Rising government instability
- No government can escape the consequences of the economic and political fallout of the crisis triggered by the collapse of the US secondary credit market. In our previous risk analysis we predicted that protracted and increasingly unpopular crisis management measures erode the stability even of governments consolidated in the first wave of the crisis. This appears to be the case in a number of countries (e.g., Hungary, the Czech Republic and Romania).
- The deepening crisis and limited scope for action drives governments of the region to take increasingly unpopular crisis management measures; public support is falling even for governments that have held up relatively well up till now (e.g., Poland and Slovakia).
- Aside from Iceland, only East- and Central-European governments fell due to the crisis, which palpably contributes to the general distrust of the region. As in the East- and Central-European region economic and political crises go hand in hand, some commentators have “written off” the region as a whole. This may further undermine the economies of these countries and, following the logic of a self-fulfilling prophecy, may trigger a chain reaction and induce the collapse of additional governments.
- As the crisis leaves all governments with limited political options, their ability to shield society from the effects of the crisis has become the major indicator of their performance. However, with few exceptions, crisis management leads to short term suffering in all countries.
- In a number of countries crisis management also intensifies existing political tensions, bringing past grievances to the surface (e.g., in Bulgaria the issue of corruption) and often erodes government stability through the escalation of conflicts within coalitions.
- Clearly, the crisis inflames ethnic conflicts, to a lesser degree intensifies anti-Union sentiment in the countries of the region and significantly increases support for radical movements. The June EP election may consolidate the position of extremist parties and destabilise governments not only in the region, but all across Europe.
Intensifying social protest
- The stability of governments may be weakened further by strong social unrest. Based on experience so far, the following factors may lead to a wave of (in some places violent) demonstrations and/or strikes:
- High or suddenly rising unemployment (a risk in Slovakia, Hungary, the Baltic States, Poland and in Romania, planning major public sector redundancies),
- Effects of the crisis on individuals’ living standards (in regional countries that risk is the highest in Hungary, Romania and the Baltic States)
- Anticipation/fear of fast deteriorating economic conditions and living standards (e.g., Baltic States and Romania)
- Growing dissatisfaction with the government and loss of confidence in political institutions (in the region currently the case in Bulgaria and Hungary)
- The combination of these factors leads to the same effects in the West and East- and Central-Europe alike: in the wake of the crisis protest movements are on the rise and governments have come under serious pressure in Western Europe as well. In other words, while effects of the crisis are not unique to Eastern Europe, internal distrust of the political system and external misgivings of these countries in their case aggravates the consequences of the crisis shared by all countries.
- Anti-government protests have been seen outside Eastern Europe as well. Huge street demonstrations have taken place across Europe, but while in the West these take the form of mass rallies and strikes, in the East European region they tend to result in street violence with more frequency (e.g., Latvia, Lithuania and Bulgaria).
- All this is explained in part by the short history of democracy and the corresponding political culture: in developed western countries more democratic, peaceful yet effective methods of protest have been adopted. As East- and Central-Europe lacks experience in channelling public discontent, demonstrations there are more likely to turn into violent outburst. Moreover, in most of these countries respect for the political elite and trust in political institutions are extremely low, i.e., anti-government demonstrations tend to question the legitimacy of the political system as a whole.
- Compared to other countries of the region, the Bulgarian economy manages the crisis with relative ease (with a budget surplus, without recession and, with the exception of inflation, meeting all Maastricht criteria) yet the country has seen perhaps the most violent street demonstrations aimed not only against the government but the entire political elite. In Bulgaria corruption has reached a level that recently the European Union decided to suspend the payment of development grants.
- The fact that, for the most part, Hungary has been spared street disturbances is explained by the following factors:
- Radical movements, at the peak of their power in the autumn of 2006, have lost much of their support, the “protest-potential” has subsided and the police are also more prepared to contain street violence.
- The leading force on the right, Jobbik has nothing to benefit from the escalation of violence prior to the European parliamentary and general elections.
- At the same time the Bajnai-package may generate intense (even violent) reactions.
Radical movements and rising anti-EU sentiment
- Clearly, the political consequences of the crisis include the rise of radical movements, parties and ideologies, as well as prejudices traced to a combination of several factors:
- The crisis has strengthened protectionist tendencies and their social base (“citizen-based chauvinism”) and in most countries of Western Europe led to the adoption of economic/political policies aimed against immigrants and the intensification of anti-immigration rhetoric. In some East- and Central-European countries the return of guest workers may place additional strains on the labour market and welfare systems. (e.g., Poland and Romania)
- The crisis that started in the United States, the target of both right and left wing radicals, quickly spread to all corners of the world through globalisation, also attacked by extremist groups: as a result, the general public may subscribe to over-simplified anti-American and anti-globalisation arguments advanced by radical movements.
- While the majority of the population is convinced that the crisis was caused exclusively by “greedy bankers”, early last autumn most governments had to come to their rescue with bank bailout packages. In turn, in most countries this has led to strong resentment, in many cases with references to anti-Semitic stereotypes.
- To forestall the erosion of political support many governments resort to the tactic of diverting public attention from political conflicts to other issues, and thereby contribute to the deepening of cultural/ethnic fault lines. The case of Slovakia is a good example in the region: Fico regularly scores points in symbolic debates based on anti-Hungarian sentiment, and Berlusconi's popularity has also been greatly improved by his firm stance taken against immigrants (especially the Roma).
