Surprises are rare in the Hungarian parliament, dominated by Fidesz for nearly a decade and a half. December 5, 2022 was an exception. On that day, György Matolcsy, president of the National Bank of Hungary (MNB), gave his annual report to a parliamentary committee and made some unexpected statements.

At that time, tensions between the government and the central bank were already high. Hungarian had the worst inflation rate in the EU, with the euro exchange rate climbing above 430 Hungarian forints (after a stunning drop, it had only been 360 forints earlier that year), so it was expected that Matolcsy, who is also known for his vanity, might criticize the government. But he went much further than that.

Opposition and government MPs in the room were clearly taken by surprise when, in the thirteenth minute of his speech, the president of the central bank pulled a handwritten piece of paper from the bundle of documents in front of him, glanced at it occasionally, and making harsher criticisms of the Orbán government than ever before.

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The governing Fidesz party’s MEPs were uncomfortable in their seats. A video of the meeting shows that the opposition DK party’s MEP László Varju, sitting near Matolcsy, his eyes bulged in excitement, feverishly taking notes, and at one point in Matolcsy’s presentation he even took a selfie with the central bank president in the background.

The unrest in the chamber was triggered by Matolcsy’s statements that, contrary to the claims parroted by government propaganda, “the Hungarian economy is in a near-crisis situation, and we have to face the fact that the financial and macroeconomic indicators are the first or second worst in the European Union.” On measures that the prime minister had previously supported wholeheartedly, he said that

“it’s not worth going back to socialism. Price freezes and all sorts of similar ideas that seem good, turned out not to work under socialism.”

Matolcsy has not only hit out at his former boss, Viktor Orbán, but also at the prime minister’s new right-hand man on economic policy, Márton Nagy, who worked at the MNB a few years earlier. This unexpected outburst was a clearer indication than ever of the serious conflicts – both personal and professional – between the various players in economic governance. Direkt36 has spent months exploring this infighting. In the process we have conducted extended interviews with more than fifty insiders who are intimately familiar with the details of the clashes and the people involved.

Our reporting has revealed how Viktor Orbán strategically operates with his most trusted advisors and collaborators. We have additionally uncovered how the prime minister’s thinking on economic policy has changed and how he has increasingly been making decisions on these matters independently.

These revelations demonstrate that the Hungarian economy’s performance over the past decade and a half ultimately bears his fingerprints. Contrary to government claims, the country’s economic performance has not been exceptional. While Hungary has improved a lot under Orbán in many respects, it has not performed nearly as well as the rest of the region. A number of statistics show that the region’s countries, including Romania, which has long been shunned, have benefited much more from the largely favorable global economic environment of the past decade and the abundant EU funding that both countries have received. According to the GKI, a Hungarian economic research institute, Romania has overtaken Hungary in terms of GDP per capita since 2023. In the same period Romanian and Slovak pensions have become higher than Hungary’s, while Hungarian consumption is predicted to be the worst in the EU. 

Direkt36 presents the behind-the-scenes story, the result of our extensive reporting, in a three-part series of articles. In this first piece, we focus on the relationship between Orbán and Matolcsy: how they discovered each other, how and why they made unorthodox economic policy decisions, and how their relationship deteriorated from 2019 onwards. Among other things, we tell how their relationship soured during the COVID pandemic, with Matolcsy even being rumored within the government to have ambitions of becoming prime minister.

We have sent questions about the relationship between Orbán and Matolcsy to the prime minister’s press chief and to the central bank, but we have not received a reply from either of them.

I. THE HARMONY

The excellent relationship between Orbán and Matolcsy has been unquestionable. Photo: Orbán Viktor / Facebook

There was a break in one of the 2011 meetings of the European Council – the leaders of the EU Member States – when Orbán turned to a member of the delegation accompanying him to Brussels. 

The prime minister and his entourage were in one of the so-called delegation rooms in the European Council’s distinctive cube-shaped building, where the leaders of the member states are allowed to retreat during the break. These rooms are, according to one source, a real feast, as they are extremely well supplied with food and drink for the prime ministers and their delegations.

Orbán turned to a member of the delegation who had just entered the room. The official’s task was to escort the Minister of National Economy, György Matolcsy, who was also in Brussels for meetings, to the airport. “Did he have blood on his lips?” – Orbán asked, rubbing his hands together, referring to Matolcsy.

