The end of the Cold War and the decline of the West – part 2

Image: Roman Odintsov


We are approaching the end of the order created at the end of the Second World War, although we do not yet know what will replace it

A new scenario for the world economy

Capitalism prevailed in the Cold War because it was able to impose “economic discipline”, the policy of adjustment, in both England and the United States. Communism collapsed because it couldn't do this in Eastern Europe. This is the conclusion of Fritz Bartel, in his remarkable book about the end of the Cold War and the rise of neoliberalism, the intimate relationship between the global financial capitalism of the 1970s and the fragile stability of socialism.

His book is the story of that moment of adjustment in the 1970s and 1980s, which brought about fundamental changes on the world stage.

In the first decades of the Cold War – in the 1950s and 1960s – there was a period of high economic growth in much of the world. Between 1950 and 1973, GDP per capita grew at an annual average of 4,1% in Western Europe, 2,5% in the United States and 3,8% in Eastern Europe.

In the mid-1970s, this economic growth slowed down. The system of Bretton Woods it established fixed values ​​for the exchange of currencies in Western countries and regulated the flow of short-term capital. In 1971, Nixon eliminated the fixed rate of convertibility of the dollar into gold, allowing the exchange rate to float in order to address the growing competitiveness of European and Japanese industry and the declining relative role of the United States in the international economy.

Oil prices quadrupled in 1973 after the Yom Kippur war. The Organization of the Petroleum Exporting Countries (OPEC) recorded a current account surplus of $60 billion and, from 1974 onwards, the rapid expansion of the Euromarket made plans viable that just a year earlier seemed impossible.

A new scenario, formed by changes in energy and financial markets and economic adjustment policies, began to take shape, in order to define the outcome of the Cold War.

Rising oil prices made it impossible to maintain the same subsidy scheme with which the USSR supplied its allies. The oil that these countries received was sold to the West at market prices, becoming the main source of foreign exchange for the partners in the socialist common market (Comecon).

The model entered into crisis and the countries of Eastern Europe were only able to face it thanks to the explosive growth of the capital market, which continued to finance them. The credits in Eurocurrency to the communist world increased by 36% in 1976, to 3,2 billion dollars, and seemed to have no end. The cost of borrowing in dollars was practically zero.

The economy of the socialist world collapses

Faced with its own crisis, the USSR ended up changing its subsidy policy. The USSR supplied Poland with 13 million tons of oil at 90 rubles per ton. The international price was 170 rubles. The same happened with the other countries in the bloc. The Kremlin supplied ¾ of the oil to eastern Europe. In 1975, it decided to adjust the prices of its oil according to a formula based on the average price of the previous five years. The Soviet economy was no longer in a position to continue subsidizing its allies so generously.

It was a decision that cost millions of dollars. For the countries of Eastern Europe, it represented an extraordinarily heavy burden – more than an annual increase in GDP, in the case of the GDR – and left them facing a scenario of eventual bankruptcy, unable to meet their financial commitments.

At the same time, the Soviet energy industry was in crisis. Its allies intended to increase energy demand by 47% by 1990, far above the increase in production, estimated at just 23%.

The only sources of financing for Eastern European countries were Western banks and international financial organizations (or the Federal Republic of Germany, on which the GDR especially depended), which operated with increasing conditionality, demanding severe fiscal adjustments and privatization of public companies.

Between 1970 and 1976, Comecon members, with the exception of the USSR, accumulated a trade deficit with the West of 26 billion dollars. From 1971 to 1975, the socialist bloc's debt to the West went from 764 million dollars to 7,4 billion dollars. The GDR's debt with the Western financial market alone, at the end of 1974, was around 3,5 billion dollars and projections of its growth already indicated that the process had become unfeasible.

In March 1977, GDR economic officials warned Erick Honecker, general secretary of the party, that, for the first time, they were facing serious payment difficulties. The foreign exchange obtained from exports was not enough to cover import needs. If the GDR had to buy oil supplied by the USSR from the West, it would have to pay an additional 4,5 billion Valutamarks (VM, the GDR's currency of accounts) between 1974 and 1976.

With oil supplies for the five-year period 81-85 frozen at the 1980 level, there were 19,5 million tons of oil less than initially foreseen in the five-year plans. Around 3,2 billion dollars would have to be imported from the West. New loans would be needed at a time when Western banks' confidence in the economies of socialist countries began to weaken.

