Estonian and Hungarian Economic Policies Before and During the Crisis: Virtue Unrewarded and Profligacy Unpunished

Abstract

The aim of the paper is a comparison of economic policies in Estonia and Hungary before and during the recent financial and economic crisis and the results of the policies. Such a comparison is justified by a crucial similarity of the economies of both countries; they are small, open economies highly integrated within the European Union. However, economic policies have been quite different. Estonia and Hungary have applied opposite exchange rate/monetary policy regimes. Hungary, in opposition to Estonia, had a rather lax and pro-cyclical fiscal policy. When it comes to policy results it turns out that the Hungarian economy was more stable in terms of the volatility of unemployment, inflation, GDP growth rates and current account. Hungary recorded lower average unemployment rates and current account deficits but economic growth was faster and average inflation was lower in Estonia. The interpretation provided argues that Estonia has been experiencing a boom and bust cycle typical for fixed exchange rate regimes. Hungary has taken advantage of the adjustment mechanism of a flexible exchange rate but its economic policy lacked credibility and there were no strong incentives – even cyclical – for fast growth. The case of Estonia, as compared with Hungary, does not support the claim that the common currency should clearly bring advantages if only fiscal discipline were preserved.