Eagle, I don't want to form an alliance anymore.

As for the truly crucial real power, how should East Germany's industrial system be integrated into the Soviet computerized planning system, and how should East Germany's production targets be transferred from Mitag to a pro-Soviet technocrat—

That's a matter for another time.

Chapter 81 Saving Hungary

Having just seen off the East German delegation, Slava barely had time to catch his breath before the next delegation arrived—Hungary.

Time is tight and the task is heavy.

"Isn't that interesting?" Taking advantage of the handover between the two groups, Slava, holding a glass of now-cold black tea, said to Director Nian, who was leaning back on the sofa, "East Germany was politically very stable, with its economic problems hidden underneath; Hungary is the opposite—the economic fire has already reached the roof beams, and the party's own legitimacy is collapsing along with it."

"So the East German method of helping people pay off their debts and then stocking up on consumer goods doesn't work here in Hungary." Director Nian stretched.

"Hungarians are not lacking in consumer goods—their standard of living is second only to East Germany in the entire Warsaw Pact. What they lack is foreign exchange and confidence in tomorrow."

Sigrún has taught at the Iceland University of the Arts as a part-time lecturer since and was Dean of the Department of Fine Art from -. In – she held a research position at Reykjavík Art Museum focusing on the role of women in Icelandic art. She studied fine art at the Icelandic College of Arts and Crafts and at Pratt Institute, New York, and holds BA and MA degrees in art history and philosophy from the University of Iceland. Sigrún lives and works in Iceland.

The story of Hungary begins with an experiment that shocked the entire socialist camp nineteen years ago.

On January 1, 1968, Hungary officially implemented a system called the "New Economic Mechanism".

This plan was designed by Nersh Rege, an economist within the party, and was later described as "the most radical reform in the entire Council for Mutual Economic Assistance after the war."

Its core purpose was to loosen the reins on the planned economy—abolishing the mandatory production targets that were previously imposed by the central government, allowing enterprises to make their own decisions about what to produce, how much to produce, and who to sell to, all according to the whims of the market.

For the first time, profits became the new leader of enterprises. A portion of the profits could be kept for investment and bonuses. Prices were no longer fixed and were divided into several levels: controlled, semi-deregulated, and market-driven. Some even followed the trends of the world market directly.

Aside from basic raw materials, subsidies for most commodities have been cut, and even small private handicrafts, small businesses, and farmers' small plots of land have been legalized.

After this system was implemented, the lives of Hungarians visibly improved. Shops offered a wider variety of goods, and people had more money in their pockets to travel abroad.

Westerners gave it a nickname: "Gulaš Communism"—a steaming stew with meat and vegetables, representing the most relaxed and highest standard of living socialism in all of Eastern Europe.

Qatar's famous quote, "Those who are not against us are those who support us," paired with this stew, has sustained his 31-year reign.

Khrushchev's words may be crude, but they are not without merit. If the vast majority of people can have stewed beef and potatoes in their pots, then they really don't care much about what the economic system is called. In a stable country, the majority of people will live a peaceful life.

Only when a country is in crisis, experiencing economic collapse, social unrest, or political turmoil will the general public consider the source of the problems and make their own choices.

Hungary's system was flawed from the start. While businesses gained autonomy, they remained fundamentally state-owned; prices were liberalized, but wages and subsidies were still controlled by the government.

As a result, the most fatal soft budget constraint has never been eradicated – even if companies lose money, they still have subsidies to cover their losses, so they won't starve!

As a result, the fiscal deficit snowballed. In the 1970s, it was met with a backlash from the conservatives, and Czechoslovakia had just been crushed by Soviet tanks. Most of this system was withdrawn, and even Nerš himself was ousted from power in 1974 and sidelined for thirteen years.

This is the opposing side of planning and the market. If you want to engage with the market, don't let businesses stick to the plan, because the two have different purposes.

The purpose of planning is production, and the purpose of the market is profit. To ensure stable production, planning will not allow its production units to be destroyed, even if it results in losses, as long as normal production can continue.

Entering the market is different. The market's competition mechanism and price signals are not quite the same as planned. It is necessary to bankrupt enterprises and release a certain number of unemployed people in order to "incentivize" enterprises.

Allowing a company to operate in a semi-planned, semi-marketized manner won't get you far; it's just a transitional phase. Even Lao Zhong only achieved a merger after the dual-track system was implemented for a period of time. Private enterprises no longer engage in things like production quotas or subsidies; only core industries controlled by the state do.