At the end of December 1979, the USSR invaded Afghanistan. United States President Jimmy Carter reacted by decreeing an embargo on Soviet grain and proposing that North American banks review their credit policies towards the socialist world.

With the instability, foreign banks began to withdraw their short-term deposits from Eastern European state banks at an alarming rate. In the second quarter of 1982, East German economic advisors warned that if they did not obtain new credit, they would have to declare insolvency.

We are being attacked, Hungarian banker János Fekete told Euromoney in 1982. It was not a military threat, but that financial institutions around the world were withdrawing their resources from the communist bloc. The doors of Euromarket were closed for Comecon. In the spring of 1982, foreign banks withdrew $1,1 billion from Hungary, leaving it only $374 million to make its payments.

In 1981, the Polish government tried to impose rationing. Prices soared, wages fell and many Poles were directed to “new jobs”. To address the protests, President Wojciech Jaruzelsky declared martial law in December, with serious political consequences for an already weakened government.

The changing landscape of the Cold War

In September 1983 in England, Margaret Thatcher announced her plan to close 75 coal mines and reduce the workforce from 202.000 miners to 138.000. The idea was to break the backbone of the English union strength, to impose the adjustment policy on the country.

Given the proposal, the powerful National Union of Mineworkers (NUM) went on strike. But, after three months, polls showed that 71% of the country was in favor of closing the loss-making mines; 51% of the population preferred the government to triumph; and only 21% supported workers.

On March 3, 1985, after more than a year of strike and already without resources, the miners began to return to work, without having obtained any concession from the government. Five years later, 170 mines, more than half of those that existed, were closed and 79.000 miners lost their jobs.

The same conservative forces that supported reforms in England supported the opposition in Poland. While the miners' leader, Arthur Scargill, failed to build a base of popular support for his strike, in Poland, the Solidarity union had the support of ten million people in its anti-government protests. The socialist government did not have the same resources to impose an austerity policy as the English conservative government, an aspect that Fritz Bartel, in my opinion, does not highlight.

Fritz Bartel argues that, contrary to what some think, the crisis of the socialist world did not arise with the perestroika in the 1980s, but with the 1973 oil crisis and its growing debt.

The great demand for capital by the United States, a consequence of its budget deficits and the high interest rates paid, thanks to the adjustment policies of the president of the Federal Reserve, contributed to diverting loans previously invested in Europe from east. This situation, associated with the reduction in the Soviet supply of subsidized energy, led the Eastern European economies to inevitably renegotiate their loans with Western banks.

Hungary negotiated a deal with the IMF in December 1982 that gave it $700 million in loans from the World Bank. But, to create a fiscal surplus and start paying its debts, it had to adopt drastic measures: increasing prices, cutting subsidies, closing companies, reducing the fiscal deficit and devaluing its currency, the guilder.

Poland joined the IMF in the summer of 1986. The Soviets did not like the move, but they could not avoid it. Poland's debt was 30 billion dollars.

East Germany did not want to make a deal with the IMF. He preferred to negotiate conditions with the RFA for opening the border in exchange for new resources. Two billion marks were lent between 1983 and 1984, “which made the GDR dependent on the German mark like a heroin addict depends on it”.

These rescues meant a dramatic change in the balance of power in the Cold War scenario.

The “success” of democratic capitalism or the decadence of the West

For Fritz Bartel, democratic capitalism prevailed because it was able to impose economic adjustments on its citizens, gaining support for a discourse that insisted on the indispensability of such reforms. Communism collapsed because it failed to do this. It was the triumph of “There is no alternative” by Margaret Thatcher.

A perestroika, the reform process promoted by Mikhail Gorbachev in the USSR in the 1980s, is seen as the socialist version of “supply-side economics”. He sought to change the policy of full employment, prices and subsidies.

For Fritz Bartel, the attempt failed because Soviet leaders were unable to impose painful economic reforms, among other reasons, because they lacked the liberal ideological tradition, which prioritized the individual. In his opinion, the Polish and English crises showed that “democratic capitalism” produces a stronger and more legitimate state than “authoritarian socialism”.

But the analysis of his own text allows us to highlight the different economic situation of the two worlds as the key factor for these results: that of a weakened socialism, increasingly dependent on Western resources, against a capitalism “strengthened” by the policies of Margaret Thatcher and Ronald Reagan, whose reforms were in the same direction as the interests of capital.

At the IMF's annual meeting in 1986, Janos Fekete argued that since the debt crisis of the 80s, capital flow had gone in the wrong direction: from poor countries to rich countries, from developing countries to developed countries.

