Central and Southeast Europe are suffering the highest inflation in the EU, pumped up by soaring food and energy prices, with the rise in consumer prices reaching an incredible 25% year on year in Estonia in August.

Even in the richer countries of the eastern EU, people are feeling the pinch as inflation accelerated this year, after starting its rise amid the global recovery from the coronacrisis in 2021.

Wages are not keeping up, with workers in all countries with the exception of Hungary suffering falls in real wages (Hungary’s is expected to turn negative soon, according to an ING research note last month).

Central banks have reacted to the soaring inflation by hiking interest rates, which is predicted eventually to press inflation down again but also will push Central and Southeast Europe into recession, as well as hitting borrowers with higher mortgage payments.

Core inflation forecasts for the Visegrad Four countries and Romania. 

In a region where consumption has been an important driver for growth, households are cutting back. People interviewed by bne IntelliNews reporters say they are shifting to cheaper brands and discount retailers, as well as putting off major purchases.

This bad economic news comes as the region is still emerging from the downturn caused by the coronavirus (COVID-19) pandemic. It also comes on top of lingering discontent with the region’s slowness in catching up with Western living standards since the transition from Communism.

Some low-income groups – notably pensioners, rural dwellers, those with less education and skills – already feel they have not benefited from the transition.

The risk is that they are becoming disaffected with democracy and will vote for populist parties, which are already in power in Hungary and Poland, and are leading the opposition in Slovakia and Czechia.

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

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, putting currencies and asset prices under pressure. Populist governments, such as Poland and Hungary, have tended to be more interventionist, imposing price caps or even forcing banks to make mortgage payment holidays.

The challenge of helping citizens cope with the cost of living crisis is also accentuating tensions in the ruling coalitions, with the Estonian government collapsing in June and the Slovak coalition breaking up this week over increasing welfare payments.

Below, bne IntelliNews reporters look at how the governments in their countries are handling the cost of living crisis and whether it is likely to spark domestic unrest.

Poland targets heating energy costs

The main thrust of the Polish government’s effort to stop Poles’ wallets from thinning fast has gone into easing the cost of heating energy for households during the upcoming cold season. 
The government also made a one-off payment of PLN3,000 ($648) to households to help cover the rising cost of coal, and has cut taxes on energy, petrol and basic food items. 

The government is subsidising the cost of purchasing coal and other heating fuels like wood pellets or oil for households with individual heat stoves. For multi-apartment buildings, which are mostly fed the heat via local district heating systems, there will be a cap of 40% in terms of how much heat companies could hike their prices.

The subsidies – especially ones to ease the cost of buying coal – are anticipated to bring the estimated 1.5mn households burning the commodity only limited relief. The spike in the cost of coal is due to short supply, which the government is simply unable to ramp up quickly.

Polish and foreign media have reported widely on days-long lines at coal mines, which sell coal sometimes up to three times cheaper than local distributors.

Even before the crisis, energy poverty in Poland affected as many as 1.6mn people. Experts now predict that the problem will grow much bigger.

Jaroslaw Kaczynski, the leader of the ruling Law and Justice (PiS) Party, said at a recent meeting with voters that they would need to “burn everything but old tyres and waste” in order to keep warm, a statement that the opposition said epitomised PiS’ inability to address the energy crisis in a systemic way.

Other than the energy crisis, Poles have been grappling with inflation – which hit a surprising 16.1% y/y in August, surprising the government and analysts alike, who expected price growth to have peaked at 15.6% y/y in July.

The government has long said that inflation is largely imported and is an effect of Russia’s war in Ukraine and well as lingering pandemic-caused bottlenecks in supply chains.

The National Bank of Poland nonetheless is obliged to curb inflation and it has attempted to do so via massive hikes in interest rates, which have gone up from 0.1% to 6.25% in little less than one year.

That, however, exacerbated the cost of living crisis by sending mortgage repayments through the roof, to which the government responded by granting all borrowers a total of eight months of “credit vacations” – meaning the right to suspend repayments – in 2022 and 2023.

According to Prime Minister Mateusz Morawiecki, the total cost of limiting energy prices will reach around PLN50bn. The cost of subsiding purchases of coal is estimated at around PLN11bn (€2.32bn), while Polish banks have complained the credit vacation scheme could set them back by PLN21bn-27bn this year and the next.

