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First the Virus, Then the Recession

As the steady stream of bad news comes in from sources across the world, talk of recession is becoming more and more common. Concern was first raised about the potential for the recession when the figures surrounding debt were released by economists around the globe. As the economic impacts of the pandemic became clear, those concerns manifested themselves into fearful predictions about growth across the world. Europe is no different and it is the lagging East that will bear the brunt of the latest economic crisis.

Old Foes

Eastern Europe is no fresh face to the recession, the 1990's and the end of Communism brought about the severe economic damage that chopped more than 40% off of annual output over the space of 5 years. This is unsurprising considering transition between governments in a functioning democracy can affect exchange rates, let alone the transition from a one-party dictatorship to a multi-party democracy. In many of these countries, the civil war was also a result of these political changes as seen in old Yugoslavia.

In response to this, the great migration happened as many fled their torn homelands to seek refuge in the West. This migration also saw a change in the demography of emigrants as young, educated professionals joined the ranks of those looking for a better life. This emigration continued all the way up until 2015 was the emigrant crisis caught the gaze of both national and international headlines. In a 2001 survey by the National Statistical Institute, Bulgarians questioned highlighted economic hardship as the main reason for emigration both legal and illegal. This has been counterproductive for those Eastern European countries that have looked to rebuild since they lack the necessary skilled workforce to run a modern economy.

Not Like the Others

Unlike other EU nations, much of Eastern Europe cannot dig itself out of this hole via means of large stimulus packages. Unlike its Western neighbours, much of the East struggles with a poor level of trust among lenders meaning that it cannot copy any of the solutions used by countries like Germany, France and Italy. In the long run, of course, this is for the best as running up large debts is an unsustainable approach to fiscal policy, however, in the short term; where much of current policy is focused, a new solution is needed.

An easy answer to this question would be to provide an EU wide stimulus package passed by Brussels that would stop its poorer members from falling through the cracks. But, as we have seen, times of instability breed suspicion and mistrust among even old allies. The Netherlands displayed quite strongly their dislike for large debts and large spending by governments and Germany, a country who historically have had an aversion to debt, has played down the idea of an EU wide response to the pandemic. All of these questions essentially stem from the age-old problem of who will pay. Just as the family meal out descends into chaos the moment the bill is to be footed, the EU has fragmented over who should carry the cost of such a response. Those who would benefit the most from the package have made the argument that richer countries should pay because they have the means to. Those that have the means to have forgotten their proverbial wallet.

Yet More Disappointment?

It may seem as if Eastern Europe is doomed to yet another decade of anguish caused by the failing of modern economics. The Eurozone’s GDP is set to fall by 11% with countries within the bloc set to fall by similar amounts. The average of all 27 EU states is a fall of around 7-8% in 2020, however, Eastern European countries such as Croatia, Slovenia and Slovakia are all estimated to have losses of 11%, 9% and 9% respectively. This must be recognised by the bloc as a problem pretty much exclusive to the East, but those Eurocrats sitting in Brussels must not assume that the consequences are exclusive to the East. Countries in Eastern Europe such as Slovenia and Slovakia are also members of the Eurozone and therefore use the euro. Any economic malaise experienced by such countries will have impacts on the rest of the Eurozone.

In order to solve this problem, the EU must act as the EU and solve problems as a collective. Despite disagreements between member states, a conclusion must be reached about appropriate action taken towards establishing some kind of rescue fund for states in trouble. Not only will this avert or delay a potential Eurozone crisis but it will also quell any anti-EU unrest that has already developed in countries such as Italy. EU, neglect the East at your own peril.

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© 2020 by James Thomas Consulting.