“What would happen if capital succeeded in smashing the Republic of Soviets? There would set in an era of the blackest reaction in all the capitalist and colonial countries. The working class and the oppressed peoples would be seized by the throat, the positions of international communism will be lost.” (‘Report to the Seventh Enlarged Plenum of the Executive Committee of the Communist International’ by J V Stalin, 1926)
Eastern Europe in 2009 is starting to look an awful lot like East Asia in 1997. The economies of Hungary, Lithuania, Latvia, Romania and other countries in central and eastern Europe appear to be tumbling into the abyss as they pay the inevitable price for the loan-fuelled growth of the last decade.
In the years immediately following the counter-revolution in eastern Europe, the economies of these countries were characterised by anarchy, confusion and large-scale theft. Industrial output sank significantly, along with every quality of life indicator (life expectancy, employment, healthcare expenditure, education expenditure, etc). However, towards the end of the 1990s, some of these countries were able to get their economies moving, with the help of compulsive borrowing from western European banks.
This injection of loan capital, combined with the already high level of industrial development and a well-trained labour force, led to a rapid expansion of production. Indeed, it has been accepted wisdom in Britain for the last few years that all the manufacturing jobs have ‘gone to Poland’.
Of course, rapid expansion of industrial production is all very well for a while; for a few years, it seemed as if central and eastern Europe would soon catch up with western Europe and the US (just as, a few years earlier, it seemed as if south Korea, Singapore and Taiwan would likewise catch up). However, just because you’re producing lots of stuff, it doesn’t mean anybody’s going to buy it. Before long, these countries found their expanding production locked in a Sisyphean* struggle with a contracting market.
The result is that pretty much every economy in the area is in serious trouble, and the various eastern European governments are on their knees begging for their share of international credit, which is increasingly hard to come by (hence the bourgeois economists’ label of the crisis as a ‘credit crunch’!) Unemployment is assuming epidemic proportions (in the Baltic states, for example, it is rapidly approaching 15 percent), production is slowing to a standstill, and the people are coming out onto the street in protest.
BBC News Online of 13 March reported that: “Foreign investors have pulled their money out of Eastern European and other emerging markets, hitting their economies hard and sending their currencies into a destabilising tail-spin.” (‘Will the euro save Eastern Europe?’)
Latvia, one of the Baltic states that split off from the USSR in early 1990, is suffering particularly badly. The biggest local bank, Parex, has collapsed and has been largely nationalised. There have been enormous pay cuts and job culls, much to the disgust of the Latvian population. At a recent riot in Riga, the capital, more than 40 people (including 14 police officers) were hurt and 106 were arrested. (The Economist , 22 January 2009)
“Fuelled by reckless bank lending, particularly in construction and consumer loans, Latvia had enjoyed a colossal boom, with double-digit economic growth and a current-account deficit that peaked at over 20 percent of GDP …
“First, Latvia’s housing bubble popped. Then the main locally owned bank, Parex, went bust and had to be nationalised, amid fears that it could not pay two syndicated loans due this year. In December Latvia accepted a humiliating €7.5 billion ($9.56 billion) bail-out led by the IMF.
“The big cuts in social spending that the package entailed led to vigorous public protests. Now the government has resigned.” ( The Economist , 26 February 2009)
According to the Financial Times, Latvia’s GDP is “forecast by the government to drop a further 12 percent in 2009. The plunge is so fast that a €7.5bn rescue package agreed late last year with the European Commission and the International Monetary Fund on the basis of a 5 percent GDP drop may be insufficient.
“Unemployment hit 9.5 percent in January and could exceed 15 percent by the year-end. Those in work are accepting pay cuts of up to 30 percent in the private sector. In the public sector, ministers, who have sliced 15 percent off their own pay, plan similar reductions for civil servants.” (‘Latvia faces more gloom as crisis bites’, 13 March 2009)
Hungary has also been particularly badly hit by the worldwide crisis, and has already received a loan of $25bn from the IMF, but this has not done the trick. The enfeebled state of the Hungarian economy led Prime Minister Ferenc Gyurcsany to announce his resignation on 20 March.
And Romania, too, has had to turn to international institutions for funds (the fourth country in eastern Europe to do so, the others being Hungary, Ukraine and Latvia). It is due to receive $25bn from the IMF.
Meanwhile, Poland’s currency, the zloty, has lost around a third of its value when compared with the Euro. The Ukrainian economy is set to shrink by around 10 percent this year, and there are fears of a systemic collapse in the Ukrainian banking sector.
Workers World of 8 February reported that: “Thousands of demonstrators in Lithuania, Latvia and Bulgaria have attacked government buildings and called on their governments to resign as unemployment soars in eastern Europe”. As the author points out, “during the existence of the USSR and the socialist bloc, workers in these countries enjoyed secure jobs and guaranteed access to education, health care and retirement benefits.”