Czechs on the streets over rising costs

Czechia has experienced the biggest demonstration so far over the cost of living crisis. In a protest organised by extremist and fringe groups, 70,000 rallied in Prague's city centre on Saturday, using the ongoing energy crisis to criticise the country's centre-right government for not doing enough to help ordinary people, as well as for aiding Ukrainians at their expense.

Protesters’ slogans and speeches were directed against the government for the high energy prices and for allegedly giving priority to people fleeing Russian aggression in Ukraine over Czech citizens. Some also called for negotiations with Putin over cheap gas supplies. The public media, the EU, the EU's Green Deal and Nato were other frequent targets.

The organisers plan another demonstration on September 28, St Wenceslas Day. Unions are also planning a separate demonstration in October. 

The fact that even fringe movements were able to mobilise so many protesters demonstrates the depth of unhappiness in the country with the government, which is perceived as doing too little, too late to deal with the crisis.

Opposition parties held a vote of no-confidence last week and support for the populist ANO movement of former premier Andrej Babis is riding high ahead of municipal and Senate elections later this month. 

Inflation in the Czech Republic hit 17.5% in July, and is widely expected to breach 20% in the coming months. Despite a thriving export business, Czechia now has the highest electricity costs in Europe in purchasing power parity terms (PPS), a survey recently showed.

The government insists that it has done more than many in the EU but it remains hidebound by the ruling neoliberal Civic Democrat’s obsession with not raising taxes. 

The government claims it has already allocated CZK177bn (€7bn) to combat inflation, and that pension hikes, one-off child benefit payments of CZK5,000 (€203), lowered taxes on gas, a waiver on renewable energy payments for households, and a discounted electricity tariff make Czechia fourth in the EU relative to its GDP in terms of aid provided to citizens. According to Reuters, the government's claimed spending is equal to 2.9% of GDP.

Last month, the cabinet agreed to increase the amount of money allocated for the energy savings tariff, which will be distributed across the winter through contracted electricity and commodity prices as per the level of energy consumption. 

Minister of Industry and Trade Josef Sikela said the discounted electricity tariff would translate to aid for households with low consumption to approximately CZK11,000 (€446), medium consumption of CZK14,000-15,000 (€568-608) and high consumption of above CZK18,000 (€730). 

However, NGOs and analysts warn that aid needs to be more targeted to have the most effective impact. A third of households is struggling to cover their monthly expanses, sociologist Daniel Prokop points out. “Help should be targeted towards the poorer half or poorer third, households with children”, Prokop told Czech Radio.    

Some 700,000 Czechs (roughly 6.4% of the population) remain trapped in endless enforcement procedures, facing debts impossible to pay off during their lifetimes. 

Slovak ruling coalition collapses

Cabinet tensions over how to respond to the cost of living crisis led to the collapse of the Slovak ruling coalition this week. 

The right-wing Freedom and Solidarity Party (SaS) pulled out of the government over the way Finance Minister Igor Matovic pushed through his welfare plans with the support of a far-right opposition party when he could not get them through the cabinet. 

The government's measures include monthly subsidies to families of €30 per child, a €50 monthly contribution to be used for children's after school activities, a tax bonus for children under six and under 15 of €70 and €100 respectively. 

Prime Minister Eduard Heger’s government now commands 67 votes in the 150-member parliament, and even with the support of a handful of independent deputies it will lack a majority.

The two main opposition parties, Robert Fico’s Smer and Peter Pellegrini’s Hlas, are comfortably leading opinion polls and have collected enough signatures for a referendum on early elections, though the question is likely to be referred to the Constitutional Court.

The political scene is likely to become more stormy, particularly if – as likely – a vote of no-confidence is held in Matovic. 

“There will be a period of friction, depression, rage,” Martin Barto, a member of SaS’ National Council, told bne IntelliNews. “There is a real threat of a really big political upheaval.”

Hungary tries to rein in budget deficit 

Hungary is different from its neighbours in that it already had price caps and welfare handouts and in fact has had to unwind some of them to keep its budget deficit under control. 

There were big demonstrations when Viktor Orban’s radical right-wing regime ripped up its manifesto pledges and moved to cut the budget deficit caused by its handouts before the election. Thousands protested in Budapest in July at the end of tax breaks for small entrepreneurs and a hike in utility price caps.

Hungary has capped retail fuel prices at HUF480 ($1.23) per litre since November, well below current market prices. Sharp rises in gas and electricity prices have forced the government to set the limit at national average consumption levels, with market prices applying above that.

