Tamás Gordon in Budapest -

Hungarian Prime Minister Ferenc Gyurcsány, his party beset by scandals, has stolen a march on his many opponents by calling for a referendum on anti-corruption measures. Whether this move will ultimately be enough to save his discredited government and its unpopular economic reforms remains doubtful.

Hungary certainly has a problem with corruption, and it appears to be getting worse. A survey by PricewaterhouseCoopers (PwC) released November 7 found that economic crime cost top Hungarian businesses about €16m over the past two years. Some 62% of the 77 companies surveyed reported that they had been victims of economic crime in the last two years, a vast increase from the 25% recorded in PwC's last survey published in 2005 and well above the Central and Eastern Europe average of 50%. The corruption watchdog Transparency International last year ranked Hungary as the 41st least corrupt country out of 163.

Gyurcsány is also struggling against a tide of political corruption that is proving especially damaging to his party.

Three years ago a promising political career in the PM's Socialist Party seemed to come - albeit temporally - to a halt in a relatively petty scandal. The rising star János Zuschlag, then a member of the Hungarian Parliament and local party boss as well as a high ranking official of young Socialists, made a tasteless comment about Holocaust victims, unaware of a running camera. It cost him his parliament seat.

However, his party refused the opposition's demands to sever all ties with Zuschlag. Instead, he was able to keep his lucrative local positions in the countryside, among them the acting chairman of the Hungarian Socialist Party in the Bács-Kiskun region. It has now become clear after Hungarian prosecutors began an investigation that he was responsible for misappropriating public money, amounting to several hundred thousand euros.

Zuschlag's modus operandi was simple: he established dozens of false youth organizations in order to apply for state funds and received financing without the state checking whether his foundations were eligible for the money requested. He has been in jail since last September - and his arrest was followed by two former colleagues also being brought into custody.

This begged the question, on both the left and right of the political spectrum, of whether Zuschlag's case was just the tip of the iceberg. Several corruption scandals since would suggest it was.

EU handouts

Entrepreneurs have provided clear evidence that bribes were asked for in exchange for positive recommendations for gaining state aid. This problem has grown in importance since Hungary now receives billions of euros from the EU.

To make matters worse for the government, the credibility of even the finance minister is now in question. HVG, an independent and highly respected weekly, published in its September issue an embarrassing article about János Veres. In the 1990s, Veres was co-owner and managing director of Bogát-Ferr, a company specializing in recycling metal. Recently, his former business partner Károly Kabai was sentenced to three years in jail because of unjustified VAT rebates during the time Veres' worked there. Although an investigation has not been launched against Veres, the opposition Fidesz party has demanded a hearing in front of parliament's budget committee to find out how it was possible that Veres did not know about the VAT fraud. The company received some €200,000 in VAT refunds, an amount that should've caught the attention of Veres who was managing director at the time and thus responsible for financial matters.

Fidesz's argument is simple: if Veres knew about the case at that time, then he has to take responsibility for it; if not, (as he claims), then his competency is questionable and is also reason for him to resign.

In Zuschlag's case, PM Gyurcsány has also had to take the stand as a witness, because in his capacity as former minister for youth and sport affairs he was responsible for granting public funds. And other former ministers and top politicians have been accused by a former high ranking ministry official, Tamás Ocsovai, that they often gave informal instructions regarding the reward of applications for state aid. With his government's popularity plunging to around 15% support over its package of austerity reforms designed to sort out the country's economic problems, the last thing Gyurcsány could afford was a political scandal of this kind. Therefore, he tried to stay one step ahead of his enemies and introduced in October his "cleanliness package" of reforms.

The package seeks to stem graft in part by preventing MPs from holding mayoral posts where they can influence who gets government and EU money, making the reward of public funds more transparent, and providing clear rules for party financing. Transparency and financial accountability are also his slogans when he demands that government and party officials should make public their financial interests.

To pass these proposals, Gyurcsány needs a qualified majority (two-thirds) in parliament, which he clearly lacks because the main opposition party Fidesz party would never give its assent to anything which could be considered as a success for the government.

Therefore, Gyurcsány has decided to put his cleanliness package to a referendum, which most probably will take place in early spring. Gyurcsány figures he has nothing to lose: if he gets the public's support, then it's a score against Fidesz, which can't ignore the public's wishes. If it doesn't, then it might also take down with it the referendum campaign launched by Fidesz against his government's austerity package, which includes sweeping spending cuts and deep reforms to public bodies such as the healthcare system.

If people vote against the reforms, it would likely spell the end to Gyurcsány's reign as PM, as he has staked his job on the idea that his party can win re-election in 2010 only if Hungary swallows his bitter economic medicine and returns to strong growth. To prevent this happening, Gyurcsány his hoping his referendum on his anti-corruption measures will deflect some attention from the referendum on his economic reforms, as the two would be put to a vote at the same time.

The outcome is unpredictable - nobody knows how far a pro-government and an anti-government issue will mobilize the public.

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