- Euro scepticism is on the rise both Western and Eastern Europe, which could be reflected in the results of the upcoming EP election.
- More affluent western countries, the citizens of net-contributing countries, would prefer to spend funds earmarked for EU projects to alleviate their own problems; the ideal of “communal solidarity” has lost much of its appeal.
- Countries in the East may expect more support arguing that in the past few years the Union did nothing but exploit opportunities offered by their markets.
- Due to rising unemployment there is growing hostility to immigrants in all countries, undermining one of the basic rights in the Union, the principle of the free movement of labour. This intensifies anti-EU sentiment primarily in East European countries.
- As a result of all the above, turnout at the upcoming European Parliamentary election may be much lower than expected. Fundamentally, this primarily helps small parties with committed voters and, due to the reasons outlined above, radical parties may increase their power base in absolute terms as well.
There is no panacea
- During the first wave of the crisis last autumn – when the markets and the population were seized by panic – a number of governments managed to increase their popularity for a short time; people were reassured by quick and decisive measures and the effects of the crisis had yet to reach the real economy.
- However, in the mid range, once the population came face to face with losses, most governments lost popular support. Due to steadily deteriorating economic outlook, budgets passed in the countries of the region soon became untenable. Holes created by shrinking revenues can be plugged in three ways: taxation, spending cuts and deficit financing. Typically, Western Europe's more stable and reliable governments opt for the latter solution while, due to a general distrust of the region, in East- and Central-Europe that option is all but ruled out. Spending cuts and the increased state revenues have a direct and profound impact on the population that, in most cases, results in a dramatic decline of support for these governments.
- With few exceptions, the crisis has weakened every government indicating: it is hard to imagine a method of crisis management deemed suitable by the general public. The crisis has already eroded support for such popular politicians and political organisations as Robert Fico and Smer. In a number of countries, following gains in the first months of the crisis, after some time the position of leading politicians were seriously undermined (e.g., Ferenc Gyurcsány and Gordon Brown).
- In addition to the severity of austerity measures, one also has to consider the economic base prior to the crisis: in countries where the economy stalled at a time of dynamic growth and promising outlook (like Ireland, Iceland or Latvia in the region) the population turned more vehemently against the government, creating serious political instability.
- In this context the Romania government is under sever pressure, as earlier the parties forming the current grand coalition had insisted that robust economic growth and rising living standards can be maintained even in a time of crisis, while currently the population is faced with major cuts in welfare programs and a tidal wave of layoffs in the public sector. Earlier high expectations for steadily rising living standards represent a serious threat as it carries the risk of disappointment on a massive scale. (The risk is less, for instance, in Hungary where the level of expectation has been lower to begin with.)
- Obviously, instead of directly, the economic crisis determines a government's stability through public opinion. Political instability is the highest precisely in those countries where the public believes the crisis has a major impact on its personal condition (see the chart below).
Various patterns in political loss of credibility
- Governments of the region and all of Europe can be grouped in the following three categories: the first includes governments that have seen barely any loss of popularity (e.g., Poland), the second governments that, while suffering heavy losses, are still in place (e.g., Bulgaria), and the third category lists governments that became victims of the crisis (e.g., Latvia).
- Governments preserved their popularity that so far managed to forestall the introduction of austerity measures, i.e., the crisis has not directly affected the population's living standards. While in Poland and Slovakia the crisis has already caused serious economic problems, the governments have yet to tackle its budgetary implications and the adopted stimulation packages may be seen by the population as the government's “helping hand”. However, in the medium range these countries will not be spared necessary austerity measures, i.e., the political crisis has been simply put in abeyance. The situation is similar in western Europe where a number of governments try to revive the economy through deficit financing, a tactic that due to rising vulnerability may backfire in the form of a sever recession.
Effects of the crisis in European countries (examples)
- Aside from Iceland, governments in the East European region were the first to go under, starting in Latvia and followed in Hungary and the Czech Republic. It is important to note, however, that these governments had been in trouble for some time and the crisis was not the only factor destabilising domestic politics. In Latvia a new prime minister was sworn into office barely six months ago and in the Czech Republic only the fifth vote of no confidence reached its objective, while in Hungary rejection of the government and the prime minister broke all past records. Thus, instead of being a direct cause, the crisis served merely as a catalyst in these debacles.
- As most countries of the region have no room for manoeuvre, a change in government cannot lead to a radical shift in economic policy. At best, the new cabinets will have more public support for the implementation of necessary measures, support they can just as easily lose once they take action, as demonstrated by Romania.
- Briefly enjoying strong public support following its recent rise to power as the crisis emerged, the Romanian government lost most of its appeal after the announcement of austerity measures, and public support for a once highly popular President, Bacescu, is also in decline. At the same time, despite the crisis the Romanian election campaign was rife with absurd and demagogue promises; the fact that now the government must face up to its positions promoted in opposition only a few months ago may be the major reason behind its loss of popular support.
- Moreover, an apparent instability and inability to get to grips with the current crisis may not only undermine support for governments, but also for the institutional system as a whole. For instance, the Czech government crisis delivered a serious blow to the reputation of Parliament as well.