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.
Despite current market uncertainty, Central Europe will remain an attractive business destination for Western investors. This is also true for emerging giants in Asia. Prior to the economic crisis, a number of Central European governments sought to diversify their trade relationships and lower export dependence on the EU-15. Consequently, growing Chinese and Indian business interest in the region, particularly in Poland, presents new opportunities for greater economic diversification as well as long-term growth prospects. This is key, since Asian economies are forecast to emerge as the leaders of the global recovery (while the EU-15 struggles with a lethargic recovery). Last year, Polish delegations traveled to China and India in an attempt to build foreign investment interest, stressing Poland’s competitive labor and operational costs, developing infrastructure and business law reforms.
Currently, both Chinese and Indian firms are vying to win lucrative road and infrastructure contracts in Poland. Moreover, this September Warsaw will host its inaugural LifeStyle Expo, a trade fair aimed at bringing together Chinese and Polish entrepreneurs to foster stronger business and trade relations. Indian investment is also increasing, specifically in the IT, manufacturing and biotech sectors.
As these new stakeholders increase their ties to Poland and other Central European economies, they bring additional influence on the future economic and political developments in the region. As evidenced by the overall lack of EU-wide coordinated response to the global recession, and the enduring appeal of economic nationalism in some Western member states, Poland has a clear interest in diversifying its pool of foreign investors and trading partners. Simultaneously, this will present new challenges for Western Europe and the United States. As the region’s primary investors, both can anticipate increased competition from emerging global Asian brands, especially as cash abundant economies like China continue to penetrate Central Europe’s markets with badly needed capital and business opportunities.
