Responses to Economic Crisis in Eastern and Central Europe set in a Comparative Context

Responses to Economic Crisis in Eastern and Central Europe set in

a Comparative Context

Prof. Martin MyantUniversity of the West of Scotland

OP VK Inovace výuky geografických studijních oborů (Geoinovace)

Introduction• Interested in policy responses, not just course of crisis• Countries with similar conditions, responded

differently (never identical conditions)• Response from how crisis is interpreted (financial

failure, lower demand, competitiveness, budget deficit...)

• Response not the only one possible, not necessarily solving the problems (pensions, cutting spending on unemployed)

• Separate issues; budget deficit and cutting state. Different ways to solve crisis, different importance to budget deficit and different ways to balance


Comparative perspective

• Mainly policy responses in the Czech Republic, Hungary, Poland, and Slovakia

• Comparative context, references to other countries; esp Estonia, Russia, Germany

• Differences in past histories, but central Europe fairly similar, also similar international positions (EU members), economic levels and structures

• Some differences in how crisis hit themOP VK Inovace výuky geografických

studijních oborů (Geoinovace)

Crisis transmission mechanisms

• 2008, financial crisis in USA, cut in credits• All those dependent on external credit (ee, hu,

some in ru: less cz, sk, pl, de)• Manufacturing dependent on credit (cars, but

very short term) (both exports and domestic)• Construction (longer term)• Budget deficits (lower tax, higher spending),

spending prevents depression• potential threat (NOT debt level, or deficit)


• Emphasis on the political factors in explaining the differences in reactions: in particular, the partisan composition of the government

• Reactions linked to the ideology of ruling parties: how they interpret the nature and causes of shocks, what seen as solution

• Party ideologies determine also access of interest groups to power


Wider comparisons

• Germany: similarities in economic conditions, but some quite different responses, maintaining employment, clearly neo-liberal agenda less prominent

• Baltics: will see similarities in economic trends, but response much more about cutting gvt

• Russia: importance of measures NOT used in EU, helping specific firms, but claiming it is normal and done in the ‘West’ (maybe the most natural response?)


Hard constraints

… severely limited options in Hungary onlyDifficulties in financing debt (as in hu) makes countries dependent on IMF financingFinancial sector problems (as in HU) -> gvt will help -> likely to need IMF financing ->Otherwise not necessarily constraints, more fears (engineered?) over constraint from state debt


Why GDP fell

• Immediate fall in GDP, due to fall in financial inflows, fall in exports, fall in gvt spending (or held in check by rise in gvt spending

• Fits with econometric model


The impact

Source: Myant/Drahokoupil 2012OP VK Inovace výuky geografických


The impact GDP

growth, 2008

2009 2010 2011 Fiscal balance,% of GDP, 2008

2009 2010

Czech Republic

2.5 -4.1 2.3 (3/4)1.2 -2.2 -5.8 -4.8

Hungary 0.8 -6.7 1.2 1.7 -3.7 -4.5 -4.2Poland 5.1 1.7 3.8 -3.7 -7.3 -7.9Slovakia 5.8 -4.8 4.0 (3/4)3.0 -2.1 -8.0 -7.9

Germany 1.1 -5.1 3.7 3.0 -0.1 -3.2 -4.3

Estonia -3.7 -14.3 2.3 7.6 -2.9 -2.0 0.2

Table 1 Main economic indicators, I, 2008-2011Source: Eurostat


Gvt spending and exports important

Gvt spending 2008

2009 2010 Exports, growth 2008

2009 2010

Czech Republic

2.75 4.8 0.5 6.0 -10.2 17.6

Hungary -2.0 -2.5 -2.5 4.2 -12.7 16.9Poland 7.6 4.8 5.9 7.1 -6.7 10.1Slovakia 8.0 13.2 0.2 3.2 -14.8 10.6Germany 2.3 3.7 1.3 -0.4 -18.0 15.1Estonia 11.9 -1.9 -9.5 -0.9 -17.3 24.7

Table 2 Main economic indicators, II, 2008-2011Source: Eurostat (real GDP growth and total gvt spending/GDP), EBRD, national statistical offices and central banks.


Credit has not recovered, gvt debt increase an issue

Credits 2008

2009 2010 2011 Gvt debt % GDP, 2008

2009 2010

Czech Republic 16.0 1.5 4.1 5.9 30.0 35.3 38.5

Hungary 10.5 -4.6 -1.4 1.3 72.3 78.4 80.2Poland 36.7 7.2 8.8 14.0 47.2 50.9 55.0Slovakia 18.2 3.1 6.0 8.6 27.8 35.4 41.0Germany 66.7 74.4 83.2

Estonia 4.5 7.2 6.7


Construction, % growth2008 2009 2010

cz 0.6 -0.9 -7.6hu 0.7 -1.6 -9.5pl 12.1 5.9 2.8sk 12.0 -11.3 -4.6


Policy responses

• Enormous range of policies and pointing in different directions

• eg, increase state spending (infrastructure, education, benefits, stadiums, subsidise jobs)

• Cut state spending, cut taxes• Support particular firms (ru) or sectors (de, sk)• Maintain jobs, make it easier to lose jobs...


