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Responses to Economic Crisis in
Eastern and Central Europe set in
a Comparative Context
Prof. Martin Myant
University of the West of Scotland
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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
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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 them
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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)
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• 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
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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?)
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Hard constraints
… severely limited options in Hungary only
Difficulties in financing debt (as in hu) makes
countries dependent on IMF financing
Financial 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
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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
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The impact
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Source: Myant/Drahokoupil 2012
The impact
Czech
Republic
Hungary
Poland
Slovakia
Germany
Estonia
GDP
Fiscal balance, 2009 2010
2009 2010 2011
growth
% of GDP,
, 2008
2008
2.5 -4.1
2.3 (3/4)1.2
-2.2 -5.8 -4.8
0.8
5.1
5.8
-6.7
1.7
-4.8
1.2
1.7
3.8
4.0 (3/4)3.0
-3.7
-3.7
-2.1
-4.5
-7.3
-8.0
-4.2
-7.9
-7.9
1.1
-5.1
3.7
3.0
-0.1
-3.2
-4.3
-3.7 -14.3
2.3
7.6
-2.9
-2.0
0.2
Table 1 Main economic indicators, I, 2008-2011
Source: Eurostat
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Gvt spending and exports important
Gvt
2009 2010 Exports, 2009
spending
growth
2008
2008
2010
Czech
Republic
2.75
4.8
0.5
6.0
-10.2
17.6
Hungary
Poland
Slovakia
Germany
Estonia
-2.0
7.6
8.0
2.3
11.9
-2.5
4.8
13.2
3.7
-1.9
-2.5
5.9
0.2
1.3
-9.5
4.2
7.1
3.2
-0.4
-0.9
-12.7
-6.7
-14.8
-18.0
-17.3
16.9
10.1
10.6
15.1
24.7
Table 2 Main economic indicators, II, 2008-2011 OP VK Inovace výuky geografických
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Source: Eurostat (real GDP growth and total gvt spending/GDP),
national statistical offices and central banks.
Credit has not recovered,
gvt debt increase an issue
Credits
2008
2009
2010
Gvt debt 2009
2010
% GDP,
2008
5.9
30.0
35.3
38.5
2011
Czech Republic
16.0
1.5
4.1
Hungary
Poland
Slovakia
10.5
36.7
18.2
-4.6
7.2
3.1
-1.4
8.8
6.0
1.3
14.0
8.6
Germany
Estonia
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72.3
47.2
27.8
78.4
50.9
35.4
80.2
55.0
41.0
66.7
4.5
74.4
7.2
83.2
6.7
Construction, % growth
cz
hu
pl
sk
2008 2009 2010
0.6 -0.9 -7.6
0.7 -1.6 -9.5
12.1
5.9
2.8
12.0 -11.3 -4.6
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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...
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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.
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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 taxation
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‘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)
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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, ‘neoliberal’
• 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
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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?
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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?
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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?
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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’
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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 neolib pension reform to bring funds back to state
• Back to normal after elections?
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Czech Republic
• Changing gvts: right-wing at start, caretaker gvt, rightwing 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?
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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...
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Same as before?
• How countries responded reflected deeplyrooted 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...
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