The Last Peaceful Days?

24 september 2011

Central and Eastern Europe: The End of Illusions about the Golden Age

Laszlo Lengyel

Resume: The economic and political crisis of 2008-2010 has had an unexpected impact by calling into question the success of the third wave of democratization in Europe.

The economic and political crisis of 2008-2010 has had an unexpected impact by calling into question the success of the third wave of democratization in Europe. The relatively young democracies in Greece, Spain and Portugal, which emerged in the 1970s as a result of the democratization of former right-wing authoritarian regimes, and recently transformed left-wing dictatorships in Central and Eastern Europe, are experiencing political difficulties. The values of previously clear goals, like a single European market, the eurozone, a Western-style liberal democracy, the rule of law, and a free capitalist economy have come into question. Even NATO, traditionally viewed as a universal guarantee of security, has made Europeans doubt its capacity.

Not only individual nation-states, but European integration itself, for which a significant portion of national sovereignty was given up, is in crisis. The Maastricht criteria are being seriously challenged, just like European rules in general, while no new criteria have been devised that would be acceptable for all in the crisis situation. The EU is increasingly coming under the control of the great powers, especially Germany, while the “third wave” countries are being marginalized.

The problems facing Central and Eastern Europe also relate to southern European countries. The tasks that the latter have failed to solve so far and are awaiting resolution are:

  • regulating the behavior of national and international agents on domestic markets;
  • adapting to the “German-style” export- and savings-oriented economic model, dominant in Europe and characterized by a positive balance of payments, a low budget deficit, and a small amount of debt;
  • consistently using a set of measures to adapt to the crisis, which is something these countries have been unable to do because of the Mediterranean “way of life.”

Central and Eastern European countries are fighting the same three problems, but experimenting with different solutions. Almost all of them are threatened with marginalization (Poland looks better than the rest, but only from a distance). It looks as if history wants, once again, to show these countries their “place in the classroom.” Those who came late and were the last to turn their backs on the authoritarian systems have to take a back seat. Western European countries, which started school earlier and have learnt their lessons (the “first wave” democracies), obviously do not know how to deal with the “latecomers.” It looks like we will have to go where we came from – to a no man’s land – and stay there for a long time.

 

FIGHTING THE CRISIS ALONE

Hungary and Poland will have a great opportunity in 2011 when they hold the European Union’s rotating presidency. Both countries have a chance to positively influence Europe, help overcome the crisis, and form a post-crisis development model. However, there are concerns that such a chance will be missed. Central and Eastern European countries are not united in their fight against the crisis, and have failed to work out a common strategy. Instead, they have decided to fight the crisis through separate schemes of threats and flattery.

After the dramatic collapse of Lehman Brothers, EU governments and the European Central Bank stopped financing countries outside of the eurozone and refused to provide financial guarantees. The Central and Eastern European economies declined into a liquidity “desert.” However, even at that point the affected governments and central banks were unable to work together to improve their position.

As a result, Hungary nearly went bankrupt before the IMF and the EU bailed out the country through an individual contract. Other countries had less debt and faced the difficult situation later. Of course, it would have been difficult to achieve success in working together against the selfish European great powers, because the “latecomers” were inexperienced. But they did not even try! Moreover, the rest of Central and Eastern Europe worked hard to prove that they were not Hungary and that they were conducting a different economic policy.

The Czechs held the rotating EU presidency in the first half of 2009. Prague attempted to step up efforts against protectionism within the EU – particularly against a French proposition to close down Eastern European factories in favor of jobs in France. The Czechs were aware that protectionism would only deepen the crisis, causing widespread European unemployment. Hungarian Prime Minister Ferenc Gyurcs?ny frustrated the Czechs’ efforts when he presented, without consultations, a 190-billion euro request to provide assistance for Eastern Europe at the EU summit in March 2009. This has rendered the Czech initiative impossible to achieve and buried both Gyurcs?ny’s hopes and those of the Topol?nek government. Clearly, the chances were not good of achieving real results in fighting French protectionism and in disputes with the Germans over a package of emergency financial assistance for Eastern Europe, but at least it would not have produced such a ridiculous failure.

