Eastern Europe's economies
What went right
Mar 18th 2010
From The Economist print edition
If Spain, Portugal, Italy and Greece want a lesson in how to take hard decisions, they should look eastward
IN THE depths of the financial crisis a year ago, it was easy to see how the woes of the ex-communist economies could cause huge problems for the rest of Europe. Western banks had lent recklessly in foreign currency to firms and households stricken by the downturn. If they all fled for the exit at once, dumping assets and stopping lending, the result would be carnage both at home and abroad. Also scary was the prospect of a currency crisis. If Latvia were forced off its peg with the euro, its Baltic neighbours might topple too. A combination of weak governments and angry voters looked ominous enough for some commentators, including this newspaper, to fret that the bill for bailing out new members from the east could be big enough to threaten the European Union.
In the event, the ex-communist economies have so far ridden out the storm (see article). Ex-communist Europe still has to grapple with its share of problems: an ageing workforce, bossy officials and poor infrastructure. But nobody has defaulted and nobody has rioted. Something went right—and it holds lessons for troubled countries in western Europe.
As easy as jeden, dwa, trzy
One reason for the ex-communist countries’ relative fortune is that they are not a homogenous block all of which is suffering in the same way. Few other countries had the huge debts that made Hungary so wobbly, or the gaping current-account deficit that made Latvia so vulnerable. Slovenia and Slovakia were shielded from currency speculators by being in the euro area. Poland, by far the biggest of the new EU countries, is in a category of its own: thanks to good government and good luck, it was the only European economy to boast economic growth in 2009. In short, Poland, Estonia and Bulgaria are as different in their way as are France, Finland and Greece.
International organisations also deserve some praise. The European Bank for Reconstruction and Development helped stabilise the region’s banks, bringing foreign lenders together to ensure an orderly deleveraging instead of a rout. Both the European Commission and the European Central Bank realised that problems beyond the euro area could create headaches inside it. Their cheap loans helped foreign creditors and countries alike. And the IMF showed itself to be a collegial and flexible organisation, not the aloof, rigid outfit that EU leaders have foolishly rejected as a source of help for Greece and other troubled members of the euro.
Yet the greatest credit should go to the resilience and level-headedness of the region’s own politicians and citizens. Seemingly weak minority governments in places like Hungary and Latvia proved capable of making enormous fiscal adjustments. The east European economies, for all their faults, have shown more flexibility in both labour markets and in what they produce than have many older EU members. Moreover, the cuts in spending and increases in taxes and the retirement age that some ex-communist countries have imposed over the past year were much more savage than anything that Greece or Spain have so far contemplated.
That is salutary for the many countries that have yet to change public expectations enough to make big, painful structural changes more acceptable. Greece and the other Mediterranean countries in the euro area—Spain, Portugal and even Italy—nowadays seem to be sicker than ex-communist Europe. They should look east for a cure.
Thursday, March 18, 2010
Eastern Europe's economies