Sozialalmanach - Caritas Luxembourg

The impact on poorer countries
Before considering further the nature of ‘the system’ I now trace the link between this
phase of the crisis and poverty. The relationship between this crisis and the global south is
a vital but somewhat different issue, so I cite two European examples: Hungary and Latvia.
In European terms, Hungary was a marginal economy well before 2009. 9 According
to the Swiss company UBS, prices in Budapest (excluding rent) were 78% of those in
New York, whereas wages were just 25.5%. Then, in October 2008, Hungary borrowed
through the mediation of the International Monetary Fund (IMF) $25 billion from the
international financial institutions, added to $100 billion borrowed already. The response of
the Hungarian Government was to propose a public sector wage cut of about 8%: allowing
for inflation, 12%. There were deep job cuts, or sometimes a sharp increase in working
hours attached to a job – this latter measure bit hard because many Hungarians had long
survived only by holding two jobs. Pensions would be cut and the retirement age was raised.
Through 2008, the Forint sharply depreciated: those companies and individuals whose
debt was calculated in foreign currencies (such as households with mortgages from the
foreign-owned banks) were especially hard-hit. There had previously been a government
subsidy for mortgages to support growth in the housing market: this was cut. The result – as
in the USA – was a catastrophic rise in household debt.
By definition, enforced austerity measures are harsh in their impact. But what deserves
mention is that the IMF support drawn down by the Government was largely directed to
the stabilisation of the banking sector. In some cases this money was reinvested in public
sector at an interest rate of 10%, then withdrawn after six months. This experience echoes
the experience of the USA, where it became apparent – and was resented – that corporate
profits are privatised but corporate losses are projected onto the public. The economic crisis
thus focused and exaggerated a long-term trend in which corporate gains hardly reached
workers, except the most senior executives. In Hungary, average wages in 2009 are, in real
terms, about the same as in the 1970s. But the rate of increase in the profits of multinational
companies – those therefore who largely repatriate their profits from Hungary – has averaged
20% per annum over the same period.
In the case of Latvia, a case history will illustrate the link between the devastation
of the crisis and the relative invulnerability of the financial sector. 10 The case is that of
a formerly prosperous couple who were caught up in the short-lived boom after Latvia’s
entry into the EU in 2004. The couple found a house to renovate and proposed to add
two floors to it. In 2007 they borrowed €237,000. At the end of 2008, when the husband’s
9 I owe much of the information that follows to OCIPE colleagues in Budapest.
10 Reported in Le Monde, 27 December 2009.
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