The economic crisis and Eastern Europe

By Jack Johnston

The global financial crisis has not only disturbed the previous course of capitalist economic development but also stalled many of its political projects. An example of this is the process of European Union expansion into the former non-capitalist states in Eastern Europe. While prior to the crisis these economies were enjoying high growth and falling unemployment, many have now been plunged into a severe downturn. This not only threatens their own internal political stability but also shakes the foundations upon which EU enlargement has been built.

The eastern enlargement of the EU, in 2004 and 2007, should be understood within the context of the restoration of capitalism that occurred throughout Eastern Europe from 1989. The economic collapse and social impoverishment, caused by the re-introduction of capitalism, were most severe and prolonged in the countries of the ex-Soviet Union. Yet the Central-Eastern European (CEE) states still suffered huge socio-economic declines. Ten years after the fall of the Berlin Wall, only Poland had crossed its pre-transition level of GDP; the Czech Republic, Hungary, Slovakia and Slovenia were just returning to this level, whilst the Baltic States still had a GDP level 20–40% below that achieved at the end of ‘communism’. Consequently poverty, unemployment and social inequalities all sharply increased, leaving millions of people with a standard of living worse than they had before capitalism was reintroduced.

From the mid-1990s the major factor that maintained these countries along the course of neo-liberal economic reform was the prospect of joining an enlarged EU. The aim of entering a common economic and political organisation, with the richest states of Western Europe, was a huge attraction for the populations of CEE. Yet, the EU demanded continual reform of the CEE economies – including further privatisations, liberalisation of the labour markets and a reduction of social spending. A contradictory situation therefore arose whereby the goal of entering the EU was generally supported by the region’s populations, although the reforms connected with achieving this aim were deeply unpopular.

By the time the CEE countries had entered the EU their economies had become subordinate to and dependent upon the major capitalisms in Western Europe. The Western European bourgeoisie aimed to exploit the CEE countries as sources of cheap labour, capital and markets for their goods. The destruction of the ‘socialist’ productive sphere allowed for the opening of these economies for Western goods and for the monopolisation of large sections of these countries’ industrial, consumer and financial sectors. This is most evident at the level of finance and banking. Over 80% of total bank assets in CEE (excluding Slovenia) are owned by foreign banks, with over 90% of these situated in seven Western European countries. The CEE governments also provided favourable conditions for international capital to extract huge profits – with low business and income tax rates introduced and the protections of labour eroded.

The CEE countries enjoyed high economic growth as they entered the EU. Between 2004 and 2007 economic growth averaged over 6.5% in the CEE states and the average rate of unemployment declined from around 11% to 7%. These growth rates were fuelled by a huge inflow of private capital. This was particularly high in the ‘financialised’ economies in the Baltic States where growth rates soared into double figures. Unemployment was eased by the ability of workers to move to Western Europe (despite the restrictions maintained by some countries such as France and Germany.) This was most evident in Poland, the largest of the CEE countries, where around 1.5m workers moved to Western Europe helping to reduce its unemployment rate from nearly 20% in 2004 to 10% in 2007. Consumers in CEE benefited from an inflow of products from Western Europe and the greater availability of cheap credits. Another important feature of the growth achieved during this time was the availability of some funds and subsidies from the EU. These are qualitatively different from private capital as they are often directed towards investing in infrastructure and fostering the development of the EU’s poorest regions, therefore acting as a form of counter-movement to the free market and providing an element of economic redistribution inside the Union.

Despite the impressive economic growth enjoyed in CEE, following EU accession, huge imbalances grew within the CEE economies. With its productive sector diminished during the transition to capitalism, CEE became increasingly reliant upon an inflow of capital from the West. Private business and consumption were buoyed by a dramatic rise in foreign borrowing, while an increase in imports expanded the region’s already large trade deficit with Western Europe. These contradictions were exposed by the global economic crisis, which has seen the scarce resources of capital flow out of the peripheries and back to the centre.

The global economic crisis has shown how the model of economic development in CEE, upon which EU expansion was built, is unsustainable. In 2009 the CEE economies contracted at an average rate of 7.9%, while the average rate of decline in Western Europe was 4.1%. Simultaneously unemployment increased in CEE from under 7% to over 10% between 2007 and 2009. The rate of economic decline was most pronounced in the Baltic ‘tiger’ economies. In 2009 GDP contracted by 13% in Estonia and by 18% in both Latvia and Lithuania. Unemployment rocketed in these countries – rising by an incredible 12% (to 20%) in Latvia in 2009 alone.