Characterise by politics

• Or by economic theory? Neither quite fits• Politics: ‘social-democratic response’,• likely to increase demand• Keynesian: cannot balance budget by cuts, can

increase GDP by spending, logical to step in where private credit has failed (construction)

• But also: listen to interests to maintain jobs.


The hesitant semi-Keynesian response

• Counter-cyclical policies accepted by the left• And where societal constraints (elections, pl) • Can include sectoral support (Kurzarbeit,

employment creation), particularly when interest representation pushes for it

• But none of the political forces in CEE willing to pursue counter-cyclical policies in the longer term

• Includes also a different approach to balancing the budget, more likely by progressive taxationOP VK Inovace výuky geografických


‘neo-liberal’ response

• Outwardly, priority is budget deficit, crisis seen as crisis of state budget

• Solve by cutting, and by higher taxes• But not by more progressive tax system – likely to be

the reverse• Really two separate issues: priority to balancing

budget can mean taxes on companies and high incomes

• Cutting taxes, private pensions – a separate agenda, using opportunity of crisis

• Do come into conflict (hu and pl)OP VK Inovace výuky geografických


Other methods – Estonia and Baltics

• All Baltic Republics faced enormous problem because of past dependence on financial inflows, also falling exports

• ‘internal devaluation’, cut spending and wages, ‘neo-liberal’

• Reality: no financial collapse, thanks to Swedish banks, enormous drop in domestic demand, but not much fall in wages

• Export recovery, because of demand in Sweden/Poland

• Emigration• Gvts reelected


Other methods - Russia• Had enormous reserves, thanks to oil exports• Big firms had borrowed from western banks and

suddenly in trouble• State reserves used to help out ‘oligarchs’, to

support jobs and firms, company towns - selective measures reflecting how politics works? Which interests are heard?

• Plans for new growth, high-tech etc

• Doesn’t fit into soc-dem.v.neo-lib?


Other methods - Germany• Must protect industry and competitiveness, sets

context for interests that have an influence• Consensus on nature of crisis, also pressed by

interest representation• Education, employment protection (but not

costless to employees)• But against ‘printing money’, because of

experience last century, and not for big budget deficits

• More ‘pragmatic’ then soc-dem or neo-lib?


Hungary• History of higher gvt spending, but hit by IMF conditions• foreign currency debt (household and corporate),• Left gvt: agrees to cuts (until 2008: consolidation mainly

through revenue increases); assistance to banks and borrowers

• Interim gvt (left-supported, business input): implement cuts (benefits, pensions, salaries, other spending); regressive tax restructuring

• Right-wing (Fidesz): first balances through unorthodox one-off measures (tax on MNCs, bank levy, pension nationalization); supports banks and borrowers; regressive tax restructuring (flat tax, VAT hike); spending cuts, including a very limited unemployment protection and punitive/populist measures

• Neo-liberal under nationalist cloak?OP VK Inovace výuky geografických


Slovakia• Left (2006-2010), Right (2010-2012)• Left – tripartite fora, pensioners

– Keeping social standards despite crisis, protecting– Stimulus (tax, aut. stabilisers, lab. mark., sectors)

• Right – no anti-crisis policy, just fiscal consolid.– wage cuts, VAT rise, debt brake

• Pendulum back on the Left in 2012• Balance budget by progressive taxation,

reversing ‘flat tax’


Poland• Easier economic situation, maybe caught

boasting about this?• Hypothesise particular features of politics:

right-wing gvt, but aware of history of failure by being too ideological

• Pragmatic: listens to interests, IS gvt spending• Handles growing debt level by reversing neo-

lib pension reform to bring funds back to state• Back to normal after elections?


Czech Republic• Changing gvts: right-wing at start, caretaker gvt, right-

wing again• Not scared of losing elections: thinking of ‘now’s the

time to implement...’• Anti-crisis prog cut business taxes, cut job creation

(interests? But not individual firms – in this)• Caretaker gvt: listens to interests, contradictory prog• Right gvt, 2010: cut benefits, public sector, not just to

balance budget, uses Greek fears• Constraints? Protests, against ‘reform’ agenda (univs)• Will they get reelected?


Why not Germany, Estonia, Russia?

• Economic policy in CEECs has much in common, but differs from all of these

• Stronger social constraints than in Baltics: protests over public sector pay, election results, general level, not individual policies?

• More ideological than Russia? Won’t help individual firms, but cannot within EU.

• Less commitment to state role to improve competitiveness, less interest representation on individual policies than Germany? Fate of car scrap, Kurzarbeit, weaker on technology, research, education...


Same as before?

• How countries responded reflected deeply-rooted thinking, structures, who has influence

• Not seen as showing failure to create competitive economies?

• Questions are how far budget deficit matters and who should pay for it

• Doesn’t change economic thinking• Maybe shifts locus of political debate towards

left-v-right? Although labels never quite fit...OP VK Inovace výuky geografických


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Responses to Economic Crisis in Eastern and Central Europe set in a Comparative Context

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