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In 1932 Horthy appointed a new prime-minister, Gyula Gömbös, that changed the course of Hungarian policy towards closer cooperation with Germany. Gömbös signed a trade agreement with Germany that drew Hungary's economy out of depression but made Hungary dependent on the German economy for both raw materials and markets. Adolf Hitler appealed to Hungarian desires for territorial revisionism, while extreme right wing organizations, like the Arrow Cross party, increasingly embraced Nazi policies, including those related to Jews. The government passed the First Jewish Law in 1938. The law established a quote system to limit Jewish involvement in the Hungarian economy.
Imrédy's attempts to improve Hungary's diplomatic relations with the United Kingdom initially made him very unpopular with Germany and Italy. In light of Germany's Anschluss with Austria in March, he realized that he could not afford to alienate Germany and Italy for long; in the autumn of 1938 his foreign policy became very much pro-German and pro-Italian.[59] Intent on amassing a base of power in Hungarian right wing politics, Imrédy began to suppress political rivals, so the increasingly influential Arrow Cross Party was harassed, and eventually banned by Imrédy's administration. As Imrédy drifted further to the right, he proposed that the government be reorganized along totalitarian lines and drafted a harsher Second Jewish Law. The Parliament under the new government of Pál Teleki approved the Second Jewish Law in 1939, which greatly restricted Jewish involvement in the economy, culture, and society and, significantly, defined Jews by race instead of religion. This definition altered the status of those who had formerly converted from Judaism to Christianity.
