Living in Financial Times

Hungary shows that the post-lockdown economic landscape requires pragmatic statecraft

26th July 2023
David Martin Jones

David Martin Jones reviews On The Edge of Times: the rerun of the 1940s and the 1970s by György Matolcsy.


What’s the point of economists?
They make astrologers look good.

This old joke seems worth repeating in the current era of high inflation, rising interest rates, European war and bank runs. The failure of the US Federal Bank, the Bank of England and the European Central Bank to anticipate the inexorable inflationary impact of mounting government debt accumulated over two years of lockdown, working from home, furlough schemes, cheap money and quantitative easing was at best myopic, at worst fiscally illiterate. The pernicious consequence of keeping interest rates low for over a decade before and after lockdown inevitably unleashed a wave of inflation which, as monetarists like Tim Congdon observed, central banks like the Fed and the ECB failed to anticipate and then overreacted to by raising central bank rates so quickly and aggressively that they left commercial and investment banks exposed to non-performing loans and vertiginously declining bond rates. Reckless and desperate central bank policies, ‘triggered soaring public debts and budget deficits’.(1)

A familiar pattern – that financial analysts reassured us would not happen again – happened again. Banks like Credit Suisse, deemed too big to fail, required state organised takeovers and European and US investors nervously wait for the next apparently well-capitalised bank to implode. The ‘adults in the room’, as former Greek finance minister Yannis Varoufakis christened the likes of Jerome Powell, Andrew Bailey and Christine Lagarde, never have to account for their policy errors or the manner in which their attempts to correct them merely compound fiscal uncertainty at the expense of the anxious and indebted middle classes in the once rich and successful democracies of western Europe and the United States. The developed world is in a post-lockdown debt trap. A dozen countries, including the US, now have debt amounting to more than 300% of GDP. (1)

As a tsunami of debt engulfs the West and poorly-led governments try to negotiate the Scylla of rising inflation and the Charybdis of popular discontent it might be worth looking beyond the dangerously valetudinarian remedies prescribed by the ‘Adults in the Room’, to those bankers who have adopted less well-advertised but often far more successful strategies to deal with the uncertain financial times we have lived in since Bear Stearns and Northern Rock investors first began to panic about their lenders solvency in 2008. One person we could look to is György Matolcsy.

Matolcsy was Governor of the European Bank of Development and Reconstruction and served as Hungary’s Minister of National Economy (2010-13) before becoming Governor of the Hungarian Central Bank. He oversaw the remarkable transformation of the Hungarian economy from being so cripplingly indebted it required an IMF bailout in 2008 to becoming one of the best performing European economies over the last decade. In his book, On the Edge of Times, Matolcsy, reflects on the lessons he has learned and today’s economic situation.

Western economists have studiously ignored Hungary’s economic performance in the Orban years while a progressive European parliament and the European Commission arbitrarily subject the Hungarian state to discriminatory treatment, such as refusing to release Covid relief funds. Like other European countries, lockdown saw a significant increase in Hungary’s debt to GDP, high inflation and higher interest rates. Nevertheless Hungary continues to enjoy economic growth and its banks, unlike those in Western Europe, do not appear either undercapitalised or likely to suffer unsustainable runs on their deposits.

The mainstream western media, of course, fails to find anything meritorious in Viktor Orban’s conservative leadership of Hungary since 2010. This reflects not only the closing of the liberal mind, but also an unwarranted arrogance and a disturbing ideological insouciance given that Hungary’s fiscal and economic performance during the Orban years merits much closer study. In particular, György Matolcsy’s analysis of the parlous state of Europe’s financial Union and the reforms that will be needed to arrest decline, merits attention from western governments and political economists.

Matolcsy contends that ‘the global challenges facing European economies cannot and will not be solved in the framework of liberalism or liberal thinking’. The economic and financial crisis confronting the post-Covid world economy needs a ‘new model’ and its lineaments may be found in Matolscy’s critical response to articles and opinion pieces published in The Financial Times between 2020-2022. During lockdown, Matolcsy developed the habit of writing regular responses to articles by prominent liberal economists and financial writers. His commentaries appeared in the columns of the Hungarian financial weekly, Heti Válasz. They have now been collated in a book length volume that addresses the central features of the crisis besetting the world economy that the baleful 2020 lockdown and its aftermath precipitated and the path that needs to be taken to avoid economic catastrophe.