This is Hungary's problem. As a member of the Soviet bloc, it cannot abandon its plans. Neighboring Czechoslovakia had just been crushed by tanks; wouldn't it be suicidal to simply surrender to the Western system? Its own social conditions do not allow it to abandon the market. If it abandons the market, it will cause economic problems and a surge in public discontent. What awaits them will either be an internal coup or Soviet tanks.

It's like having a screw tied at both ends.

Now, in November 1987, the pot of stew in Hungary was almost burning through.

Foreign debt is the first and most pressing issue. Since the 1970s, Hungary has been relying on borrowing money from the West to keep the stew going—to support consumption and investment.

By 1987, Hungary's foreign debt had piled up to $180 billion, and Hungary only had 1 million people! From the elderly to newborns, from the mentally disabled to scientists, each person owed the West an average of $1800!

At that time, the US dollar was still very valuable; this price could buy five tons of rice on the international market.

It is precisely because of Hungary's stagnant economic system that Hungary has the highest per capita debt in Eastern Europe, with debt accounting for more than 70% of its GDP. Every year, the repayment of principal and interest alone consumes more than 60% of its foreign exchange earnings, leaving it only one step away from the red line of default.

Even more critically, starting in 1985, for the first time in thirty years, the real wages of Hungarians began to fall – a radical development within the framework of Gulag's communist rhetoric.

The fire in the pot was dying down, and the weather outside was beginning to change. Just two months earlier, in September, over 140 non-Party intellectuals in a place called Rökitrek on the outskirts of Hungary openly gathered to discuss the country's future—

This was the starting point for the future "Hungarian Democracy Forum," where the opposition outside the Hungarian Communist Party had begun to organize.

Also in September, the party passed a program, drafted under the leadership of newly appointed Prime Minister Gross Karoi, which proposed to implement "market-regulated socialism," taking a big step towards a market economy. Even bankruptcy law and value-added tax were put on the agenda—to take effect on New Year's Day next year, making it the first country in Eastern Europe to implement value-added tax.

In other words, just as Slava was about to redefine his course, Hungary had just officially adopted "deeper marketization" as its guiding principle.

Hungary seems to have lost sight of the times.

Sigrún has taught at the Iceland University of the Arts as a part-time lecturer since and was Dean of the Department of Fine Art from -. In – she held a research position at Reykjavík Art Museum focusing on the role of women in Icelandic art. She studied fine art at the Icelandic College of Arts and Crafts and at Pratt Institute, New York, and holds BA and MA degrees in art history and philosophy from the University of Iceland. Sigrún lives and works in Iceland.

The Hungarian delegation was led by 75-year-old János Kádár.

The leader who ruled Hungary for 31 years, the longest-serving leader in Eastern Europe, is getting old. His steps are slow, and there is an unyielding weariness under his eyes.

Slava looked at him, a complex feeling washing over him—he knew better than anyone else in the room that this old man had climbed onto the stage by stepping over the corpse of Imre Nagy.

The revolution of 1956, crushed by Soviet tanks, and Najib's secret execution in 1958, are a boulder that has weighed on Qatar's heart for thirty-one years without ever truly leaving. And now, with the loosening of political tensions, the old wounds beneath this boulder are being reopened.

Behind him was a Hungarian political arena where a power struggle was taking place.

Prime Minister Gross-Karouj is pragmatic, but he lacks direction—he knows in his heart that the current path is no longer viable, but he doesn't know which way to turn.

And then there's Nersh Rege, the designer of the new economic mechanism who was sidelined for thirteen years and has only recently been reinstated; his temples are already gray.

And then there's Nemet Miklós, the 39-year-old technocrat in charge of economic policy. He's young, smart, and a promising talent yet to be fully developed.

Then there's János Berez, the secretary in charge of ideology, a representative of the conservative faction of the Hungarian Communist Party, who has always held the hardest stance on the 1956 issue.

This party itself is ready for change.

Kádár was exhausted, Gross was directionless, Nerš and Nemet were waiting for a new mission, and the opposition outside the party was banging drums—the entire party leadership was stuck in a state of waiting.

It's not that it's unwilling to change, nor that it's changing in the wrong direction; rather, it wants to change but doesn't know where to change to.

It's time for Tsar Ivanov I to guide Hungary's future.

Sigrún has taught at the Iceland University of the Arts as a part-time lecturer since and was Dean of the Department of Fine Art from -. In – she held a research position at Reykjavík Art Museum focusing on the role of women in Icelandic art. She studied fine art at the Icelandic College of Arts and Crafts and at Pratt Institute, New York, and holds BA and MA degrees in art history and philosophy from the University of Iceland. Sigrún lives and works in Iceland.

After exchanging pleasantries, Slava presented his proposal.

