Dave's ongoing coverage of the crisis in Central and Eastern Europe has highlighted not just the economic and political ramifications for the countries in turmoil, but the exposure of countries like Austria, Sweden and really all of Western Europe (the world if you ask Rogoff) to their problems. The weight of the crisis shouldn't be understated: it risks spurring rapid contagion, providing a political opening for the far-right (and Russia) in many countries and accelerating the moral collapse of capitalism's post-Berlin Wall workshop.
Yet not all is lost amidst the fear and uncertainty. A few developments provide hope that the crises will be met with an effective political response. The most immediate is a report by Alan Beattie of the FT that a group of multilateral institutions will announce on Friday a coordinated lending package of €25bn to the region's banks. This follows a report earlier this week that foreign banks were pumping cash into their subsidiaries in the region. The lending is key because the IMF simply lacks the resources to tackle the crisis on its own; it also masks the failures of Western European governments to follow through on anything but rhetorical promises of support. At the most basic level, however, an influx of Euros is desperately needed, and it looks like we are finally moving in the direction of a coordinated response.
The second promising development is more of a discussion than trend at this point. The merits and timing of Eurozone accession are hotly debated in the region (and Western European capitals). But it seems the attraction of the common currency's relative security has crystallized under the current crisis; Slovakia and Slovenia are perceived to be safe, for now, a feat many attribute to Euro membership. The Polish government has reportedly entered discussions for an accelerated accession to the ERM II (though, the Polish central bank was quick to temper those ambitions when it bluntly warned against joining the Euro too quickly). Even debate in the UK (I know, not in the region, just making a point) has started to discuss the merits of joining. Many, including us at IPE Journal, have opined on the threats posed to the common currency by the present crisis. But is it possible that the Euro could emerge from all the turmoil if not stronger, at least larger? Wolfgang Munchau and others argue its in fact preferable, a necessary step to stabilizing Central and Eastern Europe. But accession criteria, such as the ERM II timeframe and reference rate of inflation, would have to be scrapped (again, preferable).
On the political front, many of the governments in the region have demonstrated over the past week that they recognize the way out. In what should be held up as a lesson to the leaders of their western neighbors, the central banks of Poland, Hungary, Romania and the Czech Republic issued coordinated statements denouncing the currency instability and effectively pledging to defend their currencies. This intervention signalled to many a commitment to monetary discipline, affirmed by Hungary's decision to hold steady at 9.5%. Forward-rate contracts are now averaging in a 60 basis-point increase over the next three months. The choice is a stark one for the governments in the region: defend the currency or growth. Given the political pressure, defending the currency won't be an easy choice. But its the right one.
A final point- the countries in the region have tended to be lumped under the acronym CEE for Central and Eastern Europe (by myself included, just look above). It's rhetorically convenient, but many are calling it intellectually lazy (even irresponsible), and they have a point. Slovakia's circumstances are different than Hungary's, whose policy options may be different than the Czech Republic's. Dave rightfully noted this variance in his post above. Lumping these countries together not only fails to distinguish their relative circumstances, but risks indirectly stoking the contagion everyone hopes to avoid.
