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Merkel to visit Hungary at time of huge political challenges

January 30, 2015

BUDAPEST, Hungary (AP) — German Chancellor Angela Merkel is traveling to Budapest next week for talks with Hungarian Prime Minister Viktor Orban that come at a time of strain between the two nations, with Orban moving closer to Russia and imposing higher taxes and other burdens on German and other foreign companies operating in the country.

During a visit Monday of just a few hours Merkel will also visit a synagogue, which her spokeswoman said she felt important given Germany’s history. It also reflects German concerns at the rise of Hungary’s far-right Jobbik party, an anti-Semitic and anti-Roma party that became the second-largest opposition force in parliament in elections last year.

Merkel’s spokesman Steffen Seibert said that “internal political developments in Hungary” would figure in the talks.

“The fact that in the last election a grouping that received almost 20 percent, which certainly had xenophobic elements, certainly gives us cause for concern,” Seibert said.

Orban, however, said he expected no criticisms from Merkel, since both countries were part of the European Union.

“I believe there are no problematic areas in the issue of bilateral cooperation between Germany and Hungary,” Orban said Friday on state radio.

The relationship with Germany is key to Budapest: Germany is by far Hungary’s largest trading partner, accounting for around 25 percent of its foreign trade. For its part, Germany has considered Hungary an important partner given its strategic regional position. Germans also remember the key role Hungary played in cracking open the Iron Curtain in 1989 by opening its border to Austria, triggering events that led to the fall of the Berlin Wall.

But the relationship is complicated.

It will be Merkel’s first visit to Hungary in five years, and the first since Orban returned to power as prime minister in 2010 and began centralizing power for his conservative Fidesz party, something that has alarmed Western governments and human rights groups.

Orban has been moving closer to the Kremlin, sealing key energy deals and showing skepticism over European sanctions imposed on Russia to punish it for its actions in Ukraine.

Fifteen days after Merkel’s visit to Budapest, Putin will visit the Hungarian capital — at a time when Western leaders are shunning the Russian leader.

“The nearness of the two visits creates the impression that German and Russian influence are competing with each other in Hungary,” said Daniel Hegedus, an analyst at the German Council on Foreign Relations in Berlin. “It is unlikely that Hungary would decide not to follow the German line, but there is uncertainty about it.”

Hegedus said Merkel will want to ensure that Hungary will support Germany and the European consensus, “and will not cause difficulties in matters like the Russian sanctions.”

Officials have not said whether the talks will focus on economic issues but these have become a problem for German companies that produce cars and other products in Hungarian factories.

German companies in Hungary, which have some 280,000 employees, have been hit hard by some of the special taxes on the banking, retail, communications and other sectors introduced by the government in an effort to increase revenues while adopting a flat-rate income tax.

The banking sector, for example, is expected to pay an extra 206 billion forints ($750 million) this year, while a tax on phone calls is planned to add 56.4 billion forints to the state budget in 2015.

Another issue is a logistics tracking system hastily introduced Jan. 1 — and in test mode until the end of February without fines being issued — meant to crack down on tax fraud.

The system, in which the all goods shipped by road to or in Hungary have to be electronically registered with tax authorities, is being criticized for increasing bureaucracy and is seen as threatening companies’ competitiveness.

The German-Hungarian Chamber of Industry and Commerce hopes Merkel will persuade Orban to reconsider the new regulation.

“We are working on achieving a substantial easing in this matter,” said Dirk Wolfer, the chamber’s communications director. “If the Merkel-Orban meeting accelerates this process, we would welcome it.”

As for the special taxes, experts said there was little chance for substantial changes.

“They are such dominant instruments in the economic policy of Fidesz, that the Hungarian government will be unable to abandon them,” said senior economist Andras Balatoni at ING Bank.

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