Orbán then explained to the colleague, who was visibly shocked by the question, that Matolcsy had a meeting with the International Monetary Fund (IMF). The IMF was approached by the previous socialist government during the 2008 economic crisis, and although cooperation continued after the 2010 elections, the Orbán government was much more hostile to the international organization. As the prime minister noted in the delegation room, he had asked Matolcsy at that meeting in Brussels to be tough with the IMF– to “tear them apart.”

At that point, in 2011, there was still harmony between Orbán and Matolcsy, whose relationship went back more than two decades.

At the beginning of his career, in the 1980s, Matolcsy worked at the Pénzügykutató (Institute for Financial Research), where reformist economists outlined economic policies to counter the Socialist Workers Party’s ideas. Many of them rose to important positions after the fall of communism, including Lajos Bokros, later minister of finance, and György Surányi, later president of the Central Bank. According to his acquaintances, Matolcsy stood out from this group mainly because of his approach: he always had a lot of ideas, which sometimes even contradicted generally accepted economic principles. 

His work at the Financial Research Institute contributed to his appointment as political state secretary in the Prime Minister’s Office after the fall of communism under prime minister József Antall. He left this post relatively soon, in1991, after coming into conflict with several members of the government, including Ferenc Rabár, the finance minister. Contrary to the more conservative view of the MDF, the conservative governing party, Matolcsy saw the key to success in economic growth with state stimulus, which he expected to boost jobs and reduce inflation.

It was this approach,which Matolcsy defined under Antal, that later attracted the attention of Orbán. Fidesz, led by Orbán, was gaining ground in the second half of the 1990s on the conservative side of the political spectrum. Matolcsy had the chance to put his ideas into practice. In 2000, two years after Fidesz’s election victory in 1998, he joined the Orbán government and, as minister of economy, launched the Széchenyi Plan, a state support programme. While the economic stimulus programme was considered a great success within the government, critics argued that the funds were used for clientelism, as they were mainly distributed to local Fidesz authorities and pro-government businesses.

Of course, these criticisms did not particularly concern the government, and Matolcsy secured his position alongside Orbán. It was not until a few years later that their relationship would waver.

II. FROM CRITIC TO CONFIDANT

Matolcsy and Orbán: not a friendship without conflicts Photo: kormany.hu

In the months after the 2006 elections that Orbán’s Fidesz party lost, an illustrious group of people gathered several times in the garden of the XXI Century Institute in Buda’s Twelfth District, one of the richest areas in Budapest. Hosted by historian and well-known conservative Fidesz ally Mária Schmidt, 30-40 guests, including Fidesz politicians, journalists and intellectuals sympathetic to the party, were present to discuss what led to Fidesz losing the parliamentary elections.

The events consisted of three or four speakers giving speeches,followed by a discussion where anyone could comment and express their views. Some openly blamed Viktor Orbán for the defeats and suggested that another leader might have to be found to lead the party.

Among the critical speakers was Matolcsy. In his presentation, he talked about the seven reasons he said had caused Fidesz’s defeat, and, according to one participant, “the last and most important reason was that Viktor Orbán’s personality was the problem”. According to the source, Matolcsy argued that Orbán does not listen to other people’s opinions, he is only driven by his personal power interests. 

Orbán did not take part in these discussions, but he was informed of what was said. The meetings were partly put an end to by László Kövér, the current speaker of the Hungarian Parliament, attending once. He is fiercely loyal to Orbán and declared the meetings to be anti-party.

Of course, the fact that the domestic political situation had changed radically also helped to silence voices critical of Orbán. As a result of the austerity measures announced after the election and the leaked autumn speech, in which the then prime minister socialist politician Ferenc Gyurcsány admitted that his party was lying about the actual financial state of the country, the government’s position was shaken. Orbán took the lead in protests against the government. In 2008, Fidesz initiated referendums against the government’s policies regarding health care and tuition fees. These were also resounding successes for the party, so Orbán further stabilized his position.

“His former critics realized they were wrong. By 2008 they had all fallen in line,”

said a source close to the government, adding that by then, Matolcsy was included in those who rejoined Orbán’s ranks.