In February 2010, the Hungarian government, headed by Gordon Bajnai, succeeded in facilitating a V4 (the Visegrad Four group, including Hungary, Poland, Slovakia and the Czech Republic) joint initiative on a common energy policy at the Budapest Summit, which was a resounding success. However, the next Hungarian government, led by Viktor Orban, decided that such cooperation was not promising in the long term. Eastern European countries, including the V4, have no common policy on Russia. They negotiate energy prices, investment projects and other issues with Moscow separately, as if they were not in the same region.

In 2010, Hungary and Poland attempted to come to an arrangement with the European Union that private pension funds would not be included in federal budgets, thereby avoiding an increase in public deficit figures. Several other Central and Eastern European countries joined the initiative, but when the EU Commission showed the first signs of discontent, Hungary was quick to leave the joint action and put an end to Hungarian private pension funds altogether by nationalizing them. The immediate EU response was to acknowledge the Polish effort as that of a good student, and consider the new calculation method worth copying.

Since the late 1970s, Eastern European foreign trade has been developing along a dual dependence. On the one hand, Eastern Europe is linked to the Soviet Union/Russia in regards to energy supply; on the other hand, the region is reliant on Germany for new technologies and financial resources. Bonn/Berlin and Moscow have always negotiated with Central and Eastern European countries separately, forming their individual markets, and dictating prices. When Russia and Germany were in agreement, they “divided” Eastern Europe between themselves. In that case Eastern Europe was comfortable materially, but its pride and sovereignty was injured. If Russia and Germany quarreled, it was all the worse for Eastern Europe, as it experienced considerable losses. However, Eastern Europe would proudly wave its national colors.

By the end of 2010, the economic interest of the United States in Eastern Europe was insignificant. However, the region still plays an important role in defining U.S. security policy. Thus, there is a paradox: in terms of economic modernization and foreign debt regulation, Eastern European countries are clearly dependent on Germany, which disagrees with the U.S. on many global economic issues. On the other hand, Eastern European countries follow the U.S.’s geopolitical and military strategy that has recently come under German criticism. The specter of separate Russian-German deals made in the 20th century frightens Central and Eastern European countries, and forces them to rally around the U.S., which (and not NATO) they perceive as the only guarantee against such developments.

 

TWO PATHS – TO THE WEST AND TO THE EAST

Will Central and Eastern European countries be able to cope with the crisis? Moreover, what social, economic and political model will take shape in these countries after the crisis?

The Czech, Slovak and, in part, Polish governments have adopted a restrictive economic policy which must help reduce the federal debt and improve the budget balance. This policy was strongly recommended by Germany, the European Central Bank, and the EU Commission.

The financial austerity policy suggests that Germany’s export-targeted economy (Germany has the largest economy in Europe working on the principle of maintaining a positive balance of payments and increased domestic savings) will pull the Eastern European economies out of the recession that have accepted the German development model.

It is believed that, if implemented, this course will help bring the economies to the pre-crisis state and spur the convergence of EU countries. It is also presumed that it will facilitate the formation of civil societies, which will gradually become more savings-oriented. The process will be enhanced by a growth in the middle class and by factors relating to an aging population. As a result, Central and Eastern European societies will become more economically disciplined, somewhat akin to the German example.

The effectiveness of the “Germanization” course is questionable, though. As is known, even East Germans living in the territory of the former German Democratic Republic have failed to bring living standards up to those of Western Germany, despite generous financial assistance from the latter. The “Germanization” option creates an apprehension that the restrictive economic policy may slow down the development of Eastern European countries, postponing the time for their stable economic growth.

