Reports from JAMIE SMYTHin Brussels, DAN MCLAUGHLINin Budapest and DEREK SCALLYin Berlin.
The problems faced by central and eastern European states as a result of the current financial and economic crisis will top the agenda of an informal EU summit due to take place in Brussels on Sunday. Concern is growing that the severe economic downturn in the region could prompt more public protests, further political instability and a need for additional financial bailouts.
Hungary and Latvia have already been forced to go cap in hand to the International Monetary Fund (IMF), the World Bank and the EU to source emergency funds.
But analysts are predicting that states such as Romania or Lithuania could be next in line for a bailout and the World Bank has asked western EU states to provide funds to help banks in the region. Even a state with relatively sound finances, such as Poland, has seen its currency, the zloty, lose 28 per cent of its value against the euro since October. This is now crippling many homeowners in the region, who took out mortgages in foreign currencies such as the euro or the Swiss franc to avail of lower interest rates in better times.
Unemployment is rising as international investment in the region dries up and export markets shrink in the downturn.
There is mounting pressure on public finances which, in turn, is forcing governments to take unpopular measures that anger the public. Weeks of protests in Latvia led to its government’s fall last Friday.
There have been other protests in countries all across the region. And more are expected in the weeks to come. JAMIE SMYTH
CYPRUS: Spared the worst – so far
A year after joining the euro, the island appears to have escaped the extreme economic ill-fortune in the rest of the EU. The central bank says the euro has helped the country avoid a recession by a good margin, as has tight banking regulation. Growth is down from 3 per cent in 2007 to 0.6 per cent in the last quarter of 2008, with signs of job losses and a consumption slowdown. Official figures note a deceleration in the banking and property sectors, but performance in the services and construction sectors remain satisfactory.
MALTA: Brussels watching budget deficit
Malta is not yet in recession, although a slowdown will drag down the economy, with the jobless rate likely to rise. Though it is cushioned by a year of euro membership, economic surveys forecast a drastic decline in business and consumer confidence in the coming months.
Growth of 2.1 per cent last year will drop to just 0.7 per cent this year and the European Commission has its eye on the island to see if its budget deficit remains above the euro zone’s 3 per cent ceiling.
ESTONIA: Export collapse prompts call for currency devaluation
For years, the flat-tax economy of the north was a model pupil for many. But drastic tax changes are looming as the Estonian government seeks savings of 8 per cent, or €5.7 billion, to counter the lowest economic growth in eight years.
Most controversial are plans for a 10 per cent civil servant pay cut and a 5 per cent pension increase, just half what was promised.
The economy is expected to shrink by 10 per cent this year as consumption plummets and the property market grinds to a halt.
The important export market has been hobbled by the high value of the Estonian crown. Industry leaders are calling for a devaluation of up to 45 per cent.
The government is anxious to keep the budget deficit below 3 per cent and not to endanger its road to the euro zone. But it is slowly running out of options.
POLAND: Squeeze begins as currency falters
Severe pressure on the zloty has brought home the economic downturn to Poland, with the currency slumping 48 per cent against the euro since the summer.
The Polish government has intervened to support the currency and has promised to do so again if the decline continues.
A weak zloty is not just bad for business but also for the 70 per cent of Polish mortgage holders with loans in foreign currencies, predominantly the euro and Swiss francs.
The central bank has cut interest rates four months in a row to stimulate the economy. Growth is expected to hover above zero by year-end and unemployment has jumped one percentage point to 10 per cent.
The slowdown is playing havoc with prime minister Donald Tusk’s plans to join the euro zone by 2012.
Opponents of the move say the current instability makes it a bad time to peg the zloty to the single currency, while the pro-euro camp is worried that, unlike neighbouring Slovakia, Poland has already missed the boat.
SLOVENIA: Euro stability welcome as growth slows
Lower domestic and foreign demand for products is damaging Slovenia, the only former Yugoslav republic in the EU and, with Slovakia, the only eastern EU member state in the euro.
The euro has saved Slovenia from the currency fluctuations suffered by neighbouring states, but unemployment is rising and industrial output is falling.
Several companies have scaled back production and introduced shorter working hours, and the government is offering subsidies to such firms as long as they do not sack full-time employees or pay bonuses to managers.
The state has also cut some taxes and offered to guarantee about €12 billion in loans.
After expanding by 4.1 per cent last year and 6.8 per cent in 2007, Slovenia’s economy is expected to register barely 0.6 per cent growth this year.
LATVIA: First political victim of the crisis
In a few months, Latvia has moved spectacularly from being the EU’s fastest-growing economy – at more than 11 per cent in 2006 – to economic ruin.
Behind its fall is a tale familiar to Irish ears: a booming economy awash with cash and a property bubble caused by expansionary bank lending.
With its currency, the lat, pegged to the euro, the government was unable to steer capital inflows through interest rates. Inflation hit 15 per cent last year and, when the property market collapsed, the economy shrank 10.5 per cent in the fourth quarter alone. A €7.5 billion bailout by the IMF followed and further aid may be necessary.
After weeks of protests that sometimes descended into riots, the government collapsed last week.
