Eastern Europe’s fall puts Continent on edge
Latvia’s collapse and the sinking East is hurting Western banks, and the ideals of unity.
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Ireland is in an economic meltdown. Three key Austrian banks are on the ropes with 80 percent of their capital in the East. Last week, Moody’s warned of default risks for banks in six Western European states that are overextended in the East. Of the former Soviet states, only two – Slovenia and Slovakia – are in the 16-member eurozone. The crisis may keep the rest from joining, at least in the short term.Skip to next paragraph
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Accusations of further drift are likely to emerge Sunday with the expected announcement of a new “euro bond” – a low interest borrowing IOU that will be offered to EU states. The bonds could help Greece and Italy, though they may raise borrowing rates for the other 11 mostly newer states – a prospect decried as a rise of “economic nationalism and protectionism” in the West by Jacek Pawlicki, Europe editor of the Warsaw newspaper Gazeta Wyborcza.
Wealthy EU states, like Germany, are concerned about a backlash against the euro by failing neighbors. Deficits, bank exposure, and job loss in Western Europe is bringing a tilt toward protectionism in France, where President Nicolas Sarkozy recently announced dramatic measures to shore up the French car industry at the expense of new auto plants in the East, angering finance ministers there.
Mr. Laurent says the question in Europe is not if, but when, the EU will affirm that “not one state can fail, which would be a catastrophe. On Sunday, EU leaders should go in front of the cameras and say the EU is one, unified, unequivocally.
“The markets feel the weakness and hesitation of the troubled states, and they are betting this isn’t a reunited Europe. The predatory behavior will stop when the EU clearly backs an undivided Europe,” he says.
The East has benefited greatly from a decade of deep integration with Europe, says Katinkya Barysch, of the Center for European Reform in London. She frames the issue as one between countries that have been managed well versus managed badly. Most former Soviet states have created an industrial base, export markets, supply chains, intertwined banks, and made major political strides. But help from the EU can’t be unconditional, Ms. Barysch says. “East Europe has a strong expectation that rich countries should show solidarity. We can’t let these states go bust, but there also needs to be a shared responsibility. This should be handled through the IMF, which has the experience.
“The EU can’t bail out banks. Should the Spanish taxpayer pay for Austrian banks that made a huge killing in recent years with ridiculous loans in the East?”
German finance minister Peer Steinbrueck has said that Germany cannot stand by while its eurozone neighbors fail – a sentiment that has received praise in the German press. But there are still few specifics about how to rescue them.