Thursday, 8 July 2010

Austerity in Central-Eastern Europe

The global economic crisis has moved from the private to the public sphere. After spending billions on bailing out the failed financial system and propping up the very institutions that caused the crisis, it is now up to the tax payer to carry the burden. In recent months attention has turned to those eurozone countries in Southern Europe (such as Greece and Spain), which have faced acute public finance problems. In response the international financial markets, the IMF and the EU have exerted pressure upon these governments to enact severe spending cuts, while the EU has committed over €750bn in a bailout fund for holders of Greek government debt.

The graphic pictures of demonstrators in Greece have focused media attention on the problems occurring in Southern Europe. However, in Central-Eastern Europe (CEE) there has been no such concern, despite the severity of the economic collapse in many countries. In 2009 the average rate of economic decline in CEE was nearly 8%, while it was just above 4% in WE. Also, between 2007 and 2009 unemployment increased in CEE from 6.8% to 10.3%, while in Western Europe it grew from 7.4% to 8.0%.

Those economies that were most exposed to the global crisis and reliant upon foreign capital suffered the largest economic declines. Therefore, in 2009, GDP fell by over 13% in Estonia and by over 18% in Latvia and Lithuania. Furthermore, unemployment has rocketed in these countries - increasing by 12% in just one year in Latvia.

A feature of the present economic crisis has been the withdraw of capital from the peripheries back to the centre. This has been particularly pronounced in CEE, where over 70% of all banking assets are in foreign hands. Also the governments in CEE have had less available resources than their counterparts in Western Europe to protect their domestic economies, which has worsened the economic contraction. The EU refused to provide a rescue package for the CEE economies last year, which has left them exposed to the demands of the financial markets and international financial institutions.

The IMF provided loans to CEE countries - such as Hungary, Latvia, Romania and Poland - in order to ease their solvency problems. Concurrently, and often as a condition of the help provided by the IMF, the CEE countries have been pressured to reduce their budget deficits. In line with agreements with the EU, the CEE countries are expected to bring their fiscal deficit down to below 6% of GDP in 2010 and below 3% from 2011 to 2013. A series of government spending cuts were introduced in 2009, well before those in countries such as Greece and Spain. For example, the Latvian government announced a package of public spending cuts and tax increases that amounted to €712m in an aim to reduce the budget deficit by 10% in 3 to 4 years. This included cutting public sector wages by up to 40%, pensions by 10% and reducing social benefits and health care payments. Likewise Hungary agreed to reduce its public sector by 2.5% and introduce a new rules-based fiscal programme. The financial markets severely punished the new government when it suggested it could not meet its agreed targets. In Bulgaria public spending was cut by 15% in 2009, in order to avoid an end of year deficit and maintain its currency peg with the euro. In order to meet the conditions of their IMF and EU loans, the Romanian government announced in May 2010 that it would cut all public sector salaries by 25% and pensions by 15%. When the Romanian constitutional court declared that this cut in pensions was illegal, the government responded by hiking VAT. Even in Poland, which has so far avoided falling into recession, slowing revenues have meant that the budget deficit nearly doubled from 3.8% of GDP in 2008 to 7.1% in 2009. The Polish government has announced both public spending cuts and a programme to start a new round of privatisations aimed at raising €6.6bn in revenues.

The burden of the global financial crisis is being shifted onto those who did least to cause it and have the least resources to pay for it. It seems that the populations of CEE are being expected to pay a disproportionate share of this cost, which will deepen its own recession as well as that in Europe as a whole.

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