Funding Hungary: Exposing Normal and Dysfunctional Crisis Management

Abstract

This paper contrasts the approaches of the International Monetary Fund, the European Commission and the European Central Bank to the management of the Hungarian financial crisis of 2008. It exposes normal behaviour of the IMF and the EU Commission and dysfunction on the part of the ECB, during the first liquidity trap phase of the global financial crisis. The methodology applied contrasts the IOs’ mandate with their framing of the Hungarian crisis as well as with their actual policy recommendations. It uncovers that the IMF negotiating team had a market focus, stressed the European and regional dimensions of the Hungarian crisis, and recommended large financial assistance. The Commission’s Directorate-General for Economic and Financial Affairs representatives focused on the budgetary imbalances and treated the crisis primarily as a Hungarian crisis, which has the potential of contaminating the whole EU. They provided moderate financial assistance. Finally, the ECB thought to combat contagion to the Eurozone by ignoring the European dimension of the Hungarian case. It was reluctant to provide significant assistance to an EU member state, whose banking sector is dominated by Eurozone banks. It concludes with a note on the possible negative consequences of the ECB’s action on the European Union’s integration.