Fears of unrest in eastern Europe grow as Czech government collapses

Presidency of EU in question as Mirek Topolanek loses confidence vote

The collapse of the Czech government sent shivers through financial markets in eastern Europe yesterday fanning fears about the growing political unrest that appears to be sweeping through the EU's eastern fringes.

Prime Minister Mirek Topolanek's government narrowly lost a vote of no-confidence on Tuesday night, four days after the Hungarian leader, Ferenc Gyuarcsany, threw in the towel and five weeks after the Latvian government fell under a barrage of public protests. Most of eastern Europe's main currencies lost value yesterday as Czechs pondered the impact of Mr Topolanek's defeat, while Romania turned to the IMF for a €20bn lifeline.

The government in Prague was fatally wounded by a series of scandals rather than looming financial meltdown, but with its removal another element of uncertainty has been added to eastern Europe's volatile mix of economic weakness, political frailty and rising public discontent.

The Czech Republic is not being crushed by a mountain of debt or huge trade imbalance, as are Hungary, Ukraine and Latvia, but it is suffering as major export markets like Germany shrink. Like the neighbouring Poles and Slovaks, Czechs are braced for a sharp economic slowdown this year, although have no need for an emergency IMF or EU cash injection.

Yet, Mr Topolanek's fall will be particularly chastening for many leaders around eastern Europe precisely because he has presided over one of the region's most stable economies.

"The lost vote is yet more proof that the situation in the region isn't either economically or politically stable, especially taking into account that the Czech Republic was seen as one of the best countries in eastern Europe," said Bartosz Pawlowski, a strategist at TD Securities in London,"so it's hard to expect investors will now be seeking to invest their money in other countries, like Poland or Hungary."

The Latvian government fell last month after a looming recession sparked riots and Hungary's premier quit in the face of political deadlock over how to slash public spending. Romania's unwieldy coalition has also shown cracks over how to balance cutbacks, and Bulgaria's government is likely to lose a summer election following violent protests in Sofia.

Although Mr Topolanek's centre-right coalition was fragile from the start, it had survived earlier votes. The timing of its collapse threatens not only to hamper Prague's efforts to stave off a downturn but comes halfway through the country's stint at the helm of the rotating EU presidency.

Yesterday in Strasbourg the defeated Czech premier moved to reassure EU partners that the collapse would have "no impact" on the [EU] presidency. In Brussels, however, diplomats faced concerns on the Czechs' ability to steer the union with any credibility in a season dominated by a flurry of emergency summits on the economic crisis. "It's a particularly bad time just when there needs to be maximum coherence just days ahead of the G20 summit," said Katinka Barysch, of the Centre for European Reform.

The Czechs will represent the EU at next week's summit in London, when the bloc plans to lead calls for more regulation of international financial markets. Mr Topolanek had also banked on a grand ceremony to welcome President Obama to Prague on 5 April. "Now Mr Topolanek will just look like a lame duck" said Piotr Kaczynski of the Brussels think-tank the Centre for European Policy Studies. "He may just be able to keep things ticking along but he no longer really has any clout to speak on behalf of Europe."

Yet despite the succession of woes afflicting some of the EU's former Communist states, some observers cautioned against linking the political musical chairs in Prague to a pessimistic narrative about the region. "What happened in the Czech Republic was driven by politics," said Mr Kaczynski .

"It is increasingly popular to talk about a malaise in eastern Europe but it's utterly wrong to link these countries together. True, Latvia and Hungary are taking a battering but there are actually very troubling signs of political unrest in places like Greece, Ireland or France as well, but they are never cobbled together in the same way."

On the brink: The sick men of Europe

Latvia

A few months ago, it was the EU's fastest growing economy, with growth of nearly 11 per cent. Now Latvia faces economic ruin. In February the government collapsed following violent demonstrations in the capital Riga in protest at the government's handling of the crisis and steep IMF-imposed cutbacks. Farmers have blockaded the capital in protest at plummeting incomes, while unemployment has risen to 10.4 per cent, more than double what it was a year ago.

Hungary

Premier Ferenc Gyurcsany resigned last weekend amid efforts to impose austerity cutbacks demanded by the IMF. Hungary was the first EU member to seek an IMF bailout to stave off economic collapse. The Hungarian economy is expected to contract by as much as 3.5 per cent this year. Public sector unrest over tax and pension reforms is at boiling point and social tensions have risen with "Gypsies" blamed by nationalist groups for a crime wave linked to the worsening economic conditions.

Ukraine

Demonstrations occur almost daily as the country teeters on the brink of collapse. Economic output has plummeted and Russia continues to meddle in its energy industry. Despite this, President Viktor Yushchenko and Prime Minister Julia Tymoshenko are still locked in a power struggle that has paralysed Ukrainian politics since the 2004 Orange Revolution. Now the IMF has postponed payment of the second tranche of a $16.4bn loan due to their failure to agree on a budget.

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