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Shocking Scenarios: Rapid Economic Contraction May Lead to New Wars and Radicalized Politics

Economic contraction could provoke: confrontation between U.S. and China or an unraveling of the European Union.

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Central and East European (CEE) countries are dependent on exporting to meet Eurozone demand, which has collapsed. Net private capital inflows are expected to drop in the region by almost 90 percent this year to just $30 billion. Remittances, which account for 2.5 percent of Poland’s GDP and 8 percent of Ukraine’s GDP, are evaporating as migrant workers head back home jobless.

Germany and France are telling Eastern countries to look to the International Monetary Fund for help. While European institutions are giving East Europe the cold shoulder, offering only $30 billion in financing assistance for banks in Eastern Europe, the International Monetary Fund (IMF) is planning to double its $250 billion fund “to fight the financial crisis in emerging markets,” according to the Financial Times.


Neoliberalism has led to a historic crisis and been discredited as a political ideology and economic program, but international institutions like the IMF that enforce neoliberal policies are implementing a new phase of structural adjustment programs that will make weaker economies pay for the excesses of Western capital.

The IMF is disbursing loans while instituting new regimes of shock therapy to countries that include Hungary, Iceland, Latvia, Serbia and Ukraine.

Analyst Adam Hanieh writes: “The conditions that come with this latest round of IMF lending have been particularly opaque. … Hungary has agreed to cuts in welfare spending, a freeze in salaries and canceling bonuses for public sector workers yet the final details have not been made public. Iceland was required to raise interest rates to 18 percent with the economy predicted to contract by 10 percent and inflation reaching 20 percent.”

West Europe, meanwhile, is turning inward. In England protests are increasing against foreign investment and the 2.4 million foreign workers in the country. Xenophobia and economic nationalism will likely rise as unemployment does across the continent. More joblessness and bankruptcies will increase pressure by labor and capital for protectionist measures ranging from supporting domestic industries and more national stimulus plans to forcing out foreign workers and passing “buy national” provisions.

The effect could lead to greater pressure on Europe’s weaker economies, the growth of radical political movements on the left and right and perhaps the eventual disintegration of the Europe’s common market and currency. Already, large-scale protests or riots having occurred in Ireland, Latvia, Lithuania, Bulgaria, Iceland, Ukraine and Greece.


Russia would like to benefit from the turmoil both as a response to 20 years of U.S. policy to encircle it militarily and economically and out of rising nationalism. But its economy has been bloodied over the last year. The ruble, Russian stock market and oil and natural gas prices have all tanked, draining away $200 billion in the government’s hard currency reserves. Nonetheless, Russia will probably gain leverage over littoral states like the Ukraine and the Baltic region and Ukraine because of their lack of options.

Russia is trying to promote greater regionalization, and has cast its eyes east as part of this strategy. President Dmitry Medvedev predicted last November that “the high human and technological potential” of Asian-Pacific countries “will become the locomotive of sustainable world economic development in the future.” Recently, China inked a $25 billion deal to aid Russia’s state-controlled energy industry in exchange for about 100 million barrels of oil a year for 20 years. But this pact points to the limited role Russia plays in China’s economy, as a supplier of commodities and military hardware, while China exports more valuable consumer and industrial goods to Russia.


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