Reform Fatigue

macko usko says -- This is such a enlightening article about the region, i would also add though that it frustratingly does not include the separation of 2 groups of countries.

  • Poland Czechia Hungary
  • Slovakia Slovenia Baltics
the firsst group is going nowhere (czech might sort itself out though) and have ;arge deficits

However Slovakia Slovenia and the Baltics are doing great, they are both rising fast in GDP try to keep inflation under control, and have high likelihood of joining the euro

Its really annoying that people lump Slovakia and Slovenia with the rest. Fico is determined to get into the euro. There is no navel gazing in Slovakia! The only thing in the way is inflation (due to rocketing growth, at 4.5% its not unrealistic to bring it down in 2 years)

So much for the region's "big four." But bad news is emerging from the smaller countries as well, including the Baltic states. Across Central and Eastern Europe, the scene is almost universally depressing.

When so much goes wrong at the same time, it is tempting to look for a common cause. One factor that is often cited is "reform fatigue."

In barely 15 years, these countries have moved from central planning and economic backwardness to "normal" market economies with impressive GDP growth. But rapid change is always unnerving, and not everyone has emerged better off. Above all, uncertainty has become the norm, in contrast to the gray but predictable future offered by the old communist regimes.

Today, many people now long for that period, which they see as less driven by material values. Communist parties, more or less reformed as socialists, appeal to a surprising number of voters. In some countries, like Slovakia and Poland, far-right nationalist parties provide another alternative, by offering the soothing appeal of traditional values and familiar enemies. Reform fatigue implies that Central and Eastern Europe needs a respite to catch its breath. But another explanation of recent developments in the region begins by noting that post-communist reforms were largely dictated from outside, as a condition of admission to the EU. With membership
achieved and EU money starting to pour in, leaders feel secure enough to let economic policy slip.

Thus, budget deficits are the rule, and where they are largest, as in the Czech Republic and Hungary, they have gained priority over euro adoption. Indeed, only Slovenia has been admitted to join the euro area next year, the earliest possible date. Estonia and Lithuania applied as well, but were refused entry.

gift of the soviets

There is some truth in both explanations of Eastern Europe's backsliding. But what is the phenomenon that such explanations are supposed to clarify? There has been no general tilt to the right or left in the region. Reforms that are attacked in one country continue to guide others.
Nevertheless, the EU's newest members share some key features. Most importantly, they inherited from the Soviet era bloated and inefficient public sectors, which they are finding hard to downsize and professionalize. The private sector has been entirely rebuilt and is vibrant, but it cannot remain competitive if fiscal demands are not reduced -- a familiar problem in Europe as a whole. For now, the tension has been left unresolved, leading to high budget deficits.
But the EU's new member countries have no access to any safety net. They could well squander the significant transfers that they receive through the agricultural and structural funds, as many previous EU recipients did. If they abandon macroeconomic discipline, as Hungary and possibly the Czech Republic may be doing, they alone will face the consequences. Being outside the euro area, their currencies would fall, undermining growth in purchasing power and living standards. As they are economically small, the rest of the EU would barely shudder. Fortunately, the main lesson to emerge from the region's current troubles is that economies adapt faster than
polities to changing conditions. Growth has been strong; while it could have been stronger under more favorable policies, only huge mistakes could break the rise in living standards, given the region's productivity gains.

Western Europe went through a similar phase of economic development in the 1950's and 1960's; now it is Central and Eastern Europe's turn. Sadly, then as now, countries never seem to learn from others' mistakes.

Charles Wyplosz is professor of international economics and director of the International Center for Money and Banking Studies at the Graduate Institute of International Studies, Geneva.

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