Introduction: Pre-2006 Hungary

Hungary, situated in the center of Europe, is known for its turbulent economic and political past. While its central location and trade routes make Hungary a cultural and commercial hub, it has been a country riddled with fluctuating stability, political corruption, social unrest, and economic downturn. This cases study will investigate the economic and political history of Hungary, evaluate its decisions to enter the European Union but maintain a floating currency, comparatively analyze the position of the Hungarian forint, weigh the effects of Hungarian legislation, and ultimately answer the question as to whether Hungary is a good place for foreign investment.
In 1867, Hungary became a state within the Austro-Hungarian Empire, which was the second-largest unified territory on Europe. In World War I, the empire was defeated after the signing of the 1920 Treaty of Trianon, which split the Austro-Hungarian monarchy and reduced Hungary’s territory by one-third. Hungary was then left to regain its lost territories over the next twenty years and, to that effort, they joined forced with Nazi Germany and entered World War II. From the outset of the war, Hungary suffered severe losses which led them to negotiate with the Allies. However, once Germany became aware of these negotiations they retaliated by invading Hungary, installing a puppet government, killing over 500,000 Jewish and Roma peoples, and leaving the country in ruins before being driven out by Soviet forces in 1945.
After World War II, a Soviet-backed Communist government, in an effort to revitalize Hungary, began to nationalize the country’s industries, institute collective agriculture, strengthen the secret police, and ultimately joined the Warsaw Pact. However, the Hungarian population became dissatisfied, which lead to a series of reforms that inevitably encouraged the population to demand more reform and evict Soviet troops. These reformation demands culminated in the Hungarian Revolution of 1956. However, Soviet tanks and troops crushed the rebellion and by 1957 a new Soviet-friendly government was reinstated. Nevertheless, a process of gradual liberalization was restarted in the 1960’s to prevent unrest among the population.
In 1989, Hungary began a shift toward the European Union and was the first nation to breach the Iron Curtain, which surrounded the Eastern Bloc countries. The Communist party was replaced by a multi-party parliamentary democracy, Hungary soon after withdrew from the Warsaw Pact, and the country began to adopt liberal economic policies and welcome foreign investment. However, these reforms proved unsuccessful and lead to a severe decline in economic activity and living standards. As such, Hungarians voted into power the Hungarian Socialist Party (“MSZP”), which supported social programs but also continued with the reform. Hungary began to enjoy stability and growth until the years leading up to the 2008 political and economic crises.
From 1998 to 2002 there was a tug-of-war between the MSZP and Fidesz-led parties in Hungary, which were each defeated by charges of corruption and bribery. Nevertheless both parties continued a policy priority of entering the European Union, which was achieved in 2004. Furthermore, the MSZP-led government, at the time, believed that Hungary would also be able to meet the Maastricht criteria for becoming a member of the euro zone by 2010. However, by 2006, the rise of the MSZP quickly gave way to political disaster, corruption, and revolts.

Entrance to the European Union

In 1994, Hungary submitted a membership application to the European Union and negotiations on entry began in 1998. During the negotiations with each candidate country, progress towards meeting the Copenhagen criteria is regularly monitored. On the basis of this, decisions are made as to whether and when a particular country should join, or what actions need to be taken before joining is