With Hungary's Parliamentary elections just weeks away and Poland's own Presidential race gaining steam what are the key lessons to be drawn from Central Europe's current political climate?
First, local politics truly do matter. Specifically, strong institutions, a well-functioning democracy, accountability and transparency play as integral a part in a country's political development as its economic development. This was lacking among Hungary's officials and within its institutions during the peak of the crisis, which eventually manifested into protests on the streets of Budapest.
High unemployment, government incompetence and a severe economic recession triggered public outrage and increased the popularity of nationalist parties like Jobbik, which garnered 15 percent of the vote, and sent three representatives to the European Parliament in 2009. Some polls predict Jobbik may win up to 20 percent of the votes in the upcoming Parliamentary election, attracting voters from both sides of the political spectrum who continue to be disillusioned with Hungary's political mainstream and sluggish recovery.
Second, the ability to maintain relatively low macroeconomic imbalances enabled Poland to take advantage of preferential lending mechanisms and financial aid, including access to a $20.5 billion IMF flexible credit line (FCL). Not only did this help Poland avoid additional economic shocks and enable greater policy flexibility, but it also empowered the ruling PO party, while marginalizing the fringes. That was not the case in Hungary where years of political infighting and a badly mismanaged economy (on the Socialist MSZP's watch) forced Hungary into international bankruptcy.
While it is possible that Fidesz (National Conservatives) may win a constitutional two-thirds majority, the more important question is whether they will form a coalition or at the very least coalesce with Jobbik. If so, this could pose serious obstacles to an already demoralized EU (think Greece), stall further integration and damage the gains of post-communist transition.
Throughout the past decade, Central Europe's real estate market was one of its fastest growing and most lucrative investment sectors. Investors and speculators across Europe as well as Central European diasporas took part in the buying frenzy.
By early 2009 Central Europe's capitals had some of the most expensive housing prices within the EU. Seven Central European cities ranked in the top 50 most expensive real-estate markets in the world including Bucharest, Kraków, Prague, Riga and Warsaw.
The global financial crisis and subsequent credit crunch burst the region's property bubble. Central Europe's banks tightened lending requirements while buyers were worried that their euro- and Swiss franc-denominated mortgages would raise debt obligations as regional currencies plummeted. This was especially problematic throughout the Baltic capitals and Bulgaria's resurging Black Sea tourist outposts (whose local currencies were all pegged to the euro).
Now that the eurozone is experiencing its own market turbulence, perhaps it's time to reassess Central Europe as a high-risk real-estate investment. Unlike southern tier hot spots Greece and Spain, markets in Poland and the Czech Republic did not experience a total property bust.
In addition to attracting urban buyers (due to growing local middle class ambitions) both countries were able to take advantage of their non-euro status, via independent currency flexibility, and adjust prices.
Moreover, since local economic health drives housing prices, Poland's property market is in a much stronger position than say Bulgaria or Hungary. While all out investment pessimism towards Central Europe's property markets has abated, investors still need to be discerning when buying in the region. Like countries within the eurozone, it is important to distinguish that one size does not fit all.
