is pretty stable. The banking sector, after a lot of difficulties, now seems to be in good shape, and there's a lending boom. Foreign direct investment is rising, albeit from a very low base. The government's budget deficit is big but at least it's not growing any more. Overall, the economy is growing between 4% and 5% per year, and has been for almost three years now.
Mind, Romanian wages have not risen along with growth. The average real wage, adjusted for inflation, only rose by about 1.6% in 2003. Optimists say this is because Romanian productivity is going up, so of course output is rising faster than wages. Pessimists say that Romanian workers, especially in the public sector, will demand big wage increases soon, and that this will result in wage-price inflation. But that's a story for another time; and at least real wages are rising, which is not true everywhere in this region.
So, good news, right? Well, maybe. There are two areas of concern.