Danube Blues

It has taken a while, but on the eve of Hungary's EU accession, Budapest's city council has decided to strip the Russian dictator Joseph Stalin of his honorary citizenship.

Hungary's puppet government bestowed the honour on Stalin after the second world war in thanks for the country's "liberation" from the Nazis occupiers.

But as the republic, with its 10 million population, turns its back on its former master, it is busily trying to dump its Soviet-era trappings.

As a founding member of the Soviet bloc, Hungary is finding the process of turning its face from east to west painful.

As the city fathers discussed Stalin's fate, communist sympathisers clashed again with nationalists over the country's past.

After several attempts, the Budapest city council has managed to cancel Stalin's passport.

But this month, politicians and well-known philosophers were demanding the government lift a ban, imposed in 1993, on the use of the Soviet red star symbol.

Most countries have banned the swastika, and some have outlawed the hammer and sickle, but only Hungary has prohibited the red star as well.

Attila Vajnai, the vice president of the extreme-left Workers' Party, was sentenced in March to 12 months' probation for displaying a red star in public, and was arrested again in April for the same reason.

Meanwhile, far-right groups clashed with police in Budapest as they called for the removal of a Soviet-era statue to the Russian soldiers who died trying to free Hungary from Nazi rule.

Hungary has been on a historical a rollercoaster ride over the last 200 years, since the collapse of the Austro-Hungarian empire, after the first world war.

An attempt to break out of the Warsaw Pact, in 1956, was brutally put down by the Red Army.

Nevertheless, Hungary began liberalising its economy, initiating so-called goulash communism in 1968, and by the end of the 1980s, foreign banks were setting up shop in Budapest, behind the Iron Curtain.

Since independence, the country has zoomed ahead, growing fast. However, as accession looms, it is the easy things have been done.

On the majestic but slightly tattered streets of Budapest, the life of the average Hungarian has got better – but the going is getting tougher.

"In the first years of freedom, you can make good business, with fast profits and rapid growth while wages run behind," says Istvan Racz, the chief economist at Hungary's Financial Supervisory Authority (PSZAF).

"But after a while, a wage correction becomes due, as happened in the 2002 elections.

"We have used up reserves built up during the period of high growth, and now the macroeconomic imbalances are starting to press down again."

After several years of rapid growth, the economic noose is tightening, making problems for the government as it tries to push through painful reforms.

Despite unemployment having fallen to a two-year low, of 5.8% – the lowest level in the central European countries – economic problems dragged Prime Minister Peter Medgyessy's popularity to an all-time low at the start of the year.

Mr Medgyessy sacked his finance minister, Csaba Laszlo, in January after the budget badly overshot spending targets, running up a massive bill the state can ill afford to pay.

The state debt has risen to 57% of GDP, just below the Maastricht limit, of 60%, and the government finished last year with an unexpectedly high 5.6%-of- GDP budget deficit, as well as a large trade deficit.

"The debt stock is a problem, as it makes issuing bonds costly," says Mr Racz.

"Now the budget is relatively healthy, but if you add in the debt service bill, then the public finances begin to look nasty."

The new man at the finance ministry, Tibor Draskovics, has introduced an austerity plan to try and get public finances back into the black.

But he admits the going is going to be tough, and Hungary's plans for early entry into the eurozone in 2008 have already been pushed back, to 2010.

Tourists have flocked to the castle district of Buda, on the far side of the Danube, to admire the Hapsburgs' magnificent palaces and buy strings of spicy red peppers, a national delicacy.

Like the country's relations with the EU, the river divides the city. On the other bank, in Pest, the semicircle of roads radiating out from the river is home to the companies of modern Hungary.

The fault lines cut by Hungary's past will make the accession ride a bumpy one.

After the existing members slapped immigration restrictions on the accession countries' citizens, Hungary retaliated by introducing work restrictions on EU citizens who want to move to Hungary.

"Everyone in Hungary is not going to move to London on May 2," says Zoltan Igaz, a strategist at ING Bank, in Budapest.

"There is more opportunity here than there, anyway. This has been the cheapest and fastest accession in the history of the EU, but we are entering at a disadvantage, and it will take time for Hungary to pull itself up to the level of the member states."

The irony is that the restrictions on foreign job-hunters arriving in Buda will be more painful than the EU's ban on Hungarians wanting to go west.

According to the labour ministry, only 1% of Hungarians, or about 42,000 people out of a labour force of 4.2 million, are planning to emigrate after joining the EU.

Meanwhile, western European companies are already decamping to the centre of Europe to take advantage of Hungary's liberal and cheap regime.

"We already fall in the middle of all the categories," says Mr Igaz. "Some investors already consider Hungary to be a European country, and "emerged", rather than a transitional or eastern European country, so accession will not have much of an impact.

"We have our work cut out, but we are already more than halfway to catching up with our new neighbours."

Investors are still more interested in Poland, with its 40 million population, and the dynamic Czech Republic, which has been more successful at reforming its socialist economy.

Weighed down by economic and political problems, the Hungarian government has been forced to balance the imperative for radical change and the need to protect its population.

In a typical compromise, the Budapest city council may have removed Stalin's citizenship, but he will continue to be listed in the national roll of honour as a hero of the republic.

Moscow was responsible for an estimated 10 million Hungarians' deaths during Stalin's rule of terror.