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  When Eastern Europe will overcome the crisis?

Česlovas Iđkauskas, political analyst
2009 06 15

While searching for the data on the possibility of Eastern European countries to overcome economic crisis, I‘ve come across very interesting evaluations. The German „Die Zeit“ writes: „When soviet empire collapsed 20 years ago, Europe became an incarnation of freedom, openness and bright future for Poland, Hungary, Baltic States and Bulgaria, but today the old Europe is frowning at the post-communist states“. According to the weekly, one of the reasons of such approach could be too many groundless hopes set on countries which pulled away from the soviet regime.

Foreign capital is being withdrawn from the new EU Member States, and projects with the old EU Member States are prepared with distrust. The European Reconstruction and Development Bank forecasts a 5 percent decline in the economic growth of Eastern Europe. Poland, Hungary and Bulgaria hope to gain security through introduction of Euro, but, according to analysts, Euro will not reduce capital leakage, mass unemployment and national indebtedness. Today, on the eve of elections to the European Parliament, the right-wing populists profit from moods of disappointed citizens.

According to S.Sumleny, an observer of the journal „Expert“, during this crisis Eastern Europe has split into „responsible“ and irresponsible“ countries.  Economic growth in Eastern Europe was too excessive; integration into the EU economy was so rapid that expenditure of citizens exceeded income. The global crisis highlighted these mistakes. Trade of new Community countries with the EU amounted about 50 percent of their total turnover (the Estonian – 70 percent, Lithuanian – 71 percent, Hungarian – 78 percent). According to the observer, during the crisis Eastern Europe did not manage to flexibly respond to the varied demand.

Experts say that economy of Eastern Europe was impoverished by concentration of financial assets in several banks.  In 1995 foreign banks managed only 14 percent of the Region‘s banking sector, whereas in 2008 this share reached 78 percent. In certain countries Western European and Scandinavian banks possess nearly all assets: in Estonia they manage 99 percent of local banks, in Slovakia– 98 percent, in Lithuania– 92 percent of bank assets.  During the recession these actives become especially vulnerable, since crisis also affected investors’ bank sector. Since many credits are given very easily, the Western credit policy was absolutely unfit for the tactic of Eastern European banks.

The crisis has shown „winners“ and „losers of Eastern Europe. The journal „Expert“ writes, that situation in Czech Republic, Slovakia and Poland is quite stable, whereas the Baltic States, Hungary and Romania did not manage to resist recession. According to S.Schulze, an analyst of the Hamburg World Economy Institute, today we cannot speak about Eastern Europe as a single region from the economic point of view.

One month ago the international rating agency „Fitch Ratings“ reduced and negatively evaluated the current year‘s credit rating to ten Eastern European countries. These countries, including Lithuania, were evaluated negatively (with a possibility to revise ratings). According to the Russian internet portal BFM.ru, Lithuania‘s credit ratings could be reduced by the end of the year by another 60 percent. „Fitch Ratings“  reminds that ratings of the three Baltic States have already been reduced at the beginning of April, but this year Latvia‘s economy would decline by 12 percent, Lithuania’s and Estonia’s – by 10 percent.

However, there is no extensive analysis on how to overcome the crisis. J.O‘Sullivan from the Hudson Institute writes in the newspaper „The Globe and Mail“, that for countries like Germany and France executing wise financial policy, it would be easier to restore economy, but none of the countries would manage to do this shortly. But Eastern European countries – Poland,Czech Republic, and the Baltic States – would overtake and maybe even overpass the old Europe.  According to M.Laar, the „father“ of the Estonian reforms, during half of the „shock therapy“ decade these countries managed to get the soviet heritage out of the way and become flexible. However, the regions which are closer to Russia and which haven’t any reforms, would lack behind for decades.

For Eastern Europe the key lesson of crisis would be painful: elimination of economy regulation does not mean the transition to the road of reforms. Financial deregulation has weakened the monetary system without which prosperity of economy is impossible in all countries. According to J.O‘Sullivan, Eastern Europe would learn this lesson; Eastern and Western economies would manage to balance their actions and this would have a positive impact on political stability.

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