US Perspective on a European Trip

I just flew back the US on Sunday (9/18/2022) after a week in Budapest, Hungary.  I was very interested to hear what top economic topics are being discussed and see how things are functioning in Europe with all the energy and inflation challenges these days.

Just wanted to share some of my thoughts with you.

Departing the US on 9/11

Yes, I flew abroad on 9/11. I’m a bit slow. At first I didn’t connect the dots on why flights might have been cheaper on that day.  Anyway…

It was a strange mixture of US news that weekend between the passing of the Queen and the 9/11 memorial events. It was sad and sobering to remember that the world is a real place. Real events happen.  My heart and prayers go out to the friends and families and all those affected by both events.

Amsterdam’s Schiphol Airport

The airport in Amsterdam – where I changed flights – was chaotic and felt overcrowded.  My flight to Budapest was delayed because there was insufficient ground crew. They continued to bounce incoming flights between arrival gates and this caused a backup of planes on the tarmac.

We only departed an hour late - not too bad! could have been worse - but everyone waiting with me at the gate had their own stories from other airports and other flights through Amsterdam.  Everything was late, backed up and understaffed.

Of course, a few people who fly often commented that the situation had improved slightly in recent months. They pointed out that, when they arrived at the airport, there wasn’t a 2-3 hours-long line of passengers outside the airport waiting in addition to the crowds and wait inside.  That had been the case for many of them during the summer.

Indeed, when I flew into Europe in May this year, through one of the windows in the terminal for my flight, I could see a very long line of people outside.  Again, I’m a bit slow.  I assumed they were protestors or something. Only later did I see news reports about backups at Amsterdam airport, one of the busiest in Europe.

This time, several coffee shops were closed and on my return flight I saw piles of trash and half-eaten food all over the place.  The Amsterdam airport is usually very clean and well kept but there were trash cans in the airport that looked like something you might see outside after a rock concert.  Garbage spilled out of the can and piled around it on the floor.  Trash and half-eaten food was left all over tables at some, now closed, coffee shops and such.

While we all thought it improved some when I flew in, it seems it has not. Perhaps I just caught a good day. On September 16th – while I was in Hungary – the Royal Schiphol Group NV announced that it’s continuing to limit passenger numbers as it struggles to find staff.

KLM, the Dutch airline based in Amsterdam (my flight was Delta-KLM), apparently cancelled 34 flights on Saturday (9/17) and another 22 flights on Sunday (9/18).  And the Schiphol CEO is now stepping down.

Labor shortages and the new, post-Covid world challenges are yet to be overcome. It’s a strange new world we are in. I don’t know anything about the airport’s CEO, but my guess is that no CEO would have done better.  This labor shortage is a problem everywhere.

Hungary

Macroeconomic snapshot of Hungary

• GDP growth is currently 6.5%

• Unemployment is 3.3%

• Inflation is 15.6%

• The Key Interest Rate is 11.75%

I landed in Hungary on Monday, Sep 12th.  Hungary felt fine to me overall.  Everything seemed to run as well as it always had.  All the stores seemed open and to be doing well. Restaurants too. So, from a street perspective, things looked good.

Now, the restaurants that went out of business during Covid were still closed, but nothing seemed to have changed since I left in early July.  That’s compared to Schiphol where things seemed to have worsened in the meantime.

Gas Prices

If you google it, gas prices in Hungary are around 700-800 HUF per liter (approx. $1.73 – 1.98 per liter) but the “sticker price” I saw posted at gas stations said 480 HUF.  Who knows?  I didn’t investigate too deeply.  Gas is always about 2-3 times higher in Hungary than in the US. At 700-800 HUF per liter, a gallon would be 2,660 – 3,040 HUF or approx. $6.58 - $7.52 per gallon.

The US national average for gas today is around $3.70 per gallon.  Gas in Hungary, loosely speaking, is then about double the US price which is totally normal and actually a little lower than normal.

I don’t know if that pump price is the subsidized/capped price or the true price. I didn’t see long lines at the pumps in Budapest, but then again, I didn’t in the summer either. The long lines I found in summer where in the countryside (see Global Econ: The Problem with Price Controls).

With the war in Ukraine and the European energy crisis, I was curious to see if pump prices have skyrocketed and lines grown longer. Not yet.  The Hungarian government is still capping prices, so the shortages are somewhere. They have to be. This is likely a ticking time bomb.

Business Challenges: Energy

The owner of a Hungarian manufacturing company told me that their factory’s monthly energy bill increased by about $800,000 USD per month. That’s the additional cost each month.  They can’t sustain that or pass it on to their customers.  They aren’t sure what will happen.

I spoke with other smaller businesses facing the same challenge.  Local businesses are in a tough situation. The manufacturer I mentioned above sells internationally. So the company has non-energy costs in HUF and sales mostly in USD (and Euro).  So at least the stronger USD has helped their bottom line. 

Local companies don’t have that.  They bear all the international energy costs and then have sales domestically, so they are hit with a double whammy.

Times are tough. Energy costs are rising. Again, the Hungarian government has been helping where it can, subsidizing, capping prices and so on. But everything has its limit and there’s no end in sight.

Business Challenges: Labor Shortages

I also had the pleasure of meeting with some American multinationals and with the American Chamber of Commerce while I was here.  The key topics? Labor shortages and energy price concerns.

Multinational companies continue to pile into Hungary. It has a highly talented labor pool that is still relatively cheap compared to the same quality labor in, say, Germany. 

