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1. Don't take us under the same umbrella!

At the EU summit last weekend, Hungary's PM Gyurcsány failed spectacularly with his call for a €180 billion rescue package for Central Europe (his words; in much of the Western media: Eastern Europe; in reality: only ex-communist new EU members).

The strongest rejections did not come from Western EU members motivated by unwillingness to pay: they came from supposed fellow beneficiaries, which are worried by being taken under the same umbrella with countries in deeper crisis like Hungary. In particular, Estonia and Slovenia protested that the banking crisis doesn't apply to them at all and their financial sector are more healthy than some EU-15 members.

Recently, protests also came from the Czech Republic that they are not Hungary. In general, everyone said that different countries have different problems. Indeed, for example Slovakia, a country still far from recession and predicting growth even this year, is more concerned about Sarkozy's protectionist call on car manufacturers to return home: Slovakia's recent growth was is no small part due to factorories built by mostly French carmakers.

I would also add that a rescue package to new EU members doesn't solve the problems further East (in particular Ukraine), which could also affect us.

2. The umbrella

The heightened concern about being taken under the same umbrella is in the light of exchange rate developments in the last few weeks: in essence, all the region's currencies fell in concert, whether bad news came from Poland or Hungary or Lithuania.

So, I think there is a general trend in the region, but one about which governments are in denial: to put faith in, and be at the mercy of financial markets.

Financial market trends are not the result of independent rational evaluations of economic prowress and potential. One investor/broker's loss and win depends a lot on what other market participants do, so market movements are herd movements, even without considering misinformation and plain stupidity.

This shouldn't be news: Europe, the whole of Europe is long affected by herd movements disconnected from its own economic reality: after all, the number one factor moving our stock markets seems to be the movements at Wall Street. (In German, there is a common phrase for this I hate to hear again & again from self-unaware commentators and brokers: die Vorgaben aus Übersee = c. "the guidelines from beyond the pond".) But, the governments of Central and Eastern Europe are suddenly discovering and feeling the effects of a herd of Western investors running the other direction...

3. What kind of crisis?

I should emphasize that the fear in the countries most hit by the financial crisis doesn't seem to be a collapse or state default. With the nature of debts (a lot of it owed by local subsidiaries to their owners) and interdependencies, that doesn't seem to be a real fear of governmental and bank decisionmakers. Even Nomura, which has to pay special attention to yen-denominated credits, dismissed this recently.

However, Gyurcsány's plan didn't focus just on rescuing banks, but went into detail on facilitating lending. This is the real fear: that a downturn in lending would starve the real economy (in Hungary, in particular via the throttling of home construction financed with foreign-denominated credit).

4. No ideas

Finally, I note that various governments' reaction to the crisis is a horrible mess of uninspired ideas.

In Lithuania, the new conservative government is fast-tracking its neoliberal shock-therapic reform plans.

In Hungary, the government presented a plan that is a third-wayist mix: a silly combination of reduced company taxes, reduced social spending, and a special regime for people 'left behind'. The proposal includes an income tax reform, which would be two-tiered (eliminating the present middle tier), with tax rates increased for both, as well as the limit of the lower one (in effect, increasing the tax for low-income and high-income people and decreasing for middle-income people).

In Slovakia, the PM, who won elections and is popular with a programme of correcting the social mistakes of prior neolib economic policy, declared that he rejects deficit-based stimulus packages and favours spending cuts instead.

*Lunatic*, n.
One whose delusions are out of fashion.

by DoDo on Tue Mar 3rd, 2009 at 03:50:51 AM EST

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