Hungary, even more path-dependent?

Hungary is again pushing forward on its path towards its demise with the so-called Széll Kálmán-plan and the Draft Constitution. It would be (or probably will be) entertaining to analyze the constitution in depth in the light of Fidesz's organic/integral nationalism, how it correpsonds to this idea.JUst as it would be important to give a more detailed coverage of the economic plicies of the government, sometimes seemingly sane, but considered in its entirety lunatic at all, again very much an expression of the above mentioned ideology. However, in this post I will only formulate some preliminary thoughts and conclusions on one of the most worrisome aspects of the new constitution.


1. The new constitution will implement a debt ceiling at 50% of the GDP (although the GDP they measure to will not necessarily be identical with the Eurostat/National Office of Statistics data, a separate law will define it). Legislation on taxes and social contribution, as well as on the pension system will be subject of laws passed by a qualified - 2/3 - majority. It seems an exteremely rigid framework for any meaningful economic policy, practically requiering consent of the government and the opposition even to minor changes.
2. The government promised to bring down the debt-to-GDP ratio to 50% until 2018. The nationalization of rpivate pension funds can kickstart it and the government predicts a ratio between 65-70% in 2014 but 15% is still a long way to go. (Between 1998 and 2001, during their tenure they are still very proud of, Fidesz reduced the debt level from 62% to 53%, or 9% of GDP, with tight budgets between 1998 and 2000 and GDP growth around 4%.) 15% (more realistically around 20%) in four years seems a daring promise.

I tend to conclude the political intention and the legal framework will create a peculiar situation. Firstly, it will certainly put Hungary in the straitjacket of almost another decade of strong austerity, after 5 years from this experience. Moody's had some calculation on the possible scenarios of debt reduction and they concluded the 50% level is attainable only with an extraordinarily benevolent international environment and not quite realistically high growth rates. I would characterize it as voluntarism, and an extremely dangerous form of it.
Furthermore, there is a risk that the package - or more precisely the declaration of intention - announced last week - is simply not calculated properly. For example the Ministry of National Economy wants to spend the revenue from the electronic toll system entirely on debt reduction, while the Ministry of National Development counts on it as a source for the maintenance of public roads. Or, the government is propelling forward with a legislative package on public instruction, with an estimated annual extra cost between 300-500 billion HUF while the entire ammount of budget savings is estimated around 900 billion per year. And there is the danger, that they simply misinterpreted Hungary's economic woes. It seems they believe in the magic mixture of flat-tax (actually a significant tax-hike on labour in case of about 85% of the employed workeforce) and super-flexible labor market (i.e. very low level of social aid and unemployment benefits) just like Bajnai or earlier the Reform Alliance.
Meanwhile important elements of command economy appeared, especially the central regulation of prices for public services and utilities. But after it turned out that the new flat-tax is in fact a tax-hike they put pressure on employers to raise wages, now they threaten with legislation on this issue. And they couldn't find a solution for the problem of the fx-denominated loans, for the indebtedness of local authorities - the majority of which was controlled by Fidesz since 2006 and deliberately taking the path of making debts - and the PPP projects. The flat tax, due to the above mentioned reasons probably will not bring a significant rise in internal demand and households are still struggling with their debt and with rising public utility costs. I'm not really optimistic, although I can imagine the markets temporarily buying the package and waking up to an even worse situation after austerity bites but fails to bring meaningful growth.


P.S. It is again worth to look at Romania with its totally incompetent government, After narrowly escaping colapse and pushing thorugh a hard austerity package, still far from reducing budget deficit significantly enough, they are in a hurry to implement tax cuts. Although tehre is still no convincing proof that it could bring growth alone and Romanian is sliding down to large scale poverty with last years measures. Moreover, it will create a whole in the budget eytremely hard to patch, just look at Hungary, what is happening there. The government had to accept austerity after it carried out tax cuts around 500 billion HUF. Now, they have to cut public expenses, unemployment benefits, social aid etc. in order to save the money they handed out nicely, as a gift for the very rich and a narrow upper-upper middle class. 

Rewind?

With the events of the last few weeks one can easily think we are back to the gloomy days of early 2009. Unfortunately Marx’s famous dictum, everything in history is staged twice, once as a tragedy and again as a comedy, proved to be wrong. The tragedy of East-Central Europe was followed by the tragedy of South Eastern Europe: Greece and the unnoticed one, in Romania. The former literally collapsed (even if in an orderly way), one cannot perceive the measures adopted otherwise. The latter were and is on the verge of collapse, with decisions unheard of earlier taken. (25% cut in the wages of the public sector, 15% reduction of the pensions, closing down half of the existing hospitals, new taxes introduced and an overall tax hike is still not excluded.) Unfortunately no one will really revise his/her earlier views of the country as a rapidly emerging one, albeit the social costs of these measures (and coupled with the drying up of financial transfers from abroad, from workers in Spain, Italy etc. the economic ones) will hardly positive. Even if in a sense they were unavoidable.

Meanwhile, there are no signs of a vigorous recovery in the Baltics, where the strategy of internal devaluation – underway in Hungary, began in Romania and Greece - was fully implemented and hailed by some observers. Moreover, the  Estonian economy – seen as the first to emerge after a series of good signs in export – slipped back in the first quarter f 2010, albeit technically not in recession again. This is not spelling too much good for the new patients.

But the real problem is that it is still not certain that the decisions announced by EU politicians last weekend (a new bail-out fund worth between 500 and 750 billion euros) is the last act of the drama. First of all it is worth to remember: Europe stood here once, 14 months ago, when the idea of a 180 billion fund for the ECE countries – floated by then-prime minister Ferenc Gyurcsány was brusquely refused, most energetically by Angela Merkel. (Whose government, due to the problems I outlined in earlier posts suffered an important setback at last Sunday’s provincial elections in Nord-Rhein Westfalen.) It is not sure whether that amount would have been enough, but in a less strained environment, financial actors less focused on sovereign debt issues, it would have had a chance. Now – calculating with her share in the Greek package – Germany alone has to offer this amount.  And no one knows, whether it will suffice or not. Especially if the „markets” wake up from their excitement (driving them on Monday to exaltation) and realize: the offered solution is twofold and not exactly what they would like to see. It includes intensive monetisation of sovereign debt (something abhorring for monetarism, but a widespread practice throughout history) and bringing increased danger of inflation. (Albeit many, among them Paul Krugman, argue that under the present, deflationary circumstances this is not something one should be afraid of.) The other downside of the offered solution is that it is nothing else than issuance of new sovereign debt by countries already seen as heavily ladden with debt. (After the derivatives of the mortgage playing a role in the first phase of the crisis we can see the creation of sovereign debt derivatives – with what effect?)

I fear at the end the world have to accept the plain fact: the bubble has to be deflated and at the losses have to be distributed somehow, not just transferred from private books to state households. It will be painful, in the form of debt restructuring (in an orderly way) and probably through inflation and affecting everyone as a lot of savings and wealth of ordinary people were accumulated in financial vehicles and it will be accompanied by lower present day and possible future living standards. But at the moment the solution of taking over these debts by states seems not working in the long run and eliminating the burden with vigorous growth –while addressing competitiveness issues will need keeping costs( i.e. wages) as low as possible therefore dumping local demand – will eventually pose the question of where to export?

