Eastern Europe's Economic Crash

The downturn has hit the region with particular vengeance. Demand for countries' exports is collapsing, along with their currencies

By Jan Puhl

Ryszard Delewski is a businessman on the verge of bankruptcy. After spending anxious months worrying about the future of his company, it seems to be all over.

Delewski was meeting with a customer in Minsk, Belarus when the telephone rang and the crisis hit home. His bank was calling to inform him that his company, Delkar, was in the red to the tune of 4 million zloty, or about €850,000 ($1.1 million). The amount had accumulated because Delewski had used foreign exchange options to hedge against an appreciation of the zloty. But now the Polish currency had lost almost a quarter of its value against the euro. And no one had explained to Delewski that, if this happened, he would owe compensation payments.

Each month the 150 employees at Delewski's plant, near the central Polish city of Kielce, stamp 250 tons of sheet metal and aluminum into gutters, lightning rods and other building elements. About half of the finished products are exported to France, Portugal, Germany and other European Union countries, while the remainder is sold in Poland. "Exports have declined sharply in the past few months. But that alone would not have finished us off," says Delewski.

Given the magnitude of the current crisis, he can understand that demand for his products in the West is down. But why the zloty is falling and why he suddenly owes money is a mystery to him. "We Poles work hard," he says. "Our products are as good as those in the West, and we service our loans." Delewski feels taken in by his lender, Millennium Bank.

It took Eastern Europe 20 years to overcome the old, inefficient structures of the state-run planned economy. The big, unprofitable combines were privatized, and, as Eastern European companies moved into new markets, the region became integrated into the globalized economy.

After joining the EU, the Baltic countries in particular made enormous progress in catching up with their Western neighbors, sometimes growing at double-digit rates. Romania, a latecomer to the EU, recorded the largest number of new registrations of Porsche Cayennes worldwide in 2008. In downtown Warsaw, the Stalin-era Palace of Culture and Science, once the city's only skyscraper, disappeared behind new steel-and-glass office towers within the space of a few years. The Czech Republic still enjoyed almost full employment in 2008.

Now the once-booming Eastern European economy has ground to an abrupt halt. The worldwide economic crisis, which began with the bursting of the real estate bubble in the United States, is now making itself felt in the former communist countries. And it is hitting them with more force and more quickly than the newcomers to capitalism, spoiled by success, had expected.

The Estonians, Latvians and Lithuanians, who for years could enjoy growth rates of between 7 and 10 percent, must resign themselves to the fact that their economies are shrinking. Hungary has already tapped the International Monetary Fund, the World Bank and the EU for €20 billion ($27 billion), and Romania will need just as much. In the fourth quarter of last year alone, the Poles produced 5 percent less than in the same period in 2007. In the Czech Republic, unemployment has risen to 12 percent.

Is it now up to the Western European countries, which already have their hands full dealing with the worst economic crisis since World War II, to pay Eastern Europe's bills? On the other hand, what happens if no one helps? Could the crisis in the EU's new member states jeopardize the cohesion of the union as a whole? One thing is clear: Western Europe cannot simply abandon the new member states to their fate.

Aid for the East was one of the key topics of discussion at the EU summit in Brussels late last week. At the suggestion of the European Commission, an emergency loan fund for distressed members that have not yet joined the euro zone was increased to €50 billion ($68 billion). Commission President José Manual Barroso called the decision a "signal of strong support."