It’s also a great location globally because several key time zones overlap. If you have a global center in Budapest, you catch Asian markets in the morning, European markets all day and American markets in the afternoon/evening.  This makes Central Europe generally an ideal location for offices that manage global operations. For these reasons – low cost/high quality labor plus time zone advantage – many multinationals have their back offices based in the region.

But, in part because of the popularity of locating there, labor shortages continue to be the main problem.  This was the main problem before Covid and it’s only gotten worse since Covid.

Some companies are flying in groups of workers from other countries.  That same manufacturing company I mentioned at the beginning of this section was sending daily buses to all the neighboring towns to provide workers with free transportation to work every day. The search for workers is topic number one!

The last thing I’ll note on this topic is that there’s a funny segmentation of the labor market too.  There’s a shortage in Hungary but once you get experience at a multinational, you can then get a higher salary at that same company’s office – or a competitor’s office – in Western Europe for double the pay.  That means people have been leaving, causing population growth problems for Hungary. It also means that wages at the management level of these companies are now the same as they are elsewhere in the world.

As that continues down the chain, Hungary won’t be a low cost labor country anymore. So their long run challenge will be to develop their own industries. It’ll be awhile, but these things tend to happen more quickly than we initially think.

While they deal with continued labor shortages, they all watch their energy bills and wait. No one knows what will happen.  Energy prices in Europe spiked 600-700%.  Hungarian government subsidies, caps and other policies have prevented that from fully hitting the economy thus far. But, again, these are sandbags on the shore of rising water where everyone can see the tidal wave in the distance. Sand bags won’t help.

US-Hungary Business Challenges

A new problem in US-Hungary business relations emerged over the summer and is still unresolved. When Hungary announced in June that they will not be able to support the US-led push for a global minimum tax (GMT) rate of 15% at this time, US Treasury Secretary Janet Yellen told them that America will then cancel its 1979 bilateral tax agreement with Hungary, making Hungary the only country in Europe without a tax agreement with the US. Talk about a bully tactic!

I don’t know how or if this will be resolved.  The GMT is a horrible policy - in my opinion - but Hungary’s a bit too small a player to stand alone against it these days. Hungary’s now also alone in Europe in opposing GMT but Europe can only adopt GMT by unanimous consent among all members so now the issue is leading to further fractioning in Europe. That’s a problem.  Europe is already fracturing right now on many levels and that’s not good.

Hungary as a Microcosm

Hungary is a small country tossed around on the political-economic ocean by the giant ships of the US, China, Russia and Western Europe.  Hungary is not alone in this. In terms of influence, most countries are small relative to the US.

Our rapidly rising American interest rates are driving borrowing costs higher in all countries.  Those countries often try to raise domestic interest rates faster than the US raises its rates just to keep their currencies from weakening too much. Hungary is clearly doing this with 11.75% interest rates in the hopes of keeping the HUF strong against the US Dollar and the Euro.

This was not a topic of discussion for the people and businesses with whom I spoke.  I didn’t meet any government officials, but I’ll bet it’s a topic in the Finance Minister’s office as they look at refinancing debt, financing new projects, and so on.

Radically higher interest rates are a sledgehammer policy in those countries. That is the policy being driven in all these other countries by their own inflation challenges and by the US interest rate hikes.  We’ll see more countries struggle with the burden of higher interest rates in the coming months as the European Central Bank finally catches up to the US and other major central banks follow suit.

That sudden rate hike and realignment of global financial capital - as investors chase higher and safer returns - can cause countries to collapse. It can lead to a sudden stop of capital flowing into countries and even capital flow reversals.  That’s a challenge at any time, but today, those European counties like Hungary happen to need more international investment as they struggle to build energy infrastructure while the war in Ukraine continues.  Very bad timing.

All of that is hard at any time.  But we have a Europe being torn apart by the sanctions against Russia and trying to switch energy supplies overnight. That is just crushingly difficult on top of the inflation problems, labor shortages and interest rate hikes.  Tough times indeed.

Honestly, I’m amazed that Hungary has 6.5% GDP growth and Europe as a whole is still in positive growth territory. US GDP growth has already turned negative as has the UK’s GDP growth.

In The End…

In the end, this is where we are. It’s a very tough time and countries are in very fragile positions. Their governments over extended themselves financially during the 2008/09 crises, they way over extended during the pandemic, and now they’ll want to overextend again. But there’s a limit. Inflation is a sign that we went over that limit en masse. We need to be careful from here.

I’ll be watching to see how the European countries handle the energy crisis. Europe is announcing new, general policies every day.  Hungary and others are making their own efforts as well. It is painful to watch. I don’t know what will happen.

Interest rates are now rising everywhere and this week we’ll see the US Fed and many other Central Banks raise rates. Those pressures and the likelihood of sudden stops and capital flow reversals causing crises will rise.

Labor is short everywhere.  This causes supply disruptions and further pushes up prices in the short run. Surprisingly real wages continue to fall as nominal wage growth remains slower than inflation. This is a bit mysterious to me because it suggests people don’t believe inflation will remain high.

Employment/unemployment remains a mystery around the world. Something’s changed. Everyone knows it. Many people speculate on it, but no one really knows exactly what changed, why and whether we’ll return to “normal”.

It’s going to be a very interesting coming 12 months.  But there are many challenges on the horizon.  I think a lot will be determined in the coming 2-3 months: energy prices, interest rates and inflation, and Europe’s resolve in light of the burden of policies due to the war in Ukraine. Those are all issues that must be resolved. They can’t wait.

The air is getting thinner everywhere. The pressure continues to build. Something’s got to give soon.