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.
As the dust settles on the battered economies of Central Europe, winners and losers have clearly emerged on this the one-year anniversary of the global financial crisis.
Poland, along with the Czech Republic and Slovakia, stand ahead of the pack due to prudent economic policies, manageable current account deficits and lower macroeconomic imbalances (including lower levels of indebtedness).
Romania's and Bulgaria's growth prospects, which face stiff competition from healthier CEE economies, will continue to be burdened by deep political and economic deficiencies. Unless major initiatives, both at the local and EU level, address chronic corruption and structural asymmetries, the two countries are headed for stagnation.
Finally, the Baltic States and Hungary, saddled with debt and strict austerity programs, have the toughest road ahead and the least amount of flexibility in their recovery programs.
Despite their various predicaments, Central Europe has the opportunity to emerge stronger and more economically viable. The key is to learn from previous mistakes (domestic, US and wider EU), resist reform fatigue and continue to converge with the EU-15. That responsibility must not rest solely on Central Europe.
The EU, particularly its wealthier members, must ensure that Central Europe continues to be deeply anchored in market principles and EU institutions. Most importantly, they must convince the region that they are critical players in Europe’s overall recovery and prosperity.
For Poland, the best path forward includes keeping public spending low, taking advantage of EU funds for major reforms (healthcare, education, infrastructure and business climate) and setting a date for euro entry that is most favorable to its economic development.
Most importantly, Poland must refrain from excessive expansionary fiscal policies. Not only will Poland be unable to afford the extremely high interest rates required to cover the cost of borrowing, it will further delay euro entry.
Instead, Poland should accelerate critical structural market reforms to gain a competitive edge, before the window of opportunity closes.
