EU Rejects a Rescue of Faltering East Europe [WSJ]
By CHARLES FORELLE
BRUSSELS -- European Union leaders, led by German Chancellor Angela Merkel, rejected a call by Hungary for a sweeping bailout of Eastern Europe, as the bloc struggled to find consensus on an approach to the spiraling financial crisis at a summit Sunday.
The global recession has greatly strained the bonds holding together the 27 nations that now make up the European Union, formed in the wake of World War II, and poses the most significant challenge in decades to its ideals of solidarity and common interest.
Ms. Merkel said she couldn't see the need for a broad grant of aid to Eastern Europe. "The situation is very different" in Europe's economies. "We cannot compare Slovakia nor Slovenia with Hungary," she told reporters.
Hungarian Prime Minister Ferenc Gyurcsany, who proposed a bailout package of up to €190 billion ($240.84 billion), warned that without aid a "new Iron Curtain" would descend on Europe and again separate East from West. Hungary has been battered by declining demand for its exports and a plummeting currency -- straining Hungarians who borrowed in euros to buy houses that have now sunk in value.
[German Chancellor Angela Merkel holds a press conference on March 1, 2009 at the end of an Economic summit of European leaders at the EU Council headquarters in Brussels.] Getty Images
German Chancellor Angela Merkel holds a press conference at the end of an Economic summit of European leaders in Brussels.
The summit was originally called by Czech Prime Minister Mirek Topolanek to discuss concerns about rising protectionism in stimulus plans being proposed by individual nations. With the recent collapse of the government in Latvia, Eastern Europe's growing problems became the main focus. But leaders left Brussels with few concrete decisions and no indication that the richer EU states of Western Europe would be white knights for the East.
Consensus was hard to find even in Eastern Europe: leaders of relatively stronger countries -- fearful of appearing weak and being tarnished by international markets to which they need access for borrowing -- split with their neighbors over the wisdom of bailouts.
"Our position is that we must differentiate between countries that are in difficulties and those that are not," Polish Finance Minister Jacek Rostowski said. Poland, which benefited from years of healthy economic growth, is in better shape that some of its more-indebted neighbors. But it has seen a substantial fall in the value of its currency as investors scramble out of the region.
Hungary also proposed speeding up adoption of the euro -- now generally used by the Western European countries -- in the East.
Strict EU rules meant to maintain the euro's strength require that countries have strong fiscal positions before adopting the common currency. That has left out Eastern European nations grappling with budget deficits, inflation -- or both.
The fall of Iceland -- whose banks failed in part because Iceland's currency collapsed -- has reinvigorated calls by a number of countries to make it easier to join the safety and stability of the euro.
But both the bailout and calls for Eastern European countries to join the euro sooner were coolly received by Western European nations. Ms. Merkel and French President Nicolas Sarkozy both separately suggested that Eastern countries should look elsewhere -- to the International Monetary Fund, for instance -- for help.
Behind the tensions: The recession has struck the 27 EU nations with widely varying force. Large and steady economies such as Germany's are facing an inevitable slowdown, but smaller peripheral states such as Latvia, Bulgaria and even Ireland have been brutally whipsawed from an era of heady growth to shockingly fast decline.
The impact on Eastern Europe, which boomed in recent years, has been especially intense. Latvia, which financed its own expansion by borrowing from abroad, is literally running out of money as the credit crunch shuts those spigots off. Last week, Standard & Poor's cut Latvia's credit rating to junk.
And, as some in Eastern Europe warned, deep pain could well emerge elsewhere. All eyes are on Ireland, which is slashing public-sector pay as it scrambles to close a budget deficit that could reach nearly 10% of gross-domestic product. A protest last month in Dublin drew more than 100,000 people.
Other large countries, such as France and the U.K., face substantial domestic troubles and have little desire to persuade their populations to add the East's problems to their own.
The EU's disinclination to fund a regional bailout suggests that the IMF and other multilateral institutions will take on an even larger role in coming months -- a role that IMF officials have said they recognize. The IMF is looking to double its war chest for lending to $500 billion, and the EU is weighing whether or not to make a loan for that purpose. Last week, the World Bank, the European Bank for Reconstruction and Development and the European Investment Bank said they would provide €24.5 billion in financing for banks in Eastern Europe.
The IMF has been active on Europe's periphery: Iceland, Hungary, Latvia and Ukraine have turned to the agency for aid.
Most critical was the cold shoulder from Germany, which, as Europe's largest economy and the one with most access to borrowing, would play the largest role in financing any aid. Germany, the EU's strongest economy, is unwilling to unwind its own fiscal discipline to pay for the spending excesses of others. Admitting countries with weaker finances could hurt the strength of the euro or push up inflation across the euro zone.
At present, 16 of the 27 EU members use the euro. In Eastern Europe, only Slovakia and Slovenia do. To join, countries must keep budget deficits, government debt and inflation below specified ceilings. The recession has complicated some of those aims, particularly as some governments take on more debt. Another requirement calls for countries to hold their currencies within a preset range to the euro for two years.
That has wreaked havoc on euro-adoption plans in Hungary and Poland, where currencies have tumbled. Of the 11 EU members that don't use the euro, only Denmark could be reasonably close to adopting it. The misadventures of Iceland have provided an ample demonstration of the safety the euro offers in a storm. The North Atlantic island is not an EU member, though it shares many EU rules as part of the European Economic Area.
Iceland's three big banks -- virtually the country's entire banking system -- had expanded abroad by borrowing heavily in euros and sterling. When the credit crunch cut off their funding and the Icelandic krona fell precipitously, Iceland found itself without enough foreign currency to bail out the banks, a situation possibly avoidable if Iceland had used the euro. All three banks collapsed, and some on the island are pushing for quick accession to the EU.
Mr. Topolanek of the Czech Republic, whose country is among the strongest in Eastern Europe, said "the EU is going to leave no one in the lurch." Mr. Topolanek also said leaders had agreed to have further discussions about the EU rules for euro adoption, but that there was "broad agreement" that "it would be an error to change the rules of the game now."
The EU resolved one contentious issue on the eve of the summit: It approved France's much-criticized plan to give €6 billion in low-interest loans to domestic car makers. The French plan had drawn howls of protectionism -- particularly from the Czech Republic, where PSA Peugeot Citroen SA makes small cars -- since it made the aid contingent on the car makers keeping French factories open. |