(Inflation is painful and can easily run out of control. But this process was underway for almost a decade, only outside our books. Anyway, the bubble blown on the financial market was the very sign of inflatory pressure, or even the inflation itself. A very dangerous, self-sustaining one, as the rise in share prices (less supported by growth output than by profit) was a form of inflation. Only as long as this mass of money was kept outside the „real world” its existence was not reflected in „real prices”. But why not apply some concept of inflation to financial market as well? Couldn’t it be a model case for inflation?)

 

Anyway, the new wave of crisis arrived, after more than half a year of restful period. Meanwhile the political landscape in Hungary was completely transformed (just as it was predicted on this blog when Gyurcsány resigned, with the painful campaign…) and we will have a chance to see the new government (pompously describing itself as a new regime born from a revolution) dealing with these issues. Hopefully they will be a bit different from their newly found ally in Romania, where the politicians (often implicitly portrayed as the courageous ones, compared to Hungary) postponed hard decisions and now have to announce a package they didn’t want. But they are almost immediately ready to give in to popular pressure….

 

And probably – If the events will speed up – I will return to posting…

It is so familiar!

Actually I'm not really surprised but as usual the idea of the Hungarian politicians being uniquely stupid and villainous, runing away from every copnforntation with the popular will is widely shared in this country. Due to the recent decisions of the Constitutional Court it was cpmlemented by another complain, that this institutions is a unheard defender of social rights, blocking every reasonable attempt to gain competivity with reforms. But this is only possible in this doomed country with its exceptional political and institutional system.
The last few weeks provided a lot of counterexamples. Well, not in the form of the emergence of bolder politicians and less socially oriented judges, but as examples from other countries in Europe (and funnily not only from ECE). It began with the Latvian Constitutional Court's verdict on the pension cuts, declaring this measur void. The Romanian prime minister had a very spectacular egg-dance recently, when pieces of new legislation were revealed and immediately denied. No lay off of 100000 employees from the public sector at once, now lower pensions, even if earlier it was almost explicitely predicted. (The method is almost the same as in Hungary. Some analysts express their desire, put forward as the only possible solution, the politicians tactfully refrain from comments - and maybe in the background they even reasure them and ask them to do it - giving the impression that they accept it. It soon ensures the support of these important figures, but as soon as they confront the popular resistance they realize that votes are counted in hundreds of thousands and not in dozens.)
But the most spectacular situation occured in Germany. In this country the Christian Democrats and their long-term allies the Christian Socialists from Bavaria could at last fulfill their dream and after five years of great coalition with the social democrats form a new government with the liberals. The liberals were running a campaign based on promises of health care reforms, tax cuts, relaxation of the labour market regulations etc. Analysts said that in fact it is a proof of the decline of social/democratic ideas and of the readiness of Europeans to embrace free market as it is understood in the anglo-saxon model of capitalism. (Even though the liberals proposed a program in which they tried to emphasize their human face as well.) However, after 100 days of rule, with some tax cuts delivered, ideas of health care reform unveiled their popularity plummeted. Certainly not independently from the permanent brickering in the coalition, but they also have to face more porfound problems. There seems to be quite narrow space left for further tax cuts without major cuts in social and public services. (Even in case of the passed tax cuts they atre for many counter-balanced by a rise in the prices of public services due to a newly impsed VAT regulations and due to the loss of public income at the local level. And mewnhile it turned out that the liberals insisted on a controversial tax cut for hotels after receiving a very significant contribution form a hotel owner.) The idea of an equal a basic, contribution of to health care is seen as disadvantageous to the lower income categories and favoring the higher ones. Moreover, liberal ministers do not seem to be too competent. And at the end the Constitutional Court ruled that the new system of unemployed support, called Hartz IV is unconstituional, because it is not providing people with the basic needs for their life.
What was the liberals reaction after a thorough investigation of their situation: people are not rejecting reforms, they are disappointed with their slow pace! Let's make it faster! It is so familiar. The Hungarian liberals always nurtured this comforting idea, incaapable to admit that they views are not shared by the majority of the people an dthey ended up as a collapsed party. Not thet FDP will have the same fate necessarily. But maybe not only Hungarian politicians are crazy and villainous species.

Hungary - once again left behind

For years the idea of Hungary having a unique and unparalleled crisis, that could not happen elsewhere was a dull, repetitive syntactic element of almost every commentator's opinion. Reasons were easy to find: nowhere was such a bad government identified, no society was more attached to its socialist past, no politicians were so fearful of losing elections, no country so corrupt. But at least, being the worst among every ECE country was a mazochistic consolation for supposedly having lost the forerunner position. (However, I have many times bored my few readers with this topic.) We even had and has our own, specific and particular crisis that was caused by our own government. (Yes, even today.) 

And now the world or the fate again turned against this small and much-suffered nation and with the effects of the crisis on state-households slowly, gradually but pronouncedly unfolding everywhere others are again overtaking Hungary, or at least almost literally repeating everything that was once considered as unique and not easily reparable mistakes. Not only in one country, but in a series of states.

Greece is the obvious example in many sense, with accounting tricks, giant budget deficit (once the Hungarian reaching 9,2% of GDP was described as world record and a clear sign of exceptional insanity, than what about a value somewhere between 13,7% and 15,5%?), social resistance to changes, a deficit reduction program considering raising revenues, not exclusively relying on budget cuts etc. 

But something similar happens in neighbouring Romania, the country of a small miracle recently, many times perceived as the next economy overtaking Hungary. After a year of incompetent governing, when politicians was not ready to take energetic action and accept unpopular measures because of the presidential elections at the end of last year, a nominally right-wing government announced some steps not so unfamiliar for people knowing something about Hungary's last few years. A minimal expected tax on companies, change of the tax base effectively raising the tax rate for most of them, simple lay-off of budget personal instead of "structural reforms", introduction of new taxes, like the "junk food tax", preservation of the privileges of the very rich, dubious contract in motorway construction, and immediate retreat as signs of some resistance appear. (The prime minister denounced his minister of finance regarding the lay-off of about 100 000 people from the state sector, and described proposals from ministries on new impositions as ideas of unexperienced people.)  What is clear: there will be weaker domestic demand in an economy earlier fueled by consumption and the government's only hope is EU funds and investment. (What would be badly needed, the minister for economy announced that his intention is to introduce electricity in every Romanian villages in 2012. Think of it, EU 2010!)

But the most ridiculous series of events unfolded in Germany. The liberal party that entered the government as junior partner after the social democrats lost at about 10% of their vote share at last year's elections, in September, represented a very straightforward free-market agenda, and proposed changes on the very same fields as their Hungarian counterparts, for example lower taxes with fewer tax rates (and elimination or reduction of some taxes usually hitting the very rich) turn towards more private health care system, with a unitary contribution for everyone, irrespective of their income. As the state household of Germany is not in a good shape (and as according to some observers the chancellor, Angela Merkel in the last years became more social democratic) it led to very loud and heated clashes inside the coalition. Albeit a meeting of the party chairs last weekend served as a solution for the internal fights that threatened to deepen the problems of a coalition that was welcomed by its members as the realization their dream coalition for more than a decade, but obviously made a very week start, it is not clear whether this attempt will be successful in the long run. And the similarity to Hungary is more than striking. An intransigent liberal party is pushing an agenda against the will of a majority and against the possibilities, always referring to the coalition agreement and causing upheaval. (Ok, in Germany the minor Christian social party also has some role in this situation, as they try to impede the erosion of their voter base with a confrontative image, acting as a counterbalance of the liberals.) 