On the Edge of Times constitutes a dialogue between ‘western liberal thinkers and one of their Central European counterparts who also happens to be the governor of the central bank of his country’. The book’s premise assumes that as the age of Western Empires (the last being the American empire 1945-2075) recedes, the new age of Eurasia will be characterised by long term strategies, new structures, and new technologies. This historical transformation needs a new school of political economy to understand the new era of sustainable economies. What might it entail?

A new political and economic cycle

New thinking requires an awareness of the seminal role economic and institutional cycles play in the rise and fall of nation states and world orders. In Matolcsy’s view, 2020 represented, the historically rare, terminus of two cycles: one political and institutional that began in 1940; and another, economic cycle, that began with the oil shock and the dollarisation of the global economy after 1970.

The new cycles in geopolitics and geoeconomics will not follow the path established at the end of the Cold War where markets and institutions became increasingly open, integrated, and borderless. The financial crisis of 2008 followed by populism, pandemic and European war put an end to the once irresistible liberal international and institutional order premised on the great moderation, low inflation and low interest rates of the first decades of the twenty first century. Rather than the end of history, the period 1990-2020 was the last phase of a long Kondratiev wave, driven by technological innovation. Such waves and associated economic cycles frequently terminate in the panics and crashes that Charles Kindelberger identified and which all western economies now confront. (2) According to George Friedman, 2020 saw a once-in-four-hundred-year event where the end of two cycles coincide. (3)

Matolcsy believes that the new cycle, that began with lockdown, will be ‘completely different from the previous decades’. New restrictions will ‘put an end’ to free trade and globalization. More specifically, he argues that the first decade of the new cycle will be profoundly disruptive. The first premonitory snuffling of this new cycle saw the global economy move from low inflation, cheap money, cheap energy and global trade to inflation, rising interest rates, disrupted supply chains and deglobalization. In this age of anxiety, ‘new restrictions, the carbon border tax, labour protection, human rights and other criteria will put an end to free trade and globalization’. Can we assume, Matolcsy asks, ‘that deglobalization, managed trade, economies newly divided by social values, ideologies and environmental commitments will ensure the future victory of freedom, prosperity for all and the incumbent western powers?’.

Evidently, Matolcsy doesn’t think so. Rather than liberal democracy, the new age is one ‘of states and governments’. ‘All countries’ – the EU and most western democracies immediately spring to mind – ‘lacking competent politicians and efficient public servants’ will ‘have to face the detrimental effects of our wartime decade,’ he writes.

The wars of the new cycle are both hot, proxy wars, like that in Ukraine, and Cold like that emerging between China and the US. Matolcsy argues that ‘the new thirty years war’ began with the invasion of Iraq in 2003 and after 2016 the US ‘decided to bed down for an indefinite struggle with China’. This new Cold War 2.0, cannot be won because it is a complex, multidimensional one, ‘involving geopolitics, technologies and finance.’ In this new war, the US could opt for a strategy that privileges cyber and financial warfare over the more traditional variety. Ironically, this could offer business opportunities as was ‘the case for the financial community in the financial warfare of the 1970s and 1980s’.

Matolcsy clearly admires China, the manner of its rise as a global player, and its implications for the dual economic order of the twenty-first century. Following classical Daoist thinking, Matolcsy sees a Group of Two (G2) world determined by the strong ‘yang’ power of the US and the rising ‘yin’ power of China. At best, this could lead to a harmonious yin-yang balance of forces ‘in order to survive and gain a green future’ that Matolcsy envisages in his more optimistic moments.

More likely, at least over the next decade, is that trade and geopolitical tensions will prevail. We have, according to Matolcsy, sleep-walked into ‘a war economy’, that will ‘bring huge structural changes’ and ‘reshape the whole environment of the economy […] and change the relationships between politics and business, governments and central banks’ that will require ‘unorthodox’ rather than orthodox solutions. This is the titular ‘edge of times’. Consequently, ‘we should expect sudden dramas unfolding due to the nature of chain reactions and also because the 2020s are tending to repeat some major patterns of the 1940s and the 1970s’. Both decades ‘proved to be full of risks, of unexpected and distinctly unpleasant events’.

The new G2 world cycle presumes a ‘dual global economy’ that became evident in response to Covid, which Matolcsy considers the West mismanaged and China and East Asia handled effectively. Indeed, ‘all western countries failed in handling the pandemic as efficiently as all Asian countries’. This is the most controversial of Matolcsy’s assertions, given that the virus came out of China and the Chinese response to it was far from exemplary. This notwithstanding, Matolcsy is nonetheless correct to maintain that national responses to the virus will accelerate global decoupling and, in the process, restructure ‘global supply chains’.

