GENEVA — The riots in Budapest, incited by leaked tapes that show Prime Minister Ferenc Gyurcsany openly admitting that his government had lied for over a year about the country’s dire finances, are but the latest evidence that things are going seriously wrong across Eastern Europe.
Last June, the Slovaks evicted the government that brought the country out of the international isolation and economic malaise that it had suffered under the autocratic regime of Vladimir Meciar. Mikulas Dzurinda, whose reforms provided the country with growth and economic stability, was replaced by Robert Fico, a leftist who, having forged an alliance with Meciar and a neofascist party, has also adopted a worrisomely populist tone.
That same month, Hungary re-elected Gyurcsany, who had pursued a supposedly reformist program, but also oversaw a massive accumulation of public debt. Earlier plans to adopt the euro quickly have now been shelved, with the target date pushed back to 2011 or 2012. But even that may be wishful thinking. Meanwhile, financial markets fret about the country’s budget deficit and talk of a serious crisis.
Meanwhile, the Czechs managed to elect a perfectly hung Parliament. Prime Minister Mirek Topolanek is an advocate of urgently needed reforms, but he lacks a parliamentary majority and is pressing for a fresh general election in the first half of 2007. With no means of stemming election-year fiscal expansion, the Czechs, too, have been forced to abandon their 2010 target date for euro adoption.
Then consider Poland, where the Kaczynski twins, who hold the presidency and the prime ministership, have allied themselves with populist, xenophobic and anti-Semitic parties. One of their priorities is to attack the central bank and slander its governor, Leszek Balcerowicz, the iconic father of Poland’s economic transformation, with accusations that echo those of the Stalinist era.
So much for the region’s “big four” countries. But bad news is emerging from the smaller countries as well, including the Baltic states. Across Central and Eastern Europe, the scene is almost universally depressing.
When so much goes wrong at the same time, it is tempting to look for a common cause. One factor that is often cited is “reform fatigue.” In barely 15 years, these countries have moved from central planning and economic backwardness to “normal” market economies with impressive GDP growth. But rapid change is always unnerving, and not everyone has emerged better off. Above all, uncertainty has become the norm, in contrast to the gray but predictable future offered by the old communist regimes.
Today, many people now long for that period, which they see as less driven by material values. Communist parties, more or less reformed as socialists, appeal to a surprising number of voters. In some countries, like Slovakia and Poland, far-right nationalist parties provide another alternative, by offering the soothing appeal of traditional values and familiar enemies.
Reform fatigue implies that Central and Eastern Europe needs a respite to catch its breath. But another explanation of recent developments in the region begins by noting that postcommunist reforms were largely dictated from outside, as a condition of admission to the European Union. With membership achieved and EU money starting to pour in, leaders feel secure enough to let economic policy slip.
Thus, budget deficits are the rule, and where they are largest, as in the Czech Republic and Hungary, they have gained priority over euro adoption. Indeed, only Slovenia has been admitted to join the euro area in 2007, the earliest possible date. Estonia and Lithuania applied as well, but were refused entry.
There is some truth in both explanations of Eastern Europe’s backsliding. But what is the phenomenon that such explanations are supposed to clarify? There has been no general tilt to the right or left in the region. Reforms that are attacked in one country continue to guide others.
Nevertheless, the EU’s newest members share some key features. Most importantly, they inherited from the Soviet era bloated and inefficient public sectors, which they are finding hard to downsize and professionalize. The private sector has been entirely rebuilt and is vibrant, but it cannot remain competitive if fiscal demands are not reduced — a familiar problem in Europe as a whole. For now, the tension has been left unresolved, leading to high budget deficits.
But the EU’s new member countries have no access to any safety net. They could well squander the significant transfers that they receive through the agricultural and structural funds, as many previous EU recipients did. If they abandon macroeconomic discipline, as Hungary and possibly the Czech Republic may be doing, they alone will face the consequences. Being outside the euro area, their currencies would fall, undermining growth in purchasing power and living standards. As they are economically small, the rest of the EU would barely shudder.
Fortunately, the main lesson to emerge from the region’s current troubles is that economies adapt faster than polities to changing conditions. Growth has been strong; while it could have been stronger under more favorable policies, only huge mistakes could break the rise in living standards, given the region’s productivity gains.
Western Europe went through a similar phase of economic development in the 1950s and 1960s; now it is Central and Eastern Europe’s turn. Sadly, then as now, countries never seem to learn from others’ mistakes.
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