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Almost immediately after the collapse of the Soviet Union, the U.S. Federal Reserve, alongside the International Monetary Fund (IMF) and World Bank, provided post-Soviet states with extensive technical assistance and knowledge sharing on central banking and market economies. For post-Soviet states, integration into the global financial system and transformation into a market-based economy promised prosperity, stability, and development.
Financial liberalization entailed massive Western investment and capital. From 1995 to 2008, real GDP in the region increased by 125 percent, both due to the increase in foreign capital and the economic reforms which followed the Soviet Union’s collapse.
Western banks had the reserves, in USD and Euros, to lend to Eastern and Central European countries. Between 2003 and 2008, Western banks expanded into Eastern Europe and began issuing credit in high volumes, creating a structural dependency on foreign banks. The 2008 Global Financial Crisis fundamentally undermined the appeal of international financial integration and encouraged a rejection of the global financial institutions and actors, including private banks and organizations like the IMF. Following the disaster of the 2008 global financial crisis, financial nationalism emerged as a practice and vision of monetary and macroeconomic management and policy.
Financial Nationalism’s International Entanglement
Financial nationalism is a form of economic nationalism where a state uses fiscal and monetary policy as instruments to further nationalist goals of unity, identity, and autonomy. In practice, it entails reducing central independence, subordinating financial actors, and increasing credit sovereignty.
Fiscal policy pertains to a government’s spending and taxation, while monetary policy refers to the actions of central banks in pursuit of macroeconomic goals – such as combating inflation, increasing employment, or maintaining price stability. Financial nationalists approach international financial institutions, including private banks and organizations like the IMF, with suspicion. For financial nationalists, engagement with these institutions should be limited:non-national actors should be restricted from accessing a state’s banking system. The use of foreign currency for international trade is discouraged, and the national currency is presented not only as the proper unit of account for exports but as a national stalwart against undue influence from global financial institutions. Engagement with the international financial system is selective and based on perceived national ties or shared disdain for international financial institutions.
What makes financial nationalism distinct from economic nationalism is the tension between financial sovereignty and the interconnected nature of the international financial system. Financial nationalism cannot be isolationist in practice, because fiscal and monetary policy inherently depend on international dynamics such as foreign exchange, international liquidity, and bond and energy markets. Financial nationalists thus have to balance the pursuit of nationalist policy goals, in areas such as citizenship and security, with monetary and fiscal structures that are inherently international.
This poses a key risk for financial nationalist governments: their pursuit of nationalist goals through fiscal and monetary policy exposes them to blowback from international financial actors, which could restrict the options available to pursue nationalist goals through monetary and fiscal policy. Their pursuit of nationalist policy in the financial sector, whether by restricting the use of foreign currency in cross-border payments, could result in international actors penalizing the actions by selling government bonds or pulling out investments.
The Fidesz Party in Hungary: financial nationalism in practice
The Fidesz party in Hungary, led by Viktor Orban, is a prime example of financial nationalism in practice. Since Fidesz rose to power with a supermajority in 2010, three programs which exemplify financial nationalism have been implemented: the Funding for Growth Scheme, the Self-financing Programme, and the Bond Funding for Growth Scheme. All three prioritize national autonomy, promote national insiders, and further developmentalist goals at the expense of central bank principles and independence.
The Funding for Growth scheme promised 0 per cent refinancing loans to commercial banks on the condition that they pass these funds to small and medium-sized enterprises at low interest rates of 2.5 per cent. The goal of this program was to reduce the lending power of foreign-owned banks by increasing the loan volume issued by national banks to domestic enterprises. This initiative was meant to both increase the reach of national banks and reduce dependence of foreign-currency denominated loans, in effect, making the financial sector far more national by increasing the power of Hungarian banks. At the same time, the Central Bank lost some independence because it had to subsidize the lower interest rates on loans, which is usually a fiscal government responsibility.
Similar to the Funding for Growth Scheme, the Self Financing Programme also sought to reduce vulnerability to external financial shocks by decreasing reliance on foreign credit. To do so, the government exerted control over the financial sector by excluding them from central bank instruments, unless they replaced foreign-held debt with debt held by domestic banks in domestic currency. The programme placed constraints on commercial banks, namely quantity restrictions on foreign holdings, to force them to take government bonds denominated in Florin, the national currency. In effect, this program reduced the volume of foreign-denominated loans, which increased Hungary’s sovereign credit rating and reduced reliance on international financial actors.
Finally, the Bonds for Growth scheme reflects financial nationalism through support for domestic large corporations. The program gave the central bank large discretion to issue direct financing to domestic firms, which were often connected to the government. The Hungarian Central Bank went against best practices and issued financing to companies with weaker credit ratings. This influx of financing into the economy promotes national sources of financing, national ownership of financial and productive entities, and reduces central bank independence by encouraging the bank to go against the usual mandate of managing inflation.
While these three policies did improve Hungary’s sovereign credit balance by reducing reliance on foreign-denominated loans for both households and enterprises, it also caused the economy to overheat due to an influx of government financing. In 2023, inflation peaked at 27.5 per cent. Across all three schemes, the Hungarian Central Bank demonstrated financial nationalism by reducing its own independence to serve the government’s growth agenda, discriminating in favour of domestic actors, and prioritizing national autonomy over adherence to central banking norms.
Financial nationalism emerged out of the costs and knock-on effects of the 2008 global financial crisis. Its fundamental premise is the rejection of international financial integration, especially foreign banks, in favour of promoting national development through monetary and fiscal tools, including central bank instruments.
As Hungary illustrates, financial nationalism is often a response to the disproportionate costs of global financial crises for developing and emerging economies, which rely on foreign banks and loans. At the same time, financial nationalist policy reduces central bank independence and risks overstretching the economy by increasing liquidity and subordinating financial actors.
Monetary and fiscal policy is inextricably connected to international economic phenomena, and as such, is impossible to fully decouple from the international financial system. Financial nationalism, as both an ideological stance and policy driver, illustrates how entrenched the international financial system is. Paradoxically, financial nationalists cannot pursue their monetary and fiscal goals without relying on the international financial system they reject.
Edited by Jude Archer & Margaux Zani
The argument defended in this article is solely that of the author and does not reflect the position of the McGill Journal of Political Science, the Political Science Students’ Association, or the McGill Department of Political Science.
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