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Eastern Europe: a return to crisis

This article is over 12 years, 11 months old
Twenty years after the 1989 revolutions Mike Haynes looks at the recession and revolts shaking eastern Europe today
Issue 2138

Twenty years ago the countries of eastern Europe were rocked by a series of revolutions that brought down the Communist dictatorships that ran them. Many commentators claimed at the time that the transition to free market capitalism would lead to prosperity for all.

But now the region is facing a new crisis – and associated protests, strikes and riots – as a result of the global economic meltdown.

The International Monetary Fund (IMF) has already intervened to prop up the economies of Hungary, Latvia and Ukraine. Eastern European investment funds have all but collapsed. And that was just what happened last year – worse is expected in 2009.

The crisis is now crashing back and forth through different sectors of the world economy. Many fear that if the Baltic states of Estonia, Latvia and Lithuania go down, their economic meltdown will spill over into Sweden, Denmark and Norway.

There are also worries about larger economies such as Slovakia, Bulgaria, Romania and Ukraine. If they weaken further, it will put banks in Germany and Austria in even deeper trouble. Austrian banks have run up debts in neighbouring countries worth nearly 80 percent of the Austrian economy.

Now many governments in these countries are increasingly concerned about their ability to cling on to power. “Austerity packages” – the polite term for slashing spending and jobs – are the order of the day. With them come protests, much like the “IMF riots” that took place across Latin America in the 1980s and 1990s.

Last month saw the biggest demonstrations in Latvia and Lithuania for nearly 20 years. In Vilnius, the capital of Lithuania, a mass protest against austerity measures ended up in a riot as protesters hurled eggs, rocks and snowballs at the police.

In Latvia’s capital Riga, young people dug up cobblestones from the street, smashed storefronts and trashed police cars. The protests followed the government’s decision to push through massive cuts in social security payments.

Street clashes

Popular anger broke out elsewhere in eastern Europe too. The centre of the Bulgarian capital Sofia was brought to a standstill by protesters who surrounded the country’s parliament building.

In Romania thousands of workers walked out of factories and marched against government plans for more privatisation and budget cuts.

As January turned into February these protests spread to street clashes in Russia. This development caught many mainstream commentators by surprise. “Protests on such a scale were unthinkable just a few months ago as the economy boomed with record high oil prices and as the Kremlin tightened its grip,” said a BBC correspondent in Moscow.

The situation is also hotting up in Poland, where unemployment is growing rapidly. In December last year some 76,000 more people registered as unemployed – a rise of 2,500 a day. Many of these are people returning from working abroad.

Now Poland’s right wing government is rapidly revising down its growth forecasts and planning massive public spending cuts. Meanwhile the zloty, the Polish currency, is tumbling against the US dollar.

This is prompting protests. Some 4,000 steelworkers in the southeastern city of Rzeszow demonstrated against the government on Thursday of last week.

They had recently agreed to a 20 ­percent cut in pay and hours to avoid sackings. Now they have been told that 8,000 steelworkers in the region are threatened with 2,000 job losses. The militant protest – organised by the Solidarity trade union federation – demanded government aid for the steel industry.

The dream in these eastern European countries has always been to catch up with the more advanced countries of western Europe. Protesters in the Bulgarian capital chanted, “We want to live in a normal European country.” But this dream has always been hard to realise – and hope can only take you so far.

The old Communist regimes of eastern Europe believed they had a way of catching up with and even overtaking the West – growth that was tightly controlled by the state.

The lives of ordinary people were sacrificed to building up the economies of these countries as rapidly as possible. This involved huge investments in the military and in heavy industry. And for a time it seemed to work.

Reinvented tycoons

But by the 1980s things were going badly wrong, and between 1989 and 1991, these “state capitalist” regimes collapsed. Then the people of eastern Europe were promised an alternative path to deliver the same dream – free market capitalism.

The market certainly did deliver for some. A small group at the top made their fortunes, including many bureaucrats from the old order who jumped ship and reinvented themselves as business tycoons.

