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Eastern Europe’s fall puts Continent on edge

Latvia’s collapse and the sinking East is hurting Western banks, and the ideals of unity.

By Staff writer / February 26, 2009

Facing trouble: Workers protested at a shoe factory in Tuzla, Bosnia, on Wednesday. Nervous Western banks have been pulling investments from the region recently.

Damir Sagolj/Reuters

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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.

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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.

“The future of Europe may be unfolding in the East,” intoned Le Monde this week. “Western Europe cannot let Eastern Europe fall apart.”

Concern is mounting over the specter of larger political instability, as well as the worries that a prolonged crisis could undercut the East’s 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’s 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 “is threatening to throw nearly 20 years of economic reform into reverse.”

Amid the warning signs, the Continent is now scrambling to respond. On Sunday, nine East European states will hold an “emergency” summit, ahead of an “extraordinary” EU summit later in the day.

A basic question for both gatherings is how much “solidarity” EU leaders will show. Will the crisis be managed within the EU’s 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’s the go-fast approach.

Economist Eloi Laurent, of Sciences Po in Paris, says the issue is one of political will. “We behave like there is still a wall dividing Europe ... but if the US can bulk up 2 thousand billion in the next months, can’t the EU do something for a small Baltic state?”

What started as an ugly economic crisis across Europe – not only in the East – is now shaping into a crisis over the EU’s identity and character, say political economists. Fragile notions of European “unity” are smashing against national interests and an often hidden discourse of “strong” and “weak.”

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