Apparently Orbán forgave him for his criticisms, as Matolcsy accompanied him to several private meetings on economic issues during this period. After his election victory in 2010, Orbán appointed him as minister of national economy.

“Orbán saw that Matolcsy wanted it badly, and he needed people like that,” said a former senior government official. According to the source, Orbán has always been skillful at using ambitious people like Matolcsy for his own purposes.

According to the source Orbán is always looking for associates who dare to challenge systems and has the vision to do so. When he sees this in someone, he tries to make them feel good about it. According to the source, Orbán then invites the person he wants to meet to his office, tells them how much he is counting on them and shows the public how close he is to them. Once the person believes this, he “almost falls in love with Orbán.” Then Orbán’s current favorite minister, such as János Lázár ex-minister leading the Prime Ministers Office and László Palkovics ex-minister of technology and innovation were those who, “work hard” and “take risks.” Those who fit this description were made to feel “equal to Orbán.”

The same happened between Orbán and Matolcsy after 2010, the source said. During this period, Matolcsy, the economy minister, was responsible for a number of high-profile and controversial measures, such as the nationalization of private pension funds, the crisis tax on various sectors such as telecoms, energy and retail chains, and the introduction of a single-rate tax. As the tax reforms have mainly benefited the wealthier, they have not been well received in Fidesz’s parliamentary group, with MPs in rural constituencies in particular concerned about how the measures will affect their popularity locally. “Come on,” “it’s too much,” were the kinds of phrases heard from Fidesz MPs complaining about the measures, said one of Matolcsy’s former colleagues.

Orbán defended Matolcsy repeatedly. “No one can offer me the amount of money for which I would be willing to give up my right hand,” he said when Matolcsy’s possible departure was raised in the autumn of 2010. As criticism of Matolcsy within the ruling party continued to mount in 2011, Orbán explained why he was sticking with his minister at a meeting of the Fidesz loyalists in the rural town of Kötcse. According to a report in the now defunct Heti Válasz, he said he did not need an economist, but an “economic politician” who could break away from “textbook solutions.” By this, he meant that in Matolcsy he had found someone who would apply his policies to the economy instead of standard economic principles.

Although economic growth has fallen short of Matolcsy’s promises, Orbán’s confidence in him was undiminished. This was reflected in the fact that the prime minister proposed Matolcsy to head the central bank at the beginning of 2013, the year that András Simor, who had been under attack by Orbán for years, was finishing his term at its helm.

The prime minister expected Matolcsy to lead the central bank, which is supposed to be independent of the government, in a way that is more in line with the Fidesz’s positions. Matolcsy did not disappoint.

III. THE MAGICIAN

Under Matolcsy’s presidency, the Central Bank of Hungary (MNB), the government and the Bank grew strong ties Photo: MNB

When Matolcsy arrived as the new president of the MNB in the spring of 2013, he wanted to act quickly. 

As the MNB had raised interest rates in response to the 2008 crisis, making credit available from banks more expensive, the amount of money on the market had fallen and the economy had slowed down.

The central bank under András Simor started to cut interest rates cautiously by 2012, but Matolcsy wanted to move faster. According to a source familiar with the events, Matolcsy’s inner circle feared that a sudden drop in interest rates could cause serious problems. They argued that the effects of the 2008 economic crisis had not yet fully passed, so it was not the time to rush.

In discussions with his colleagues, Matolcsy stuck to his opinion. In the words of a source familiar with the central bank’s operations, he “strongly argued that it should go down,” referring to interest rates. Eventually, the MNB started to cut interest rates in accordance with Matolcsy’s ideas. When Matolcsy took over the central bank in March 2013, the base rate was 5.25 percent. It was lowered to 0.9 percent by May 2016.

Matolcsy’s calculation worked. Commercial banks adapted to the cut in the base rate, borrowing became cheaper, and it became worthwhile for households and companies to spend and invest.

“The Hungarian economy needed it like a loaf of bread,”

said one financial expert, explaining how the interest rate cuts had succeeded in pumping money into the economy as it emerged from the crisis.

