Economy & Finance

Analysis: Bulgarian crisis ill omen for struggling emerging Europe

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SOFIA (Reuters) – The violent protests that forced Bulgaria’s cabinet from power this week underscore the lose-lose situation facing the European Union’s newest members as they struggle to stop economic downturn and stem growing public anger.

Ruling parties which stick with strict austerity programs to win investor trust risk being bounced from power by voters fed up with cost cutting and tax hikes.

Governments which loosen the fiscal screws or try unconventional ways to rebuild support before elections may alienate investors and invite more pain down the road.

Whichever path they take, ordinary Bulgarians, Slovenes, Czechs and Hungarians, all of whom get the chance to vote this year or next, face rising unemployment and stagnating wages.

It is a poisonous combination for any ruling party’s election chances and also increases the likelihood of political stalemates stalling decision making, unconventional, untested policies and a rise in support for the political fringe.

Tim Ash, an analyst at Standard Bank, said the Bulgarian government’s fall, the latest in long line in Europe, may not be the last in the continent’s former communist east. “I suspect we have to expect more of this across the region,” he said.


Many of the 100 million-odd people who joined the European Union in the last decade hoping for western-style living standards are losing hope.

Austerity is at least partly to blame. Under pressure from Brussels to reign in budget deficits, governments have cut costs and raised taxes, exacerbating a slowdown caused by a drop in demand for their exports in the debt-choked euro zone.

According to a December survey from Eurobarometer, the EU’s polling agency, four fifths of those polled thought their national economic situation was “bad” in eight of the EU’s 10 ex-communist members, with unemployment a main worry.

Those concerns are gaining steam in Slovenia and the Czech Republic, two countries that have pursued aggressive austerity programs that have deepened painful recessions and driven jobless rates to record highs.

“The way the government is cutting spending on the public sector and investments, there is little prospect that I will get a proper job,” said Dejan, a 24-year-old Slovene management student. “I and many of my colleagues are looking for jobs abroad in the hope of a better future there.”

Already vulnerable due to the country’s economic woes, Prime Minister Janez Jansa’s coalition collapsed last month following anti-graft protests. Now the tiny euro zone country may face an early election – its second in as many years – if opposition parties can’t agree on a new government.

A similarly embattled administration is that of Czech Prime Minister Petr Necas, who economists say is prolonging the longest recession in 15 years with strict belt tightening.

A danger there, economists say, is a self-defeating cycle in which austerity kills growth and budget revenues, prompting an even bigger squeeze to hit fiscal targets.

“The main culprit here is the Czech Republic, they appear to be wedded to austerity,” said William Jackson, an economist at London Capital Economics.


The cost-cutting approach could be pushing voters towards the edges of the political spectrum.

In the Czech Republic, anger over austerity has lifted the Communists – little reformed since they ruled Czechoslovakia in the Soviet era – to second place in some opinion polls, giving them as much support as Necas’s ruling Civic Democrats and their partners TOP 09, combined ahead of an election next year.

“No one wants this government. No one supports them. How come they’re still there?” said Premysl Mastny, a 70-year-old pensioner.

In Hungary, a fragmented opposition poses little threat to Prime Minister Viktor Orban, but a full 40 percent of the electorate is undecided ahead of a 2014 vote.

And in Bulgaria, analysts say there is a risk that an early election as soon as April will produce a stalemate like those that have clogged up reforms in neighbors Greece and Romania.

Fighting to hold onto voters, some politicians have strayed from the usual neo-liberal script of reforms and behavior embraced by most EU governments.

In Hungary, Orban has angered investors by imposing Europe’s highest bank tax and targeting foreign owned utilities and retailers to boost budget revenue.

And with the popularity of his Fidesz party down by more than half at under 20 percent, analysts say he looks set to try to rebuild support with a mix of pro-growth economic policies and domestic-targeted rhetoric ahead an election next year.

Possibly taking a queue from him, Bulgarian Prime Minister Boiko Borisov raised eyebrows before resigning this week by threatening to strip the power distribution license from a unit of Czech utility CEZ, a major focus of protests.

Their EU partners, the Czechs, denounced the move as “alarming” and analysts said it clashed with EU norms on due process.

They added that while that may garner short term favor among voters, it would be dangerous because it may alienate investors and hurt the recovery over the long term.

“Orban received the ire of the foreign business community, and I guess Borisov (wanted) to follow suit, risking a generally constructive track record over the past decade or so in terms of trying to improve the business environment,” wrote Standard Bank’s Ash.

(Additional reporting by Luiza Ilie in Bucharest, Marja Novak in Lubljana, Jana Mlcochova in Prague and Tsvetelia Ilieva in Sofia- editing by Philippa Fletcher)

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