Europe’s imperial delusions

Matolcsy argues, again somewhat questionably, that ‘China is a well governed, centralised state that works efficiently to give prosperity to all its citizens’. China is certainly capable of using its growing technological and geopolitical reach to sustain its economic and political status in a G2 world. At the same time, the US will remain the alternative yang power due to its own considerable technological resources and energy self-sufficiency.

This is not the case with the rest of the West. In particular, Europe lacks any global tech brand and is beset by illegal migration and political division. These problems are self-inflicted. The introduction of the euro in 2000 has proved a curse rather than a blessing. Europe is mired in public debt and, unlike the US, has to find means to service that debt. Only Germany and the Netherlands have benefited from the single currency. Yet Germany will soon cease to be the political and economic engine of the EU as its export model becomes increasingly unsustainable in a G2 world.

The progressive pursuit of ever closer union, in hindsight, merely ignited conflict between member states, whilst the EU’s ‘circular economic principles result in minimal growth and even less innovation’. The Greek debt crisis, the migration crisis, Brexit and the pandemic, piling Pelion upon Ossa, have fragmented Europe. After 2008, the EU suffered from an ongoing economic crisis. After 2015, it endured a permanent political crisis. From 2016, it also suffered an identity crisis leading to ‘a family tragedy’ with divorce from the UK. In response to these successive crises, western Europe’s progressive elites have killed the European dream through a mixture of ‘Brexit, migration policies, the euro […] austerity policies and the weakness of the single market’.

These crises weakened both Britain and Europe. Brexit undermined Britain’s role as a global financial hub whilst Europe’s failure to erect strong borders, impeded ‘free movement inside the bloc.’ According to Matolcsy, without effective free movement, all other freedoms of European integration including the single market ‘will weaken and finally vanish’. In this way, the euro delusion has proved disastrous for European citizens. The fiscal policies of the Eurozone countries and the monetary policies of the ECB need to be freed from the euro’s chains. Fiscal union ‘is half-built with no banking union, no sizable budget and no rules to leave’. Necessary monetary reform would require a complete U-turn on ‘the harmful dream of a United States of Europe.’

Matolcsy argues that complete reform of the Maastricht Treaty is needed in order for the southern belt of the Eurozone to regain monetary independence. Europe, in fact, requires two or more currencies ‘within a loose currency zone’ and desperately needs ‘an unconventional economic policy based on pragmatism rather than idealism’. It requires ‘diverse business models, multiple payment systems and digital currencies running on multiple infrastructures’. Such unorthodox currency reform would require flexible and tailor made digital euros providing ‘a historic opportunity to capitalize on the diversities of all the members of the currency zone.’

The aftermath of the pandemic and war in Ukraine means Europe now confronts, ‘crises of demography, migration, the euro and global competitiveness across the board’. Europe needs sweeping structural reform in all member states and in nearly all economic policy areas. The harmful dream of a United States of Europe has turned into a nightmare. The Franco-German political engine has come to a standstill. The Eurozone will either break into two blocs or the ECB could follow the Japanese path of stagflation by ‘piling up’ even more debt.

Paradoxically, mistakes made by Brussels may allow ‘the real legacy of European traditions to unfold’. Freedom, creativity, a culture of innovation and co-operation can only prosper in a Europe that recognizes the sovereignty of the nation states that compose it. This cannot happen under ‘any kind of European empire’. In fact, the unintended consequences of the failure of Euro-imperialism, creates the opportunity for a different Europe, better adapted to the new economic and political realities that have emerged since 2020.

The new Europe will require the twenty-seven nation states in the Union to stand on their own two feet to pursue ‘tailor-made structural reforms in order to secure their own futures’. Ultimately, Europe needs less progressive ideology and greater attention to prudence ‘which is really dear when you have so much to lose’. What would a more prudent approach require in this challenging geoeconomic climate?

The great transformation and the rise and fall of nations

According to Matolcsy, in the ‘still unfolding Cold War 2.0 between the US and China,’ Europeans need to adapt to the political and economic implications of a G2 world. While China and the US face-off geopolitically, Europe should pursue neutrality and self- interest ‘via smart and targeted means’.