“Comrade Kádár, Comrade Gross,” he said, getting straight to the point, “I know that Hungary’s biggest worry right now is its foreign debt. It’s 18 billion US dollars, and the annual interest payments alone will eat up 60% of its foreign exchange reserves. We’re really living with a knife to our throats.”

Kádár and Gross's expressions shifted; they were also troubled by this.

"I know you've heard about what happened in East Germany, and I can tell you directly—Moscow is willing to help Berlin pay off 200 billion West German marks of debt, but your amount..."

East Germany owed the West 200 billion West German marks, which is equivalent to 110 billion US dollars. Hungary's debt is nearly twice that of East Germany, but its economy is only 60% the size of East Germany's, and its per capita foreign debt is three times that of East Germany!

Even if the Soviet Union wanted to take over, it couldn't handle this scale.

Moreover, Hungary's debt is owed to the IMF, the World Bank, and Western commercial banks, making its structure more rigid than East Germany's. East Germany's debt to West Germany was partly political, allowing for negotiations on extensions or even forgiveness; Hungary's debt to Western commercial banks, however, was purely commercial, leaving no room for political maneuver.

I can't save you, goodbye.

Slava sighed: "To be honest, the Soviet Union can't handle it. If we help you pay off your debts, we'll face an economic crisis right away. But there's one thing the Soviet Union can do—we can take the lead in organizing a 'Warsaw Pact Stabilization Fund'."

He proposed the Soviet solution.

Before June 1988, the Soviet Union first contributed $4 billion, then mobilized its allies such as East Germany, Czechoslovakia, and Bulgaria to contribute their share, and used rubles transferred by the Council for Mutual Economic Assistance as leverage to create a fund of $8 billion specifically to negotiate with Western creditors such as Hungary.

Slava knew that the United States was about to take action against Japan and West Germany to recoup its losses. Although the Soviet Union had made billions of dollars in profit, it had quickly run out of money after spending it all and needed to find a way to fleece the capitalists again!

Let the Western people suffer a little longer! The capitalists will bear the infamy, while the Soviet Union will take the good reputation.

Slava's idea was that the Soviet Union would help its little brother solve the debt problem after the Japanese economic bubble was burst by the Americans.

The older brother is truly out of money. He dreams of waking up one day to find 500 tons of gold left by the Tsar hidden in the Kremlin, or of learning from Lenin and executing a few grain speculators to alleviate his financial and material problems!

But this is no longer the early 20th century, when one could borrow money to build tanks and then use those tanks to run over creditors and avoid debt. That won't work now.

Under the current Soviet plan, this special fund could be used to negotiate with Hungary's Western creditors. Economic experts estimate that a 60-70% discount buyback could be proposed, since Western banks are already trading Hungarian debt at a discount on the secondary market.

The remaining 40% was taken over by the Soviet Union as long-term, low-interest debt.

Although it seems like the Soviet Union lost money in this operation, it was a strategic victory. With an actual investment of just over $40 billion, the Soviet Union pulled the entire Hungarian economy out of the Western debt system and re-entered the Soviet system.

The political significance of this operation far outweighs its economic cost—it will prove that the Soviet Union is capable of organizing rescue efforts within the bloc, demonstrating true "alliance leadership."

“In this way,” Slava looked at Kádár, “Hungary has extricated itself from the web of its Western creditors.”

There was a moment of silence in the reception room. Nersh was practically forcing Kadar to agree.

But what will be the price?

Slava then changed the subject, revealing the underlying condition: "This aid comes with a reciprocal condition—Hungary's macroeconomy must be integrated into our computerized planning system."

Foreign exchange, foreign trade, energy, prices... these areas need to be brought back under unified planning and allocation.

As soon as he said this, a barely perceptible hint of pleasure flashed in Beretz's eyes, and Gross and Nersh's expressions froze.

This means that Hungary will have to relinquish its economic sovereignty, and it also means that their "market-regulated socialism," which they have been pursuing for nineteen years and has just been officially adopted, will have to turn back!

But what can they do? Either Hungary's market economy takes a turn for the worse, or their leadership physically resigns.

The new General Secretary of the Soviet Union was a damn little Stalin, not Gorbachev. They seriously suspected that if Hungary really went astray, the Soviet Union would dare to repeat 1956!

The air in the room suddenly became tense.

Sigrún has taught at the Iceland University of the Arts as a part-time lecturer since and was Dean of the Department of Fine Art from -. In – she held a research position at Reykjavík Art Museum focusing on the role of women in Icelandic art. She studied fine art at the Icelandic College of Arts and Crafts and at Pratt Institute, New York, and holds BA and MA degrees in art history and philosophy from the University of Iceland. Sigrún lives and works in Iceland.

