Variations of Crises

Why did the crisis hit almost all the new EU member countries and the successor states of the Soviet Union harder than Germany or Austria? Has the time come for a negative appraisal of the transformation and the neoliberal economic model?12 To answer these questions, it will be useful to briefly review the effects of the global crisis of 2008–9. It began, as is well known, on Wall Street in 2007, when the US real-estate bubble burst, and reached an initial climax with Lehman Brothers’ bankruptcy in September 2008. In this first phase it was still a financial or stock market crisis. The shock waves rapidly reached the new EU member countries as Western investors withdrew capital to cover their losses at home. By late 2007, the Baltic countries had been thrust into the aforementioned recessions. (Already in 2008 Estonia had negative growth of 4.2 percent and Latvia of 3.3 percent.13) Hungary, Romania, Ukraine, and all the other countries that depended on foreign capital felt the immediate effects of the crisis. As tax revenues dropped and governments channeled funds into bailout programs for banks, the crash turned into a budget crisis. This second phase hit the postcommunist countries first and especially hard. In 2008 the International Monetary Fund and the European Union extended loans of tens of billions to avert an economic breakdown in the Baltic states, Hungary, and Ukraine, and in Romania in 2009.

In 2010 the shock waves reached the countries of Southern Europe, although except for Spain, these did not have property bubbles. Neither had southern European banks participated in US subprime speculation, unlike German financial institutions. But the Mediterranean EU countries were exceedingly vulnerable to crisis because they were deeply in debt. Meanwhile, the great recession further reduced national tax revenues and increased budget deficits across Europe. Investors withdrew from countries such as Greece and Italy, lacking the confidence that they would ever pay off their debts. The debt problem spiraled into the so-called euro crisis, which, however, did not have a direct impact on most postcommunist countries, since they had retained their national currencies. But they struggled with the problem of foreign currency loans, more on which below.

In a third phase, the budgetary crisis turned into an economic crisis. In 2009, all the old EU countries went through their deepest recessions of the entire postwar period. Some postcommunist countries suffered slumps almost as dramatic as in 1990 or 1991. Indeed, the decline deepened on a West-East scale, with the new EU member countries far harder hit than those in the old European Union, Poland and the often overlooked Albania being the only exceptions. But Germany, too, was badly affected because of its reliance on exports. The entire financial, budget, and economic crisis of 2008–9 approached the dimensions of a great depression—but the political and economic elites were eager to avoid any associations with the crash of 1929. In fact, the GDP of some countries in the world, especially China, was still growing. In a global-historical perspective, then, the familiar eastern European pattern was repeated: the crisis hit those countries worst that had curtailed government intervention, liberalized markets, and given banks free rein to extend loans. Nonetheless, it is too simple to blame neoliberalism. A range of coinciding factors determined the course and duration of the great recession in postcommunist and southern Europe.

As Bohle and Greskovits have shown, the type of Foreign Direct Investments in the years preceding 2008 had a crucial influence on the course and consequences of the crisis. Wherever FDI flowed primarily into the financial and real estate sectors rather than manufacturing, international capital sources dried up or were withdrawn. This occurred in the Baltic states, Romania, Bulgaria, and Croatia. Their balance of payments was poor even before the crisis—that is, they imported and consumed far more goods and services from abroad than they exported. FDI in the Visegrad countries, in contrast, flowed predominantly into industry. They were able to increase their exports and stabilize their balance of payments, and were less dependent on international capital as a consequence.14

Hungary was the exception in this regional pattern. Similarly to the Czech Republic and Poland, its FDI inflow was favorably structured. But its high national debt made it nonetheless dependent on the influx of foreign capital, which stopped abruptly in 2008. In addition, it was the only country in the region to extend loans liberally in foreign currencies. This practice is considered in detail below as an illustration of the pitfalls of the neoliberal order. Slovenia, meanwhile, had its own specific set of problems. Privatization here was financed primarily by manager buyouts and generous loans from Slovenian banks. As in the Czech Republic before 1996, this investment strategy led to an accumulation of bad loans. With the onset of the crisis, the likelihood of their being paid off became utterly illusory. A banking crisis resulted, one with which Slovenia is still grappling. The problems in Russia and Ukraine were slightly different again. Russia suffered primarily from the drop in commodity prices, caused by international stock market speculation. Ukraine’s import-export imbalance had been worsening since 2005. Like the Baltic states, its economic growth was financed on credit.

FDI inflow into Poland, the Czech Republic, and Slovakia was more favorably structured, and the governments here had tried to limit private consumer borrowing even before the crisis. These countries were affected worst by the unprecedented slump in exports and their dependence on the German economy. Germany, in turn, relied on the export markets that were now faltering. But major German banks had also actively gambled away hundreds of billions on the US property and subprime markets. The postcommunist world, where the credit sector was dominated by foreign banks, was largely innocent of this. Few of the new EU member countries had to pass “rescue packages” for banks as Germany and the United Kingdom did. However, this was small comfort in the heat of the crisis, when international investors were withdrawing as much capital as they could or refusing to lend any more to debt-ridden countries.

The only exception in this gloomy scenario was Poland. Although the Polish export market slumped, like the Czech and Slovak markets, Poland managed to compensate for its foreign trade losses by increasing government expenditure, devaluing the national currency (which is not possible in the eurozone), and using its human capital, analyzed in chapter 5. The severe recession in the United Kingdom and Ireland prompted at least three hundred thousand of the two million migrant workers who had left Poland since the nineties to return home with their savings.15 This wave of remigration increased the population of Poland by at least 0.7 percent. The returnees invested their earnings in new livelihoods. In this way, they helped Poland achieve economic growth of 1.6 percent even in the crisis year 2009, compared to −5.1 percent in Germany. In the midst of the crisis, then, Poland caught up economically with the West more rapidly than in all the previous twenty years. At the same time, the individual countries of East Central Europe diverged more than ever.

Expert analyses of the crisis must have sounded like gibberish to the citizens of postcommunist countries. In general, the language of crisis has fallen into two categories. While remaining firmly abstract when referring to the world of finance—consider the key phrase “systemically important” (often paraphrased in the United States as “too big to fail”)—it becomes idiomatic when nations and societies are under discussion. The Baltic states and Greece were said to have “lived beyond their means” and would consequently have to “tighten their belts” (both favorite terms of the German chancellor Angela Merkel), as if it were a matter of losing a few surplus pounds. Staying with the body weight metaphor, the speculative capital that flowed into Europe until 2009 was like a bad diet. The financial equivalent of fast food, it provided instant satisfaction but generated a craving for foreign capital, which left states and economies with the long-term problem of high debts. The private consumers who succumbed to the credit frenzy and incurred debts to buy property or consumer goods are now feeling the effects.

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