The world of politics, in Eastern as in Western Europe, was initially taken up with responding in the short term to the various challenges of the great recession. In 2008–9, the postcommunist states had their hands full preventing the further decline of their currencies and economies (and, in some cases, national bankruptcy), and restoring the “markets’ confidence.” In a foretaste of things to come in Southern Europe, the IMF and the European Union helped Latvia, Hungary, Romania, and Ukraine with bailout programs. But these were subject to strict conditions, the social and economic consequences of which will be considered below. This neoliberal variant of crisis management was only one of many ways that countries dealt with economic turbulence. Which one they chose depended to a large degree on the course of transformation they had previously taken. Historians and social scientists speak of “path dependencies.” But the deviations from the paths taken before 2008–9 are perhaps the more interesting phenomenon.
Bohle and Greskovits have traced three different transformation outcomes that shaped the crisis in each individual postcommunist country: first, a neoliberal order cushioned by welfare state provisions (“embedded neoliberal regimes”—in the Visegrad countries); second, unambiguously neoliberal regimes (in the Baltic states, Romania and Bulgaria); and third, a neocorporatist model (in Slovenia). The list can be extended by the addition of oligarchic-neoliberal systems (to be observed in the post-Soviet states, in a slightly different form in each). This typology is useful for explaining the different paths of transformation (see also “A Typology of Reform Outcomes” in chapter 4) and the trajectories of crisis in 2008–9. But it does not extend to the western neighbor states of the former Eastern Bloc or the European Union in general. Comparison with Germany, especially, is illuminating as it reveals a number of parallels with the Visegrad countries in terms of crisis development and government responses. Similarly, Slovenia does not stand alone with its neocorporatist order. Austria also has a distinctly corporatist character: membership in the chamber of commerce (Wirtschaftskammer) is more or less compulsory for all enterprises; trade unions and the chamber of labor (Arbeiterkammer) are strong as well, and there is a general tendency to seek political consensus.
Germany, Austria, Poland, and Slovakia tried to cushion the effect of recession on society by increasing government expenditure. The German public spending program raised eyebrows and made headlines worldwide for schemes such as the car-scrapping premium (devised by the German government to encourage car owners to trade in their old models for new). But Poland pursued the most distinctly Keynesian policy. At a time when tax revenue was rapidly dwindling, the Polish government hazarded a budget deficit of over 7 percent to increase public spending. Slovakia left the neoliberal path it had started on ten years previously, abolishing the flat tax in 2012. The Czech Republic wavered between austerity measures and active crisis management, and fell back into recession in 2012. Logically enough, only relatively affluent countries with comparatively low debts could afford to introduce Keynesian countermeasures. Slovenia, with its neocorporatist model of government, responded to the crisis with no more effective measures than desperate attempts to shrug off international assistance and to overcome the banking crisis alone.
Alternatively, countries embraced neoliberalism even closer. The Baltic states, Romania, and Bulgaria resorted to drastic austerity measures to deal with the crisis. These involved slashing the salaries of government employees and their—already low—expenditure on basic social services. In this way, they passed along the cost of the crisis to the general public. But Romania and Latvia, certainly, had no other choice. Like Poland in 1989–90, they depended on Western loans, for which they had to fulfill the IMF’s strict criteria. As a result of the austerity measures, unemployment soared (in Latvia, for instance, it more than tripled between 2007 and 2010 from 6.0 to 18.7 percent), masses were plunged into poverty, and many moved away, depleting the population. Latvia lost almost two hundred thousand inhabitants between 2009 and 2011, or 9 percent of its population;27 Lithuania lost three hundred thousand; Romania, 2.4 million.28 Population shrinkage is not attributable solely to migration. It can also be caused by rising mortality rates and other factors; the incidence of illness and suicide rose dramatically in the wake of the crisis. But at least two-thirds of those who disappeared from the population statistics were migrants. The crisis compounded the downward demographic trend that had begun in the nineties. Latvia has lost six hundred thousand of its previous 2.6 million inhabitants since independence; Romania, 4.2 million of 23.2 million. An analogous development can be observed in the Republic of Ireland, which also responded to the crisis with a draconian austerity program. Its rate of migration has tripled since 2004 to between 80,000 and 90,000 migrants annually. Unlike in Romania and Latvia, however, its population losses were to some extent compensated by immigration (partly from Romania).29
Shrinking populations find it harder to achieve even nominal economic growth. This in turn has repercussions on forecasts, stock markets, capital flows, and investments. Thousands of places have become ghost towns, with a few hundred residents where once a few thousand lived. The decline in populations is a longer-term process that cannot be attributed to one single factor or economic policy. Nonetheless, the sudden rise in migration in the years 2009–11 in precisely those countries that had pursued neoliberal policies before and after the crisis points to a direct link with the economic and social recipes prescribed by the IMF and the European Union.