In this G2 world, the latest economic cycle is more complex than the one ushered in by the second world war. ‘Regionalism will replace globalisation’, argues Matolcsy, and ‘the major megatrends of our century, rather than being global and bipolar […] all of them – including digital transformation – will be regional and multipolar’. Adapting to this changed environment, prudent states should avoid simplistic, free market solutions and mix market openness with smart government. Prudent states will become what Matolcsy terms ‘fusion’ economies where ‘fusions of government/central bank programmes and new capital heavy businesses’ launch new innovative technologies.

Building a sustainable economic future requires efficient, creative, stable and able government to escape the global debt trap. To address this financial reality, both central banks and national budgets will play a critical role in shaping winning and losing economies. States with efficient governance will flourish, while incompetent and hesitant governments will suffer. In this brave new world of ‘states and governments’, countries ‘lacking competent politicians and efficient public servants’ will endure the detrimental effects of ‘our wartime decade’.

In this context, the current ‘whatever it takes’ policies pursued by the EU, UK and US are ‘poorly crafted and mismanaged’. However, it is not too late to stop the accumulation of public debt. Western democracies urgently need ‘targeted means’ to accelerate recovery and undertake radical structural reforms. The reforms that stimulate growth and sustainability begin with taxation. Hungary achieved economic growth and financial stability after 2010 through ‘a complete overhaul’ of its tax system. The tax recipe, Matolcsy writes, is straightforward. ‘All income type tax regimes should be lowered and VAT type taxes on consumption increased’. Meanwhile, governments should introduce targeted taxes ‘to finance the transition to a long-term sustainable economy’. Matolcsy adds, ‘we did it in Hungary and it works’.

Such flat tax reform, raising revenue through indirect taxation and reducing the income tax burden on wage earners, seems an obvious fiscal reform, but one that is consistently dismissed by the economic ministries in the developed west, where income tax rates have been raised to address public debt. In the process, tax rises prompt higher wage demands, strikes and inflation in a vicious rather than a virtuous circle. In October 2022, when the UK Prime Minister, Liz Truss, attempted to reform the UK’s punitive income tax regime along Hungarian lines, the adults in the room and in the IMF excoriated her reforms, the pound collapsed and her tenure in government came to an abrupt end.

Money, the alchemy of finance and the role of Central Banks

Prudent and targeted taxation reform will not come to the economies of the West anytime soon. What about the other vital financial reforms that Matolcsy counsels? Namely the role central banks must play in supporting prudent government and economically sustainable growth?

Sound money is, of course, ‘the core economic public good’. Yet, as with the wider economy, the internet and the tech revolution has fundamentally disrupted the traditional way of creating and spending money. We have entered a new era of monetary policy. The global financial crisis of 2008, and the Eurozone crisis of 2010-12 ‘reignited’ long standing global financial instabilities. Meanwhile, cryptocurrencies, especially during lockdown, emerged as ‘safe havens based on new internet technologies’. According to Matolcsy, the rise of fintech, the China-US standoff and the Covid-19 pandemic are intertwined and there is a pressing need for a new financial order. The debt-ridden West needs a new Bretton Woods or Plaza Agreement built on ‘digital central bank money, gold and electricity’.

However, given the dangers posed by crypto-bubbles, digital currencies require regulation. The attraction of Central Bank Digital Currencies (CBDC) is that their mix of credit, fiscal easing, AI, big data, and blockchain technologies could transform the global financial system. CBDCs will enable central bank governors to use targeted means rather than economically damaging quantitative easing. Regulated, to remove speculative risk, digital platforms will be ‘a game changer in the financial world’. They will ‘enhance the supply side of our economies’ and ease inflation pressures. Such an evolution might indeed be the future but it has a worrying downside. In terms of social control, central banks and even high street banks, as the de-banking of the UK’s Nigel Farage case demonstrates, have a growing capacity to oversee and supervise our behaviour. The digitalisation of finance will only enhance opportunities for politicised decision making regarding our speech and actions.

The future is, however, digital, while most western business and government structures remain stuck in an analogue age. Central banks, Matolcsy contends, must therefore play a leading role in moving to new hybrid monetary systems, where ‘banks… use electronic cash to finance the transition to a green, digital and sustainable economic structure of the future’. They ‘should have the full authority to issue their digital currencies in order to provide the whole financial system with a regulated path to the transition from the present petrodollar/Eurodollar system to a new one.’ Absent CBDCs, Matolcsy argues, we will not be able to follow the ‘orderly closure’ of the ‘outgoing financial order which prevailed from 1996-2021’. Significantly, the Bank of Japan, the Central Bank of China and the Bank of Korea are already testing digital currencies. Western democracies lag behind and could miss out, yet again, on the opportunities they offer at the start of a new economic and business cycle, where the green and digital transition will be the engine generating growth.