I won't say, that the fate of the German coalition will be similar to the Hungarian one, but I somehow fail to see the prudent politicians, willing to make personal sacrifices, boldly acting against temporary unpopularity etc. And even the Polish government (in a country which at last, contrary to forecasts, avoided economic contraction) fails to bring budget deficit under control for electoral reasons. We are once again lost, others leading the pack.

Lost in Space and Time

Decisive second round of presidential elections in Romania. Some TV stations has an all-day program covering the events - funny and sad, comical and tragic - with the indispensable talking heads, intellectuals analyzing. An economist - former minister of finance -, a historian - former minister of foreign affairs, - and a political scientist - not a former minister at all - shares their views on Romania. The country is seriously and dangerously divided, as the unexpectedly succesful mobilization shows. The political debate in the capmpaign was on superficial issues instead of programs. The Romanians are dependent on the state. Romania is situated as the last country in the EU in every respect. The governments of the last few years were irresponsible. The country is seen as similar to the Ukrain. (!) As if I would be in Hungary. Maybe some of the Hungarian intellectuals has lrearned Romanian and asked to participate in Romanian TV programs? I don't think so, it would be ruinous to they conviction that Hungary is alone as the only divided country with a population hoping for help from the state, with superficial debates, irresponsible governments and at the bottom of the EU.

Prudent politician vs. Hungarian madness

One of the most typical accusation to the adress of the Hungarian politicains from the business elite that the political elite simply bargains long term advantages fro short term political ones. (The most recent one comes from the prime minister, Gordon Bajnai, who is not really a politician, but one of the experts - with current finance mininster, Péter Oszkó, who arrived with great plans into politics and administration and clearly had to realize that in the public administration best practices from business can be even outright failure...) This statment is usually supported by an argumentation, pointing out that other ECE political elites could have managed their countries better and were more focused on the long term. Well, after a deputy whip of the largest Polish government party told in an interview to Bloomber that his party is not ready to commit political suicide and make budget cuts until the elections in 2011 I think this refine construct could be forgotten. Ukraine is a complet mess, because politicians are not willing to committ the same suicie, Romania similarly, in Serbia - another recent candidate for overtaking Hungary in the self-flagellant and nationalist discourse - the number of pensioners is estimated to be higher at the end of the year as those working (a fact advertised by the largest and most professional Hungarian economic website, www.portfolio.hu as the only case in the region, even though it was already the case in Romania two or three years ago, although to admit it would have meant an abandonment of the idea of the Romanian miracle due to flat tax), and this series could be much longer. It is again a small but clear sign how self-focusing and how detached from realities can this supposedly expert thinking be...

(Oh, and it is not excluded that at the end Germany will experience something similar to Hungary's fate in the 2000s. The liberals in the new coalition are very insistent on their promised tax cuts - the justification is the same: lower taxes mean more employees and more income - while their partner(s) in this "natural" alliance are fighting against their ideas - not only against their proposed tax cuts and the realization of it, but privatization in the health insurance system etc. The conflict is clear and at least superficially not dissimilar to the internal conflict of the Gyurcsány-government in Hungary. Moreover, the tax cuts are a textbook example of redistribution from down to the middle and upper income categories. In the lower segment of income it will be offset by growing costs of public services - litter transportation, contribution to the costs of health care etc. That makes it an illusion or at least a dubious attempt - especially in ECE with relatively low income levels - that tax cuts will bring more purchase power, more demand for local services, consumption goods etc. As long as it had to be offset by spending cuts it will automatically lead to higher cost of public services and in case of low income levels this raise of expenditures will suck up the additional income. While those with a really high income won't really spend more on hair cuts as their hair won't grow faster due to more money....)

The typical ECE blindness - Hungary, an "oasis of stability", according to a Romanian business newspaper.

It is really hard not to laugh loudly or weep equally strongly. Ziarul Financiar published an article on Hungary,praising the efforts of the government and even stating that now the country is the most stable in the region. The article is a kind of exemplary of almost everything I have complained at these pages: wishful thinking, promotion of particular interests camouflaged as general ones, posing as well-informed even if it is clear that there was no real inquiry about the facts and the use of non-existent examples from the not-so-beloved neighbours in internal fights.
At the moment Romania is in a political chaos (for foreigners with a modest and secure income it is just a tolerable place), and the business elite proposes solutions putting the whole burden of the crisis on the population, especially on the lower social groups, not accepting any kind of personal loss, moreover even striving for personal gains in the form of further tax cuts. As something similar happened in Hungary in the last few months it is an obvious choice for giving examples and that way the exaggeration - the most stable country etc. - is comprehensible. But there is almost nothing to support this claim, besides statements from the Hungarian government, what is a dubious proof anyway. (Which government facing financial hardships would eagerly admit that their efforts brought moderate results and the seemingly better situation compared to the one a year ago is more a result of the growing risk appetite of the "very efficient" markets than that of thier own efforts.) Moreover, even the mesures listed in the article as the causes of this sudden but well deserved change in Hungary's situation has not too much foundation. The Bajnai government is far from being a technocrat one (the Ziarul Financira obviously portrays it that way because the president, Basescu proposed a prime minister from the Romanian National Bank and this designated premier suggested that his government would have been a technocratic one...), the corporate taxes were not lowered, but slightly hiked. On the other hand a series of measures, however welcome by the Romanian business elite they would be, were not hepling the fiscal stabilization and even the claims attached to them and mentioned in the article - for example lower social contributions will help employers to keep their workforce - did not visibly brought the suggested result (look at the growing unemploymetn in Hungary that is only counterbalanced by government financed public work programs, and not the supposed positive effects of lower labor costs). Unfortunately, what Ziarul Financiar presents as an example to follow, a very desirable set of measures, even in the presented form, is nothing else then a receipe for making social divisions deeper, differences larger, redistributing welth from the botom to the top of the society.
And even the typical ECE negligence is not lacking from the text. Although Bucharest is not far from Budapest and ZF would be certainly capable to send somenone there and who could make a thorough eamination of the situation, hear different opinions etc., they rely on a short note of Bank of America Merril Lynch describing Hungary as the inevitable forerunner of the region! That's the part that makes me weep and laough simultaneously... That kind of pompous and carless behavior! What some guys far away say about a country after putting some basic data in their models is worth more attention, is a more thorough knowledge of the situation than the one someone from there, with some work could have synthetized. (Just beacuse these guys are sitting somewhere in the West in an office building? or because this case, exactly because of the lack of information an be portrayed as a desirable soultion - at least for a certain social group - for the problems at home?) Welcome to ECE...

(Well, shall I explicitly note that the respective article was already taken over by some Hungarian websites?)

As summer recedes, public figures resume their work a new waye of stupidity strikes?

Not only I have returned from a long vacation accompanied by a hopefully exceptional silence, but the public figures of Europe and with them the media is filled with a new wave of opinions regarding the crisis, its consequences and effects in the individual countries. As if nothing have happened, and the mood of the economic world wouldn't be impressed by the new leading theme of "recovery" the first appearances were nothing else than sheer stupidity. Moreover, the cacophony and the surprise developments can undermine the very hope for a fast and strong recovery, especially in ECE.

Recovery everywhere - why to be scared?