A third mode of response to the crisis was basically muddling through without a clear concept. This applies to Ukraine, which was “rescued” from national bankruptcy with an IMF emergency program in 2009. This, like others, was motivated in part by the Fund’s need to prevent losses for the Western banks and financial institutions that had invested large sums in the country; the combined western FDI in Ukraine amounted to over 36 billion euros in 2009, the bulk of which would have been lost if Ukraine had declared state bankruptcy.30 As controversial as the rescue package was, it gave Ukraine a chance to weather the crisis. However, Ukrainian president Viktor Yushchenko’s successor Viktor Yanukovych redirected the international aid into the pockets of his family members and allied oligarchs. Consequently, Ukraine’s economic demise continued and the huge gulf between rich and poor widened. This was the deeper-rooted reason for the revolution against Ukraine’s kleptocratic regime in winter 2013–14.
A fourth mode of response was making a rhetorical repudiation of the West while still trying to implement key elements of the neoliberal order. Russian president Vladimir Putin has taken this line since the start of his second term in office. In 2006 Putin set about ousting international corporations from Russia, including Shell and other Western energy groups. By revoking drilling licenses, bringing charges of pollution, and finally setting his tax police on them, he harassed the companies into selling their shares in Russian companies.31 In one high-profile case, the American chairperson of a joint venture of BP and the Russian oil company TNK was subjected to summonses, police questioning, and home raids until he eventually escaped abroad in fear for his safety. (TNK “took over” BP’s shares some years later.) The Russian government’s ruthless conduct was a symptom of its determination to regain control of the key sector in the economy—gas and oil production. The Kremlin had begun silencing politically critical oligarchs in 2003. Putin also railed against the West in the international arena. At the Munich Security Conference in 2007, he gave an inflammatory speech challenging the hegemony and universality of Western values.32 But Russia persisted in its efforts to join the World Trade Organization (succeeding in 2012), and welcomed Western investors into other sectors of the economy and the Moscow stock exchange.
The weakness of the state-capitalist system that Putin established lies in the primacy of government. Political scientist Neill Robinson has labeled it “political capitalism.”33 To do business in Russia, it is essential to have access to policymakers. This access is based on personal ties; it is not regulated or transparent. Opaque business connections are the tools of corruption, and making payments to elicit favors one of the methods. If the very system breeds corruption, it cannot be eliminated by raising state officials’ salaries, which helped to significantly reduce corruption in the new EU states, or threatening them with draconian punishments.
Another problem endemic to state capitalism is a large rich-poor divide. Authoritarian systems are not answerable to the public in the same way as are democratic systems. To some extent, feedback from the public caused the countries in East Central Europe to moderate their neoliberal reform policies and devote more attention to achieving social equality. In contrast, authoritarian regimes can more easily ignore discontent among the population, because they do not depend on popular voting. Nevertheless, Vladimir Putin has increasingly pursued a populist line and tried to raise the standard of living of the Russian middle class. The communist regime in China has acted similarly. In this way, they have made state capitalism more globally competitive, at least against a West that is whittling away its social security systems. Thanks to high returns from its natural resource exports, Russia had the means to spend generously on active social policies until the conflict over Ukraine erupted and the West imposed sanctions.
At the moment it seems that aggressive nationalism and military intervention against Russia’s neighbors is succeeding in raising Putin’s popularity. China is also pursuing a policy of expansion in the South China Sea. From a historical viewpoint, aggressive foreign policy is nothing new for authoritarian regimes. It repeats a pattern known from the nineteenth century and the age of imperialism.
In parallel with attacking the West, Putin has sought to build an alliance to rival the European Union. In 2010–11, Russia founded the Eurasian Customs Union together with Belarus and Kazakhstan; in May 2014 the Eurasian Economic Union was formed. From a Russian viewpoint, the Union is not complete without Ukraine as a member. Russia would certainly gain from closer economic links with its southwestern neighbor. But the Ukrainian oligarchs do not intend to bow to Putin’s political primacy. And the Ukrainian public does not wish to be dominated by its neoimperialist neighbor, especially as Putin supported ousted president Viktor Yanukovych. The basic problem of Russian (and Chinese) state capitalism is that in contrast to the European Union it relies on the hegemony of one state. Nevertheless, the combination of capitalism and authoritarianism certainly has some appeal. Belarus and Kazakhstan voluntarily joined the Eurasian group because, unlike the EU, it is not concerned with their observance of human rights, and perhaps allows greater autonomy than Brussels would. Under Russia’s umbrella, these countries can also avoid the economic regulation pursued by the European Union. International investors have returned to the Moscow stock exchange, notwithstanding governmental abuses of power like those in 2006 or the aggression in Ukraine. They may not be able to take over Russian corporations or exert much influence on Russian management, but they can expect high returns.
