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

By James HagengruberEurope editor / February 23, 2009

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

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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."

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."

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