Back from a long summer recess, although the lack of posts recently was not due to my activities (however overburdened I'm am with tasks and responsibilities) rather the lack of impulses and events. One could have seen a rising tide of good news (maybe even the favorite color has changed from green to a more ripened one), a series of countries posting positive growth figures for the second quarter (quarter-on-quarter, in yearly comparison it is rather pathetic) and economic sentiment soaring almost everywhere. As the latter is considered to be a so-called "leading indicator" (i.e. signaling in advance the trends of the respective economy) further economic expansion is expected in the coming month. The change was abrupt, and rather peculiar. While only a half a year ago (almost) everyone forecasted that the world is doomed, now (almost) everyone is prophesizing that our torture is already ended or it will soon end.

Europe's bottleneck

I'm living a honeymoon with my driving license. It is not a month old and I try to practic as much as I can. As I'm no spending my time in the middle of Romania (Sfintu Gheorghe/Spesiszentgyörgy) I could have reexperienced something I have noticed earlier as a passenger. The lack of the necessary infrastucture of traffic. There are no transversal motorways, crosing the country, no suitable fast traffic routes. Some of the main European higways were rebuilt in the last decade, but it is far from being enough. Especially if one takes into account the fact that Romania is situated along one of the most importnat landroutes in the EU. As the Western Balkans is still not a part of the common market the larger part of goods transported from Turkey and the Balkans to the West is crossing the country, having no alternatives. And without the necessary infrastructure the country literally became Europe's bottleneck. Trailers crawling along the two-lane roads with steep curves...

There is no direct relationship with the crisis, at least in a narrow sense. But as Romania's fast growth in the last decade was fuelled not only by a credit bubble and the inflow of financial transfers from the guest workers but the lack of major infrastructural development and investment it reveals a side of the low tax low redistribution approach not emphasized in the good years: without the necessary budget incomes there is no way to finance such works. (To be fair with Romania, it was amongst the most shbby countries at the end of the communist regime, therefore its need of infrastructural development was extraordinarily high, especially compared to the level of its GDP.)

It is not a major finding, nor a great discovery, but maybe could highlight how complex the situation in many ECE countries is. It is not only an issue of one or two percent more growth or 5 or 10 percent lower taxes. Many of those countries needed a thorough reconstruction and not simply a transformation. And once again, a problem of a single member state has far reaching consequenes for the whole of Europe...

Moldova reloaded

After the riots in the wake of the elections in April the parliament in Moldova was unable to elect a president (according to the constitutional provisions a candidate needs 61 votes in the 101 member parliament, the communist party had only 60 MPs) and as the constitution prescribes early elections were held at the end of July. The results - although the communists still retained their position as the far largest party - are different enough to modify the balance of power, but not different enough to resolve the deadlock. The outcome is highly improbable, even though adherents of so-called pro-European parties are in a cheerful mood, celebrating the fall of the last communist government. I do not want to discuss the options and possibilities as I have very limited expertise on the Moldavian politics. But the situation has some underlying characteristics worth to outline, more precisely the distorting effect and influence of the application of a very limited dichotomy - pro-Europeans and pro-Russians - regarding the political divisions in the area on the perception of external observes.

Detruisez l'Autriche-Hongrie - reloaded?

Indivudal states - as entities and historical individualities - are not eternal ones. A significant part of the world's and Europe's sovereign entities are relatively newly established, and many of the seemingly resilient ones went through phases in the last hundred years when their existence and/or sovereignity was in doubt. It is quite clear in the Eastern part of the EU, where every new member state didn't exist 150 years ago (or at least not in their present form and as sovereign states - for example Hungary or Romania), many of them was established as independent nations after the WWI but ceased to exist between 1939 and 1944, while others emerged as new "powers" of the region. The realignment of ECE happend again in 1945-1947 and after 1989.

The important point is that the present configuration of this part of the continent is not necesserily an eternal, given one sanctioned by thousands of years of history, or a divine action: it is a reasult of the collapse of greater frameworks of states, empires and would be nation states. Those who are familiar with the region's history will almost automaticly associate to violence, war, armed attacks on neighbours after reading such an introduction, especially after the rise of extrem rightist (and extreme nationalist) forces at the election for the European Parliament. But my only concern was to highlight that states can collapse, fail and be dissolved due to the circumstances. Some of them is simply collapsing, as its institutions can not control its territory, others' endgame begins at the fringes, with the loss of efficiency of the state administration and with the emergence of alternative powers at the local or regional level, others simply implode due to their incapacity to fulfil its tasks and responsibilities towards its subjects, and these factors can coincide with each other. But, although in many times a kind of external impact - in the form of war, crisis, presure from a great power etc. - plays an important role in it, the internal incapacity (impotency) of the state is almost never lacking among the factors behind such developments. And - as it is a lesson from these events - even the largest and seemingly quite stable formations can be dissolved very rapidly, at an astonishing pace.

Maybe we can see similar processes at the fringes of the EU today. Countries, struck by the crisis, without room for manouvre and having lost a significant part of their state revenues, compelled to follow prescriptions of great creditors who rushed to their aid and bailed out them, are in more and more dire situation, as they are forced to cut down their public services. The budget cuts in Latvia are affecting the public instruction system, the health care (for example certain surgeries will only be available for clients of foreign helth insurance systems from the autumn, as the Latvian helath care will cease to finance those for Latvian citizens), maybe the police, the judiciary system. In this case it is the result of accross the board budget cuts, but other examples exist in Romania or Hungary as well. In the latter the state financing available for hospitals was reduced significantly and only the reduction of their services could lead to some balnce in the expenses and revenues. (Meanwhile the cuts in the contributions of employers and employees to the health care budget will significantly worsen the financial situation of the health insurance system.) In Romania the lack of funds is almost everywhere, but it surfaces quite sporadically, either in regional or in sectoral terms. According to press reports one county tribunal will be closed in August due to the lack of financing, the salary of judges will be cut with 1/3 of it (in a country where - accoding to the EU's assessment - corruption is in full bloom, and the state is incapable to act against this phenomenon decisively), in many cities there is not enough money to open the schools in September etc. Although the government insists that they will provide at least the necessary basic financing, it is far from being certain, especially as Romania has to comply with the conditions of the IMF and the EU in order to receive the individual tranches of its huge loan.

Not that it would be exclusively a fault of the external world. The Latvian government is desperatly defending a currency peg from an eventual devaluation (and from this perspective salary cuts in the public sector are lying on the road to "internal devaluation"), the Romanian is caught between electoral promises last fall, an uneasy coalition of "social democrats" and "conservative liberals", an alliance for Romania('s wealth), really aimed to divide the resources of corruption among them, and between the coming presidential elections, while in both countries the "econimc miracle" of the last years was "financed" with low taxes and growing consumption - based on loans and loans and loans, leaving no buffer for a case of crisis.

But the most worrying development is concerning the future of the EU. The predictions - forecasting problems in the coherence of the eurozone - are not ceasing, while the handling of the crisis highlighted the deficiencies of the inter-governmental approach in times of crisis. The reluctance of the Germans to develop a real common perception of the crisis, to allow European institutions to act independently (although those never has shown much willingness to act that way) although comprehensible, was certainly not benefitial. And as Wolfgang Munchau points out: after the Constitutional Court's decision on the Lisbon Treaty everything will be even more complicated. Even in the field of common economic policy. Not to speak of facing the real problems, the incapability of ECE in the long run to dael with its underlying social problems and with the impact of the demographic trends without a common social policy. But if the slow dissolution of the East will continue it could easily reach to the heart of the union itself.

Why do statistical offices exist?