The MNB’s decisions also benefited the state as they have reduced the interest burden on public debt. The government was trying to raise funds by issuing government bonds and the interest rates on forint bonds are heavily influenced by conditions in Hungary, including the base rate. “This has allowed money to be spent on other things, such as stadiums,” the finance expert said. The Orbán government could use the money previously earmarked for interest payments for whatever investments it liked. 

Matolcsy tried to inject money into the economy in other ways than just cutting interest rates. The central bank launched various programmes, such as giving free credit to commercial banks, which then passed it on to businesses at low cost. “These gave a big boost to corporate lending, and also gave loans to companies that were friendly to the Orbán’s government,” said a former government official, explaining why Matolcsy’s activities as central bank president were initially popular in government circles.

Matolcsy’s popularity within Fidesz was also boosted by the central bank’s insistence at the end of 2014 that the exchange of foreign currency loans into forint should be completed as quickly as possible. The timing of this proved to be extremely fortunate. The Swiss franc exchange rate went out of control at the beginning of 2015, with the Swiss franc jumping from 250 to 320 forints in a matter of weeks, but this did not affect those foreign currency borrowers who were able to take advantage of the quick exchanges to forint . The impact of the soaring exchange rate on the creditor sector “would have caused a real riot,” said a source in the banking sector. 

Orbán liked such moves and was pleased with Matolcsy. According to a source close to the government, the prime minister has always demanded bold, creative ideas in many areas, including economic governance, and Matolcsy has met this demand. “He was a real trickster,” the source said. Within the governing party, Matolcsy has started to be described as a ‘magician’ who says a lot of strange and hard-to-explain things– but some of them actually work.

Matolcsy had some more controversial ideas too.

When the forint weakened significantly as a result of the cut in the base rate, the value of the central bank’s foreign exchange reserves increased its value in forint as a consequence. Previously, the central bank paid the resulting profit into the central budget, but Matolcsy decided otherwise. Instead, the central bank pumped hundreds of billions of forints into its foundations.The Fidesz-majority Parliament, backing Matolcsy, passed a law that made the transfers in and out of these foundations private. In 2016, the Constitutional Court ruled that the law was unconstitutional, and the public was finally able to learn that the foundations had been used to provide lucrative contracts to pro-government figures in secret, including Matolcsy’s cousin.

Matolcsy received significant criticism at that time, but he was already looking for a way out of the central bank.

IV. THE FADING LOVE

From the left: MIhály Varga minister of finance; PM Viktor Orbán; László Parragh, president of the Chamber of Industry and Commerce and György Matolcsy at an event in 2019. Photo: Magyar Kereskedelmi és Iparkamara

Hundreds of entrepreneurs gathered for the Hungarian Chamber of Commerce and Industry’s annual opening in mid-February 2019. In a conference room at the elegant New York Palace on the Ring Boulevard in Budapest, four important figures of Hungarian economic governance sat facing the entrepreneurs at a long table covered with white tablecloths: prime minister Viktor Orbán, central bank president György Matolcsy, finance minister Mihály Varga, and László Parragh, president of the Chamber of Industry and Commerce, which has close ties with the government.

These events are usually memorable because Orbán talks in detail about his economic and political ideas. This time, however, the speaker before him, Matolcsy, attracted attention for his surprising presentation. He talked about the need for a new competitiveness turnaround, just like the government measures after 2010. He then outlined a 330-point programme of reforms, including a reform of the education system, which he said would enable Hungary to catch up with Austria by 2030.

Matolcsy always came up with ambitious and bombastic ideas, but this time, his ideas were not in conjunction with the prime minister’s plans. “The whole thing was unpleasant,” said a source close to the prime minister. It was clear from the start that Matolcsy’s proposals would not come to anything. Orbán, who spoke after Matolcsy, did not react to the 330 points, the source said. In addition, the next day, Parragh said the idea of catching up with Austria was surreal, while Varga presented a much more restrained competitiveness programme a few days later. 

According to sources close to the government, Matolcsy’s effort was intended to get Orbán’s attention, as he had been unhappy with his situation for some time. He was less interested in monetary policy and felt that the central bank presidency no longer held a serious challenge for him and hoped to return to government before the 2018 parliamentary elections.

“He dreamed of being the top minister for the economy,”

said a source close to the government. According to an ATV article in late 2017, Matolcsy lobbied Orbán to this end.