Hungary has now imposed an export ban on fuels and recently loosened logging regulations to meet increased demand for solid fuels such as firewood.

In much of Southeast Europe the impact of the war in Ukraine has meant a further hike in food prices, and the lack of locally produced food in the shops is visible. Instead, retailers are resorting to costly imports to fill their shelves. 

In Bulgaria, the poorest of the EU’s 27 member states, households are reducing non-essential spending to a minimum to face the coming winter and to be able to buy food and pay for their bills.

“I think twice before deciding to travel this summer. I have never thought about my budget before as my income is excellent and I can afford a high living standard for my family. However, the fuel has jumped a lot and we have cancelled several trips,” Desislava, 50, a mother of three, tells bne IntelliNews.

Food stores remain busy for now, but this is mainly thanks to the summer tourist season and the Ukrainian refugees in the country. Many expect that after the end of the summer season the consumption will decrease significantly.

“I am nearly having a panic attack every time I enter the store – full of crowds, buying so many things, that employees have no time to refill shelves,” Daniela, 46, says.

She spends the summer at the Black Sea coast and does her weekly shopping at the local supermarket. As August ended, however, the crowds disappeared too. 

Croatia, which is more dependent on tourism than Bulgaria, is expected to see a similar fall in economic activity as this year's summer season comes to an end. One segment that aims to do well out of the crisis is pawnbrokers; there has been a surge in advertising among pawnbrokers encouraging cash-strapped Croatians to turn to them as a solution to the crisis. 

The beginning of autumn brings a new set of financial worries. Two surveys of parents in Romania show they are increasingly concerned about the costs of back-to-school shopping in an environment of sharply rising prices. 33% of those interviewed by Deloitte said their household financial situation had worsened over the last year, while 37% expected to have to spend more on school supplies this year than they paid in 2021 for the same items. More than three-quarters (77%) planned to switch brands if preferred products were too costly or out of stock. A separate survey by United Media Services found almost one in 10 parents were concerned about higher prices for back-to-school products. 

The latest data from statistics office INS shows Romania’s retail sales volume index increased by 2.5% y/y in July, which was the weakest annual growth rate in over six quarters. Moreover, as reported by bne IntelliNews, households’ purchasing power is being eroded by rising inflation, and retail sales are only shored up by people buying now because they expect consumer goods will get even more expensive in future. 

Even in emerging Europe’s richest country, Slovenia, higher prices are causing more people are turning to supermarkets such as Lidl and Spar that stock more discounted goods. Annual inflation in Slovenia, where the average wage is around €1,300, was 11% in August and was influenced the most by higher prices of fuels, electricity and food.

A bne IntelliNews reporter has noted the sharp increase in coffee prices, much to the dismay of the population in a country where the coffee culture is just as important a part of social life as in neighbouring Italy. Before the pandemic, the usual price for an espresso or lungo was €1 or up to €1.20 in chic cafes. Prices are now at €1.30-1.40 in regular cafes and as high as €1.50-1.70 in higher-end venues (with the range in prices depending on whether cafes charge for takeaway cups).

Mixed responses 

Governments in the region have taken a variety of approaches to tackling the crisis. Some have adopted a blanket approach, helping everyone affected by rising prices of, for example, electricity or car fuel, such as Romania’s much-criticised ‘cap and subsidy’ scheme for energy prices, or Bulgaria’s handouts for drivers. 

More targeted approaches specifically helping lower income households are rarer – not least among those governments with elections coming up that want to boost their ratings by offering something to everyone, not just the poorest in society. There are exceptions, though, like Slovenia’s one-off energy supplements that are specifically for low-income households and other vulnerable groups.​

This is despite clear indications that poorer households are being disproportionately affected. A working paper from the International Monetary Fund (IMF) forecasts that the average European household will experience an increase of around 7% in its cost of living this year relative to what was expected in early 2021. However, not only does the impact vary widely across the EU – Estonia and Czechia are forecast to be the worst affected of the EU member states, while the impact in Hungary will be minimal – but within countries, the burden falls most heavily on low-income households that spend a higher share of their budgets on electricity and gas.

The IMF puts the case for targeted measures aimed at poorer households rather than blanket support, especially in countries like Estonia and the UK, where living costs for the poorest 20% of households are forecast to increase by about twice as much as those for the richest households. 