My preferred Romanian politician, Mr. Băsescu swung into action today again. At a conference entitled "The Future of Social Change: 1989-2009: Visions and Perspectives after 20 Years of Transition" he vigorously attaced the lazy and populist Romanian politicians as - according to him - Romania is in danger to become a country of peoples depending on social assistance. Mr. Băsescu - who recently began to play safe on economic issues, he even contradicted the optimistic forecasts of the Chair of the National Bank and predicted a lasting contraction of the economy - interpreted the facts quite peculiarly. It is probably true (I havn't checked it, I only rely on other data) that a half of the country's nominal population receive regular social assistance in the form of some payments. (It is actually more than half of the real population, as millions are working abroad.) But the alleged reasons for it - populist politicians, except Mr. Băsescu himself, of course, buying votes with social transfers - is a gross oversimplification of the social processes of the transition period.

According to official data the number of employed people in Romania, a country with a nominal population of 22 million, and a real one somewhere between 19 and 21 million, is at around 4,6 - 4,8 million. (Just a slight comparison: in Hungary, a country of 10 million, where the official rate of employment is not higher than 55-56% the sheer number is 3,7-3,8 million.) Moreover the ratio of active people and those who receive pensions - either regular or so-called agricultural ones* - is below 1, at around 0,98. That means: less than one working Romanian bears the burden of providing one inactive with some kind of benefits. It is usually not considered to be a healthy and sustainable situation. (It is true that the financial transfers of guest workers make this picture less disastrous, but as it is unofficial the state can not lift its responsibilities using it as a pretext, nor enjoy some decent income from it.)

The phenomenon was a result of the transition itself, when - not only in Romania, but in many other ECE countries - the suddenly rising unemployment was "cured" by allowing people to escape into the pension systems, momentarily relieving the states from the discontent of its citizens, but in the long run causing ever growing demands on the social systems. But even retrospectively it is not clear whether this treatment was a complete failure or more logical than it seems. In many cases (Hungary, Poland, Romania, Slovakia) the respective economies never really regained the lost workplaces (in Hungary the volumen is 1 million!) and even though outmigration was a factor rapidly depleting the reservoir of unemployed people in some cases (Romania, Poland, Slovakia) the rate of unemployment remained high. (Romania was seemingly an exception, but with the huge number of pensioners it is only a statistical trick.) The FDI focused policies were not capable to ensure a low level of unemployment in two decades and with the crisis hitting ECE and undermining the former economic model it is not clear whether the nearest future will bring further opportunities.

The situation is aggravated by the fact, that Romania experienced a long period of sustained high inflation and the wages remained relatively low in order to achieve competivity. The former led to a rapid loss of real value of social payments, the latter led to the necessity to rein in state income - due to lower taxes - to give a bit more to the "ordinary people". (It was also a core element of a perceived competivity advantage, although personally I consider this argumentation dubious.) Nevertheless, state income remained low not allowing to raise social spendings, but at the same time personal income was not growing rapidly as well (except in the last two years, but it was a result of overheated economic growth, tightening labor market, therefore unsustainable, and even with this rapid rise average wages remained the lowest in ECE, except Bulgaria, somewhere around 250-300 euros a month. Therefore it is not surprising that not only pensioners but other social groups need state assistance for various reasons. (For example some subsidy or support to the natural gas consumption, that can amount in winter months higher than the monthly income of a family.)

But, not denying the role of populist politics, in Romania and in other ECE countries, the main factor behind the extended social provisions - and their limited effectivity as well - is the process of transformation itself. There is no better example for it than Romania, with its large poverty stricken social sectors, shabby infrastructure (a source of balanced budgets in recent years was the lack of investment in those areas) lifting costs of social services and low wages in order to ensure competivity. From this perspective, Mr. Băsescu was not right, rather he completely missed the point: it is not a a shame but a necessity to be a nation of socially assisted people and the only option to alter the situation is to get rid of every kind of social responsibility of the state. (Even minimal ones, as for example average pensions are not higher than 100-150 euros per month, not a huge amount for decent living, but a real burden on a state household determined to lift every tax from enterprises.) But even in this case there would be a half of the population left without the necessary means for a subsistance.

* In Romania two pension systems exist, the regular one and the so-called agricultural. The latter is composed by people earlier working in agriculture during the communist era and paying contributions into a separate system.

A new migration period? - Fears and future of the East

The fear from a mass immigration from the East to the West was always prevalent since the EU accession of the countries in the region became a certainty. Its intensity never really diminished and it surfaces again and again, even though the recent years didn't proved it. For a certain extent quite the contrary happened, the migration was beneficial for both the destination and the country of origin, at least in the short term. But as the intention for migrating is not lower than it was some years ago one can consider it a structural phenomenon in the architecture of the EU, at least for the time being, and with lasting impacts on both the integration and the respective countries.

The main source of and reason for migration from the East to the West is very simple: the possibility to work and earn money, more than it would be possible at home. For a while the system is beneficial not for the countries receiving the wave of migrant and benefiting from the relatively cheap labour, but for the countries in the East, where the bulk of those who try to make a new fortune in the West invest their earnings and savings. Mainly in real estate, but a part of them even start new enterprises as well. But there should be one underlying assupmtion in order to preserve this behaviour: the huge differences have to became more moderate with time and that way enable he migrants to return home and live on their earnings there. (Well, again I know that the whole phenomenon is more complex...)

As far as the accession countries are concerned this last, important precondition was not realized yet. Although for a moment it seemed that soaring wages in some countries (Poland, Romania, the Baltics) can somehow attract the emigrées to return, it proved to be artificial. The raise of wages without the corresponding increase in productivity hurted the competitivity (it was caused by shortages in labour), while the flow of migrants was turned back (at least partially) by the effects of the crisis in the West, that led to the loss of low paid jobs, in a large proportion filled by migrants from the East.

Up to this point it is a rather an ordinary story with ups and downs and I'm not really keen on putting forward the issue of migration and migrants in that context. My aim is to emphasize the structural importance of the phenomenon in the
EU and its significance for its future. As the main reason behind the movement of labour was the huge differences between parts of the EU in a sense it was nothing else than a way to handle the tensions arising from the fact,that the market in Europe is much more integrated than the economic policy and the social systems. While the respective countries in the East were compelled to race for investemnts with relatively cheap labour and it meant low taxes as well, the inflow of money from the West was the only way to raise the standard of living significantly, not only for those in the working age, but for those in the pension systems, as the income for elderly peaple was ridiculous and terrifying at the same time in many cases. On the other hand the migration was in effect a way to deprive those countries from a considerable part of their workeforce, and even if it was not necessarily deliberate, it was an inherent consequence of the accession and the architecture of the EU.

The real problem is, that the countries in the east, even now struggling with the process of ageing, having no good prospects for their future composition of the population in terms of the ratio of active and inactive population are not in a position to make investments in sectors with higher additional value of labour, and there is a fair probability that they will be trapped in this process. They can't provide their population with even the minimal social security (there are countries with an avarage pension at around 100-150 euros per month!) and they could only rely on the migration and the resources sent home by those working in the West. On the other hand migration diminishes the reserves in workforce and soon leads to labour shortages resulting in the raise of wages, unsustainable in terms of competivity, and/or immigration into these countries, very probably leading to social tensions. Moreover, in order to keep the remaining workeforce throgh investment they should provide further tax cuts for companies investing in those countries, eiher for lowering the cost of labour or in the form of a low corporate tax rate. It is almost certainly a vicious circle.

