World Bank president: Eastern Europe must not fail (Latvia just did)

By , Europe editor

WASHINGTON – Western nations and banks must not let the economies of Eastern Europe slip deeper into depression, World Bank President Robert Zoellick cautioned.

Eastern Europe is "probably the most exposed" to this crisis, Mr. Zoellick said Thursday to a group of journalists from the US and Germany. But Western banks are increasingly focused on their core markets at home and unwilling to extend the needed credit to the east.

"What do you think is going to happen if Eastern European economies are collapsing? It's not going to be so good for Western Europe, either."

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The response of Western governments and banks in the next four weeks could have profound effects on the depth and length of the crisis, he said, adding, "2009 is going to be a very dangerous year." After a weekend meeting in Berlin, Europe's leaders are now calling for a doubling of an IMF fund meant to help nations in crisis.

Human cost of economic downturn

Zoellick wasn't just talking about the economy when he spoke of this being a dangerous year. This crisis is proving deadly for the developing world: Some 400,000 additional children are expected to die this year alone as their families slip below the poverty line, according to recently released World Bank estimates. Developed countries must direct a portion of their stimulus packages to poor countries, Zoellick urged.

Zoellick's speech Thursday evening at the annual banquet of the Arthur F. Burns Journalism Fellowship was as dark as the night outside the hotel ballroom. As times get tougher, nations must resist urges to block themselves off, he said. A coordinated, international effort to ensure that economies don't collapse is needed now.

"A backyard backlash could pull us into an economic spiral," Zoellick said. "The siren song of protectionism will make this worse."

Shortly after Zoellick spoke, one government of Eastern Europe collapsed. Latvia's center-right prime minister and cabinet resigned Friday, as the country's currency plunged and following recent weeks of antigovernment protests. The economies of Estonia and Lithuania are closely linked with Latvia, raising concerns of spillover.

By many accounts, the former Soviet states of Europe now face a crisis as profound as the breakup of the USSR and a financial mess as big as the Asian economic crisis of a decade ago. As The Economist recently noted, "The Asian countries recovered thanks to export-led growth. Now the whole world is in a mess."

Larger emergency fund proposed

Leaders of Europe met over the weekend in Berlin to find common ground ahead of the Group of 20 summit scheduled for early April in London. Britain's prime minister, Gordon Brown, left the meeting Sunday with a call for more backup from the International Monetary Fund: "We are proposing today ... a $500 billion IMF fund that enables the IMF not only to deal with crises when they happen but to prevent crises."

But Europe's powerhouses are struggling to come up with a common position to deal with the crisis, according to statements made to the press by Czech Prime Minister Mirek Topolanek as he returned to Prague from the weekend meeting: "It was obvious that the four countries representing the EU in G20 (France, Germany, Great Britain, Italy) do not have the same opinion on a number of issues."

Signs of turmoil are emerging across the continent, and not just in the east. The Guardian reported Monday that British police are preparing for a "summer of rage" with victims of the downturn expected to take to the streets.

Little cushion for the world's poor

Apart from Eastern Europe, the the world's developed nations must not ignore what the crisis is doing to the poor, Zoellick said. Because of the crisis, this year upwards of 50 million people will join the ranks of those who live on less than $2 a day. These numbers are in addition to the 130 million worldwide pushed into poverty last year by skyrocketing fuel and food prices, according to estimates recently released by the World Bank.

The developing world has the same problems as Europe and North America, but few of the tools to soften the blow from the crisis. "Unlike developed countries, three-quarters of these countries cannot raise funds domestically or internationally to finance programs to curb the effects of the downturn," Zoellick said.

During April's Group of 20 summit, Zoellick said he will push for developed countries to direct 0.7 percent of economic stimulus packages to a vulnerability fund for developing countries.

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