The situation in Russia is notorious and typical of the former Communist bloc. According to one estimate Russia had 80,000 millionaires in 2002 and 120,000 in 2006. The number of billionaires grew from seven in 2002 to 53 in 2007.

But it has been a rocky ride for the rest of the population. The Economist magazine recently ran a feature on the effects of the transition to market capitalism in eastern Europe.

“On any estimate, the number of ‘excess deaths’ since 1989 runs into the millions,” it concluded. “The number of actual deaths since 1989 is far greater than the number of deaths that would have occurred had ­pre‑­transition trends in death rates continued.”

Countries such as Latvia, Lithuania, Poland, Hungary, the Czech Republic and Slovakia were hit by serious ­crises associated with the transition. Mass ­unemployment rocketed in the early 1990s before the recovery began.

In countries that had been part of the former USSR, the crisis was deeper and longer. But by the start of this decade they too were showing signs of recovery. Buoyed up by the rising price of oil, the Russian economy began to grow fast.

But becoming “Western” was not simply about hoping for higher standards of living.

For many countries it also meant joining the European Union (EU). In 2004 Poland, Hungary, the Czech Republic, Slovakia and the Baltic states made it. Then in 2007 Bulgaria and Romania were let in.

Russia was left out. But it hoped that its gas and oil power would force the rest of the world to take it more seriously, especially as the price of oil hit $150 a barrel. Now the oil price is dropping and this strategy is going badly wrong.

Nowhere is the problem of trust greater than in Hungary. The government there has never recovered from a leaked recording of a secret speech by the prime minister in 2006, shortly after he won the election.

“We’ve screwed up,” he said, “not a little, but a lot. No country in Europe has screwed up as much as we have.

“We have obviously lied throughout the past 18 to 24 months. It was perfectly clear that what we were saying was not true. We lied morning, noon and night.”

It is now clear that the mini-boom following the transition crisis in eastern Europe was based on little more than a speculative investment bubble spilling over from the West. The obvious case is Russia. Output is falling and the oil price has collapsed to less than $40 a barrel. This has changed all the calculations made earlier last year.

But there are also problems in other countries. Central Europe has seen investments by companies such as Volkswagen, Renault and Nokia. But beyond this foreign investment has been thin, and focused on distribution and finance.

As in Britain and the US, real and bubble investment became so mixed up that it was hard to separate the two. Now investors are cutting back – and some even talk about moving on altogether.

Weaker domestic economies are especially vulnerable when foreign demand falls. Tourism also suffers and money sent back by migrants declines as unemployment rises in the advanced countries.

The hope is that 2009 will be hard but 2010 better. But this depends on the optimists being right in thinking that the worst of this crisis is almost over.

The region is also caught in geopolitical tensions between Russia and the West – highlighted by the recent gas disputes. Russia has certainly been using its energy exports to political effect, but it is also playing a good capitalist game and arguing that it should charge market rates rather than subsidise its neighbours.

Eastern Europe continues to get advice from global financial institutions that the solution is to cut wages, trim social ­benefits and thus become more “competitive”. According to the Organisation for Economic Cooperation and Development (OECD), minimum wage rates are too high, it is too hard to sack people and social benefits encourage people to stay unemployed.

This is despite evidence of poverty, low birth rates and a demographic crisis. Across the old Communist bloc population levels are either stagnant or falling.

The street protests are an encouraging response to this crisis – but they are not straightforward. Enormous political confusion still reigns, not helped by the mistaken association of the term “socialism” with the policies of the former state capitalist regimes.

Governments which seek to protect “local” firms come into conflict with workers whose jobs depend on foreign imports. In this confusion it is easy to turn the conflict towards local minorities.

Elements of the racist right have also been active, making it more important for the left internationally to make links with activists in eastern Europe. We all need to learn from examples of united protests against the crisis.

Contrary to received wisdom, the people of eastern Europe have a strong tradition of sustained campaigns from below and radical trade unionism. This spring is likely to bring more protests – and also more opportunities for the left.

Mike Haynes is the author of Russia: Class & Power 1917-2000, which is available at Bookmarks, the socialist bookshop. Phone 020 7637 1848 or go to »

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