Likely effect on western Europe
According to The Economist : “If a country such as Hungary or one of the Baltic three went under, west Europeans would be among the first to suffer. Banks from Austria, Italy and Sweden, which have invested and lent heavily in eastern Europe, would see catastrophic losses if the value of their assets shrivelled. The strain of default, combined with atavistic protectionist instincts coming to the fore all over Europe, could easily unravel the EU’s proudest achievement, its single market.” (‘The bill that could break up Europe’, 26 February 2009)
Making the case for western European countries to pool together to bail out central and eastern Europe, The Economist continues: “The bill will indeed be huge, but in truth western Europe cannot afford not to pay it. The meltdown of any EU country in the region, let alone the break-up of the euro or the single market, would be catastrophic for all of Europe; and on this issue there is little prospect of much help from America, China or elsewhere. It is certainly not too late to rescue the east; but politicians need to start making the case for it now.”
And, indeed, on 20 March, EU leaders agreed to double the EU’s medium-term crisis fund to €50bn in order to help central and eastern member states. EU leaders also announced that €75bn would be provided to the IMF “to boost its lending ability, urging other countries to follow suit”. (‘EU summit agrees to boost aid to Eastern European members’, Xinhua, 20 March 2009)
Given the scale of the crisis in eastern Europe, the money the EU is talking about is a drop in the ocean – Austria (the country most exposed to banking failure in eastern Europe) was suggesting a figure three times higher than that finally agreed upon. Clearly, the western European countries recognise to some extent that there simply isn’t enough money in the pot to contain this crisis.
Germany and France in particular – somewhat less reliant on the banking sector than other countries – have stated that they want to strictly limit the amount of cash spent on bailing out eastern Europe, preferring to plough money into their own struggling industrial sectors (German factory output fell by 7.5 percent in January alone). Nicolas Sarkozy, the French president, has said openly that French leaders of industry should close factories in eastern Europe in order to save jobs in France.
No Keynesian solution
Having been proclaimed dead in the 1980s, Keynesianism is all the rage again these days. Barack Obama and Gordon Brown are gleefully talking about fiscal policy as if it were a universally-accepted tenet of bourgeois economics. [Note that ‘fiscal policy’ refers to the governmental practice of stoking demand in the economy by launching massive spending projects and cutting taxes. Of course, this leads to enormous debt (‘fiscal debt’), but the theory is that this debt can be paid back sustainably once the worst of the crisis is over.]
The problem is that there can only be so much ‘fiscal debt’ in a ‘credit crunch’! The premium on credit is high at the moment, and it will only get higher as the amount of money in the pot reduces and the competition for loans increases. Before long, an awful lot of countries – particularly the poorer countries – will no longer be able to borrow. The result of this can only be a continuation of the current downward spiral.
Tempting as it is to believe that Keynes had all the answers, the truth is that no amount of tricky economic tinkering can divert the fearsome juggernaut of recession that is sweeping the capitalist world.
As Harpal Brar wrote in his book Imperialism – the Eve of the Social Revolution of the Proletariat : “Of course, the bourgeois economic gurus, the finance ministries of the main imperialist countries, and the institutions of world imperialism such as the IMF, are not lacking in prescriptions which they claim will cure capitalism’s ills, make it healthy and fit to continue forever. These prescriptions range from the requirements of disclosure and greater transparency on the part of the financial institutions to regulation, limits on borrowing (‘leveraging’), introduction of capital controls, better insolvency regimes, and improving ways of responding to crises. None of this tinkering, however, can get rid of the contradiction between the social productive forces and private appropriation – a contradiction which periodically reproduces crises of overproduction, with all the resultant destructive consequences.” (2007, p77)
Ultimately, Keynesian solutions will fail for the large imperialist economies as well as for the smaller economies. The scale of the problem is too big and the funds available too small. The imperialist governments will keep on borrowing until they can no longer afford to borrow and there is nothing left in the international pot. Depending on how China chooses to dispose of its vast savings, the imperialists may be left with no option for recovery but inter-imperialist war.
As Martin Wolf, chief economics commentator at the Financial Times , wrote recently: “We are witnessing the deepest, broadest and most dangerous financial crisis since the 1930s … The combination of a financial collapse with a huge recession, if not something worse, will surely change the world. The legitimacy of the market will weaken. The credibility of the US will be damaged. The authority of China will rise. Globalisation itself may founder. This is a time of upheaval.” (‘Seeds of its own destruction’, 8 March 2009)
A time of upheaval, without doubt. Martin Wolf admits that there is no easy escape from the crisis; what he cannot say, of course, is that the only real alternative is socialism.
As Lenin wrote, back in 1917: “Only a proletarian socialist revolution can lead humanity out of the deadlock created by imperialism and imperialist wars. No matter what difficulties the revolution may encounter, and in spite of temporary setbacks or waves of counter-revolution, the final victory of the proletariat is inevitable.” (‘Materials relating to the revision of the party programme’)
* Sisyphean: adjective denoting a task that can never be completed. (From Sisyphus in Greek mythology, who was condemned to the eternal task of rolling a large stone to the top of a hill, from where it always rolled down again.) [Babylon]
> Credit crunch or capitalist crisis – April 2009
> The economic crisis deepens – Februrary 2009
> Economic crisis: no escape under capitalism – December 2008
> Financial hurricane leaves Ike in the shade – October 2008