In the first half of the 1980s, the combination of adjustment policies promoted by Paul Volcker; the increase in military expenditure (a result of the arms race in which the two superpowers were involved); the fall in international oil prices and production in the USSR created two political blocs with very different material and economic capabilities.

If, between 1972 and 1982, 147 billion dollars entered developing countries, the trend was reversed. Between 1983 and 1987, 85 billion dollars were transferred to developed countries. Severe adjustments weakened the possibility of future growth, while the surplus obtained through great sacrifices was intended to pay interest.

Ronald Reagan managed to solve the problem of the growing North American deficit with the massive inflow of foreign capital, following the increase in interest rates decreed by Paul Volcker. Faced with its own problems, the Soviet government had to worry about the living conditions of its population. For Mikhail Gorbachev, the alternative to solving his economic difficulties was to end the system of subsidized exchange prices with Comecon and fix it in strong currencies, at market prices.

Mikhail Gorbachev began suggesting that each country solve its own problems. Subsidy policy could not continue as before, nor would the days of military intervention in countries in crisis, as had happened in Hungary in 1956 or Czechoslovakia in 1968, return. It was a fundamental change, of enormous consequences for the time, which laid the foundations Russia's new relations with its former allies.

But it is in the economic reform, which put the Russian economy on its feet, that lies a key factor in explaining today's Russia. What was then its weakness laid the foundations for the strength it demonstrates today in the face of the West's draconian sanctions in the context of the Ukraine war. By replacing the subsidy system, which drained its economy, with exchange at market prices, it established the foundations for its own development, based on its natural resources.

In the changes that have been going on for around 50 years and that fueled the short flight of those who dreamed of the “end of history”, the foundations of a very different history were hidden, in which the roots of the decadence of the West were found.

German unification and Washington's ambitions

In the German Democratic Republic (GDR), the economic and political situation continued to deteriorate. In the last two months of 1985, the price of oil on international markets plummeted. Refined petroleum was the GDR's main export product. It was produced from crude oil supplied by the USSR at subsidized prices. In 1985, the GDR exported 2,5 billion volutamarks (VM), a value that dropped to 1 billion in 1986 and to 900 million the following year.

Austerity seemed to be the only way to avoid state insolvency. If the country wanted to keep the flow of capital open, it would have to double its exports while imports remained constant. This would require economic reforms, including increasing prices, eliminating subsidies, closing companies and unemployment. However, party general secretary and GDR president Erick Honecker was reluctant to reduce the benefits of the German social system.

Debt to the West had increased from two billion VM in 1970 to 49 billion VM in 1989, which left the country completely dependent on Western capital, and 65% of expenses were financed by credits. In 1990, just to keep the debt stable, it would be necessary to reduce consumption by between 25% and 30% and obtain a trade surplus of 2 billion VM.

The GDR could only survive on loans from its rival, the FRG, unless it managed to obtain support from the USSR. On November 1, 1989, Egon Krenz, who had replaced Erich Honecker as head of state and party in October, traveled to Moscow to meet Mikhail Gorbachev. The Soviet leader was reportedly surprised by the seriousness of the GDR's economic situation, but reiterated that he could not provide it with more than envisaged in the 86-90 five-year plan.

On November 4, around half a million people gathered at Berlin's Alexander Platz, demanding reforms. It was the day before the wall fell. Alexander Schalk, director of the GDR's Commercial Coordination Section, traveled to Bonn to meet Federal Minister for Special Affairs Rudolf Seiters and Interior Minister Wolfgang Schauble. Informed of the results of the meeting, Chancellor Kohl decided to impose conditions on Krenz: he demanded a date for holding elections, with the political participation of the opposition, in exchange for financial support. RFA resources would only be made available if the GDR created market conditions for the economy and opened it to private activity.

In December, a month after the fall of the wall, Krenz was replaced by Dresden party secretary Hans Modrow. Kohl arrived in Dresden on December 19 to meet with Modrow: he again argued that a law guaranteeing free elections and a legal framework protecting foreign investments in the GDR were indispensable conditions for aid. Modrow brings forward the elections, initially scheduled for May, to March 18, 1990 and asks the West Germans for a new loan of 15 billion German marks.

The elections were won by the opposition “Alliance for Germany”, with 48% of the votes, and the leader of the East German Christian Democratic Union (CDU), Lothar de Maizière, became the new prime minister.