The prime minister had a completely different idea. After the 2018 elections, he again placed his confidence in Varga, who continued to be responsible for economic affairs as finance minister. Orbán decided that he needed Matolcsy as central bank president, so when Matolcsy’s first term came to an end in early 2019, Orbán proposed him for another six-year term as head of the MNB. 

Soon after, Matolcsy came up with his 330-point proposal, but the negative reaction from the government indicated that the relationship between the government and the central bank was beginning to drift apart. This became even clearer when, after his set of proposals had been swept off the table, Matolcsy began to criticize the government’s economic policy and its managers.

In September 2019, Matolcsy criticized Mihály Varga in almost every sentence of an article he wrote. “According to him, the new Hungarian Golden Age is over, that was it, it lasted seven years, but now it’s over” Matolcsy wrote. Varga didn’t let it go, the next day he posted a picture of a knife on his Facebook page. In his post he wrote among other things: “I reassure everyone: it will only be for food!” According to a source close to the government, Varga was sending a message to Matolcsy with the picture.

This exchange made clear to the public that the relationship between Varga and Matolcsy was fraught. 

The different personalities of the two politicians played a significant role in the conflict. “Matolcsy is the inventor type,ideas pop out of his head. Varga, on the other hand, is a precise, disciplined, conservative-minded economist,” said one source. This made their working relationship very difficult. According to an acquaintance of Varga’s, the two politicians were not even on speaking terms around the time of the change of government in 2010. And a source close to the government said that Varga was particularly unhappy that before 2018 Matolcsy had dreamed of leading a ministry that would include the Finance Ministry, making Matolcsy Varga’s boss.

The conflict between Matolcsy and Varga continued even after the government faced prolonged economic difficulties following the onset of the COVID pandemic in 2020. Matolcsy came up with new reform proposals to mitigate the pandemic’s damage, including a 12-point package that suggested reforms to the healthcare, education and pension systems, which he published in the summer of 2020.

By this time, there was so much distrust between the government and the central bank that Matolcsy’s various multi-point plans were interpreted by many in the government as an alternative government program. “There were growing signs that Matolcsy was imagining himself as a crisis-management technocrat head of government,” said a government official. The government was starting to fear that Matolcsy was ambitious and would seek to capitalize on any mistakes made by the government in their handling of the pandemic. . 

However, the fears, which emerged in conversations between government politicians, did not appear to be real. Rather, it was fuelled by suspicion of Matolcsy, whose increasingly erratic behavior were making some question his loyalty to Orbán. had previously been Finally, Matolcsy himself indicated that he had no real plans to replace Orbán.

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In fact, he wanted a big favor from the prime minister. After Matolcsy realized that he could not get back into government, he wanted to make sure that he could stay in office after his second term as president of the central bank expired in 2025. This would have required a change in the law, which stipulates that a person can only serve two terms at the helm of the MNB. According to sources, Matolcsy raised this issue in 2021 because it looked as if the opposition might have a chance in the 2022 parliamentary elections. In this situation, Fidesz was interested in cementing its people in key positions for as long as possible. However, Matolcsy was no longer a man of confidence at that time, and Orbán rejected his request.

According to an acquaintance of the central bank president, Matolcsy experienced something similar to what highly influential ministers such as Tibor Navracsics and János Lázár have experienced. For a while, at the height of their power, both politicians were touted as potential successors to Orbán, but after a while they were completely sidelined from decision-making.

“The person starts saying things like Orbán has no time for me anymore, ”

and everything becomes more difficult, the source said. Orbán no longer has use for them. “Matolcsy is in the middle of this now,” he said.

Several sources close to the government said that Orbán and Matolcsy’s relationship did not deteriorate for one specific reason, but that the erosion of their relationship was part of a longer process. “There was a disconnect. Orbán cut Matolcsy out. At the same time, he fell in love with Márton Nagy,” one source said. In 2020, Matolcsy parted ways with his influential vice-president, Márton Nagy, known as the operational manager of the MNB. Orbán, however, “fell in love” with the young economist, and made one of his most influential ministers in just a few years.

Nagy is the subject of the next part of our series of articles.

Cover picture: Somogyi Péter (szarvas) / Telex ; Fotó: MTI, MNB, Telex

Bence Széchenyi contributed to the translation of this article.