Eastern Europe in 2008

The most urgent thing to hope for is a soft landing for economies grown complacent amid perpetual sunshine and friendly faces. Large imbalances and a global credit crunch are an alarming mixture. Lars Christensen, a hawkish analyst of the region at Danske Bank in Copenhagen, notes that twitchy investors in the Baltic states and Bulgaria are already sending money market rates higher, and have driven down the value of the Romanian lei. Some early signs indicate that Santa will be kind. Credit growth is slowing. Estonia’s growth rate and property prices have dropped sharply: bad news for construction companies, but good for everyone else (and its current growth rate of 6% is still mouth-wateringly good by West European standards). But inflation remains far too high, sharply up on the year-end figure for 2006 in every country except Hungary. Higher prices for food and natural gas will make that worse, stoking the pressure on competitiveness.

Second on the hope list is better treatment from rich neighbors. The extension of the Schengen passport-free travel zone to the new members of the European Union risks being the high-water mark of integration between „old” and „new” parts of the continent. It is a fine thing to be able to drive from the north of Finland to Gibraltar without showing your passport. But the danger of leaving the western Balkans stranded in a no-man’s land is growing. Slovenia’s historic presidency of the EU, which starts in mid-2008, will be a huge success, if it can get membership talks started with Macedonia and unfreeze talks with Serbia, particularly on visas. The European Court’s recent decision in favor of a Latvian building company driven out of business by Swedish labor protectionism was a good start. But it is high time to end remaining labor-market restrictions and restart negotiations on free trade in services.

Third would be some glimmers of hope from Russia, both in its treatment of opposition activists at home, and its neighbors. Given the Kremlin’s overwhelming domestic support and the ease with which it gets what it wants from the outside world, it is tempting to hope that it might start taking things a bit easier. Two new troubling tactics against troublemakers are the abuse of psychiatric incarceration—most recently against an opposition leader in Mari El and the use of the draft against men of conscription age. Reports that Oleg Kozlovsky, a leader of Oborona, the main anti-Kremlin youth movement, has been conscripted despite his exempt status, are shocking given the hellishly brutal mistreatment that even apolitical conscripts can expect. Things look a little more hopeful on foreign policy: Dmitry Medvedev, at the time of writing the president-designate, seems to have no great chip on his shoulder about the West. If the Kremlin wants to show its cuddly and respectable face, then it ought to refrain from any political shenanigans in Georgia next month, and treat the Baltic states as fully fledged members of the EU rather than rebel provinces.

Fourth would be new faces. It is hardly surprising that voters across the region feel jaded: the tired collection of squabbling, self-interested and ideas-free politicians are, a poor advert for democracy. The growth of an economically independent and well-traveled middle class that sees the need for better government all too clearly should provide fertile soil for a new generation of competent, interesting leaders. For now, the new Polish government stands out in the political beauty contest, less because of its own charms than because the competitors are so unimpressive: sometimes weak, sometimes slippery, often both. On that note, Happy New Year. (economist.com)