“So far, Europe’s policymakers have responded to the energy cost surge mostly with broad-based, price-suppressing measures, including subsidies, tax cuts and price controls. But suppressing the pass-through to retail prices simply delays the needed adjustment to the energy shock by reducing incentives for households and businesses to conserve energy and enhance efficiency. It keeps global energy demand and prices higher than they would otherwise be,” the IMF economists argued. 

“Moreover, the increasing cost of these measures is squeezing economies’ limited fiscal space as high prices persist … Policymakers should shift decisively away from broad-based measures to targeted relief policies, including income support for the most vulnerable.” 

The fund warns that in many countries, the cost of measures in response to the energy crisis – mostly broad price-suppressing measures – will exceed 1.5% of 2022 economic output.

Projected cost of living increases for the EU and UK in 2022. Source: IMF

 

Caps and subsidies in Southeast Europe 

The parliament of Slovenia adopted temporary measures to eliminate the consequences of the high cost of living for the most vulnerable groups of citizens on August 31. 

Low-income households will obtain a one-time energy supplement of at least €200 with the amount to be increased depending on the number of children, up to €314. An energy supplement will also be given to employees, parents of children with special needs, pensioners and some other people, provided they live in a low-income household. The first allowance payments will be made in November. 

Due to the rising food prices, which also affect the cost of providing meals at work for employees, the government decided to exclude reimbursement of food expenses from the tax base.

As well as this targeted aid, both Slovenia’s current government and its predecessor have used fuel price caps. The former government under Janez Jansa introduced a flat measure ahead of the April general election, but uncapped it shortly when it became clear that Jansa’s Slovenian Democratic Party (SDS) had no chance of forming a cabinet. The new government led by Robert Golob has since reintroduced more progressive capping. 

As observed by one bne IntelliNews reporter in Slovenia, these changes in policy saw cars lining up at petrol stations every time before easing in capping was announced, though the situation later stabilised. 

In Bulgaria, prices started surging more rapidly since April due to high fuel costs. As a result, prices of basic food products increased by between 25% and 40% for just a few months, affecting not only the households with low income but also those with higher living standard.

The authorities are also trying to reduce the electricity and heating price for households and companies, compensating that with the excessive profits of energy companies.

Direct financial aid is also provided to people whose incomes are below the poverty line, mainly retired people.

In Bulgaria, retail fuel prices jumped by between around 50% for diesel to more than four times for methane since April. In an attempt to mitigate these price hikes, the former government of Kiril Petkov introduced several measures. All car owners can use a BGN0.25 (€12.3) per litre discount at petrol stations that is subsidised by the state.

Romania launched the so-called “cap and subsidy” scheme aimed at protecting end-users from excessive rises in electricity and natural gas prices back in February, and it has since been extended as prices continue to rise. 

Most recently, the government passed an emergency decree on September 1 amending and prolonging the decree issued in February pertaining to the “cap and subsidy” scheme. The new decree prolongs the validity of the scheme until the end of August 2023 (from the end of March 2023) and seeks to secure a better balance between the cost of the subsidies and the revenues generated from the “solidarity contributions”, which are taxes levied on the “windfall revenues” derived by energy companies. The scheme will cost the budget some RON1bln (€200mn) per month and the solidarity contributions should entirely cover it, Minister of Finance Adrian Caciu said at a press conference after the government meeting.

In Croatia, the government is preparing to adopt a pack of financial measures that would help households and companies deal with the surging prices. The government has already capped retail price of fuels and is amending it each week. It also has pledged a direct aid to households and retired people.

EU-level intervention 

In addition to the measures taken by individual member states, governments are also looking for action at EU level. At a meeting on September 9, EU energy ministers are expected to back unprecedented interventions on the energy market in a bid to put a lid on the price rises that have plagued EU economies since Russia’s invasion of Ukraine in February. 

Documents prepared by the Czech EU Council presidency, and obtained by Politico, warn that the interruption of supplies through Nord Stream 1 as well as other energy supply restrictions "are feeding rising inflation, and have severe impacts on all businesses and consumers”.

Prague has asked fellow EU members to consider price caps and other potential measures to tackle the rise in energy prices, and there are hopes a decision will be made on Friday to help avert a deeper economic crisis and more political fallout. 

Contributions from Robert Anderson in Prague, Valentina Dimitrievska in Skopje, Wojciech Kosc in Warsaw, Denitsa Koseva in Sofia, Clare Nuttall in Glasgow and Albin Sybera in Ljubljana.