Those countries most dependent upon the inflow of foreign capital were most severely hit by the crisis, such as the Baltic states, Romania and Bulgaria. These countries have maintained fixed exchange rates with the euro, with their overvalued currencies hampering their recovery. Simultaneously, the outflow of capital from the region has caused large currency depreciations in those countries with floating currencies (e.g. Poland and Hungary.) Currency devaluations are a particular threat in many CEE countries where the majority of loans are often taken out in foreign currencies. The general slowdown in Europe has also hit those economies that are most reliant upon exports (e.g. Slovakia and the Czech Republic.) These exporting industries (for example in the car industry) have tended to be built with foreign capital, developing products for Western markets, and are therefore dependent upon high demand within the Western economies.

The economic crisis has been met by a new wave of shock-therapy reforms throughout the region that have surpassed those implemented in most Western European countries. With foreign capital pouring out of CEE states, their governments, which have access to scarce domestic capital, have been unable to support their own economies and populations. Many CEE governments were forced to turn to the IMF for support, which in turn demanded a series of draconian public spending cuts. Governments from a number of CEE states (including Latvia, Hungary and Bulgaria) have proposed a series of drastic public spending cuts that will both deepen their economies’ recessionary spiral and hurt the worst off in society. In March last year the EU rejected any possibility of implementing a European wide rescue package that has left its poorest economies, the majority of whom are in CEE, exposed to the crisis.1

The expansion of the EU was built upon a seemingly ‘win-win’ arrangement for both CEE and Western Europe. The huge profits made by Western European capital after the restoration of capitalism in CEE were consolidated alongside an expansion of the markets for their goods and the availability of a new inflow of cheap and relatively skilled labour from the East. Simultaneously, the CEE economies enjoyed a new influx of capital from the West, the region’s exporters could compete in an enlarged European market and the region’s population could move and work freely in Western Europe. As we have seen, the economic crisis has ended this arrangement and thus threatens the whole process of EU enlargement. The greatest danger however will not come from nationalist right-wing forces that could potentially grow within the CEE states – although this is obviously a threat. Rather, the greatest risk facing the EU comes from the rise of protectionism within the richest countries of Western Europe.

Despite the fact that it was the richest capitalist economies in Western Europe that benefited from the liberalisation and opening up of the European market, it is probable that they will be the first to raise new protectionist barriers. Signs of such a development have been shown by the reactionary demands raised by some in the UK for ‘British jobs for British workers’. Although the rise in racism in Europe – fuelled by the world recession and wars – has mainly centred on the Muslim communities, there has also been an increase in resentment towards migrants from CEE which has been exploited by the far-right.

Another example of protectionist ideology was the announcement by Nicolas Sarkozy that the French government would only protect car companies that did not close factories in France. The result of such a policy would mean shutting down factories abroad, which would particularly hit workers in CEE countries such as the Czech Republic.  

The neo-liberal model of European integration and expansion has come to a close as it is unable to maintain the necessary economic, social and thus political cohesion. The EU has, before and after expansion, enforced a set of economic reforms upon the CEE economies that has left them dependent upon international capital and dangerously exposed to the global crisis. Yet, the EU also provides some elements of protection for these economies. The ability of workers from these countries to move and work abroad is a right that the left must defend. Similarly the subsidies and funds (which are often insufficient, misdirected and grossly mismanaged) have allowed for some direct investment into the economies of CEE. In fact, during a time when private foreign capital has virtually deserted the region, EU funds have remained one of the only sources of capital left in CEE. While the major capitalist economies will attempt to reduce such redistributive capital flows, the left must resist the drift towards protectionism and instead propose an alternative economic programme based upon a European-wide investment programme. The alternative is that Europe will once again be torn apart economically and politically, which would most adversely affect the poorest countries in CEE and fuel the rise of racism and far-right across the continent.


1  Of course this situation is not confined to CEE. A number of Western European governments have recently announced their own austerity measures, particularly in those countries that are themselves most dependent upon an inflow of foreign capital. The four countries with the highest budget deficits in the euro-zone are presently Greece (13%), Ireland (12.5%), Spain (11%) and Portugal (8%). The governments in both Greece and Ireland have recently announced budgets that will dramatically seek to decrease the size of their public sectors and reduce public sector wages. Although Greece is facing acute budgetary and debt problems the EU has refused to help it financially and instead is using the crisis to urge a new wave of neo-liberal reforms in the country.