Eastern Europe faced with the crises of the system

7 April 2011 by Catherine Samary

The “European construction” (associated with the redefinition of continental relationships after the fall of the Berlin Wall) aroused popular aspirations, which were radically opposed to the current situation: aspirations for a continent that would resist antisocial policies while remaining open to the world, according to a democratic, social, ecological and solidarity-based logic… This was in particular what was hoped for in Eastern Europe, where the populations aimed for greater freedom and a higher standard of living. These hopes were shattered, creating a breeding ground for xenophobic trends… Understanding the turns of history, the specificities of globalisation and “European construction” in which Eastern European countries have been involved,the true framework of the present crisis (versus superficial indicators of “catching up”) is essential for the people to be able to re-appropriate their choices and thus their future.

The confrontation of Eastern Europe to the new world order in the 1980s

The 1970s had been a decade marked by a crisis of profit Profit The positive gain yielded from a company’s activity. Net profit is profit after tax. Distributable profit is the part of the net profit which can be distributed to the shareholders. and of the world order, striking the countries of the capitalist centre. The countries of Central and Eastern Europe remained, as was exemplified by Czechoslovakia, dependent on the economic “support” of the USSR, backed by its tanks… Their debt towards Moscow, in non-convertible roubles (in the framework of the barter relations within Comecon - the Community of Mutual Economic Aid, governing the exchanges between countries with planned economies) was from now coupled with a second debt, this one denominated in hard currencies, and it had become heavy. The USSR was not involved in this debt, as it was still subject to a Cold War boycott, both financial and industrial, that had blocked any imports of cutting-edge technology since 1917. The opening of borders to Western imports, aimed at a certain acquisition of modern technologies, was thus done (with the agreement of the USSR) by the countries of Eastern Europe not subject to the Western boycott. This newly open window also corresponded, for the regimes concerned, to the search for imports of Western consumer goods to reduce mass discontent after the stalemate of the economic reforms of the 1960s. The process was also for them a question of obtaining certain Western technologies with the aim of improving the quality and the productivity of their own exports: these exports would then make it possible to repay the debts in foreign currencies. But bureaucratic conservatism did very little to make the technological imports effective and the debt steadily increased, accentuated by rising interest rates Interest rates When A lends money to B, B repays the amount lent by A (the capital) as well as a supplementary sum known as interest, so that A has an interest in agreeing to this financial operation. The interest is determined by the interest rate, which may be high or low. To take a very simple example: if A borrows 100 million dollars for 10 years at a fixed interest rate of 5%, the first year he will repay a tenth of the capital initially borrowed (10 million dollars) plus 5% of the capital owed, i.e. 5 million dollars, that is a total of 15 million dollars. In the second year, he will again repay 10% of the capital borrowed, but the 5% now only applies to the remaining 90 million dollars still due, i.e. 4.5 million dollars, or a total of 14.5 million dollars. And so on, until the tenth year when he will repay the last 10 million dollars, plus 5% of that remaining 10 million dollars, i.e. 0.5 million dollars, giving a total of 10.5 million dollars. Over 10 years, the total amount repaid will come to 127.5 million dollars. The repayment of the capital is not usually made in equal instalments. In the initial years, the repayment concerns mainly the interest, and the proportion of capital repaid increases over the years. In this case, if repayments are stopped, the capital still due is higher…

The nominal interest rate is the rate at which the loan is contracted. The real interest rate is the nominal rate reduced by the rate of inflation.
in the beginning of the 1980s.

However, the election of Reagan after the Soviet intervention in Afghanistan, launched an extreme phase in the arms race, which weighed heavily on the USSR in the first half of the 1980s. The cold war peak gave the United States the opportunity to take the offensive in several aspects of their own multidimensional crisis: on an internal level, public spending on military weapons and equipment strongly supported research and innovation, while re-charging an economy that had started the decade in a recession. At the same time, on an international level, the United States began the first phase of a broad-reaching resurgence of the Military-Industrial Complex and technological hegemony, which would be enforced by the military interventions of the following decade. The technological revolution that was underway in the United States and in the greater part of the capitalist world was an essential element in the ability of the ruling classes to restructure social relations and the world order. These shifts would widen the gap between the Unite States and the Eastern bloc, whereas this gap had been historically reduced between the Second World War and the 1970s.

