‘Noise’ of Article 7 could help Orbán, says Nomura


The threat of the EU’s Article 7 procedure being triggered against Hungary will probably leave markets unaffected, while politically the governing Fidesz and Prime Minister Viktor Orbán could benefit from its “noise” prior to the elections next year, London-based analysts of Japanʼs Nomura say in an analysis sent to the Budapest Business Journal.

While the EU’s “rule of law principles have been grinding” since the Fidesz government came to power in 2010 and constitutional changes, tax laws and anti-foreign company regulations have all been studied by the European Court of Justice - resulting in “various forms of two steps forward, one step back by the government” - the European Council has not been concerned about processes in Hungary, the Nomura analysis says. 

However, it adds that the European Parliament has kept a close eye on issues such as civil liberties and the rule of law since the end of last year. This culminated in the EP adopting a resolution on May 17 in which it called for the triggering of the EU’s Article 7 against Hungary. The current government predictably responded to the resolution by blaming Hungarian-born financier and philanthropist George Soros, in keeping with Fidesz’s recent rhetoric, with meddling in Hungaryʼs affairs. Now, the European Parliament appears to be concerned about the suspension of refugees’ rights, independence of the judiciary, restrictions on NGOs and the clampdown on liberal universities.

And yet, Nomura observes, even if Article 7 were to be triggered against Hungary, under EU principles unanimity is needed to remove Hungaryʼs EU voting rights and the other members of the ever-tightening Visegrád Four bloc - Slovakia, the Czech Republic and Poland - would be expected to veto in favor of Hungary. In fact, the analysis notes, Minister of Foreign Affairs and Trade Péter Szijjártó has already called on Poland to veto any such move if it ever happened.

Markets ignoring Article 7 threat

As far as markets are concerned, it appears that ignorance is applied, at least for now.  As Nomura’s analysts see it, “the market has correctly discounted the risk and whilst inquisitive of the issue, seems to be showing no particular concern. That is not to say there isn’t significant headline risk to come on this – but the end point appears clear through that,” the analysis observes.

Instead, Nomura diverts attention from the markets to domestic politics, speculating that Fidesz and Orbán could actually benefit from the “noise” surrounding Article 7.

“What we find to be the more interesting and important issue is that this Article 7 process should be viewed through the lens of domestic politics. With the election due in April or May 2018 and Orbán on course for the possibility of a third consecutive term, we think he actually welcomes the Article 7 noise,” Nomura suggests.

Independent opinion polls suggest that Fidesz is currently hovering at around 50%, with the application of the 5% threshold for seats in Parliament. Under the new electoral system sketched out by Fidesz, this means a larger number of seats in Parliament, Nomura notes; however, it is still below the two-thirds majority that has hitherto given the governing party room to pass laws easily with relatively little opposition.

Orbán’s supermajority at stake

At the same time, Nomura observes that Orbán might well still be aiming for a supermajority.

“We think he would again want a two-thirds majority and currently, polling levels are below those of May 2014. Recent by-elections have also seen Fidesz suffer losses and the constituency levels data show that while a majority is possible, two-thirds appears out of reach. Hence, Orbán requires a rally in the polls of around 10 percentage points in the next year,” Nomura says.

Nomura believes that the government’s “populism, anti-foreigner rhetoric, anti-EU stance and strong man image” are all part of a campaign, and the formal threat of Article 7 fits into this well. Nomura’s analysts expect the government’s narrative along these lines to intensify in the upcoming months, “with recent offers of citizenship to ethnic Hungarians in Romania, future measures against NGOs as well as liberal media. However, the end point desired, we think, is more ‘fear’ than resolution – in that sense we don’t see him actually shutting down the CEU, which is the Soros-backed university most targeted.”

Analysts at Nomura see the Fidesz target of a two-thirds majority remaining a challenge for a party having been in power for “so long.” However, they add, due to the lack of effective opposition, at this point Fidesz seems to be “very much the only real contender.”


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