On the other hand migration is not necesserily means of making those countries even poorer subconsciously. The migration can be a way - in this case also not necessarily deliberately - to compell member states to set up a kind of common, or at least harmonized social security system. For the time being migration was only prevalent among those in the working age. But it can evidently lead to the complete failure of the new member states what is a pressure on the whole community and on the other hand there can be a second wave of migrants, this time elderly ones, who are discontent with their situation and perspectives in the respective eastern social security systems and who has a right to settly in the EU anywhere. (Anyway, cynically speaking, as long as the politicians from the West and the Commission urge the Eastern countries to rein in social expenses it also implies that living on 100 euros per month is possible and decent, in compliance with the values of Europe as being an ever growing area of prosperity and therefore the 100 euos pension should be regarded as enough to settle in any other country.) If such a pressure would arise it would simply turn the process, this time the east not exporting the benefits of migration, but the negative effects, and not only in terms of budget expenses, but in terms of social tensions.

It is not a predestined story, of course. But it is certainly among the possible outcomes of an integration where there is no will to resolve the largest divides between new and older members. And as the integration of the capital markets benefited - maybe disproportionately - the older members, the integration of the labour market (more precisely the principle of the free movement of people) could benefit the new member states' population, although in a very peculiar way, clearly distoring the initial intentions behind it.

Never say reform again? - Despised words and obvious bias

The release of the GDP data gave an opportunity to quickly assess the situation in ECE and Reuters did it with an article yesterday. Although the piece is not unbalanced, it has some peculiarties in it, showing incoherence in the picture and the argumentation. (Although it is rather a report then a text expressing opinion, the concluding remarks disguised as a citation from Katinka Barzych, clearly shows the preferences of the authors, more reform is needed in ECE.) Especially the part about the two types of ECE economies is lacking any real factual basis and can only be interpreted as a sign of an effort of those analysts who visibly failed as experts, to uphold their views and their personal legitimacy. After yesterday's data it is really questionable to make a significant difference between so called reform countries - Poland, Czech Republic and Slovakia - and "reform laggards" like Hungary or Bulgaria (!). Especially in the case of the latter, where not only a budget surplus was achieved - that means having had more restricted public finances as in any of the above mentioned reformers, but that was also praised as a booming and investment and business friendly country. Other telling fact is the lack of Romania from the classification, wich was again pointed out as a model for the reform laggard(s)... Maybe it would have been too much even for our experts to qualify Romania as having brighter outlook after the country registerd the largest contraction outside the Baltics?

Even more contradictory is the classification of the Baltics. For years those countries were considered to be among the most reform oriented, most business friendly ones with flat-tax systems and budget surpluses, low redistribution rates and social expenditures,* while Hungary as reform laggard - implicitly even in the above mentioned article - was criticized because of its "high" social spending. The fate of the Baltics, simply dosn't fit into the framework of reform countries having a good chance to emerge early from the crisis, and I'm convinced that it completely undermines the whole argumentation. Moreover the "experts" expressed their views that countries relying on strong export oriented industrial sectors will have an earlier recovery, due to growing demands in their export markets as the recession fades. But the reform laggard Hungary has one of the strongest export oriented industrial sector that in itself performed quite well even under the strains of the restrictive fiscal policy of the recent years, with huge growth rates in production and export as well. Why do these so-called economists think that Hungary's export oriented companies wouldn't be able to use the growing demand in order to expand their production, especially as the country's public finances are in a significantly better shape then two years ago? And why do they think that the Slovak industry relying heavily not on a differentiated range of products but on three car producing companies will experience a growth similar to the one seen in the last years? Can they ensure that the demand for cars will remain the same? Can they predict that consumers will have the same amount of money to spend and will look after the same goods at the same amount? I would call it voodoo economics rather than expertise... Or, even worth the complete incapability to pose the right questions.

The similar effects of the crisis in ECE and the contraction far worse then expected in countries earlier expected to fare better than "reform laggards" can be a sign - besides showing those experts in their completely miserable condition - that the very model of growth implemented in these countries after the change of regime reached its limits, especially as the integration of the financial markets deprived the fiscal policy from its means to controll and influence the outside flow of capital.

Despite the possible objections and the important questions looming over ECE even if "experts" do not dare to ask after them, they sole advice is to continue reforms. Although the crisis and the events in the Baltics even before, revealed that the economic model so wholeheartedly advocated was not capabale to fulfil any of its promises - sustained and fast growth, growing incomes at the individual level, fast real convergence to Europe - they are sticking to these ideas. Peculiar. And not only peculiar. Sometimes it is complete blindness. Nigel Sharing expressed his opinion that: "“The Baltics have proven that they are flexible enough to carry out these reforms and wage cuts. The only danger is that public pressure could grow due to the rounds of budget cuts.” But it s a contradictio in adjecto. If the Baltics already prooved its flexibility then no danger of the abovementioned kind should exist. If such danger exists then the Baltics has not proven anything of its flexibility. Moreover, the political developments - recently the Estonian coalition practically collapsed, the rightist parties look after new possible combinatitons, excluding social democrats - shows that the pressure is growing. Why not, one should ask? It is not only the course of events to be expected in an economic crisis, but at the same time reveals another important part of the problem. The much advocated model ensured fast growth - at least seemingly and certainly only temporarily - but at the cost of social cohesion, with growing inequalities. Why shouldn't societies opt for a moderate growth - especally as the sustainabilty of the 6-7-8-9% rates in the medium term are highly questionable, at least after the recent crisis' experiences - instead of a faster one menaing only real convergence to Europe only for the highest 10% or 20% of the respective societies. Sometimes there is a reason behind the development that the phrase reform is more and more despised in some ECE countries...

Oh, and the Slovak press was once again true to its traditions. The SME summarized the Reuters article with the following title
"Reuters: Slovaks made refomrs, Hungarians didn't. We can see the result" Yes, we can see. Slovakia is falling from a higher cliff into a deeper canyon?

*A recent rankings of competitivity of individual economies, based on the data from 2008 (!) provided by the IMD Business School ranked the Baltics still higher than the other ECE countries, despite a huge loss of position compared to the previous year....

Doomsday or the truth revealed? - Q1 GDP data released...

It is almost official - Slovakia is always keen on overtaking Hungary either towards heaven or hell. The official (although preliminary) data on the economic growth in the countries of Hungary, Slovakia, Czech Republic and Romania is out. Every one of them was much better then the landlside experienced in the Baltics ranging from a 12,/% to a 18% year-on-year, but neither was very rosy. The Hungarian one 5,8% seasonally adjusted is slightly better then it was expected especially as the range of predictions/forcasts (or rather guesses, sometimes even bets) was between 5,5% and 10%(!). The other three publications were equally surpirsing, Slovakia with 5,4%,* Czech Republic 3,8% and Romania 6,4%. In these cases the data was far worse than it was expected, the contraction being twice or three times faster than predictions/forecasts (or rather guesses, sometimes even bets).

The conclusions? The situation is not rosy (ok, it is dire) but ECE is more homogenous than the "analyts' and "economists" were ready to admit. The predicted differences are less pronounced in terms of GDP contraction and if one compares the decline of the GDP with the year on year datas from the 4th quarter of 2008, then it is quite clear that Hungary, the economy of which fared worse in 2008, performed relatively better, not that it has any real significance among the present circumstances. The important issue is that those countries that were presumed to be more resilient either because being in the Eurozone and/or having a supposedly better tax system making them more competitive in the eyes of so-called analysts and economists underperfomed their forecasts. Those factors that were considered to influence the economic processes were seemingly not really importante in determining the economic contraction's pace. One can even dare to assume that they played no role in it. The broader framework of the world economy determines the fate of ECE not individual country's responses.