Nonetheless, the recommendations of the European Central Bank and the EU Commission, however eclectic they may be, offer a fairly consistent and pragmatic approach to overcoming the crisis. They focus on restricting public and private consumption, concentrating resources for accelerated economic growth, and overcoming backwardness in strategically critical economic sectors. Furthermore, these measures include the broad involvement of external resources, and coordination of the basic lines of economic activity with major global trends. They also require the implementation of profound systemic reforms. Politically, such crisis management is anti-nationalist, anti-populist and Europe-centered. It is based on the institutions of private property and the rule of law, and is globalization-friendly. This is a genuine Western approach.

Yet there is a different path, or “Eastern” model – neo-nationalist, populist, anti-global and EU-skeptical, consumption-oriented and state-capitalist. Viktor Orban’s right-wing Hungarian government chose this path for the country’s development. Budapest believes that a restored, strong nation-state will regain sovereignty from international financial institutions and transnational corporations, increase national capital and domestic consumption, and attract additional resources from dynamic economies, above all China and Russia. The Hungarian government keeps Europe hostage by being weak – you don’t want me to crash, so let me go! The Hungarian path means that the authorities postpone making the electorate pay for emerging losses, charging them to foreign investors and to future savings. This specific economic development model is matched by a specific consumption model, which the Hungarian government intends to shape by controlling and influencing private consumption.

It looks like the Hungarian authorities are trying to influence the European Union in the way communist Hungary’s Kadar government twisted the Soviet Union’s arm after the 1956 events. Budapest is demanding that the EU ease up on Hungary and make an exception from the generally accepted model. Otherwise, it says, the dominoes will fall one after another, and the EU will not survive. Tactics formerly applied to the Socialist camp are now being tried on the EU.

In the former communist countries of Central and Eastern Europe, government institutions and management were very similar, but the way of life differed significantly. Hungary’s “goulash communism” allowed for certain freedoms in private life, the right to own some private property, and the freedom to travel abroad. This is something that was a real dream for the majority of people in other Socialist countries where the level of individual freedoms was much lower and the economy was homogeneous.

Charles Gati wrote that “the New Economic Mechanism (NEM), begun in 1968, had introduced a measure of rationality into the economy. By focusing on agriculture, small-scale industry and the service sector, the reform succeeded in creating an economy in which plan and market could somehow co-exist and living standards rise as well. Kadar's ‘gulash communism’ – perhaps an early version of ‘perestroika’ – was also assisted by his regime’s relative political tolerance and openness – perhaps an early version of ‘glasnost’.”

The inhabitants of the “happiest barrack” in the Socialist camp, homo kadaricus (a term still in use), based its pride on this particular lifestyle and Forint-nationalism – not on the Hungarian language, the state tricolor, or history, but on a way of life. A homo kadaricus lived better than his neighbors, except for the Austrians, whom he was trying to copy. The Austrians, too, were inspired not by their history or the glory of a former empire, but by the standard of life they achieved, or Schilling-nationalism. In turn, the Austrians sought to equal the Germans, who had lost the war, but had won a comfortable and peaceful life of Deutschmark-nationalists.

In the 1990s, the vast majority of Hungarians saw the radical transformation of the country as a possible way of becoming Austrian or German. This is why they followed the elite into the EU, NATO, and the West. However, these dreams never came true. The Austrian way of life is just as far away as it was in 1989, if not farther. Eventually, this led the country to a special “Hungarian path.”

In 1989, the majority of the electorate voted for political right-of-center and radical right-wing parties that proclaimed a course towards building a strong nation-state, EU-scepticism, and a belief in the Twilight of the West. The country’s political spectrum now includes traditional ethnic nationalists frustrated by symbolic politics, national grievances, rage and emotion, as well as more rational, lifestyle nationalists, whose material needs were not met in recent years. The former can be purchased by waving flags and chanting slogans, while the latter are more demanding. To accept and legitimate the new authorities, they demand stable economic growth from the government and a continuously increasing standard of living.

Time will show who is right. The common European economy is in a deep crisis and EU institutions are strained. It is quite possible that the EU will not be able to withstand the showering challenges of the Greek, Irish, Portuguese and Spanish debt crises, and the 2011 debt-deflation turmoil while keeping the eurozone intact.

