Eastern Europe and the economic Iron Curtain

Dire warnings are starting to float around that Eastern Europe could face a region-wide financial collapse if decisive action isn’t taken right away to prop up faltering economies from Latvia to Ukraine.

The Guardian’s Larry Elliot laid out the case of why Eastern Europe is in such dire straits today. Like many complex problems, there’s not one simple reason why the countries are in such trouble, there are many.

The countries of Eastern Europe are new to the whole free market economics thing – all had been led by Communist governments until the early 1990s when the Soviet Union folded. Many of the countries took to free market capitalism quickly, but it’s becoming clear that their economies are not mature, or diverse enough, to weather the global economic crisis. Countries that rely on natural resources for much of their export sales, like Russia, have been hit hard by the fall in oil prices over the past year. Other countries, like Slovakia, that attracted foreign factories by the dozens thanks to a pool of cheap, yet skilled, labor, have suffered as demand for products from those factories has fallen. Still other countries, like Poland, have been hit by mortgage crises – because the banking system in their country was new, many people took out mortgages from foreign banks, so as their local currency lost value, they have seen their mortgage payments skyrocket (since they pay them in Swiss Francs for example, rather than Polish Zloty, which now is worth a whole lot fewer Francs).

All in all it makes for a collection of economic crises that take in much of Central and Eastern Europe. And at the same time Elliot was raising warning flags in the Guardian, the heads of Europe’s big economies were giving a thumbs down to a request for a comprehensive economic rescue.

Hungary's Prime Minister Ferenc Gyurcsany proposed that the European Union put together a bailout fund for Eastern Europe that would total $240 billion. Gyurcsany warned that without a bailout a new “iron curtain” would carve Europe into rich and poor sides. But German Chancellor Angela Merkel, leader of Europe’s biggest economy, balked at that idea following an emergency EU summit meeting on the economic crisis this weekend. Merkel said that conditions varied widely across Eastern Europe and that aid should be handled on a country-by-country basis.

Merkel is right in a sense about the differences in Eastern Europe, but at the same time Gyurcsany makes a good point when he says that drastic action is needed. The government in Latvia has just been replaced, and that country has seen widespread protests over the economic situation there (Latvia’s basically bankrupt), there are fears similar protests will spread to other countries in the region this spring.