7

The Great Recession: 2008–9 and Its Consequences

The End of Economic Convergence?

With rich and poor so closely juxtaposed, and different developments occurring in each European country and region, it is not easy to take stock of the outcome of neoliberal reforms. Any conclusions about transformation would depend upon the investigator’s vantage point: the view from the panorama terrace of a newly built Warsaw skyscraper tells a very different story from the scene in the Carpathian Mountains, where the poverty of the peasants contrasts oddly with the natural beauty of the landscape. In addition to this urban-rural divide (which is also growing in Western Europe and the United States), distinct results of transformation can be observed in each country. Czechs or Slovaks have probably less cause to complain than Romanians or Ukrainians. But subjective perceptions do not necessarily correspond with the supposedly objective truth told by facts and figures.

The crisis of 2008–9 was not confined to Eastern Europe but gripped—and continues to grip—the southern EU states, too. La crisi is still omnipresent in Italy’s public and political discourse, and indeed the great recession is far from over. Greece is suffering from an even worse depression, comparable to that in the United States in the 1930s. The German government, in contrast, is proud to have overcome the crisis at home very quickly, and has gained additional political clout as a result. The various causes, characteristics, and phases of the financial, budget, and economic crisis in the different countries are explored in greater depth below. For now, the imprecise term “crisis” will serve as an all-encompassing cipher.

As well as the spatial context, the point in time is highly relevant for any balance sheet of transformation. Until 2008, when the shock waves of the Wall Street crash reached Europe, all the postcommunist states had been booming. In the second transformation decade, the upturn was especially vigorous in the countries and regions that had been struggling to find their feet in the nineties. In 2004–5, several successor states of the Soviet Union achieved double-figure growth rates, including Estonia and Ukraine.1 Romania and Bulgaria seemed to be echoing the developments in East Central Europe. Even the underdeveloped regions of eastern Poland and the other new EU member states profited from the boom. A stock-taking of economic transformation in early 2008, then, would have looked as rosy as Jeffrey Sachs’s resumé of the shock therapy.

Before the crisis, economic forecasts were also optimistic—in fact, overoptimistic, in view of the floods of foreign capital that deluged most countries in Eastern Europe. Current account deficits grew as a result—for example, to over 22 percent of the GDP in Latvia in 2007 and 2008. In other words, within the space of two years, the country imported and consumed almost 50 percent more than it produced in terms of manufacturing and services. This huge imbalance could only be counterbalanced by a huge inflow of foreign capital. The volume of FDI tripled between 2005 and 2007, flowing primarily into the financial and real estate sectors. At this level, return expectations could never have been fulfilled, not even by a supposed “tiger” like Latvia. An Eastern European bubble emerged that was bound to burst, even without the global financial crisis in 2008.

A comparable situation arose in southern Europe, where the economies of Greece and Spain were in no condition to justify the loose approach to loan granting they took after the introduction of the euro. In both parts of Europe, vast amounts of money were pumped into consumption and real estate. Although the framework conditions were neoliberal, the result was a kind of “privatized Keynesianism,” facilitated by cheap loans. The Czech Republic, Poland, and Slovakia—the countries that political scientists Béla Greskovits and Dorothee Bohle identified as “embedded neoliberal systems”—exercised greater caution. Here, borrowing was somewhat curbed, and FDI inflows were used primarily in commerce and industry, not in finance.

Thanks to the buoyancy of their economies, FDI inflows, and transfer payments from Brussels, the new EU member states continued to catch up with the old EU countries (see fig. 7.1a). In the year before the crisis, the GDP (adjusted for purchasing power) of Slovenia and the Czech Republic was almost on a par with the EU average: the former’s economic output reached 91 percent of this in 2008; the latter’s, 81 percent. These two countries even overtook East Germany in 2006, casting a negative light on German transformation. Slovakia followed at a distance in 2008, achieving 73 percent of the average per capita GDP in the European Union; the Baltic states notched up 69 and 59 percent; Hungary, 64, and Poland, 56 percent. Romania and Bulgaria were the laggards, with economic outputs of 47 percent and 44 percent, respectively, but they, too, quickly caught up.2

Fig. 7.1a.  Catch-up processes of postcommunist countries, 2001–2012. Source: Eurostat, ongoing releases.

Fig. 7.1b.  Catch-up processes of postcommunist countries with southern European Union countries, 1996–2011. Source: WIIW Report 2012 (Table I/1.5).

The countries in transition were soon hot on the heels of the southern EU countries (see fig. 7.1b). As early as 2002–3, Slovenia achieved the same per capita GDP (adjusted for purchasing power) as Portugal, the poorest old EU member country. The Czech Republic caught up with Portugal and East Germany in 2006, as mentioned above, and Greece in 2011.3 However, the field was leveling for different reasons than before the crisis. Greece, like Berlin in relation to the other cities of East Central Europe (see chapter 6), was meeting upcoming nations—Slovenia and the Czech Republic were the economic trailblazers among the postcommunist countries—on its way down. The readjustment was perhaps unsurprising, considering that the historical kingdom of Bohemia had been as economically advanced as its Western neighbors from the nineteenth century.4Moreover, the Czech Republic and Slovenia border on old EU countries, making them obvious choices in every respect for Western corporate investments.

