TELEGRAPH 3.3.09
Europe sees trouble rising in the East
Economic crisis has brought tensions between the 'old' and 'new' EU
to boiling point, say Adrian Michaels and Bruno Waterfield.
So much for a compelling display of European unity. A disastrous
summit in Brussels at the weekend laid bare what everyone already
knew: the global economic crisis is threatening to tear apart both
the continent's single market and the peaceful transition to a
prosperous European era after the dissolution of the USSR.
Mirek Topolanek, prime minister of the Czech Republic, one of the
first former Eastern Bloc countries to hold the European Union's
rotating presidency, warned of "the greatest crisis in the history of
European integration". Ferenc Gyurcsany, his Hungarian counterpart,
spoke of fears that the economic meltdown would lead to the
abandonment of poor by rich, of East by West. "We do not want any new
dividing lines. We do not want a Europe divided along a North-South
or an East-West line . We should not allow a new Iron Curtain to be
set up."
But disputes between East and West were very much in evidence.
Germany scoffed at Hungary's call for a mass bail-out of economies
near the brink in eastern Europe. The French, who recently handed the
EU presidency to the Czechs, continued to act like disruptive back-
seat drivers. Nicolas Sarkozy openly suggested the Czechs were not up
to the task of running the EU.
On Sunday, following a tense lunch hosted by the Czechs, he even
claimed that the whole idea of an emergency summit had come from him
and from Angela Merkel, the German Chancellor.
So far, Latvia's government is the only one to have fallen in the
East. But there are increasingly shrill demands from countries such
as Hungary to be bailed out by their wealthier European partners.
Germany, understandably, has balked at being considered the sole
source of funds. Its economy is contracting fast and it has limited
resources.
The problem is a serious one. If Europe cannot solve its
difficulties, say the doom-mongers, the euro will split, the union's
authority will be fatally undermined and member states could find
themselves run by xenophobes and extremists, being wooed back into
the fold by a wounded but competitive Russia.
Robert Zoellick, president of the World Bank, said last month: "It
would certainly be a political and human tragedy if you saw the
reuniting of Europe from 20 years ago [when the Berlin wall came
down] come to a crisis now."
Two years ago, the EU celebrated its 50th birthday in the shadow of
Berlin's Brandenburg Gate. The symbolism of marking the Treaty of
Rome's anniversary at the point where the free West once met the
totalitarian East was obvious. Leaders partied to the strains of Joe
Cocker and solemnly intoned: "Thanks to the yearning for freedom of
the peoples of central and eastern Europe, the unnatural division of
Europe is now consigned to the past."
But countries in the East still feel apart, in spite of 10 former
Soviet satellites being members of the enlarged EU. (Slovenia and
Slovakia are already using the euro.) Nine countries held their own
breakaway summit on Sunday morning, discussing their worries that the
West was treating them as second-class citizens.
Meanwhile, global summits reinforce the East's view that it is being
made to ride in the back of the bus. The G20 group of developed and
developing nations will be the major discussion and co-ordination
forum for the crisis and the next meeting is in London next month.
The big EU four - Germany, France, Britain and Italy - will be there.
As a courtesy, the Czechs will be there in their capacity as holders
of the EU presidency. Thanks to President Sarkozy and Gordon Brown,
Spain and the Netherlands are also on the guest list.
But Poland, for example, which is a new, large and crucial eastern
member of the EU, has been shunned. "Since when did it become the G22
and since when was Holland bigger than Poland?" asked one diplomat.
Poland can feel particularly aggrieved in being left out of
discussions. Its economy, though under pressure like everyone else's,
is far from the desperate straits suffered by some of its regional
neighbours. The East is no monolith and its comparatively healthy
economies such as Poland, the Czech Republic and Slovenia are, by
many measures, faring better than Spain, Ireland or Greece.
But there is no denying the pain currently afflicting many of the
countries that celebrated their post-Soviet freedom by rushing
headlong into free trade of goods and services and loading up on debt-
fuelled expansion.
Western companies were attracted to the East for its cheaper
manufacturing costs. Now there are fears that subsidiary plants will
close while subsidised jobs are protected at home. In Hungary and
elsewhere, citizens abandoned mortgages denominated in their home
currencies in favour of the lower interest rates on offer in euros or
Swiss francs. Now the monthly payments are hard to meet.
Italian and Austrian banks were allowed to buy up most of the
region's largest financial services companies. There are now
legitimate fears they will repatriate their dwindling funds to focus
on home markets.
Meanwhile, far too much debt was taken on and the risk of default is
rising. The East must repay or strike new deals covering $400 billion
in short-term debt.
The Baltic countries have pegged their currencies to the euro in the
hope of speeding their accession to the single currency. But the lack
of consequent room for manoeuvre means swingeing cuts in spending are
required while exports collapse and the recession deepens.
The cost of getting eastern Europeans, including the EU's poorest
countries, out of the crisis was estimated at £169 billion by
Hungary, a sum that was dismissed out of hand at the summit in
Brussels. [I would have said the Hiungarians were being greatly
over-optimistic -cs]
But the figure might not be extreme. Zoellick, at the World Bank, has
called for western Europe to find the lion's share of £85 billion of
fresh banking capital for the East - big money when western countries
are facing their own crisis. A decision last Friday by the European
Investment Bank, the European Bank for Reconstruction and Development
and the World Bank to find £22 billion seems a drop in the ocean.
Whatever Germany may feel about being the saviour of last resort, the
truth is that the EU cannot afford [for political reasons -cs] to
let countries in central and eastern Europe fall apart: the political
consequences of a new Iron Curtain would be too grave.
The EU needs a blueprint to sell to western voters as their own
economies contract. So far, it has put what seems a sensible brake on
further enlargement. Germany and the Netherlands last week blocked an
assessment of a membership application from Montenegro. Long-standing
promises, made in 2003, that Albania, Bosnia and Serbia will be
considered for EU entry look like being broken. Turkey's entry bid is
stalled.
Next month, Germany, Austria and Belgium are expected to extend free
movement restrictions on workers from central and eastern European
countries, a full five years after they joined the EU. Eleven
countries have announced that restrictions on Bulgaria and Romania,
which both joined the EU in 2007, will be in place until 2012.
But Thomas Klau, Paris director of the European Council on Foreign
Relations, [an ex-FT journalist specialising in European integration
and a convince EU protagonisy and publicist -cs] warns that these
measures could undermine Europe's stability. The very promise of
entry into the EU was driving essential economic reforms and leading
to prosperity, even though hectic growth and too much debt
contributed to the crash. An enlarged EU with open markets has in
general spread benefits across the bloc.
"To take back the firm commitments [of EU entry] would be
devastating," Klau said.
Just as Europe needs to keep open the door to future new members, it
needs also to defend the openness of its markets and societies from
protectionism. New EU countries grew 5.5 per cent per year over the
five years before the crisis, compared with about 3 per cent before
entry
Posts
