Page 5 - CE Outlook Regions 2023

EU because of the high weighting of food and energy prices in its CPI
baskets, with the rise in consumer prices reaching 25% year on year in
Estonia in August. Wages are not keeping up, with workers in all
countries suffering falls in real wages.

Central banks have reacted to the soaring inflation by hiking interest
rates, which is depressing investment. On the positive side, as the
region began tightening monetary policy earlier than Western Europe –
in June 2021 – economists expect central banks led by the Czech CNB
to start loosening monetary policy beginning in the middle of the year.

For citizens, the fall in real wages comes on top of lingering discontent
with the region’s slowness in catching up with Western living standards,
particularly since the global financial crisis. Only Czechia (at 92% of the
EU average GDP/capita on a purchasing power parity basis in 2021),
Estonia and Lithuania (89%), have almost converged with EU levels –
and are ahead of Spain, Portugal and Greece – while the remaining
Central European countries still all hover around 70-75%. Czechia is
the only CEE4 country classified by the IMF as an ‘advanced economy’
rather than an ‘emerging economy’.

Some low-income groups – notably pensioners, rural dwellers, those
with less education and skills – already felt they had not benefited from
the transition from Communism since 1989. The risk is that they are
becoming permanently disaffected with democracy and will keep voting
for populist parties, which are already in power in Hungary and Poland,
and are leading the opposition in Slovakia, Czechia and Estonia.

Radical right-wing populism continues to be fuelled by social disparities
created by the transformation from communism, the cultural shock from
accession to the EU and its values – on issues such as LGBT rights –
as well as phantom fears about migration and other topics spread by
misinformation.

This growing disgruntlement could also spill over into the international
sphere, because patience could run thin with the cost of imposing
sanctions on Russia in terms of higher energy prices, as well as the
burden of looking after hundreds of thousands of Ukrainian refugees.
At a demonstration in Prague in September, 70,000 protested against
the government, but speakers also railed against sanctions, refugees,
the EU and Nato.

To contain discontent, most governments have put in place energy
price caps at a heavy cost, sometimes funded by windfall taxes. But
across the region opposition parties are calling for governments to do
more, at a time when budgets are already stretched from dealing with
the pandemic.

The challenge of helping citizens cope with the cost of living crisis is

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