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Eastern Europe awaits austerity

  Economic pain will touch off protests and may topple governments in central and eastern Europe this summer, but those inside the EU will fare better than outsiders like Ukraine, where the crisis is most acute.

Crisis responses have ranged from budget cuts in Latvia and Hungary, which have turned to the IMF and European Union for help, to others pumping billions of euros into economies laid low by investor flight and a collapse in western demand.

The fallout is severe across the region, killing growth in places that used to boast the fastest rates in Europe, causing unemployment to spike, putting banks under pressure and forcing cash-strapped governments to cut state wages and raise taxes.

Analysts say it could force out leaders in new EU members as elections approach this year and next, while populists may gain more support in European Parliament elections in June. Non-EU governments are facing even harder challenges.

For many states with huge external financing shortfalls, budget cuts are the only way to avoid meltdown, a factor grasped by electorates accustomed to chaos and shock therapy. That should prevent unrest from reaching the level of deadly riots that accompanied the Asian crisis in the late 1990s.

“People are used to fast change. It’s not going to plunge into mayhem,” said Katinka Barysch, deputy director at the Centre for European Reform. “And the international community has stood ready to help those countries that are in trouble. It didn’t let Latvia go bankrupt or Romania or Hungary go down the drain.”


Ukraine has been hit hard. It clinched an IMF deal following the collapse of several banks and a steep fall in its currency, and its economy has been battered by shrinking markets for key steel and chemicals exports, causing a huge drop in output.

Public anger and fears of job and benefit cuts have led to some protests. But analysts say bickering between President Viktor Yuschenko and Prime Minister Yulia Tymoshenko over IMF-prescribed reforms is a greater risk, as it has blocked the flow of those funds and could worsen the turmoil.

“They have a real danger of state failure,” said Ivan Krastev, head of the Sofia-based Centre for Liberal Policy Studies. “You can have the type of crisis that Russia had in 1998. You can have default.”

The IMF has already ploughed $40 billion into packages in Ukraine, in EU states Latvia and Hungary and non-members Belarus and Serbia. Romania wants a €20 billion EU/IMF deal.

But they come with a price. Latvia’s government fell last month following the most violent unrest there since the fall of communism in 1991, after officials slashed public sector wages by 15l% and raised taxes.

Hungary has frozen public wages and put a limit on customary year-end public sector bonuses. Trailing the right-of-centre Fidesz by 16% to 43 in a survey by pollster Median this week, the ruling Socialists face a crushing defeat in European Parliament elections in June that could heap pressure on the prime minister to step down before a 2010 general election.

Bulgaria’s Socialist government wants to pump billions of euros into the economy, but it has put on hold a plan to hike public salaries. And it faces little chance of reversing polls showing more than three-quarters of voters are dissatisfied.

The centre-right party of bodyguard-turned-politician Boiko Borisov is expected to win a general election due by July.

Analysts said despite political changes, policy choices are limited and any new government in the region will probably have to stick closely to existing austerity measures.

“There are going to be protests in a region that is already prone to protests. You are going to have several governments fall,” said Peter Zeihan, vice president for analysis at Stratfor, a global intelligence company. “But they realize what’s at stake if they make the wrong decisions... This is going to be a rough summer, but they’re going to have to bite the bullet.”


Only a few governments in the EU’s newer ex-communist members have won re-election in the last 20 years, and many voters are doubtful politicians have answers to the crisis.

“I have a hard time to see which of the two bad options would be worse -- the current government to stay on, or the opposition to take over,” said Mihály Szabó, an 18-year-old student in Budapest.

The IMF has taken what some economists say is a more pragmatic approach than in past crises and is not pushing for states it helps to immediately slash spending, although it has baulked so far at letting Latvia and Ukraine raise deficit targets.

The danger, apart from political upheaval, is that the crisis further delays reforms in education, business conditions and infrastructure projects that have stalled since the bloc expanded eastward in 2004, analysts said.

“Central and Eastern Europe is much more in the business of surviving the crisis than of using it,” Krastev said. “This is the major danger. Crises provide opportunities for reforms, restructuring towards a more competitive economy. I am very much afraid that this is not what’s going to happen.” (Reuters)