New Member States heterogeneity

There are significant differences across the new Member States of Eastern and Central Europe in how they have fared in the financial crisis, and, as a consequence, to the crisis aftermath. Peter Hall has argued that former communist countries made the transitions to the market economy at the height of the neoliberal era and were sold the most radical version of market model by the IMF and the World Bank, especially in the area of privately funded multi-pillar pension reform (Hall, 2009). When in 2008, a number of Central and Eastern European countries were the first to fear default, Hungary, Latvia, and Romania had to seek refuge with the IMF, also because of lack of EU experience and expertise, in order to defend their currencies. Foreign bank ownership turned into a prominent risk factor, as questions arose about possible bail-out from their home country fiscal authorities. The combination of all these factors triggered severe austerity regimes and tremendous hardship. The IMF recommended giving up the peg on the euro, but the Commission opposed this. Instead, these three countries have had to cut spending drastically, close schools, reduce public sector salaries from between 15 and 25 per cent, cut public sector pensions, and raise taxes. In Latvia pensions were reduced considerably, for example by 10 per cent for old age pension benefits and 70 per cent for working pensioners, and spending on education was reduced by 25 per cent in 2009 compared with that of 2008. Furthermore, Romania planned to cut 100,000 jobs in the public sector. On the other hand, Poland and the Czech Republic did relatively well in the wake of the 2008 crash. Although the public debt in Poland was higher than expected in 2010, it remained below the nominal safety threshold of 55 per cent. Hence, the Polish Government saw no direct need for an austerity package. In the Czech Republic a package of austerity measures was introduced to create savings of 35 bn Kc, consisting of a variety of measures (Prague Post, 2011). Special temporary unemployment benefits were cut, severance pay was curtailed, and benefits for those too sick to work were reduced. In addition, monthly payments for those with minor disabilities were reduced. In the area of child support, birth allowances were to apply to the firstborn child in families with income of less than 2.4 times the subsistence level. Finally, other measures included a taxation of working pensioners earning more than 840,000 Kc per year.

In Hungary, as early as 2006, under pressure from the EU's excessive deficit procedure, the just re-elected prime minister Ferenc Gyurcsany announced drastic social and economic reform in order to bring the budget deficit under control and to prepare for EMU membership. As Gyarcsany's reform package caused sharply negative repercussions on growth, real wages, public sector employment, and consumption, Hungary became one of the first victims of the global financial crisis. In October 2008 its currency and stock market plunged, and foreign finance dried up. In order to escape bankruptcy, the Hungarian government had to rely on the coordinated rescue package of the IMF, WB, and EU, with severely stringent conditions attached. After a landslide victory in parliamentary elections in 2010, the second right-nationalist majority government of Viktor Orban renationalized funded private pensions and cleverly excluded the costs of this reform from its public debt figures. The reform has effectively allowed the government to seize up to €10 billion in private pension assets, in order to cut the budget deficit while avoiding austerity measures (Natali, 2010). This bold strategy to regain financial sovereignty, including the suspension of a €20 billion safety net deal with the European Union and the IMF, resulted in significant reductions in the value of Hungarian assets (Hungarian Government, 2010). In this context of predicament, Hungarian policymakers came to acknowledge that the problem of underemployment was not per se related to the level and duration of social benefits, rather its roots lay with the inflexibility of the Hungarian labour market, and more in particular in the lack of social services providing for the care of children between the ages of 0 and 3.