Hungary’s Exports Offset Anemic Domestic Demand

Recently published foreign trade data confirm that Hungary’s economic recovery continues to rely on strong external demand. The country posted a record-high trade surplus in November, with export growth (20.2% y/y) outpacing import growth (18.3%). The divergence between export and import growth reflects both robust demand in the eurozone, which absorbed 78% of total Hungarian exports, and anemic domestic demand. Exports to Germany, which consist primarily of intermediate goods, accounted for more than one-quarter of total exports in the first 10 months of 2010.

Eastern Europe: The Vicious Circle of Economic Pain and Political Jitters

There is plenty of evidence that the economic crisis that has swept Eastern Europe has already entered the political sphere. The Czech government lost a parliamentary no-confidence vote on March 24, just three days after Hungary’s prime minister resigned. In February, the Latvian government collapsed under a barrage of violent protests. Riots also erupted in Bulgaria and Lithuania. As the economic crisis bites and unemployment rates soar, voters have been losing confidence in their governments’ ability to cope with the deepening economic downturn. What is more troubling is that this confluence of crises creates a vicious circle. Economic gloom fans social unrest and brings governments down. In turn, rising political risk unsettles already jittery investors and will certainly not help the recovery prospects in the region that is highly dependent on capital inflows.

Two caveats should be highlighted, however. First, the recent wave of popular unrest has not been isolated to Eastern Europe. Ireland, Iceland, France, the UK and Greece also experienced street protests. Yet, many Eastern European governments do seem more vulnerable as they have limited policy options to address the crisis and little or no room for fiscal stimulus due to budgetary or financing constraints. Hungary’s outgoing prime minister stepped down in March amid battles over spending cuts, while in the Baltic states and Romania, public discontent will keep brewing due to deeply unpopular austerity measures.

Recognition Practice and Geopolitical Risk in Eastern Europe: Georgia, Kosovo and Beyond

In recognizing the two Georgian enclaves – South Ossetia and Abkhazia – Russia left no doubt that its decision was partly in retaliation for Western recognition of Kosovo, Serbia’s breakaway province. Moscow deeply opposed Kosovo’s independence and repeatedly warned recognition could set a precedent for other separatist regions. In return, western policy makers argued that Kosovo was a unique case, with no implications for other conflicts. Similarly, following the Russian recognition of the Georgian enclaves, western officials flatly rejected any parallels and maintained that the Kosovo case was only a convenient excuse for an increasingly assertive Moscow.That may be true, but the blame games and theoretical and legal debates only divert attention from the more serious point. Unilateral recognitions, whether justified or not, could influence other separatist movements which in turn could emphasize the exceptional nature of their own demands for statehood. The cases of the Kosovo and Georgian enclaves do, in effect, erode the international law of states’ sovereignty and the sanctity of borders and could thaw the two remaining ‘frozen conflicts’ in the CIS region (Nagorno-Karabakh in Azerbaijan and Transnistria in Moldavia), fuel tensions in Ukraine’s Russians populated Crimea and again destabilize the region where the recent trend of violent state fragmentations actually began – the Balkans. It is worth remembering that the secessionist governments of both Abkhazia and South Ossetia repeatedly called for international recognition following Kosovo’s unilateral declaration of independence and argued that if Kosovo could break away, so could they. So who is next?