Austerity and growth in Central and Eastern Europe: understanding the link through contrasting crisis management in Hungary and Latvia

Within the context of international debates on fiscal consolidation this article examines the experience of the 10 Central and Eastern European countries which joined the EU in 2004 and 2007 (CEE-10) and asks how austerity influenced growth in the region. By looking at the composition of adjustment, the analysis confirms the pre-crisis consensus - from the perspective of economic growth and competitiveness, expenditure-based consolidations are superior to consolidations which are based on raising revenue. The mechanisms behind this outcome are examined by comparing the fiscal consolidations in Latvia and Hungary, which represent two different approaches to fiscal consolidation. While Latvia followed the textbook approach, Hungary aimed to save households from the burden of adjustment and stimulate the economy. Although both achieved substantial improvements in their fiscal balance, competitive gains and dynamic growth appeared only in the case of Latvia. In explaining this outcome, the article emphasises the consequences of unorthodox measures on expectations - while a shared economic philosophy fostered trust and confidence among the major actors in Latvia, growing state intervention and the deterioration of institutional quality increased uncertainty in Hungary and undermined long-term growth prospects.