Turbulence in Eastern Europe 'East' Doesn't Automatically Mean Crisis

Twenty years after their peaceful revolutions, the countries of Eastern Europe have failed to become paragons of stability. They are also struggling to cope with the global economic crisis. Still, the problems of the EU's new member states pose no threat to the European project.

By Reinhold Vetter


Way out of the recession: Latvia is one the Eastern states relying on EU help to pull itself out of the crisis.
REUTERS

Way out of the recession: Latvia is one the Eastern states relying on EU help to pull itself out of the crisis.

Western media love to portray East Central Europe as verging on economic and political ruin. But this picture is distorted. Indeed, some states have fallen into deep recession, or even depression. In Estonia, Latvia, and Lithuania, GDP will sink by up to 15 percent this year, after a growth rate of 10 to 12 percent in 2007. The Czech economy will also shrink this year by about one percent, after growing in 2007 and 2008. In contrast, Slovakia and Poland will retain a modest positive growth.

Slacking growth means less tax revenue for the state. Without additional spending cuts, an increase in the national budget deficits for 2009 will be unavoidable. Even so, Poland, the Czech Republic, Slovakia, and Bulgaria could manage to keep their deficits below the "Maastricht limit" of 3 percent of GDP; Hungary, Lithuania, Latvia, Estonia, and Romania will significantly exceed the limit. The Baltic states, Hungary, and Romania are truly at risk of national bankruptcy, which is why these states are also being favored for international financial help. Latvia, for example, has already been promised €7.5 billion from the International Monetary Fund and the European Union. In return, Latvia has agreed to make major cuts in expenditure. So, as the head of Latvia's central bank put it, "the party is over."

The eastern EU states are being affected differently by the crisis, mainly a result of varying degrees of dependence on exports. That is why Hungary, whose economy is open and oriented toward the world market, is especially vulnerable to economic downturn and recession in the western EU countries. In contrast, Poland benefits from a large domestic market that can absorb a sizable part of what it produces. The most important reason for the steep economic downturn of the Baltic states is another story. Their growth in recent years was based on increasing consumer demand paid for on credit, much of which was financed in foreign currency. As Baltic currencies have fallen in value, paying back the debt, especially for euro or swiss franc credit, has become very expensive and new credit can only be had at high interest rates, if you can get it at all. With no cash available, there is no engine to drive economic growth. Estonia and Latvia especially -- in contrast to most other EU countries in the region -- lack the modern production capacity that is needed to stimulate growth.

The stimulus packages of the East Central European countries are as different as the effects of the crisis. While countries like Latvia and Hungary have to undertake painful restructuring, for example in social services, the Polish government's program is moderate. It includes credit help and tax cuts for small and mid-sized businesses, further liberalization of the labor market, and a more effective use of EU money. In conjunction, government spending, especially for the military, has been cut. Similar steps are being taken in the Czech Republic. In Slovakia, on the other hand, the government has started a program that focuses on applying state aid to keep and create jobs and projects to further modernize infrastructure and sink energy costs.

From Crisis to Crisis

The economic crisis is unfolding among very different political conditions in the region. While governments in some countries are stable and backed by conclusive election results, in other countries cabinets are stumbling from crisis to crisis because they lack clear majorities. The stability of party structures also varies widely in Eastern, Central, and Southern Europe. But in all cases the current crisis is making the weakness of their political systems more prominent. This is particularly true for Latvia, where for years governing coalitions have been formed by parties that are weakly anchored in society. As a result, they are facing growing political crisis, which has been escalating since January when a demonstration of over 10,000 ended in riots in Riga. The demonstration and rioting against the dramatic cost-cutting plans of the governing coalition (made up of the People's Party and the Green/Farmer's Party alliance) led to the government's collapse. In the meantime, the new head of state, Valdis Dombrovskis of the populist right-wing New Era Party, has announced a new saving program even more drastic than its predecessors.

According to surveys, more than 90 percent of Latvia's citizens have no trust in their political parties: They are condemned as a political instrument of corrupt business oligarchs. If new elections were announced tomorrow, almost no parties would make it past the five percent hurdle. The weakness of the parties encourages populism, which often takes the form of frequent referenda. The last referenda, however, had to be thrown out because voter turnout was so low, which led German political scientist Axel Reetz to conclude that "either it's a sign of an unbounded political disdain, or perhaps the people have learned that nothing can be accomplished through populism."

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