After the Berlin Wall fell, the nations of Eastern Europe jumped on the new train of capitalism. They borrowed and built, borrowed and built, and now – just like many Americans – they find they can't always pay their mortgages. The struggle of Eastern Europe can be felt across the great financial spider webs, not just of Europe, but of the world.
"There's a domino effect," said Kenneth S. Rogoff, a professor at Harvard and former chief economist of the International Monetary Fund. "International credit markets are linked, and so a snowballing credit crisis in Eastern Europe and the Baltic countries could cause New York municipal bonds to fall."
The currencies of Hungary, Poland, and the Czech Republic have all fallen against the Euro. Therefore, when these countries try to pay what they owe to Western European banks, their money means less, and their loans are therefore harder to repay. The banks of Western Europe are already in a pinch, holding back on lending as they face their own corner of the recession. US banks are not in a good position to lend money to European banks, and capital is therefore drying up. Less capital. Fewer loans. Less growth. Less revenue. Fewer jobs. The cycle spirals downward.
The jobless rates have risen across Europe. In Poland, the jobless rate was up to 10.5 percent in January. With their currencies declining and facing mounting debt, Eastern European countries have had to cut back on basic services. On Friday, Latvia's coalition government collapsed and Prime Minister Ivars Godmanis was forced to resign. Latvia follows Iceland, whose Prime Minister Geir Haardewas resigned on January 26th after months of protests and unrest.
The economic trials have moved several countries to press forward toward greater EU involvement. The IMF has had to step in to give billions of dollars in aid to the countries of Iceland and Latvia, Hungary and Ukraine in the interest of protecting the whole continent. Hungary's Prime Minister Ferenc Gyurcsany asked Brussels to speed up the process for bringing Eastern Europe into euro membership. Iceland's interim government led by Johanna Sigurdardottir is now considering applying for EU membership.
The people of Europe have not sat down during the crisis. In the Ukraine capital of Kiev, people rushed to take their money out of the banks. In Russia, thousands gathered to demand the government resign in the face of the crisis. In Dublin, more than 100,000 protestors surrounded the Irish parliament on Saturday to criticize bailout money for bankers while public sector workers were expected to take pay cuts.
Europe is being stretched, and during the middle of winter – which is not something to sniff at when you realize that Poland, Iceland, and Latvia all lie on parallels north of the Canadian border. Unemployment is rising and these countries continue to slide into economic quicksand. Will Europe be able to pull out? Certainly.
Recessions have come and gone a multitude of times through the centuries. The question is not whether Europe will survive the crisis, but how. When individual countries are strong and prospering, they enjoy their independence. It appears that these difficult times are drawing the nations of Europe together more tightly than they ever have been. How that will play out in the political future remains to be seen.
