Eastern Europe鈥檚 fall puts Continent on edge
| Paris
How quickly the European Union will or will not rally to help its most economically crippled new states in the East is becoming a major political test for the Continent.
Crisis summits will be held this weekend in Brussels to confront the problem, which is escalating as Western banking capital flees the once red-hot economies of the former Soviet states. But the problems may quickly move West.
鈥淭he future of Europe may be unfolding in the East,鈥� intoned Le Monde this week. 鈥�Western Europe cannot let Eastern Europe fall apart.鈥�
Concern is mounting over the specter of larger political instability, as well as the worries that a prolonged crisis could undercut the East鈥檚 emerging middle class. The Baltic states and Hungary, whose liberal Irish-like trade and growth models have collapsed (Latvia went belly up this week) have been hit harder than the Czech Republic and Slovakia, which had taken slower growth approaches. Poland and Romania are more protected by their size, economists say, though Poland鈥檚 zloty has lost half its value against the euro in recent months.
This week, the European Bank of Reconstruction and Development warned that the crisis 鈥渋s threatening to throw nearly 20 years of economic reform into reverse.鈥�
Amid the warning signs, the Continent is now scrambling to respond. On Sunday, nine East European states will hold an 鈥渆mergency鈥� summit, ahead of an 鈥渆xtraordinary鈥� EU summit later in the day.
A basic question for both gatherings is how much 鈥渟olidarity鈥� EU leaders will show. Will the crisis be managed within the EU鈥檚 formal channels, including using measures like an IMF bailout? That would be the go-slow approach. Or will the crisis be viewed as so potentially dangerous that leaders will unveil a host of major US-style initiatives to recapitalize banks and assist states with stimulus packages? That鈥檚 the go-fast approach.
Economist Eloi Laurent, of Sciences Po in Paris, says the issue is one of political will. 鈥淲e behave like there is still a wall dividing Europe ... but if the US can bulk up 2 thousand billion in the next months, can鈥檛 the EU do something for a small Baltic state?鈥�
What started as an ugly economic crisis across Europe 鈥� not only in the East 鈥� is now shaping into a crisis over the EU鈥檚 identity and character, say political economists. Fragile notions of European 鈥渦nity鈥� are smashing against national interests and an often hidden discourse of 鈥渟trong鈥� and 鈥渨eak.鈥�
Ireland is in an economic meltdown. Three key Austrian banks are on the ropes with 80 percent of their capital in the East. Last week, Moody鈥檚 warned of default risks for banks in six Western European states that are overextended in the East. Of the former Soviet states, only two 鈥� Slovenia and Slovakia 鈥� are in the 16-member eurozone. The crisis may keep the rest from joining, at least in the short term.
This isn鈥檛 simply a nascent East-West crisis: Also at play is an older 鈥渘orth-south鈥� eurozone crisis 鈥� with Greece, Italy, Portugal, and Spain in difficult straits, compared with northern Europe.
Accusations of further drift are likely to emerge Sunday with the expected announcement of a new 鈥渆uro bond鈥� 鈥� a low interest borrowing IOU that will be offered to EU states. The bonds could help Greece and Italy, though they may raise borrowing rates for the other 11 mostly newer states 鈥� a prospect decried as a rise of 鈥渆conomic nationalism and protectionism鈥� in the West by Jacek Pawlicki, Europe editor of the Warsaw newspaper Gazeta Wyborcza.
Wealthy EU states, like Germany, are concerned about a backlash against the euro by failing neighbors. Deficits, bank exposure, and job loss in Western Europe is bringing a tilt toward protectionism in France, where President Nicolas Sarkozy recently announced dramatic measures to shore up the French car industry at the expense of new auto plants in the East, angering finance ministers there.
Mr. Laurent says the question in Europe is not if, but when, the EU will affirm that 鈥渘ot one state can fail, which would be a catastrophe. On Sunday, EU leaders should go in front of the cameras and say the EU is one, unified, unequivocally.
鈥淭he markets feel the weakness and hesitation of the troubled states, and they are betting this isn鈥檛 a reunited Europe. The predatory behavior will stop when the EU clearly backs an undivided Europe,鈥� he says.
The East has benefited greatly from a decade of deep integration with Europe, says Katinkya Barysch, of the Center for European Reform in London. She frames the issue as one between countries that have been managed well versus managed badly. Most former Soviet states have created an industrial base, export markets, supply chains, intertwined banks, and made major political strides. But help from the EU can鈥檛 be unconditional, Ms. Barysch says. 鈥淓ast Europe has a strong expectation that rich countries should show solidarity. We can鈥檛 let these states go bust, but there also needs to be a shared responsibility. This should be handled through the IMF, which has the experience.
鈥淭he EU can鈥檛 bail out banks. Should the Spanish taxpayer pay for Austrian banks that made a huge killing in recent years with ridiculous loans in the East?鈥�
German finance minister Peer Steinbrueck has said that Germany cannot stand by while its eurozone neighbors fail 鈥� a sentiment that has received praise in the German press. But there are still few specifics about how to rescue them.