On February 6, Kohl had announced his intention to immediately begin negotiations to unify the currencies of the two Germanys. The unification process was accelerating, but a united Germany was viewed with suspicion by both British Prime Minister Margaret Thatcher and French President François Mitterrand. The American George Bush, however, did not seem to be worried. On the contrary, the United States sought to consolidate it. Germany was the fulcrum of its presence in Europe, so its unified NATO membership was of vital importance to Washington.

Perestroika and economic adjustments in the USSR

The USSR's economy was also in freefall. By the first half of 1987, Gorbachev had transformed perestroika into a campaign of radical reforms. The idea was to replace the administrative coercion of the State with the economic coercion of the market. The idea was to make private profits (from public companies), bankruptcies, wage inequality and labor mobility become part of the economic rules.

There are those who consider that this was the beginning of the abandonment of socialism, an idea that I do not share. In this regard, I would like to point out that, for me, the fundamental aspect – property – continued to belong to the State.

But Soviet leaders had not been able, in four years, to stop the deterioration of their economy. Reform of the price system, essential for perestroika, proved politically impossible. Price liberalization and unemployment only really materialized when Boris Yeltsin came to power in Russia in 1992.

Mikhail Gorbachev asked himself what the solution would be: increase in prices? Russia's vast natural resources allowed it to avoid dependence on Western capital. But the collapse of oil prices in 1985-86 and the economic reforms of the early years of perestroika had deteriorated the balance of payments.

In April 1990, the president of Russia's foreign trade bank, Yuri Moskovskii, warned Mikhail Gorbachev of the difficulty of obtaining new funds in the face of an increasingly negative attitude from foreign creditors. The problem was not so much the amount of debt, but the pace of growth: it had gone from 16 billion dollars in 1985 to 40 billion in 1989.

The experience of several countries in the 1980s (such as Mexico, Brazil and other Latin American countries, as well as Poland and Yugoslavia) showed that postponing debt payments had adverse economic and political consequences. But renegotiating the debt was not in the Soviets' plans, as that would leave them in the hands of the IMF.

NATO negotiations

On May 14, 1990, Soviet leaders meet with German envoys to discuss their economic situation. The German government claims that financial support will only be granted if it is part of a package that includes a solution to the “German problem”: unification of the country, membership of NATO and withdrawal of Soviet troops.

When Secretary of State James Baker arrived in Moscow in mid-May, he told Gorbachev that NATO would no longer be a threat to the USSR because it would transform from a military organization into a political organization that would not extend to East Germany. . He presented him with a list of nine reforms in this regard. When the Warsaw Pact fell apart, its former members, including the USSR, were asked to send diplomatic representation to NATO headquarters in Brussels.

The United States considered the possibility of giving the USSR the 20 billion dollars it requested to withdraw its troops from central Europe and allow Germany to join NATO. But Baker's offer was not the only one on the subject in Washington. Bent Scrowcroft, George Bush's national security adviser, wrote him a memo on May 29. He assured him that economic aid was a direct and quick way to guarantee the West's victory in the Cold War, which would be a strategic option to achieve the unification of Germany in NATO and the withdrawal of the Soviet military from Eastern Europe.

If Mikhail Gorbachev were willing to accept these terms, financial assistance could set the Cold War armistice in our favor, he said. In his opinion, the ongoing changes would be irrelevant if the United States were unable to perpetuate its own power on the continent.

The demands of the USSR

German monetary union was scheduled for June 1, which meant the cost of maintaining Soviet troops in Germany would skyrocket. The cost would now have to be paid in German marks and not in the devalued currency of the GDR. Of the six million tons of oil it cost, it would rise to 17 million if nothing changed. This amount was much higher than what the USSR provided to the entire GDR.

Russia's reaction was pending. What would this Germany's place be: in NATO, in the Warsaw Pact, neutral? For Gorbachev, keeping Germany out of NATO was fundamental. The USSR still had 380.000 soldiers in Germany. The Cold War could not end without resolving this issue. “No one should expect a unified Germany to join NATO,” Gorbachev said. “The presence of our forces would not allow it. We can withdraw them if the United States does the same.”

The Kremlin demanded that the FRG assume the GDR's commitments to the USSR. This demand was compatible with Kohl's strategy, who was willing to solve these problems with German financial resources. When Gorbachev met with the German Chancellor on July 15, he asked him for a plan for the withdrawal of Soviet troops from the country and an agreement on Germany's membership in NATO. He told him that if the USSR guaranteed Germany's full sovereignty, he was willing to finance the troop withdrawal and sign a broad cooperation treaty. If they decided to accept the unity of Germany, the Germans would help them keep their economy running.

