Fiddling while eastern Europe burns

As the financial crisis deepens, the EU's indecision and failure to act threatens to shatter the vision of a united Europe
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* Simon Tisdall
*guardian.co.uk, Tuesday 24 February 2009 19.29 GMT

If the EU has an answer to the intensifying financial firestorm in eastern Europe, it is keeping it to itself. But the longer member states fiddle about, the greater the risk of a pan-continental conflagration – and of lasting damage to the EU's core aspiration for wider and deeper union.

A fractious meeting of foreign ministers in Brussels this week seemed to sum up all that is wrong and doesn't work in the EU. Rather than urgently address massive Hungarian debt defaults, plunging Polish output, splintering Baltic coalitions, or Ukrainian street protests, they wasted time arguing over Slovenia's arcane Adriatic fishing boat dispute with Croatia.

Richer west European states, led by Germany, fear eastern instability could further harm their struggling economies. Austrian bank lending in eastern Europe, for example, is equivalent to about 80% of Austria's entire GDP. Eastern borrowers must repay $400bn in debt owed to western banks this year – or else everybody gets burned.

But worries about spreading contagion did not prevent "old Europe" holding up an EU commission plan to spend €5bn on energy and other infrastructure projects, part of a €200bn stimulus package that southern members like Spain and Greece say unfairly favours the east. The main concern of Gordon Brown's Eurosceptic Britain, meanwhile, seems to be stopping its pocket being picked by recent arrivals.

Robert Zoellick, the president of the World Bank, says the EU should take the lead in rescuing eastern Europe. But the commission has reportedly already spent nearly half of its €25bn emergency fund on Hungary and Latvia. Much more will be needed. But wealthier EU governments have yet to cough up – while private capital is moving in the opposite direction as western banks reduce their exposure.

It's far from clear who, other than the eager-to-please Japanese, will fund the EU's weekend call, backed by the US, for a doubling of IMF rescue resources. Yet this gambit was itself evidence of political weakness – an indirect admission that Europe, where many new members (and two old ones, Britain and Denmark) have yet to adopt the euro, lacks union-wide financial institutions with the clout to deliver effective bail-outs.

The financier, George Soros, argued recently the unfolding crisis "has convincingly demonstrated the advantages of a common currency". Creating a "eurozone government bond market" would help raise much-needed rescue funds, he said. Other commentators also want rapid expansion of the eurozone, to draw in laggards such as Poland. Yet even if these ideas provided sure-fire solutions to eastern Europe's woes, they remain political anathemas, for different reasons, in Britain and Germany.

The political ramifications of the EU's indecision, if it continues, are many – but two main effects stand out. One is the prospective definitive ending of an eastwards enlargement policy already crippled by the Lisbon treaty stalemate.

Not just Serbia, held back in any case by its failure to arrest accused war criminal Ratko Mladic, but also Montenegro, Macedonia, other Balkan countries, and Turkey have all seen their EU membership chances recede sharply in recent months as Europe's weaknesses, economic, political and institutional, have been cruelly exposed.

Other casualties may include Armenia, Azerbaijan, Georgia, Moldova, Belarus, and Ukraine, potential members of the EU's new "eastern partnership" due to be launched in May. The scheme involves expanded free trade and economic and security cooperation, part of an ambitious nation and democracy-building programme.

In return, the EU hopes to expand its influence, secure non-Russian controlled energy routes and more broadly, to reduce Moscow's influence in the former Soviet sphere. Yet all this could now be jeopardised by the disarray in Brussels over the basic question of what to do about the swath of eastern Europe it already has.

The divisive, disillusioning impact of all this shilly-shallying on recent EU entrants is the other main political effect. While wealthier states have boosted fiscal spending to mitigate the downturn, some new members are being forced to cut budgets.

"The immediate feeling of helplessness of the central and east Europeans is compounded by a more profound sense that their post-cold war growth model is broken," said Katinka Barysch of the Centre for European Reform. "The ingredients of past success – opening up to trade and investment and selling local banks to west European ones – have left these countries vulnerable. The EU, which acted as an anchor for reform, has lost clout and credibility."

In other words, faith in the vision of a Europe whole and free is in danger of eroding. The crash of '09, not unlike previous historical calamities, is calling into question the future of a united Europe.

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