Since the great recession of 2008–9, the state capitalist system has also proven capable of an effective foreign trade policy. Recently, Russia concluded several business agreements with Hungary, including a treaty on the supply and construction of two new reactor blocks for the nuclear power station in Paks. Hungary will finance the plant, projected to cost around ten billion euros, through a loan from Russia, to be repaid over thirty years. The deal is a sign of the encroaching influence of Russian state capitalism on some eastern EU countries. It was a defeat for Western corporations such as Areva (France) and Westinghouse, which were outbid by the Russian Atomic Energy Agency Corporation (RosAtom). This is not a regular company, but a government authority controlling various companies, including a nuclear power plant construction firm.34
On a personal level, Putin no doubt found a sympathetic partner in Hungarian premier Orbán, with whom he shares a similar temperament and outlook. Both have displayed authoritarian tendencies—Orbán is sometimes nicknamed “little Putin”—and both favor the use of emotionally charged rhetoric, often referring to the greatness and suffering of their nations. Hungary lost two-thirds of its national territory under the Treaty of Trianon in 1920. Putin regards the disintegration of the Soviet Union as Russia’s Trianon. Both politicians cultivate virile, masculine public images. But there the similarities end. As a member of NATO and the European Union, Hungary cannot attack a neighbor as Russia did Ukraine. Bound by the EU treaties, Orbán has less political latitude than Putin. Nonetheless, Hungary has undergone a remarkable transformation from model reform country—the Bokros package of 1995, the pension reforms of 1998, the complete opening of the economy and several other measures ticked all the IMF’s boxes—to deviant. In response to the crisis of 2008–9 and the huge deficit in the national budget, Viktor Orbán has slackened the neoliberal order. He has nationalized the second-pillar compulsory private pension fund established in the late nineties. Ironically, he had introduced the scheme himself during his first premiership (1998–2002). By the time it was nationalized in 2010, Hungarian employees had invested the equivalent of over ten billion euros, which was then redirected into the national budget.
Ostensibly in order to consolidate the budget, Orbán introduced a number of special taxes on banks, energy companies, telecommunications groups, and international supermarket chains.35 Using nationalist rhetoric, he accused foreign corporations of profiteering at Hungary’s expense and causing many of the country’s ills. Similarly, the aforementioned sanctions against the international banks that had provided foreign currency loans were both populist and popular. They were followed by laws against international service companies, landowners, and leaseholders. While EU regulations prevented the Hungarian government from legally exempting native companies or citizens, the laws were implemented in such a way that in practice they mostly were.
Hungary’s economic nationalism is an indication that the Orbán government is not concerned merely with consolidating the budget but, like Russia, with reducing foreign involvement in the economy and renationalizing domestic profits. But Hungary cannot afford to go as far as harassing international investors. It has made several fiscal compromises, either at the European Union’s insistence or in order to avoid completely alienating foreign banks. A flat tax rate of 16 percent was introduced in 2011 with an eye to satisfying international investors, echoing the policy of many postcommunist countries after the turn of the millennium. It remains to be seen whether this contradictory economic policy is viable in the long term—most economists doubt it.36
For some time, however, Hungary has been improving its trade and current account balances; the economy is growing again. As labor costs in China and other Asian countries rise, countries like Hungary may regain their appeal as production sites for European companies. Yet despite levying so many special taxes, the Hungarian government is still in deficit. Crucially, Orbán has neglected perhaps the most important resource in the neoliberal order—investors’ confidence and positive forecasts. The younger generation, meanwhile, are voting with their feet. Since the outbreak of the crisis, some two hundred thousand young people have left the country to work abroad.37 Many of them are well-educated former residents of Budapest, who oppose Viktor Orbán’s policies. His combination of nationalism and populism is anathema to young, cosmopolitan Hungarians. However, the voters gave Orbán a comfortable majority in the parliamentary and European elections of 2014. In this way they rewarded him for his clever harnessing of popular discontent with the neoliberal order and its acute side effects.38 Recent developments in Poland after the election victory of the national conservative party PiS (Law and Justice Party) point in the same direction. The working poor, young people with trash contracts, and Polska B in particular voted for PiS, which has pledged to create a “fourth republic” of Poland (as distinct from the third republic created in 1989). These political reactions are probably the most dangerous legacy of the neoliberal transformation, and might cause further damage to the already weakened European Union.