Roughly 25-30% of the Hungarian economy is controlled by cronies of Hungary’s ruling Fidesz party, said Jozsef Peter Martin, head of Transparency International Hungary, as he presented a report to MEPs at a European Parliament committee hearing on April 25.
MEPs at the EP’s Committee on Budgetary Control (CONT) hearing wanted to hear confirmation whether the Hungarian government is indeed trying to make it impossible for some foreign firms to operate in Hungary, leftist-daily Nepszava reported, adding comments from a senior official of the EC internal market directorate-general, who said: "the EC is aware of the impact of these restrictions on foreign companies in Hungary".
The hearing came after a press report by Der Spiegel revealed how government-backed businesses try to squeeze out foreign companies with mafia-style methods.
Representatives from French, German, Hungarian and Austrian companies complained about the Hungarian government's attempts to make life difficult for companies, especially in sectors declared strategic.
The Der Spiegel report cited the story of two German construction companies, which were given buy-out offers 'they could not refuse' from domestic-owned rivals enjoying the support of the ruling party.
Since sweeping into power in 2010, Viktor Orban has set a goal of boosting domestic ownership in banking, energy, media, telecommunication and retail to over 50%. He has succeeded in achieving that target except in retail, which is dominated by German-owned discount chains.
According to the German weekly, the Hungarian PM is frustrated by the success of Lidl, Aldi and Spar, which continue to gain market share despite the regulatory headwind and additional levies.
The government has long been targeting foreign multinationals in a bid to help local rivals close the gap, but that has not proved successful. Price caps on a dozen or so food staples have also hurt smaller shops and forced them to spread losses by raising prices on other products. Price-conscious customers chose discount chains instead.
Last year, retailers were hit with a progressive revenue-based windfall tax, which also targeted foreign companies dominating the market. The latest government measure involves forcing major grocery chains to offer mandatory discounts regularly. The unorthodox, politically-driven measure will do little to lower Europe’s highest food inflation, analysts said, but it means another levy on them.
Citing international research and Transparency International’s own findings, Martin spoke about the state of corruption in Hungary and how Fidesz-backed companies manage to expand and squeeze out competition.
TI’s annual Corruption Perceptions Index (CPI) report released earlier this year showed that Hungary was the most corrupt country in the EU in 2022 and how its CPI score had plummeted more than any other country since 2013.
TI Hungary’s executive gave a long list of discriminatory practices of public funds being channelled to private entities, including public procurements, and the nationalisation of assets, which are later transferred to private companies. Martin also confirmed that many successful local companies experience the same as foreign firms in strategic sectors and receive "offers they can’t reject", but hostile takeovers are also a common practice.
Government regulations such as the revision of licenses or restricting exports, the levy of extra-profit taxes and the harassment of firms by authorities are also characteristics of Hungary's crony capitalism.
Germany is the largest investor in Hungary in terms of cumulative FDI, and it is Hungary’s largest trade partner. For long, German companies have been positive about their investment opportunities in the country, but this is changing, according to Martin. The latest survey by the German-Hungarian Chamber of Commerce showed that 18% of German companies complained of legal uncertainties in Hungary.
At least there is one sector where German companies face a significant tailwind. The Orban government has handed out hundreds of millions of euros directly in state grants or through tax breaks to German firms in the manufacturing sector, where they have strong competitive advantages and operate without domestic rivals. German automakers and suppliers have enjoyed generous subsidies over the years.