Crypto will, at the same time, inexorably create a digitally divided Western and Eastern world of global finance reinforcing the G2 geopolitical order. The coming financial transition will be neither peaceful nor comfortable especially during the initial phase. An ‘ongoing global (currency) war must be financed, regulated and accelerated by central banks’. It will require a prudent mixture of ‘both the free market… and targeted means from the state.’ Budgets, banks and governments will assume a far more proactive role in economic growth and development. Central banks will partner their governments in targeting the means to enable innovative business endeavours.

After the global financial crisis, Matolcsy concludes, ‘politics took over from markets and states from corporations’. Without pragmatism and unorthodoxy the West’s financial sector faces a ‘Minsky moment’ where all economic players faced with unsustainable debt, lose confidence at the same time, creating conditions of financial panic.


Matolcsy has peered deeply into the state of the global economy and his crystal ball seems less opaque than those employed by his liberal critics. Matolcsy’s prognostication that we entered a distinctively different economic and political world after lockdown seems daily more evident. After 2020 the zeitgeist shifted from globalization and free markets to regionalism and localism. This grave new world of asymmetric geopolitics has certainly hurt both ‘globalization and growth’ but it is not evident that it will necessarily facilitate ‘social justice and economic fairness’ as Matolcsy, sometimes, contends.

More likely as global trade flows diminish, we will enter a complex G2 world where smaller and middling states balance, bandwagon or hedge between the greater powers of China and the US. In this world, states like France or regions like the EU, will seek to avoid being a ‘vassal’ of either of the two Grossraum. In this new Kondriatev cycle, that Matolcsy has done much to distinguish, middle power states that act prudently and adapt proactively to the new digital and technological possibilities of the emerging economic order will flourish, while those which maintain unsustainable levels of public debt and tax their citizens to the hilt, will decline and fall.

Prudent statecraft will not be averse to the market, but will recognize the key role that banks, budgets and government sponsored research and development will play in the new cycle. It is states in Asia like Taiwan, South Korea, and Singapore that have always emphasised the role of the state in picking industrial and tech winners, that suit this post liberal order. Europe and the UK must catch up fast or enter permanent decline.

The great transformation that Matolcsy outlines parallels the thinking of an earlier and similarly insightful Hungarian economic anthropologist, Karl Polanyi. Polanyi looked closely at how the first ‘self-regulating market’, premised on the pillars of the gold standard and a liberal state order, collapsed after 1914. What Polanyi identified as a ‘double movement’ that undermined the liberal trading order of the nineteenth century seems to have repeated itself again at the end of the post war cycle of globalization and deflation in 2020. (4) Polanyi in 1944, and Matolcsy in 2022, wrote that governments should attend more closely to the solidarity of their societies and less to abstract economic models to ensure pragmatic adjustment to new and extraordinary global conditions.

‘We stand’ once again, As R.M. McIver wrote in his foreword to Polanyi’s path breaking study, ‘at a new vantage point, looking down after the earthquake on the ruined temples of our cherished gods. We see the weakness of the exposed foundations’. (4) Perhaps we can learn how and where to rebuild the institutional and social fabric, ‘to better withstand the shock of the change’ that is coming. (4) Matolcsy offers important guidance. He writes that there is an evident way out of the West’s current existential dilemma. The proof is the ‘success of Hungary’ with its unorthodox mixture of tax reform and central bank intervention. Yet ironically, rather than looking to learn from Hungary, the nation is the European progressive elite’s preferred bête noir.

(1) Matolcsy, G. (2022) On the Edge of Times The rerun of the 1940s and 1970s. (Budapest, Pallas Athene Konyvkiado).
(2) Kindelberger, C. and Allen, R. (2000) Manias Panics and Crashes. 5th ed. (London, John Wiley).
(3) Freidman, G. (2020) The Storm Before the Calm: America’s discord, the coming crisis of the 2020s and the triumph beyond. (New York, Doubleday).
(4) Polanyi, K. (1944) The Great Transformation. (New York, Farrer & Gerhart, 1944).

On The Edge of Times: the rerun of the 1940s and the 1970s (Pallas Athene Konyvkiado, 2022) is available to purchase here.

David Martin Jones is a Visiting Professor and teaching fellow in War Studies at King’s College, University of London and Honorary Visiting Professor at the University of Buckingham. He is director of research at the Danube Institute.