Poland’s advance, however, cannot be explained by historical traditions or an ideal geographical situation. Only its westernmost regions, such as Silesia and the area around Poznań, were close to Western markets. Yet this largest and most populous new EU member closed the gap between its GDP and the EU average by 10 percent in the first five years after EU expansion, achieving 61 percent of the EU economic output in 2009 (as opposed to 51 percent in 2004). By 2013, Poland’s GDP had grown to two-thirds the EU average.5 If the economies of the southerly EU countries continue to stagnate or shrink, and the Polish economy continues to grow apace, it is only a matter of time before Poland, too, catches up with the poorer EU member countries, and even closes in on Italy.6 But historians usually refrain from making predictions, and rightly so, because there is always the possibility of political disruptions or other unforeseen problems. More important than statistics are the real prospects for the younger generation. Young Poles who have good qualifications, speak one or two foreign languages, and don’t live in the wrong part of the country (Polska B) have good chances of finding a better-paid job than their contemporaries in Spain and Italy. (See the figures in chapter 8.) On the negative side, the tendency to work with “trash contracts” (śmieciówki)—that is, short-term employment arrangements—even in government, is growing in Poland, too.

The benchmark for prosperity in central Europe is Germany. Until 2004, the River Oder marked a distinct rich-poor divide. It ran along regions of Poland that bore the legacy of defunct agricultural cooperatives: high unemployment and weak infrastructure. But after EU expansion, conditions in Poland began to converge with those in the former GDR. As in the case of the “Polish economic miracle,” this was caused by mistakes made during East Germany’s transformation. The statistics on economic convergence in East and West Germany attest to this. Despite all its economic problems, in the first years after reunification East Germany caught up with the West. But in the mid-nineties, its economy began to lag behind. In 1996, the five new German states (of the former GDR) achieved 62 percent of the West German GDP per capita, and lingered at that level until 2002. In later years, the East German GDP improved somewhat to reach 66 percent of West Germany’s (see fig. 7.1c).

These ostensibly positive statistics leave a bitter aftertaste. They hint that East Germany has little chance of catching up with West Germany in the foreseeable future. Moreover, economic development in the new German states, as in all postcommunist countries, is regionally uneven. While growth centers such as Dresden, Leipzig, and Jena, and Berlin in recent years, are flourishing, rural regions and old industrial centers such as Lusatia have still not recovered from the shock therapy in the early nineties. Neither have the huge transfer payments to the former GDR helped these regions find their feet; they seem to challenge the entire premise of economic reform from above. The far speedier recoveries of the Czech and Slovak Republics and Poland point to the importance of transformation from below, from within society, which was obviously neglected in the former GDR.

Fig. 7.1c.  New German states against old German states by percentage. Source: OECD Statistics (Regional Accounts TL3).

Wide sections of the Polish population embraced self-employment, and this propelled the country’s boom. According to UN statistics, in 1991 the annual German per capita GDP was the equivalent of $22,321 while the Polish GDP was $2,188—a difference of ten to one.7 By 2009, Poland’s GDP had grown to 50 percent of Germany’s (see fig. 7.2).8 Considering the economic gulf that existed twenty years previously, the Polish glass is more than half full.

Fig. 7.2.  Poland’s economic catch-up process with Germany, 1995–2011. Source: WIIW Report 2012 (Table I/1.5).

The psychological effect of this economic convergence cannot be overstated. As affluence increases, ever more citizens of the new EU countries can afford to travel abroad, as the statistics on tourism show. Poles travelling to Germany today are not necessarily seasonal workers, cleaners, or bazaar traders, as many were in the early nineties, but increasingly tourists. Especially for the younger generation, the proverbial “return to Europe” is no mere empty phrase. Sharing in European prosperity has retrospectively legitimized the reforms since 1989 and EU accession in 2004.

The global finance, budget, and economic crisis brought the boom to an abrupt end. Double-figure growth rates were replaced by equally dramatic negative growth in 2009. The Baltic states, the staunchest followers of neoliberalism in the region, suffered the worst slump. Latvia had the most dramatic crash with a decrease of 17.7 percent, followed by Lithuania (−14.8) Ukraine (−14.8), Estonia (−14.1), Slovenia (−7.8), the Russian Federation (−7.8), Hungary (−6.8), and Romania (−6.6). Excepting Poland (and to some extent the Czech and Slovak Republics), all the former Eastern Bloc countries experienced deeper recessions than Germany and Austria (see fig. 7.3).9

While the German and Austrian economies soon recovered, even the new EU countries that chalked up high growth rates after the crisis (Estonia was the European frontrunner in 2011 with a GDP increase of 8.3 percent) did not return to 2008’s levels for many years.10 Slovenia and the Czech Republic, the erstwhile trailblazers among the new EU member states, fell into a second, prolonged recession in 2012.

The trend toward convergence has turned. Slovenia is once again as far removed from the average European Union GDP as it was in 2003; the Czech Republic has ceased to catch up. Intra-German convergence has also stopped since 2010 as the new German states take longer to recover from the crisis than old West Germany.11 Only Poland and Slovakia, and recently Romania, have been able to defy the downward trend and propel growth rates beyond those before 2008. But even Poland has not been able to close the gap on Germany and Austria any further since 2010. Not only that, but the national debt of Eastern European countries has risen so sharply that doubts about the sustainability of the economic miracle are beginning to grow, even in Warsaw.

Fig. 7.3.  Recession in the transformation countries 2007–2011. Source: WIIW Report 2012 (Table I/1.6).

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