Cover Story : United Front



Turbulent times:Demonstrators in Romania in 1989 seize control of a tank

Central and Eastern Europe (CEE) has changed beyond recognition in the 20 years during which Global Finance has been published. Few would have dared hope in 1987 that the region would, in just a couple of years, begin its rapid reintegration into the global economy and democratic community. Countries that had spent the best part of half a century unofficially at war with the West quickly became key members of NATO and, eventually, the European Union (EU).

There have undoubtedly been some upsets along the way: The horrific conflict in the Balkans in the 1990s has left a painful and shameful legacy for the region. Meanwhile, recent unrest in Ukraine has reminded observers that democratic reforms are far from entrenched in some parts of the region. However, what is most remarkable about the transformation of Central and Eastern Europe has been the overriding peacefulness with which it has occurred.

The key event in the development of modern Central and Eastern Europe is undoubtedly the entry of many states from the region into the EU. A total of 10 countries joined the EU in May 2004: the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Slovakia and Slovenia plus Cyprus and Malta from outside the region. All accession countries benefited from generous funding from the EU in advance of entry andmost importantlyfrom the expectation of convergence with the developed economies of Western Europe. Bulgaria and Romania joined on January 1 of this year. Most EU accession states have enjoyed rapid growth in recent yearsalbeit often after years of stagnation following the end of the Soviet era.

Many countries from Central and Eastern Europe have managed to leapfrog some Western European countries in economic and financial policies such as low and flat tax. The Czech Republic, the Balkans, Hungary, Poland, Slovakia and Slovenia are demonstrating the benefits of free markets and radical taxation policies to a slow-growing Western Europe. They are also providing the model for the next wave of EU hopefuls, including Croatia, Turkey and Ukraine.

The new and prospective members of the EU are just one part of the Central and Eastern European story. Russia has endured a political and economic rollercoaster that has taken the country from glasnost and perestroika to the disintegration of the Soviet Union to a coup and then to a form of democracy, although not a form many in the West believe is credible. Russias economic performance has been similarly erratic. Vast swaths of Russias assets were effectively stolen by what are now known as oligarchs in the 1990s, creating an economic power structure that will persist for decades to come.

Despite all these tests, the country has reemerged in recent years as a global superpower of oil and natural resources. Russia has quickly capitalized on the political power that this economic strength has given it, with a series of multi-billion dollar listings of oil, banking and other companies in London.

The development of financial markets across CEE has also inevitably experienced problems. Many countries suffered from endemic corruption during the privatizations of the 1990salthough none so much as Russiawhich turned both domestic and international investors off buying shares. But most countries have now settled into a pattern familiar across Europe, with medium-size and large companies seeking local listings and raising money in the international debt marketsincreasingly at prices close to their Western European rivals. The reintegration of Europe after more than half a century of separation is almost complete.

Laurence Neville