Economy & Trade, Europe, Financial Crisis, Headlines

EUROPE: Cold Breeze Sweeps the East

Zoltán Dujisin

BUDAPEST, Mar 23 2009 (IPS) - The region that liked to see itself as the engine of European economic growth and as immune to the global economic crisis is now being pointed to as the next to hit the slump.

Foreign capital is fleeing the region, currencies are weakening, and a slowdown in economic growth or even a contraction of the gross domestic product is expected in the Central and Eastern European member states of the European Union (EU).

Hungarian Prime Minister Ferenc Gyurcsány, who has now resigned in the face of growing criticism over the handling of the economic crisis, begged Western Europe to bail out the entire region with a 180 billion euro package. It was a controversial call.

“It was a mistake to try to give the impression the region is homogenous and that the problems are the same,” Hungarian economist Andras Nagy told IPS. “He thought he would create a stronger bargaining position, but this was not properly prepared, and the other countries did not agree with this tactic.”

In Slovakia, one of Europe’s fastest growing economies but where budget revenues are shrinking, the government is ambitiously promising to save in state administration, carry out public investment that favours domestic suppliers, help car manufacturing units, while preserving all social programmes and keeping the budget under control.

In Poland, after initial optimism budget revenues have been lower than expected, and several ministries, such as those for health, justice, the interior and above all defence ministry are grappling with lack of funds. The effects of the crisis are also being felt in the Czech Republic after a long denial.

As big EU powers agreed last February to strengthen monitoring and regulation of financial markets, finance minister Miroslav Kalousek of the neo-liberal government in the Czech Republic, currently holding the six- month rotating EU presidency and with the initial goal of ‘deregulating’ Europe, cautioned against “populism in financial regulation.”

“This is mainly political,” says Nagy. “The Czechs and the Poles said they wouldn’t be seriously affected; they are very nationalistic and they are trying to create an image they are better than the others, while the Hungarians are complaining about a catastrophe. I wouldn’t believe either the optimists or the doomsday forecasts because they cannot know what will happen.”

There has been little cooperation between the countries in the region, except for some coordinated verbal intervention from the Czech, Hungarian, Polish and Romanian central banks to protect their currencies.

There is also talk of a coalition led by Polish Prime Minister Donald Tusk against what Polish daily Gazeta Wyborcza called the “spectre of economic protectionism that is now once again haunting Europe.”

This was a reaction to French President Nicolas Sarkozy’s suggestion that French car manufacturers should abandon their units in the Czech Republic, with whom relations are at an all-time low.

“Western Europe is clearly not very helpful because they are in so much trouble themselves,” says Nagy. “But if any of these countries are in great difficulty they will help.” Such help has been given to Hungary and Latvia, and Romania could be the next in line, with the West fearing that bankruptcy in one country could have a spillover effect.

Austria has been the most active promoter of an aid package for the region due to its high stakes in Eastern European markets. Austrian banks such as Raiffeisen and Erste are major players in the region, and have up to 230 billion euros, 70 percent of Austria’s gross domestic product, in loans abroad, much of it in foreign currencies that have become more expensive to debtors.

Hungary and Romania are in a delicate position in terms of private household debts, with a massive number of loans having been taken out in foreign currencies that became highly costly following the devaluation of national currencies.

Speculators have jumped in to take advantage of the currencies’ devaluation, with dangerous and costly consequences for the countries’ credibility. Many officials are accusing the same speculators of trying to influence investors in the regions by helping publish sinister economic forecasts.

The Hungarian currency lost 20 percent of its value in half a year, and people fear for their homes and businesses. Only Slovenia and Slovakia, which adopted the euro this year, are safe from the catastrophic consequences of currency swings.

A very active Gyurcsány has suggested early entry to the euro for the EU countries outside the common currency, but analysts deem his proposal politically unrealistic.

Known in the 1990s as Eastern Europe’s ‘model child’ for western reformers, Hungary is now named by U.S. President Barack Obama as a negative example to avoid. Many Hungarians consider a 20 billion euro credit line from the International Monetary Fund (IMF) degrading.

“Hungary’s major problem is an extremely high deficit caused by previous governments’ mismanagement,” says Nagy. Hungary’s economy is expected to contract by 3 to 3.5 percent this year, with IMF conditions likely to harm pensioners and public employees in a highly welfare-driven country.

“We are on the way to being colonised,” Tibor Szanyi from the governing Socialists complained in an interview last month. “The IMF tells us what we can do and what we cannot.”

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