Eastern Europe sailing into uncharted waters

Ukraine has just been promised $16.5 billion from the IMF to prevent its financial system from collapsing. Hungary will also receive a rescue package of yet unspecified value. The value of Polish zloty has fallen around 17 percent against the dollar over the past week, and more than 10 percent against the euro. As stock exchanges plummet, currencies collapse, and economists cut once-hot growth forecasts, these are the new hard times for the countries in Central and Eastern Europe – even those like Poland that until recently seemed relatively immune to the global financial crisis.

But it’s not just the economies of those countries that warrant closer scrutiny. The fallout of the crisis may be as big or greater in the political arena. Ukraine, for one, is not a pretty picture and others may follow. The crisis is exposing not only the weakness of the transition economies, but also the shortcomings of their political systems that will make it difficult to deal with the crisis. The Economist observes:

And that is the deeper problem for eastern Europe: not so much financial wobbles and weaknesses, but corrupt and incompetent politics. Their leaders found it hard enough to govern efficiently even when times were good. What will happen when foreign investors are stingier and growth slows or stops?

Now, when steering the region’s economies out of the stormy waters is combined with the unavoidable necessity to go back to tough unfinished reforms (public finance, labor market, education, etc.), the current financial crisis is a test of those young democracies as well. And the Western countries, once sure examples to follow, are being crushed by the magnitude of their own problems and offer little in a way of useful guidance.

The political compass, which once sent a reliable, if often ignored, message about the needed direction of policy, is swinging wildly as Western governments break taboo after taboo in the hope of fending off financial meltdown. For countries that have been told that privatisation, liberalisation and balanced budgets are the sure path to salvation, these are confusing times. The result, says Ivan Krastev, a Sofia-based pundit, is “an implosion in the idea of normality”.

Can Europe – and in particular its Eastern half – cope?