The 1980s were therefore marked by debt crises in several Eastern European countries - Romania, Yugoslavia, Hungary, Poland and East Germany (the GDR) - which, incapable of profoundly reforming themselves without major anti-bureaucratic social transformations, had launched imports of Western technologies in the preceding decade, financed by private crediti. This debt crisis marked a new historical phase, allowing major external pressures to weigh on the societies of Eastern Europe at the very moment when the USSR of Gorbachev was turning towards an external “disengagement”. This process was aimed at obtaining the Western credit that was necessary for its modernization. The search for hard currency to pay for imports thus resulted in additional pressures and tensions within COMECON at the end of the 1980s - the USSR was, from now on, demanding repayment of debts, and if possible in hard currencies… and making the search for Western finance and technologies a priority in foreign policy. This phase marked, therefore, a “withdrawal” from any interventionism, as exemplified by the agreement negotiated with Chancellor Kohl on German unification…

Meanwhile, the five indebted countries of Eastern Europe had experienced different politico-economic trends, which all played a decisive part in the historical turning point of the “transition” towards a change of system at the start of the 1980s:

- The Yugoslav Federation, under pressure from the International monetary fund IMF
International Monetary Fund
Along with the World Bank, the IMF was founded on the day the Bretton Woods Agreements were signed. Its first mission was to support the new system of standard exchange rates.

When the Bretton Wood fixed rates system came to an end in 1971, the main function of the IMF became that of being both policeman and fireman for global capital: it acts as policeman when it enforces its Structural Adjustment Policies and as fireman when it steps in to help out governments in risk of defaulting on debt repayments.

As for the World Bank, a weighted voting system operates: depending on the amount paid as contribution by each member state. 85% of the votes is required to modify the IMF Charter (which means that the USA with 17,68% % of the votes has a de facto veto on any change).

The institution is dominated by five countries: the United States (16,74%), Japan (6,23%), Germany (5,81%), France (4,29%) and the UK (4,29%).
The other 183 member countries are divided into groups led by one country. The most important one (6,57% of the votes) is led by Belgium. The least important group of countries (1,55% of the votes) is led by Gabon and brings together African countries.

(IMF) in the 1980s, was paralysed by the rise of social and national conflicts and by three-figure hyperinflation, reflecting the loss of overall coherence of the system. The wars of ethnic cleansing which accompanied the dismantlement of the Yugoslav federation and its system, as well as the impasses of the European and U.N. peace plans, were instrumentalized by the United States to redeploy NATO NATO
North Atlantic Treaty Organization
NATO ensures US military protection for the Europeans in case of aggression, but above all it gives the USA supremacy over the Western Bloc. Western European countries agreed to place their armed forces within a defence system under US command, and thus recognize the preponderance of the USA. NATO was founded in 1949 in Washington, but became less prominent after the end of the Cold War. In 2002, it had 19 members: Belgium, Canada, Denmark, France, Iceland, Italy, Luxembourg, the Netherlands, Norway, Portugal, the UK, the USA, to which were added Greece and Turkey in 1952, the Federal Republic of Germany in 1955 (replaced by Unified Germany in 1990), Spain in 1982, Hungary, Poland and the Czech Republic in 1999.
after the dissolution of the Warsaw Pact Warsaw Pact A military pact between the countries of the former Soviet Bloc (USSR, Albania, Bulgaria, Hungary, Poland, the German Democratic Republic, Rumania, Czechoslovakia). It was signed in Warsaw in May 1955, as a reaction to the Federal German Republic joining NATO. Albania withdrew in 1968 after Soviet intervention in Czechoslovakia. After the dislocation of the USSR, the Pact’s military organization was dissolved in April 1991. . The Yugoslav crisis was a decisive stage towards the Euro-Atlantic integration of the regioni.

- The Hungarian Communist leaders were unique in deciding to respond to the crisis of the external debt by selling the country’s best enterprises to foreign capital - which initially created the opportunity to diminish the internal austerity policy, and made Hungary the principal host country for foreign direct investment (FDI) , in the first years of the following decade of “transition”. The Hungarian government also did nothesitate, following on the new European relations established by Gorbachev, to help to bring down the Wall ( for a price)

- Conversely, the dictator Ceausescu attempted to pay back Romanian debt on the backs of his people – an act that Romanian nomenklatura finally rejected as too explosive for itself. This group subsequently instigated a pseudo “revolution” which included the execution of the dictator at the end of the 1980s.

- Meanwhile, the absorption of the GDR by the Federal Republic of Germany agreed upon - with the accord of the USSR. The USSR received financial resources from Germany, accompanying the repatriation of its troops.

- Lastly, after the repression of Solidarnosc under the regime of the Polish general Jaruzelski, compromise agreements opened the door for the introduction of liberal shock therapy in Poland, backed by the cancellation of the Polish debt, as decided by the United States at the beginning of the 1990s. Indeed, no expense was spared to win over the new " elites “who were came to power power in the time of privatizations… and NATO.

The integration into globalized capitalism and new world order had begun. But what about the European construction ?

Read more in pdf

Eastern Europe faced with the crises of the system

Other articles in English by Catherine Samary (4)



35 rue Fabry
4000 - Liège- Belgique

00324 226 62 85