Germany is desperately fighting for the salvation of the euro and the EU’s common economic policy. The German approach rests on adopting a Competitiveness Pact, which proposes strengthening the coordination of measures by eurozone countries to reduce state debt, toughen control over their budget deficits, and unify national fiscal and social policies, specifically in what concerns pension allocations and age, and corporate taxes. In addition, plans are being made to issue Eurobonds intended to consolidate the euro and preserve the eurozone. If adopted, the Pact will result in the emergence of a “two-speed” European Union within one eurozone. Furthermore, countries beyond the eurozone will face a serious challenge. Should they combine efforts to deepen financial-economic cooperation, or stay away from it for a while?

Jaroslav Kaczynski, the leader of Poland’s conservative opposition, made a resolute statement on January 30, 2011: “Poland should stay out of the eurozone for the next 20 years or more. The situation of some countries in the eurozone shows that the euro isn’t beneficial for Poland. Instead of being replaced with the euro, the Polish currency, the zloty, should become the third reserve currency in Central Europe.” Kaczynski also said that Poland should improve its fiscal situation by levying taxes on banking operations. “The Polish banking sector, majority-held by foreign financial institutions, should be ‘re-Polonized,’ also with the help of the state, while foreign capital should not be allowed to buy Polish electricity and petrochemical firms.”

We may have entered a post-EU era; at least the European Union as it has existed for the past twenty years is becoming a thing of the past. Now self-help is required for each of us. This could be the twilight of transnational banks and corporations to be taken over by a network of state-run and private small and medium-sized enterprises. The Western-style rule-of-the-law countries may stand in the way of political agendas and could be replaced by “sovereign democracies” and command economies. Some believe this is the dawn of a new global era of neo-nationalism and social populism, of which Hungary, led by its Prime Minister Viktor Orb?n, will be a forerunner.

In 2009, Hungary succeeded in beating the first acute shock of the financial-economic crisis through resolute steps taken by the Gordon Bajnai government. Today, the real indicators of Hungary’s economic performance are not as bad as its international repute, especially after the implementation of the Bajnai economic package. Yet the good news from Hungary is of no use, since no one believes in the Hungarians anymore. Moreover, this is right, because there is a large gap between the better indicators and the Orban-government’s discredited policy.

A few years ago Polish analysts were concerned that the Kaczynski brothers’ economic mistakes would spread to Hungary. However, no one could imagine then that Viktor Orban would invent an exceptional cocktail, combining Kaczynski’s national-conservative populism with anti-Western economic measures.

Following the victory in the April-May 2010 general election, the new Hungarian leadership imposed a heavy anti-crisis tax on financial institutions and large corporations. Simultaneously, the assets of private pension funds, which accounted for some 10 percent of GDP, were nationalized. Control was introduced over the wage policies of private enterprises. A campaign was launched in the media against renowned writers, scientists and musicians, and a law restricting the freedom of the mass media was endorsed. These moves aroused a wave of severe criticism from Europe and the United States. Later, following reproving remarks by the European Commission, Hungary made amendments to the law. Yet the struggle continues in Hungary for control of the media.

Orban may well complete the “daring” job that the Kaczynski brothers began in Poland and Fico took up in Slovakia. Then Budapest might again be followed by Prague, Bratislava, Warsaw and other capitals. The new Hungarian disease is not only serious in its rash of economic nationalism and feverish political populism, but may contaminate the entire region. Cesary Kowanda has already drawn attention to the danger of the Hungarian disease for Poland, and pointed out its initial symptoms: a sharp increase in the budget deficit and public debt, and oversized social security allocations. He demonstrated how a “safe and sound” Eastern European country could suddenly turn into a sick nation.

