Between Scylla and Charybdis?
Participants from Central and Eastern Europe discussed issues of EU-Enlargement, financial crisis, and the introduction of the Euro at the seminar EU-Enlargement: New Members – Old Periphery? Part I.
Katharina Fussi - Dec. 04, 2006
Activists and experts from Slovakia, Slovenia, Hungary, the Czech Republic and Austria had traveled to the weekend seminar in Bratislava on November 11/12, 2006. The organizers ATTAC-Austria, CEPA Bratislava, IPE Vienna and Združenie sociálnej sebaobrany offered a forum to take up discussions that had taken place in Vienna earlier this year at the Alternative EcoFin during the Austrian EU-Presidency.
Joachim Becker at the IPE seminar in Bratislava, November 11/12, 2006. (Photos: Rasto Prochazka)
In the last decade, so Becker, the composition of the negative current account shifted from a strongly negative balance of trade to a strongly negative balance of income. This shift can be explained by a number of factors. In the early 1990s, the EU negotiated asymmetrical trade agreements with the Central East European countries. These agreements protected sensitive sectors of the EU-15 which were important export sectors of Central East European countries (e.g. agriculture). This aggravated the trade deficit. Foreign direct investment contributed to export growth but led to profit remittances as well. Generally, growing profit remittances and interest payments have to be paid as a consequence of the high capital imports which finance the current account deficit. As Joachim Becker indicates, it would be of great importance for these countries, neither to concentrate investments only on one or two branches, nor to focus capital spending only on one region of the country. For Slovakia, for example, this would mean a focus beyond the car- and steel-industry as well as a development strategy that is not reduced to Western Slovakia. He points out that there are indications of a high external vulnerability comparable to Latin America in the 1990s, like persistent current account deficits and escalating foreign debts. As far as an eventual membership in the European Currency Union (ECU) is concerned, Becker points to the danger of a financial crisis in the CEE in relation to an accession to ECU: Along with the privatization process, foreign direct investment (FDI) reached a certain limit. Slacking capital inflows or outright capital outflows could bring the CEE countries into trouble. Indeed, currencies of Eastern EU-members could come under pressure comparable to the Latin American examples. Governments might choose to enter the Euro zone quickly in order to avoid an exchange rate crisis. Such a strategy will have a price, Becker adds. The regulations of the EU-Growth and Stability Pact are rather likely to lead countries into a recession. "One might think", Becker muses, "that this pact had received its name because it brings neither growth nor stability".
Read in part II on the Czech and the very special Slovene experience.
The author studies Political Science at the University of Vienna and belongs to the editorial team of the Paulo Freire-Center in Vienna.
"Every financial crisis starts with a business euphoria"
Explaining the Latin American economic crisis in the 1990ies, Johannes Jäger, University of Applied Sciences BFI Vienna and IPE Vienna, argues that one of the reasons for the financial crises in Argentina and Chile was the adoption of a fixed exchange rate between the unstable Peso and the stable US-Dollar. While this allowed dampening the high inflation rate, the deficit in the balance of payments, in particular in the current account, was growing considerably. Following Jäger, "every financial crisis starts with business euphoria", but in general the euphoria does not last very long, like in the case of Argentina. The pecking to the US-Dollar attracted foreign investors but overvalued the Peso. Due to this overvaluation, prices of Argentine products increased and the following trade deficit did nothing to curb the inflating foreign debt. Constant monetary inflows put pressure on Argentina's current account and inflated its foreign debts. In trying to keep the Peso stable as well as in introducing restrictions to short-term flows, Argentina, as Jäger puts forward, stuck to a (neo)liberal economic and financial policy. When a long-term recession hit the economy, Argentina’s central bank was left without any room to manoeuvreBetween Scylla and Charybdis: Financial Crisis or Stagnation?
Joachim Becker, University of Vienna and IPE Vienna, points out that many of the figures on external debts and current account deficits in Central and Eastern Europe are worse than they were in Latin America in the pre-crisis years. Thus in some Central and Eastern European countries, above all in the Baltic States of Estonia and Latvia, the rate of foreign debts grows even faster than in Latin America. Since their accession to the European Union, the share of short-term capital inflows has increased significantly. Big waves of privatization in countries like the Czech Republic and Slovakia have contributed even more to an extension of foreign investments. What makes this situation critical, Becker argues, is the dependence on foreign capital.
In the last decade, so Becker, the composition of the negative current account shifted from a strongly negative balance of trade to a strongly negative balance of income. This shift can be explained by a number of factors. In the early 1990s, the EU negotiated asymmetrical trade agreements with the Central East European countries. These agreements protected sensitive sectors of the EU-15 which were important export sectors of Central East European countries (e.g. agriculture). This aggravated the trade deficit. Foreign direct investment contributed to export growth but led to profit remittances as well. Generally, growing profit remittances and interest payments have to be paid as a consequence of the high capital imports which finance the current account deficit. As Joachim Becker indicates, it would be of great importance for these countries, neither to concentrate investments only on one or two branches, nor to focus capital spending only on one region of the country. For Slovakia, for example, this would mean a focus beyond the car- and steel-industry as well as a development strategy that is not reduced to Western Slovakia. He points out that there are indications of a high external vulnerability comparable to Latin America in the 1990s, like persistent current account deficits and escalating foreign debts. As far as an eventual membership in the European Currency Union (ECU) is concerned, Becker points to the danger of a financial crisis in the CEE in relation to an accession to ECU: Along with the privatization process, foreign direct investment (FDI) reached a certain limit. Slacking capital inflows or outright capital outflows could bring the CEE countries into trouble. Indeed, currencies of Eastern EU-members could come under pressure comparable to the Latin American examples. Governments might choose to enter the Euro zone quickly in order to avoid an exchange rate crisis. Such a strategy will have a price, Becker adds. The regulations of the EU-Growth and Stability Pact are rather likely to lead countries into a recession. "One might think", Becker muses, "that this pact had received its name because it brings neither growth nor stability".
Slovakia: "A weak state is subsidizing strong companies"
Roman HavlÃÄ?ek, member of CEPA Bratislava, confirmed Becker's estimations. He emphasizes the doubtful role of private capital for Slovakia’s development and points to the fact that a lot of public goods like public transport, heating, and gas supply have already been privatized. The Lisbon strategy is "a mantra in Slovakia", HavlÃÄ?ek says and criticizes the development strategy of the Slovak government concentrating on existing industrial centers. HavlÃÄ?ek fears that the spill-over effect in favor of peripheral areas, expected by government officials, will not materialize. Furthermore the Slovak government concentrates on big business which doesn’t do anything for regional development: "a weak state is subsidizing strong companies". These government strategies, so HavlÃÄ?ek, might weaken less developed areas in Slovakia which would form a mere labor-reservoir for the industrial regions. Migration from the periphery to the center might be the result.Read in part II on the Czech and the very special Slovene experience.
The author studies Political Science at the University of Vienna and belongs to the editorial team of the Paulo Freire-Center in Vienna.
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