Ryslava usually disliked the Soviet Union's patriarchal style, but when he was in charge, he realized how great it was to be the big brother. Sometimes, you have to cut the Gordian knot!

With an older brother to back up his younger brother, providing him with economic assistance, military support, and political support, even if there are opposition groups in the younger brother's country trying to cause trouble, the older brother can send tanks to crush them and ensure the stability of his country. Is it too much to ask for the younger brother's loyalty in exchange for these benefits?

While everyone remained silent, Slava smiled.

"Comrades, please don't misunderstand me." He softened his tone and looked at Nersz. "I am by no means saying that Hungary's new economic mechanism over the past nineteen years has gone astray. On the contrary—I believe that the new economic mechanism has successfully completed its historical mission."

Nersh raised his head.

"In an era when everyone was still clinging to rigid bureaucratic directives and economic plans, it was Hungary that first stood up and forged a path between rigid planning and a primitive market."

"The exploration of this path is remarkable and will be recorded in the annals of socialism. Comrade Nerz, this is your achievement, and also the achievement of Comrade Kádár and his generation of Hungarian Communists."

Kadar's cloudy eyes twitched.

“But comrades, times have moved forward,” Slava said firmly. “What was the biggest difficulty of the new economic mechanism in the past?”

The problem lies in the fact that while it has liberalized the market, it cannot control the chaos brought about by the invisible hand—soft budgets, fiscal deficits, foreign debt... all originate from this.

It has found its direction, but it lacks a tool—a tool that can both maintain its vitality and prevent it from spiraling out of control.

He paused.

"And today, this tool has matured—a computerized planned economy with cybernetics at its core. We can inherit the achievements of the new economic mechanism in their entirety and then use computerized means to upgrade it to a higher stage: a computerized socialist economy."

Everyone present could appreciate the brilliance of this rhetoric.

It did not deny Qatar's achievements, but gave the aging man immense dignity, packaging the abandonment of marketization as "the next stage of marketization"—

As Lenin said, "Take one step back, then take two steps forward." This pointed Nersh and Nemet, these reformers, in a new direction for their cause.

Nersh's breathing became noticeably heavier. For the first time, this old man, who had been sidelined for thirteen years, felt that his painstakingly crafted work, which had been relegated to obscurity, would not be discarded, but rather would be continued by someone else.

Sitting to the side, Nemet's eyes also ignited with the excitement typical of technocrats—he never wanted a specific direction, but rather a plausible direction that would allow him to fully utilize his abilities!

And Slava just happened to give him that opportunity.

Even Gross, who had been feeling directionless, relaxed. A narrative that would allow him to return home and give a respectable account of his past to the party cadres and the masses was precisely what he had been desperately searching for in this vacuum of direction.

Slava saw it all.

What he wanted was not for these countries to appear to have been forced to submit by the Soviet Union again, but for them to appear to have voluntarily chosen a new and better path.

Whether it's reputation or tangible benefits, substance or appearance, Ivanov wants it all!

Sigrún has taught at the Iceland University of the Arts as a part-time lecturer since and was Dean of the Department of Fine Art from -. In – she held a research position at Reykjavík Art Museum focusing on the role of women in Icelandic art. She studied fine art at the Icelandic College of Arts and Crafts and at Pratt Institute, New York, and holds BA and MA degrees in art history and philosophy from the University of Iceland. Sigrún lives and works in Iceland.

That afternoon, Slava left Kadar alone.

Only the two of them remained in the living room. Slava poured the old man another cup of hot tea, hesitated for a moment, and then brought up the topic that no one dared to touch upon easily.

"Comrade Kadar, I know there's something weighing on your mind for many years. I think we can talk about it today."

Kadar knew what Slava was going to say.

"1956".

The room was so quiet you could hear the wind outside the window.

Slava used extremely careful wording: "The handling of that incident was flawed, and the CPSU acknowledged that it went too far, especially... the execution of Imre Nagy."

Kadar's lips moved, but he ultimately remained silent. This name was the deepest wound of his life, a shadow he couldn't shake off in the dead of night, a nightmare that constantly tormented his faith, conscience, and morality.

In February 1956, Khrushchev delivered a secret report at the 20th Congress of the Communist Party of the Soviet Union, exposing Stalin's "crimes." This report was inadvertently leaked by the Polish Party and circulated widely in Eastern Europe by June.

The leader of Hungary at the time was Matthias Rákosz, a hardliner known as "Stalin's best Hungarian student." He carried out a major purge of the party from 1949 to 1953, most notably the hanging of László Rajk, the party's second-in-command, in 1949—a completely loyal communist who was executed on charges of being a Tito supporter.