Moreover it is another question mark regarding the expertise of the analysts, who have a great influence on the image on the individual countries - conferring and/or conveying the opinion and judgment of the "markets" about those economies, and that way sometimes even deciding whether those will be financed or not - sticked to ideas clearly not really having roots in the present reality, namely that every country is an individual case and the main reason behind the depth of the crisis is the respective economic policy.

Otherwise the competiton is not finished. Slovakia is on the heels of Hungary and Romania is already leading the pack. Beware Hungarians...!!!

*Update: according to figures at the website of the Slovak Statistical Office the seasonally adjusted data for Slovakia was in fact 6% decline, that means even higher than the respective Hungarian one.

"I was not lying, I'm only idiot" - scene two of the teachers' salary saga

The story of the law raising teachers' salaries in Romania rolls on. The president, Traian Băsescu, after admitting a mistake yesterday was possibly warned by his spin doctors that it is dangerous to assume responsibility. As a consequence, at the evening he began to manouver in order to put responsibilty on anyone else. According to his new explanation it would have been strange not to promulgate the above mentioned law - even though the government insisted that it is practically impossible to realize, or only with a serious imbalance of the state houshold - while the National Statistical Office and the IMF predicted economic growth for Romania for 2009.

Apart from the usual deception in political communication one can once again highlight the fact how the idea of exceptionalism and singularity prevailed and prevails even over common sense in ECE. Although many "anaylsts'" forecasts ultimately turned out to be quite far from reality, to accept the idea that a country in wich growth depends on consumption based on the money sent home by guest workers in countries heavily affected by the crisis (Great Britain, Spain, Italy!) and on a housing bubble - a classical one, an appartment in a block of flats in Bucharest, built in the '50s was more expensive then a newly built flat in one of the most prestigious areas of Budapest - would not be influenced by the world ecenomy's events was simply idiocy, even if it was shared by so called experts as well. And it was clearly not independent from the fact, that it was tempting to use as a political leverage the fact that the countries seemingly hit by the crisis was "arch-enemies" of Romania and in this sense falling behind the own country, reinforcing the feeling that everything goes right in this state.

"Read my lips, I'm lying" - electoral promises and harsh realities in Romania

Romania, until recently a beloved model country for "economists" and "experts" and "analysts" in Hungary, is getting nearer to social turmoil. Not that it is expected in the nearest future and as I was there recently there was no visible change compared to timexs of "normality", when the rapid growth generated by the supposedly very simple tax system - at least according to the above mentioned categories of human beings - made it one of the "threats" for Hungary's never existing frontrunner position.

But the crisis didn't let Romania unaffected and as the consuomtion is declining, the housing bubble is ended, the guest workers in the EU countries were laid off and try to live on unemployment "benefits" while the government, in order to control the budget deficit made cuts once again reducing consumption earlier fuelling the economy Romaina arrived into the next stage of the deathly spiral: more budget cuts are needed. The real problem - at least for the politicians at the moment governing the country - is that these cuts will affect some categories whose votes were almost literally bought at the last elections, first of all teachers, whom these parties not only promised 50% raise of their salries, but they even passed a law, against the will and objection of the incumbent minority government of the liberals and the Hungarian minority party. Now the country's president admited tht it was a "mistake", but he defended his earlier position and action with the argument that in last October, when the respective law were voted, he could not have foretell that the crisis will affect Romania and the state budget will be in so dire state as it is.

I wouldn't say that it is a refined position, especially the knew-nothing part, but maybe it will be somewhat effective in political and electoral terms. (Romania's parties are not only preparing themselves for the upcoming elections to the European parliament, the more important prize is the seat of the country's president,m up for grab this autumn.) Otherwise, if someone considers this statement, there is something more substantial behind it tha the usual "politicians are always lying, but they are rarely compelled to admit it" phenomenon. Romanian politicians were able to veil the sour reality relying on the refined nationalism of the "every ECE country is an individual case" approach for this aim. As Hungary was forced to apply for an IMF loan they could have pointed out the huge difference between that country - for a while treated as the sick man of ECE almost universally, that way reinforcing the attempts of the local politicians - and theirs, for a long period described as one of the new "miracles" in the region. As the Hungaians were portrayed as solely responsible for their own fate, denying any similarity - not to speak of structural sameness - to the situation of other ECE countries it was easy to fend off counterarguments warning of the dangers of such a move.

But the necesity to admit this political lie and the reaction of the teachers - a strike in order to impede pupils to write their baccalaureate - reveals something else as well. Many people in these countries - always unobjected by those influencing the public discourse - percieved the process of European integration and europeanization as a well deserved reward for their transition from a "communism" to "freedom" and identified it with a fast catch up in material terms as well. It was reinforced by the mass migration and travel, as a result of wich more and more people knew the difference of the standard of living in "Europe" and in their countries, perceived as "Europeans". The perception of being European was accompanied with the idea that being European means material well being as well. The visible and sensible tension between this consciousness and the lack of its material elements (or at least the feeling that those are insecure), this duality of officially being recognized as "Europeans" and having very limited possibility to live as "European" is another common phenomenon shared by many in ECE, that makes it easier to be manipulated by financial promises, but easily backlashing on politicians as it makes it harder to make budget austerity accepted by the population.

Our Hero, the bycicle repairman?

The Romanian premier proudly announced yesterday that during the negotiations with the IMF the government was capable to defend both the flat tax system and its level, because, as he put it: the loan has a preventiv character and therefore the Fund set no conditions for it. (???) The latter statement is a bit confusing as according to the prime minister 2/3 of the loan will raise the reserves of the national bank while 1/3 will be used for recapitalizing banks and restart the flow of credit in the economy. This seems very similar to the case of Hungary where a part of the loan was directed to the reserves of the cantral bank (optically it raised the rate of debt/GDP ratio although at the end it is not the necessary outcome, if it will be used for replacing outgoing debt or not used up just returned to the IMF, but market "analysts" are hardly aware of this fact, only some real economists were capable to do this simple accounting task) and the IMF set conditions for the Hungarian government as well, although not specific, rather general ones. MMoreover, the IMF seems to be very "flexible" these days regarding the individual measures, for example in the Baltics they presented their proposals for Latvia, but yielded to the Latvians pressure and accepted that the country is not ready to give up the currency peg. I suppose this was the case here as well, the IMF delegation presented an overview of the situation prepared by their staff (according to the Cotidianul the IMF forecasted 4% contraction and 4,7% budget deficit) and suggested some measures. The Romanian governemnt defended the pride of the Romanian economy, the flat tax system and the low tax rates - at least in public - vehemently and prevailed.

It is quite probable that the IMF was not sticking to their own ideas as they accepted proposals of governments in other countries as well and even they are forced to accept the rapidly changing realities in ECE, making the reaching of the goals of the IMF sometimes illusory. Romania simply repeated the tactics of some Baltic states, its politicians fought for something easy to achieve to make the bitter pill a bit sweeter, and preserve national pride. We don't know of course how proud ordinary Romanians are of their tax system, but politicians are clearly obbsessed with the idea that: a, they are, b, this tax system is the primary source of the growth of the recent years.

