Central and eastern Europe has gone through unbelievable development during the past two decades in all aspects: politically, economically and socially. But the financial crisis has thrown much of that progress into doubt. Some brave and unpopular steps urgently need to be taken by the governments of the region. If these choices are not made urgently, the region's macroeconomic and social stability will be at risk, with most of the blame going to the local politicians.

First, most countries in Central and eastern Europe (CEE) greatly underestimate the problems they will face in 2009 and 2010 as their economic models – built on foreign direct investments, foreign borrowing and, for the regional members of the European Union, additional funds from Brussels – need a complete overhaul. Today's problems cannot, and should not, be solved just by relying on financing from the EU and other international financial institutions. Instead we need a long overdue adjustment, with fiscal and structural reforms, including pension, healthcare and education reform.

Second, banks that are majority owners of the CEE banking sector are underestimating the seriousness of the economic situation, while making it worse by hesitating to take even the limited help offered by their governments, such as in Austria and Hungary. The level of interest rates paid by the biggest CEE banks to governments as part of the bail-out package of 8-10 per cent is proof of the scale of the problems. Moreover, some banks are turning to new investors – not always the most fit and proper – for funding.