Latvia’s problems have been compounded this week after rating agencies downgraded the country’s sovereign debt to “junk” status.
Latvia can now only borrow money at drastically higher rates than other EU members, making it difficult to contain the budget deficit, as promised to the IMF.
ROMANIA: Getting set for austerity plan
Two major ratings agencies have downgraded Romania’s credit status to “junk”, making it harder for the country to borrow and refinance existing debt. The new centre-left government has drafted an austerity plan for 2009, scrapping most of its pre-election social spending promises and pledging to slash the budget deficit.
But it may still require help from abroad to meet all its spending needs, and talk is rife of a potential loan from either the IMF or EU, or both. Senior officials are reluctant to seek such a rescue package, however, fearing it would hit Romania’s reputation and make it even harder to find future creditors.
LITHUANIA: Spending cuts and tax hikes spark riots
Vilnius has been hit by riots as angry Lithuanians take their frustration to the door of their politicians. Police used tear gas against protesters who pelted the Seimas parliament building with snowballs, rocks and fireworks last month.
Protests since then have been peaceful but the anger remains. Like its neighbours, Lithuania has been hit by plummeting export and domestic demand, fleeing foreign investors and a plunging currency.
Two months after taking office, the government has introduced hugely unpopular spending cuts, tax hikes and severe wage controls.
After shrinking 1.5 per cent in the fourth quarter of 2008, the economy could contract by as much as 6 per cent this year. Things could get worse if Lithuania is hit with higher borrowing costs: ratings agencies have already placed the country on a “watch list”.
The EU is concerned Lithuania will lose control of its budget deficit, breaching euro zone rules and harming its chances of joining the single currency bloc.
BULGARIA: Slowdown unites diverse groups in anti-government protests
Bulgaria’s government was rattled last month when a demonstration uniting students, farmers and green activists tuned into a riot in the centre of the capital, Sofia. Long-term complaints about government corruption and incompetence were compounded by officials’ perceived failure to deal with mounting economic problems, which have hit Bulgaria’s farmers particularly hard.
Farmers want more government aid and want banks to relax conditions for loan repayments. The ruling coalition has earmarked the equivalent of €3 billion for investment projects to boost the economy and, with elections due in July, it is also promising to increase pensions, salaries and other social spending.
Growth is expected to fall to 0-2 per cent in 2009, after several years at more than 6 per cent annually. Trade unions fear at least 50,000 people will lose their jobs this year.
SLOVAKIA: Major car-making nation hit by drop in demand
Nicknamed the “Tatra Tiger” after one of its mountain ranges and in recognition of a decade of powerful growth, Slovakia is suffering from its reliance on now-ailing foreign markets.
The country is one of the largest per-capita carmakers in the world, but exports are plummeting as demand for new cars across Europe slumps. Industrial output fell by 16.8 per cent year-on-year in December, the sharpest fall in at least 10 years. Slovakia is still expected to post the strongest growth among countries using the euro, however, with expansion forecast at around 2.4 per cent. This is well down on 6.4 per cent last year and 10.4 per cent in 2007.
BALKAN NON-EU MEMBERS: Crisis clouds hopes of prosperity and EU accession
Serbia was quick to secure a $520 million (€405 million) standby loan from the IMF last autumn, but is now seeking €2 billion from the organisation and a further €400 million from the EU as the economic outlook worsens.
Neighbouring Croatia is expected to redraft its budget after a sharp drop in tax revenues due to the economic slowdown. Like Serbia, Croatia is likely to slip into recession this year.
Growth is also slowing in Montenegro as foreign investment dwindles, particularly from rich Russians who have pumped large sums into the country.
Workers at a major aluminium plant owned by Russian oligarch Oleg Deripaska have protested against production cuts and expected layoffs.
Analysts say the economic crisis is also dampening EU enthusiasm for further expansion into the Balkans.
CZECH REPUBLIC: Suffering as export markets shrink
Like neighbouring Slovakia, the Czech Republic is highly dependent on export sales revenue, and is suffering as demand falls in foreign markets. The Czech economy grew by just 1 per cent last year – its worst performance since 1997 – and it is expected to shrink by about 2 per cent in 2009.
Prague officials say they will not need outside help to weather the crisis, and point out that the Czech economy does not suffer from the serious spending and debt imbalances that have destabilised Hungary and the Baltic states. The government approved a stimulus package this month, which will inject an estimated €2.5 billion into the economy to help offset slowing demand at home and abroad, and counter a rising unemployment rate.
HUNGARY: Economic woes stoke social tension
Hungary was the first EU member to seek an IMF loan to ease its financial worries. The $25.1 billion (€19.7 billion) aid package calmed fears of economic collapse, but the Hungarian economy is still expected to contract by as much as 3.5 per cent this year.
Measures to cut the country’s big budget deficit have exacerbated the pain for many who are struggling to pay foreign currency loans and mortgages. Low interest rates made them attractive in recent years, but they are now much more expensive to repay as the local currency, the forint, has rapidly lost value.
Nationalist groups claim that a wave of “Gypsy crime” is sweeping Hungary amid the worsening economic conditions – the murder of a Roma man and his young son this week has stoked social tension.