 

EUROPE IN A DANGEROUS WORLD

European confusion is but one component of the dismal global political landscape. In any event, we may arrive at a turning point in 2012. If the Republican candidate wins the U.S. presidential election, the “remission” policy that has been in place since 2008 could disappear. With the re-election of President Barack Obama, the current detente may last for some time, but it will hardly make it irreversible. The Russian presidential election in 2012 will result either in the takeover of a conciliatory Dmitry Medvedev by a tough Vladimir Putin, or in a new political arrangement. If Putin, “a dove on the ground, but a hawk in the air,” returns to power, a constant threat will emerge that the Russian leader may at any point make changes to the “reset” policy by pressing the “delete” button.

China is going to have new leadership too, but most analysts expect a freeze rather than a thaw in that country. In Western Europe, which has increasingly often been swept by cold winds lately, conciliatory politicians are having hard times.

We may end up looking back on the reconciliatory years between 2006 and 2012 as the last episode of peace when more troops were being withdrawn, rockets were dismantled, and Russia’s relations with its neighboring countries thawed (with rare exceptions, like the war with Georgia). In other words, this was when Eastern Europe was not on the frontlines, but was a calm and peaceful place to live. Eastern Europe will definitely lose its calm if a violent and imperial U.S. uses our difficulties to legitimate relentless retort, if Russia trades its social problems for outside aggression, and if the EU plunges into chaos.

“The world remains more Hobbesian than the White House cares to admit,” Patrick Stewart said. “Global interdependence is increasing, but fundamental interests still collide and strategic rivalries persist. The Obama administration appears to regard the decline of U.S. hegemony with equanimity, anticipating that shared national interests and mutual security dilemmas will permit the established and the emerging powers to pursue collective goals, such as arresting nuclear proliferation, mitigating climate change, combating terrorism, and preserving an open, liberal international economic system. But it has left a darker scenario unexplored: What if the new global order leads to an era of multipolarity without multilateralism?”

In the worst-case scenario, as described by Stewart, it is pretty certain that the region from the Baltics to the Balkans will become a field for flexing muscles – both economically and politically, including with a military component – by the U.S., Russia and Germany in a game to redistribute spheres of influence and gain control over financial institutions, energy facilities and distribution networks.

The fight for control over Eastern Europe has already begun. During talks in Kiev, Bucharest and Belgrade held in spring 2011, Russian Prime Minister Putin proposed that Ukraine, Romania and Serbia enter into a strategic cooperation, above all in the energy sphere. It is obvious that the main goal sought by Russia in this maneuver was to weaken those countries’ ties with the West. However, Western top officials were on alert and took counter-measures. President Obama’s visit to Warsaw on May 27-28, 2011, and the conversations he held with Eastern European leaders, may ruin Moscow’s strategic intentions. During this visit, Obama announced U.S. plans to deploy S-130 carriers and F-16 fighters in Poland, and the concerted participation of U.S. companies in the development of large shale gas deposits in Poland. Thus, the U.S. leader indicated a significant strengthening in the U.S. presence in NATO’s eastern flank in the immediate future.

Remarkably, at a G8 summit shortly before his visit to Poland, Obama pointedly discussed a wide range of Middle Eastern problems with President Medvedev, but made no mention of U.S. plans for intensifying Washington’s relations with Eastern Europe.

Negotiations concerning the admission of Croatia to the EU (planned for 2013) and Serbia (after the “unexpected” detection and arrest of Ratko Mladi?) may move faster, active U.S. support of Belarus’ democratization with Poland’s assistance will continue, and Ukraine will certainly not be left to the mercy of fate thanks to the West’s helping hand. This will upset Moscow’s plans for expanding its influence in Central and Eastern Europe. Washington has intensified its activity in the region, actually ignoring Russians’ sensitive attitude towards Eastern European matters, and increasingly often resorting to hard power in place of soft power. 

* * *

In case of the most unfavorable, and confrontational, scenario, Eastern European countries will not have much room to maneuver. The nightmare, from which we seem to have been cured by Euro-Atlantic integration, may return. Zwischeneuropa will again fall into the claws of someone else’s rivalry and be held hostage to somebody else’s big games.

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