In the carefree years earlier this decade, the countries that cluster around the eastern frontiers of Europe – the likes of Poland, Hungary, Latvia and Estonia – were some of the brightest stars of the boom. Their economies grew merrily and attracted piles of foreign investment. But with the advent of the global banking crisis and the subsequent world economic downturn, those stars are looking more like black holes.
Collapsing global demand has hammered the exports of the emerging economies of Central and Eastern Europe. Investors are frantically pulling out their money, pushing down the value of national currencies. Almost all of these former darlings of global capitalism are likely to see their economies contract sharply in 2009. The quicker you rise the harder you can fall, and these former Soviet satellites are falling hard indeed. Unemployment is rising and borrowers are being cruelly squeezed.
The latter group is in particular trouble. Many private citizens and firms took out loans denominated in euros from foreign-owned banks, attracted by the lower interest rates. In Latvia, lending in foreign currency rose from 60 per cent in 2004 to an astonishing 90 per cent in 2008. Euro borrowing seemed a rational thing to do as the conventional wisdom was that these countries would enter the single currency sooner or later. Now the folly of that conventional wisdom stands revealed. The sharp falls in the value of the Hungarian forint and the Polish zloty, among others, have pushed up the real value of these borrowings to punitive levels.
Some respite from the credit crunch arrived yesterday. The local banks of these countries were promised €34.5bn in aid from the European Bank for Reconstruction and Development, the European Investment Bank and the World Bank yesterday. But further support might be requested. There will be a strong temptation for the cash-strapped governments of Western Europe to decline to provide funds for such a bailout. Yet this would be a grave mistake.
For one thing, helping these countries is in our own direct economic interest. Swedish, Austrian and Italian banks invested heavily in Central and Eastern Europe during the boom. The Western financial sector will be hit by massive losses if they go under. Already our banks are seeing the cost of their borrowing rise because of their exposure in the East. There are even greater dangers lurking ahead. A South Asian domino-style collapse could conceivably drive these nations back into the arms of Russia. All the geopolitical gains made by Europe since the fall of the Iron Curtain could be lost.
But this is not charity. Support for our Eastern European economies is a sensible investment. The political leadership of these countries made mistakes in allowing their economies to become dangerously reliant on construction, consumption and foreign capital. But their people are hard working and educated. And, in time, when global demand picks up, the currency slides should make their economies more internationally competitive.
It would be madness to allow this economic downturn to jeopardise the peace dividend from the collapse of Communism and the integration of these countries into the European family. The overriding lesson of this crisis is that we are all economically connected. If we do not hang together, we shall hang separately. If our European neighbours need our help, they should get it.