Job seekers wait to be assisted at a state labor office in Szekesfehervar, Hungary. (Photographer: Balint Porneczi/Bloomberg)

As Brexit Britain Puts Up Barriers, Hungary Shows the Downside

(Bloomberg) -- Hungarian Prime Minister Viktor Orban set the tone for Europe’s nationalists in 2015 when he erected a metal fence along his country’s southern border to keep out immigrants, many of them refugees.

His three-year campaign demonizing incomers as a source of terror and a threat to jobs would be emulated by populists across the continent and made Orban a hero for U.S. President Donald Trump’s former adviser Steve Bannon. Britain backed leaving the European Union to control immigration and countries like Italy and Poland embraced parties echoing Orban’s nativist message.

As Brexit Britain Puts Up Barriers, Hungary Shows the Downside

But after reaping the political reward with another emphatic election victory, the Hungarian premier is now facing the potential impact on the country’s flourishing economy.

Hungary has one of the lowest unemployment rates in Europe and is suffering from a dire labor shortage that’s been exacerbated by an exodus of talent westward. Orban has made politically toxic what otherwise would be a solution to replenish the workforce: importing people. Instead, his government is allowing companies to ask for longer hours from existing workers. Thousands of Hungarians have braved winter temperatures since last week to protest legislation they are calling a “slave law.”

“Economic nationalism has found its limit,” said Charles Robertson, chief economist at Renaissance Capital in London. “If the labor supply cannot be increased, then all Hungary can do to try and square the circle is force the existing workforce to work longer hours.”

As Brexit Britain Puts Up Barriers, Hungary Shows the Downside

The demonstrations in Budapest came the same week the U.K. published proposed rules for limiting workers from the EU after Brexit. Businesses, especially in industries such as tourism that rely on lower-paid workers from eastern Europe, have warned about a labor shortage that will threaten the British economy.

The Hungarian law caters especially to carmakers. Daimler AG and Volkswagen AG’s Audi business employ thousands in the former communist country while BMW just announced a new factory near the eastern city of Debrecen. The new rules allow employers to ask for 60 percent more overtime annually, or 400 hours from 250 currently.

Initially drawing the ire of labor unions, the legislation has galvanized the opposition and touched off a protest wave.

Thousands have turned out for more than a week. At the headquarters of the state broadcaster late on Sunday, lawmakers of different political stripes jostled to have their demands read out on air. They included a repeal of the overtime law, but also a call for independent courts and a free media. 

“I'm not just here because of the slave law, I'm here because of the system,” said Barnabas Toth, a movie director and first-time protester. “All around us it's like a deepening swamp but the worst thing of all is apathy, that's the biggest enemy of all.”

Orban, 55, returned to power in 2010 and set about establishing his self-declared “illiberal democracy.” He became the standard bearer for opponents of German Chancellor Angela Merkel’s open-door refugee policy in 2015 and the black sheep for the European mainstream. By the end of the following year, nationalist allies had won power in Poland, Britain had voted for Brexit and Trump had been elected president.

Orban was censured this year by the European Parliament, which recommended an EU investigation into Hungary because of the risk to the rule of law. But back at home, Orban's support looked solid, not least because of a healthy economy.

As Brexit Britain Puts Up Barriers, Hungary Shows the Downside

While the unemployment rate has plunged to 3.7 percent, near an all-time low, the number of unfilled jobs has soared to a record high after doubling in three years. The labor crunch has caused wages to increase by more than a third in the same period. That’s raising spending and fueling the fastest economic growth in 13 years. Yet the lack of qualified labor is the single biggest risk for investors, followed by the cost of hiring, according to an October report from the German-Hungarian Chamber of Industry Commerce. 

“The overtime legislation looks like a desperate move,” said Tamas Boros, co-director of Policy Solutions, a think-tank in Budapest. “Orban appears to have boxed himself in with his anti-immigrant rhetoric.”

Orban and his political allies have consistently argued immigration is a threat to Hungary’s identity and national security. Hungary has “run out of workers” and the challenge now is to attract less labor-intensive value-added jobs, the premier said in a state radio interview on Friday. In the meantime, he said those who wanted to work should be allowed to do so. He said he would defeat the protests with patience and resolve, however long they last.

As Brexit Britain Puts Up Barriers, Hungary Shows the Downside

One problem for Hungary is that it would be drawing on a depleted labor pool even if the political language changed. Poland, where the government mimicked Orban’s anti-immigrant stance, drew as many as 2 million Ukrainians in recent years and the number of mobile workers in labor markets further east has shrunk.

While Orban has talked of the need for more guest workers, for now the government is doubling down on raising the birth rate. It started a billboard campaign popularizing the concept of the family and, like Poland, is boosting child benefits. Hungary’s population is set to decline by a third this century, largely in line with regional peers, according to United Nations forecasts.

“An alternative solution is to allow large scale immigration from farther afield, but Hungary has led central European resistance to immigration from Syria and others,” Robertson at Renaissance Capital said in a report. “In this regard, Orban’s policies have now become contradictory.”

©2018 Bloomberg L.P.