Monday, March 29, 2010

Hungary's Economy Still In Free Fall

As talk of Europe's economic collapse focuses on the so-called PIIGS countries -- Portugal, Ireland, Italy, Greece and Spain -- less attention is turned to the hardship gripping most of eastern Europe.  Hardest-hit Latvia has lost more than 25 percent of GDP since their recession began, making it the second longest cyclical downturn on record -- and, as Mark Weisbrot writes, if IMF projections prove correct, it will soon pass the 1929-33 decline of the U.S. Great Depression.  The latest data shows Hungary is far from getting out of the trough.  But it's not alone.  A think tank is predicting at least 10% unemployment for eastern Europe. 

The latest numbers out of Hungary are grim.

Unemployment there averaged 11.4 percent between December and February. 

Hungary's economy shrank last year by 6.3 percent, and predictions for this year don't see any pickup.

And if dpa is reporting this correctly, the following statistic is truly frightening.

The German press agency reports only 54.6 percent of people between 15 and 64 are employed, among the lowest rates in the European Union. 

This is explained by the fact that so many Hungarians retire early.  Again another whooping stat: three million of Hungary's ten million citizens pick up state pension checks.

Countries in the region, including Ukraine, Latvia, and Hungary have been prescribed bitter medicine from the International Monetary Fund and European Union: "Internal devaluation, " as Weisbrot explains

Instead, they are following a program of “internal devaluation” – shrinking their economies and increasing unemployment so as to lower wages and prices relative to their trading partners. If they can accomplish this, then the hope is that they can export their way out of the recession (with a boost from imports falling as well).

Weisbrot was referring to the PIIGS, but the medicine has been dispensed in eastern Europe as well. 

In Hungary, the valued added sales tax has been raised to 25 percent, one of the highest rates in Europe.

Nagykanizsa, in the southwest of the country, has been especially hard hit by job losses. General Electric plans to lay off more than 2,000 people here. At the same time, unemployment benefits and pensions are being cut.

The country's prime minister Gordon Bajnai told Deutsche Welle he has steered Hungary away from the brink. 

Last November, the chief economist of the European Bank for Reconstruction and Development, (EBRD) had a gloomy prediction for the region. 

“The consequences of the world economic crisis will burden this region more than the rest of the world in coming years,” declared the chief economist of the EBRD, Erik Berglöf, speaking on the fringes of a conference held by the Austrian Central Bank in Vienna last week.

World Socialist Web Site, quotes an EBRD Transition report with some edifying reading.

In its Transition Report, issued at the beginning of November, the EBRD examined the reasons why central and eastern Europe had been hit particularly hard by the crisis. One of the main problems identified by the ERBD was the manner in which economies in the region had been financed in those years when they experienced sustained growth.

This growth was made possible almost entirely by foreign direct investment. As a result, many national economies in eastern Europe collapsed when foreign investment suddenly stopped following the eruption of the global financial crisis. The EBRD expects that in the coming months the current outflow of capital from the east back to western banks will continue.

The ERBD expressed concern over the extent to which eastern European economies were dependent on foreign currency loans. In many countries, loans are made only in euros, dollars or Swiss francs. In Austria, generally grouped among the western European economies, foreign currency loans total 17 percent of gross domestic product. The corresponding percentage in Latvia is 90 percent; in Estonia, 80 percent; and in Bulgaria, 50 percent of GDP.

WSWS notes the cruel irony that the ERBD now declares that eastern Europe must shed its “dependence on foreign currencies,” although it played a major role in promoting just such a policy.

Without the option of spending their way out of recession like the United States and United Kingdom, eastern Europe is being forced to snatch away some of the hardfought gains made after the fall of Communism.

Vienna's Institute for International Economic Studies looked into its fiscal ball, and predicted at least 10% percent unemployment rates across the former East Bloc nations. 

The institute does not see employment returning to pre-crisis levels for at least five years. 

The severity of unemployment varies widely in the former communist states: 20 percent in Latvia, 13 percent in Slovakia and 10 percent in Hungary expected in 2010.

The situation is worse in southeastern Europe, with a forecast of 30 percent unemployment in Macedonia, and more than 20 percent in Serbia and Bosnia, owing to weak economic growth.

Experts warn that a "lost generation" could be created by the high unemployment in young people between 20 and 25 years, who lack training and experience and have little chance of finding work in the next two to five years.

With job prospects bleak, expect voters to vent against those in power.

In Hungary, the ruling Socialist Party is predicted to be routed in April elections by the center-right Fidesz movement.

In the Czech Republic, the ruling rightwing ODS party is facing a crushing defeat in upcoming polls by the opposition Social Democrats.

But will Hungary's Fidesz or the Czech Republic's Social Democrats find the silver bullet to save their countries' respective economies?  Doubtful.  Decisions on that for the most part will be made in Brussels.

Nevertheless, elites in central and eastern Europe seem to want into the 'eurozone' and slipping into a financial straight jacket.

Latvia's ex-president has blasted suggestions that the eurozone should delay its eastwards expansion due to the Greek crisis and challenged the 16-nation bloc to get its house in order.

"The member states of the eurozone did not follow their own rules. Let's be frank about it," Vaira Vike-Freiberga said during a debate in Poland on March 29 with International Monetary Fund chief Dominique Strauss-Kahn before an audience of government and financial officials.

"If they had truly followed the rules they had set down, they would not be in the mess they are in now. All they have to do is follow the rules and they'll get out of it. To use this as an excuse not to fulfill the promise to the incoming members I think, frankly, is cheap," she said.

Only Slovenia and Slovakia have adopted the euro.

In the Czech Republic, President Vaclav Klaus thinks keeping the country's currency, the koruna, and not rushing to adopt the euro makes sense for the Czechs.  

Klaus, however, is an iconoclast, out of touch with today's "thinking" in the region.

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