Booming economies, Dangerous Politics

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A deep disjuncture between well-performing economies and disturbing political trends has opened up in much of the Eastern Europe, according to the Economist Intelligence Unit's latest Economies in Transition Report (June 2007).

Real GDP growth in the 28 transition countries of Eastern Europe and the former Soviet Union reached a record 7.1% in 2006, and very strong activity has carried on into the H1 of 2007. Foreign direct investment (FDI) inflows into the region reached a record total of $108 billion in 2006, up by 40% on the $77 billion received in 2005.

By contrast, the politics of the region exhibit a number of worrying trends, including signs of a deep political malaise in East-Central Europe, very poor political relations between Russia and the West, the consolidation of authoritarian trends in some countries of the CIS, an unsettled domestic political scene in key countries such as Ukraine and a looming crisis over the future of Serbia's breakaway province of Kosovo. For the moment, economies have generally not been affected but according to Laza Kekic, the Economist Intelligence Unit's Director for Eastern Europe, “The divergence between economic and political trends cannot persist indefinitely. There is an appreciable risk that bad politics will eventually overwhelm the good economics.”

Most of Central Europe's economies have continued to boom following the attainment of EU membership in 2004. At the same time riots in Hungary in 2006, in conjunction with worrying political developments in a number of other countries, have highlighted a political malaise in the region. Although there appears to be no imminent threat to political stability, governments across the region are weak and populist tendencies have strengthened.

The removal of the previous unifying goal of EU accession has exposed the underlying fragility of the region's politics. Although democratic forms of government are in place, the substance of democracy—including a political culture based on trust and healthy levels of political participation — is often absent.

According to the Economist Intelligence Unit's Index of Democracy, only two states from the region—Slovenia and the Czech Republic—qualify as consolidated full democracies. Survey results show disappointing levels of support for the core values associated with the transition, and there is a strong nostalgia for pre-transition days.

The Balkan economies have continued to recover strongly. FDI flows have been at record levels in most countries. Rising employment and wages, and strong inflows of migrants' remittances, have underpinned buoyant consumption growth. South-Eastern Europe is also poised for regional trade integration with the expansion of the Central European Free-Trade Agreement (CEFTA).

Yet one of the main sources of potential instability in the wider region surrounds the future of Kosovo. The US and most EU countries are firmly in favor of independence; Russia is firmly opposed. Irrespective of the final outcome, the situation threatens wider stability; it has the potential to affect a host of other disputes across the region; it will represent a major test for the EU; and it could also exacerbate greatly the already troubled relations between Russia and the West. Furthermore a potential crisis over Kosovo is looming at a time when the credibility of EU expansion (the main stabilizing force for the region) has been gravely weakened.

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