At the end of August, they sat down to negotiate this aid. The Soviets asked for 20 billion marks and Kohl offered eight. Then he increased his offer to twelve and finally to fifteen. Gorbachev agreed to Germany's NATO membership, but demanded that it not be extended to East Germany while Russian troops were there, which could take three to four years under World War II occupation rights.

On September 12, Germany's occupying powers signed an agreement in Moscow renouncing these rights. On October 3, 1990, Kohl celebrated the absorption of the GDR into the FRG at the Brandenburg Gate. A month later, on the anniversary of the fall of the Berlin Wall, Gorbachev and Kohl signed an agreement on the withdrawal of Soviet troops from Germany within three years.

Unfulfilled promises? A new world order

The debate about compliance with the commitments made by the United States and Germany towards the Soviet Union in the 1990 negotiations on NATO's expansion to the east gained renewed relevance with the conflict in Ukraine.

In November 1990, a year after the fall of the Berlin Wall, the member countries of the Conference on Security and Cooperation in Europe (CSCE) signed the “Paris Charter for a new Europe”. “Europe is freeing itself from the legacy of the past.” “The era of confrontation and division in Europe is over”, they state in the first paragraph of the document. Thirty-four years later, it is clear that none of this was true.

“Were there or were there no Western guarantees that NATO would not expand eastward in exchange for the Soviet agreement for German reunification?” asked North American academic Mary Elise Sarotte in a article published in 2019, thirty years after the fall of the Berlin Wall. In fact, it was an update of an article that the same author had published in 2014 in the magazine Foreign Affairs. It is not possible to attempt to resolve this issue here, but Mary Elise Sarotte's work is up to date, with references to recently declassified official archives, and her analysis of these references is meticulous.

What conclusions does she reach? “The evidence shows that, contrary to what is thought in Washington, the question of the future of NATO – not just in the GDR, but throughout Eastern Europe – arose in February 1990, shortly after the fall of the Wall.”

“Senior American officials, working closely with FRG leaders, hinted to Moscow during this month's negotiations that the Alliance could not expand, not even into the eastern half of a yet-to-be-reunified Germany.” .

The documentary evidence, says Mary Elise Sarotte, shows that “the United States, with the help of the FRG, was quick to pressure Gorbachev into agreeing to reunification, but without making any written promises about the Alliance's future plans.” In a nutshell, she adds, on this issue “there was never any formal agreement, as Russia claims”.

It seems clear that there is no formal, written agreement. But it also seems clear that the issue was discussed and promises made by some were later reviewed by other senior US officials.

Mary Elise Sarotte adds that, according to documents kept in the FRG's foreign ministry, Hans Dietrich Genscher, then foreign minister, told his British colleague Douglas Hurd on February 6, 1990, that “Gorbachev wanted to eliminate the possibility of future NATO expansion into the GDR and the rest of Eastern Europe”. Genscher proposed that the Alliance publicly declare that the organization had “no intention of expanding its territory eastward. Such a statement should be of a general nature and should not refer only to East Germany.”

The debate continues along these lines. In the absence of a written commitment, there are those who argue that there is no commitment, such as Mark Kramer, director of the Cold War Studies project at Harvard University, who disagrees with Sarotte. Others – including the Russians – reiterate the different occasions on which the issue was discussed and the promises made not to expand NATO eastward.

As we know, for Russia the promise was not fulfilled. Vladimir Putin referred to this case in his great speech at the Munich Security Conference in 2007. “What happened to the guarantees that our Western partners gave us after the dissolution of the Warsaw Pact?” he asked.

The fact is that NATO continued to expand eastwards, up to the borders of Russia, creating a political reality very different from that which European countries imagined in 1990, in their “Paris Charter”.

A new wall ran more than a thousand kilometers to the east, until Russia decided to break it in February 2022, when its troops crossed the Ukrainian border. Moscow declared its membership of NATO unacceptable, creating a new political reality in Europe with global repercussions, the result of which will put an end to the order created at the end of the Second World War, although we still do not know what will replace it.

*Gilberto Lopes is a journalist, PhD in Society and Cultural Studies from the Universidad de Costa Rica (UCR). Author, among other books, of Political crisis of the modern world (uruk).

Translation: Fernando Lima das Neves.

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