Maybe they are right, although I would be a bit suspicious. But the real question is what kind of measures were offered and accepted by the Romanian government to comply with the conditions of the IMF, if they are not ready to raise budget revenues even if the income of the state houshold is collapsing in the recent months? (The chairman of the social democrats, the coalitional partner of Emil Boc's PDL attacked yesterday the IMF agreement and offered instead a relaxation of the budget deficit from 2% of the GDP, implicitly suggesting that the governemnt accepted keeping this rate as a goal of the agreement, leaving not much room for easing. But once again a caveat is in order. As Boc can present a success to the public it is possible that Geoana simply wants to have his own one and fights for a larger budget deficit after it was already agreed by the IMF.) The logical solution is budget cuts, but it is a problematic issue, as we could have seen in the case of Latvia as well. Unions are preparing for demonstrations even because of the cuts in the present budget that became obsolete in one month (it was accepted in February) and with further painful measures they will be even more eager to act. The coalition is not united regarding the necessity of the loan and it is another political risk. As for the economic problems, in Romania the export oriented sectors has much lower share in the GDP than in Hungary, Slovakia or in the Czech Republic and the country's growth was driven by a real estate bubble based on credit fuelled by transfers from abroad. (According to different estimates 1,5 -4 million Romanians are working abroad, mainly in country seriously affected by the crisis, like Spain, Italy.) It was similar to the Baltic case and signs of overheating were clear, therefore the task would be not only to manage the crisis but to direct the economy on another track. The government at the moment tries to launch great construction projects based on the better absorbtion of EU funds (the plans are 10bn euros for this year!) and to relaunch stalled housing projects. The proposal is simple, but doubious: local self-governments will buy those stalled projects and finish them.

It is not sure that another path, the raising of revenues would be succesfull as well. It clearly won't be benefitial for demand, although it hardly would be the main reason for the real estate market to be frozen. As the workers abroad will be affected by the crisis it will dissipate the basis of credits and consumption and it is hard to imagine the government pump enough money to the economy to substitute 7-9bn euros a year. But the real danger could be the financing of the deficit. Romanias credit ratings are in the "speculative range" and the main reason the country was not affected by this fact earlier was the massive transfer of income from abroad and the optimism about the countries future. But it is hardly a way to follow in the coming years and the government in an effort to defend higher income form higher taxation can deprive itself from budget revenues even after the crisis is over.

Shame, fear and pride - notes on exceptionalism

The Romanian president, Traian Băsescu was very active this week, adressing the parliament with a speech on the state of Romania. (Although it was an event similar to the usual State of the Nation Adress, as Băsescu's prerogatives are very limited it was rather an act of substituting the premier, Emil Boc. It is quite interesting, how the president is acting as a substitute of the prime minister, the resons behind it, but not the story I would like to deal with here.) After one or two months of contradicting scraps of news, statements on the necessity of an eventual crdit from the IMF the president announced that Romania will receive support from the international financial institutions and the EU. In hard times it is far from being surprising and perhaps as an action to contain the spreding consequences of the crisis a wise one, or at least an inevitable one. But the long story of the credit once again reveals the importance of national pride, the will of being differentiated from "others", from neighbors considered as traditional enemies.

As it is well known, two of Romania's neighbours, Hungary and Ukraine have a running agreement with the IMF, those countries are receiving financial support in the form of credit. Although Romania was considered for a while as a possible next to the line of countries applying for IMF credit it was a very delicate issue in the country. Politicians, the governor of the Romanian National Bank were either denying any overture towards the Monetary Fund or downplayed it as a condition of the EU for its own support program. There were many contradicting announcments, even Băsescu was oscillating between denial of the necessity and the acceptance of compulsion. He once even spoke of the necessity to consult the people on the IMF loan. (As if it would be time enough to make such consultations in case of necessity.) Others were spreading fairy tales that the EU has no such condition (a member of the European parliament even told the press that the EU Commission is prohibiting Romania from an agreement with IMF!) and used the opportunity for attacking the government. Quite peculiarly the chairman of the coalitional partner of Băsescu's PDL, the social democrats, is opposing the idea even at the moment, arguing that Romania needs an own "anti-crisis plan". (The government, in wich Mircea Geoana's social democrats are sitting announced its budget in February as a complete anti-crisi plan...)

Although I personally have no real emotions over IMF loans and similar agreements, even if I'm not quite convinced of the usefulness of their recipes for the respective economies, such feelings are not completely incomprehensible. But in this case the reluctance is rather a sign of the traditional enmities than the expression of real ideological convictions. (The social democrats were so eager to be a governing party that they abandoned almost every points of their election program, even those that would be advantageous for the state budget and in line with the traditional leftist perception of social justice, like the progressive tax-system.) The relationship between Ukraine and Romania is far from being relaxed, a territorial dispute was settled by the International Court in The Hague, Băsescu mentioned some territorial reorganizations in favor of Moldavia and at the expense of Ukraine and the Ukrainian nationalism, having a strong official support in the last months caused problems for the Romanian minority in Northern Bukovina. The other neighbor, Hungary is one of the traditional "others" in the Romanian identity, an arch-rival. The ever graver political chaos and the steep economic contraction in the Ukraine and the very slow economic growth in Hungary in the last few years - while Romania was treated as a new economic miracle - certainly accentuated the self-esteem of Romanian politicians. It became even more emphasized when at the end of last year the IMF and the EU considered Romania as one of the few countries predicted to have growth in 2009. Against this background the necessity to ask for an IMF loan - and to admit, that Romania has to face a grave economic situation, first of all contraction, certainly was a shock for many politicians. The IMF loan is not only the loss of sovereignty (one of the most important elements in the consciousness of the Romanian political elite in the 20th century) but the loss of the favourable position compared to the arch-rivals - the missing of the chance of overtaking them. (Although regarding Hungary it was rather illusory in the short term even one year ago.) In this sense the crisis relegates Romania to its earlier position, threatens to lose its newly acquired "Wunderkind" status and to eliminate the perceived and precious differences between the country and ECE. The fact, that it is treated as a catastrophic result clearly shows the stance of the Romanian elite towards the idea of ECE. (Băsescu promised in his speech not only a fast recovery, but the chance to get loose from the region in case of hard work.)

In Slovakia, before the gravity of the economic situation and the budget deficit was revealed, the leading newspaper, the liberal (in European sense) SME publsihd sarcastic commentaries on Hungary's premier and economic situation, while at the same time pointing out the hypocrisy of Robert Fico, the Slovak prime minister. Th surprising fact was not the negative opinion on Gyurcsány, but the scornful tone indicating a self-assured belief in the superiority in the Slovak economic reforms. Those were implied not as a possible and contradictory way of managing problems, but as the only, and self-evidently superior model, something to be followed obligatorily and at the same time conveying supriority to those who are pioneers of its case.

What about Hungary? Well, this country obviously does not belong to the region. The ridiculous story of the forint coming lose of the other ECE currencies continued to be spread, it was even mentioned as reality in the press at Wednesday. I'm not an ardent lover of the idea of national characteristic but there are obviously some people who are not happy without having the feeling that they are living in a doomed country. Moreover, the "analysts" of Raiffeisen Bank Hungary took it granted in their analysis published this week. I would say, that the usual distortion of time was somewhat reversed, and not complete history created based on ten or fifteen minutes, but ten minutes streched into a week or more, maybe into eternity. We are now living forever in that ten minutes last Wednesday....