European crisis summit: Divided they stand

Brussels (l'Humanite) If the debate on protectionism is raging, the reason is that Europe is divided in the face of the crisis. This extraordinary European Council was called on Sunday afternoon by the Czech EU presidency. But for the first time ever, it will be preceded by an informal summit of eight east European countries on Poland’s initiative. “The rules of fair competition must be preserved in Europe,” Radislaw Silorski, Poland’s Foreign Secretary warned. The eastern countries are afraid western markets might be closed to their exports.

The East of Europe has been severely hit

Whereas the latest EU members have enjoyed higher growth rates over the last years, they are the frailest in the face of the crisis. Valdis Dombrovskis, the current Latvian prime minister who was appointed last Thursday, following the first fall of a government as a result of the crisis, immediately declared that his country was “on the brink of bankruptcy”. On top of that, Europeans banks operating in the east are especially hit by “rotten assets”. According to L’Echo’s February 27 issue, Nomura, a financial services group, reckons that in east European countries, “one fourth of bank assets … might prove ‘rotten.” Worse still, on October 15, the Czech communist deputy Jarmir Kohlicek declared to l’Humanité : “We have no Czech banks. They are all foreign owned. What if the parent banks repatriate their assets as a solution to the crisis ?”

Under the rule of young managers schooled in American universities or of former apparatchiks later converted to the free-market dogma, the states tried to shed their debts by cutting social services. At the same time, the subsidiaries of Austrian, Swedish, German and Italian banks were trying hard to lure households into contracting debts: families were invited to take out loans in foreign currency (euro, but especially Swiss francs) and pay off their lower interest rates against the higher rates of their own currencies. Thus, many households now find themselves incapable of paying back loans that have become too costly.

The Swedish banks did abroad precisely what they were forbidden to do at home, given the rules imposed after the violent financial crisis that hit that country in the early 1990s (due to the excessive households debt). Austrian banks themselves are so exposed in east European countries that Vienna is one of the most active promoters of a plan in favour of east European banks. And the truth is that they are liable to default on up to 80% of the Austrian Republic’s GDP. It seems that Vienna’s appeal has been heard. Thus, yesterday, the World Bank, the European Bank for Reconstruction and Development, and the European Investment Bank presented a program involving €24,5 billion in loans to prop up the east European banking system.

In such a context, east European countries are afraid that their currencies might collapse in the future. “I am concerned about the volatility of the exchange rate,” declared Joaquin Almunia, European Commissioner for Economic Affairs. And indeed the Romanian leu has fallen by 20 percent since the beginning of the crisis – which makes it very difficult to pay back loans in foreign currencies. For some countries like the Baltic countries, which had pegged their currencies to the euro – a great source of pride to them and a proof of their national independence – the effects could be devastating.

Very expensive State bonds

In addition to helping the banks, states must now boost their currencies’ foreign exchange rates. Some of them, like the Baltic countries and Hungary, make no mystery of their intention to join the euro zone for the protection they think it affords. If Europe is divided between East and West, another line of division opposes the north and the south of the euro zone, as the southern part of Europe has sunk deeper into debt, to the point of jeopardizing the single currency. Imbalances between Euro-zone economies used to be offset by modulating the exchange rates. Today this is achieved through variations in the interest rates, which makes it difficult for certain countries to get loans. If Germany can raise funds at relatively low rates (3.12 percent), it is not true of Greece (5.57 percent). And taking into account the overall volume of state loans (€2,350 billion), some countries might find it hard to raise funds.

The risks are so real that Chancellor Angela Merkel, whose country balked at the idea of launching a European stimulus plan, is now calling for the co-ordinated issue of state bonds in Europe so that they all find creditors.

Given all those divisions, diplomats are not expecting big results from Sunday’s summit. The statements of the European Central Bank and of the Commission, at a time when unemployment is sweeping across Europe, do not point to a likely change of course in the EU’s economic policy.