The global economic crisis threatens to divide Europe anew. While all of Europe is being battered by the slowdown, Eastern Europe is even more vulnerable and exposed than its Western neighbors. Yet, the two sets of economies are deeply connected. A plunge in the east will wash — not ripple — across the west. But just as important are political linkages between the two halves of Europe. The European Union was created to unite the continent in a single destiny. Western Europe’s failure to help out those nations in the east would repudiate the notion that their fates are shared and could cripple the entire European project.
While the entire world is dealing with the impact of the financial crisis, Eastern European economies have been especially hard hit. According to the European Bank for Reconstruction and Development (EBRD), the region needs about $130 billion to refinance short-term debt owed to foreign creditors. The shortfall threatens an unprecedented crisis in the region and has governments scrambling to get help.
Their first impulse is to turn to the EU. The union held an emergency summit last month, at which Hungarian Prime Minister Ferenc Gyurcsany called for a 180 billion euro bailout package to help the weakest EU members. Ultimately, as much as $380 billion could be required. That plea fell on deaf ears. German Chancellor Angela Merkel, reflecting the traditional German suspicion of fiscal laxness, rejected the notion, arguing that Eastern European countries should be dealt with on a case-by-case basis. And, indeed, several of the EU’s central and Eastern European members, such as Poland and the Czech Republic, whose economies are still in good shape, have protested against being lumped together with other countries who are not.
The strains within the EU are not just felt between older and newer members. Longtime members of “Europe,” such as Italy, Spain and Greece, are badly hurt by the downturn, and their membership in the euro — the community-wide currency — has limited their ability to respond with traditional stimulus measures because they are bound by rules that limit the size of fiscal deficits. EU members that have not yet adopted the euro — to do that, members have to meet targets that show their economies have converged with that of Europe as a whole — are being battered by their currency’s depreciation against the euro: The Polish zloty has dropped 30 percent against the euro in six months, Hungary’s forint has fallen 22 percent, and the Romanian leu has declined 16 percent. Since the bulk of the loans they have received come from European banks, the deterioration of their currency against the euro makes debt service hard, if not impossible.
The reluctance of the EU to help out those partners’ economies threatens, in the words of Mr. Gyurcsany, to draw another “Iron Curtain” across the region. That sounds like hyperbole, but it does provide powerful insight into the thinking of those nations. Central and Eastern European governments joined the EU because they saw membership as the best route to modernity, prosperity and security. They looked west to stabilize their societies after the wrenching adjustments that followed the collapse of the Soviet Union.
Yet in addition to seeing Europe as an economic model — a model that is currently in need of considerable repair — they also looked to the community for security and a sense of solidarity against the prospect of a resurgent Russia. Ms. Merkel’s fiscal probity, no matter how justified, does not provide the reassurance that Eastern Europeans seek.
Economists believe that Eastern Europe’s financial crisis is manageable as long as Western banks keep funds flowing to their subsidiaries in the region. The EBRD, along with the World Bank and the European Investment Bank, has announced a 24.5 billion euro aid package for the region. The International Monetary Fund has provided bailouts for Latvia, Hungary, Serbia Ukraine and Belarus. Much more help will be needed.
Several EU members have suggested that they loosen rules on joining the euro, to provide relief for countries being hammered by exchange rate swings. While there is resistance to easing criteria, there may be support for shortening the time that members have to wait to receive permission to join the euro.
In fact, the technical, economic issues provide cover for a more basic question: To what degree are EU member governments inclined to think as a community rather than individual nation states? The failure to reach out and aid current and future members sends an unmistakable signal — that the EU does not see its fate as intertwined with those of its partners. It could signal the end of the European project.
Ultimately, however, Europe may be more united than its leaders believe. Most of the loans to Eastern and Central Europe came from Western European banks; the fate of the Eastern economies weighs heavily on euro-zone banks. If dreams of a united Europe are not enough to spur EU leaders to action, self- interest may yet prevail.
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