The Credit Crunch and Economic Solidarity€¦ · The Credit Crunch and Economic Solidarity . Europe is torn between essential ... Their core business and home markets came first,

Summer School 2009

‘EU Eastern Enlargement Five Years On: National Interest or European Solidarity - What really matters?’

Eamonn Butler

Session 3: 13th July 14.30-16.00

The Credit Crunch and Economic Solidarity

Europe is torn between essential solidarity and national egoismThis situation is now unsustainable for everyone, whether within

the Eurozone or still out in the cold

Timothy Garton Ash

The Guardian, Thursday 26 February 2009

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Everything is being stress-tested in this crisis. Europe, too. The weak points in the way

the European Union has been put together, politically and economically, over the 20

years since the world changed in 1989, are all showing up. As we saw with the

investment banks last autumn, if one bulkhead bursts, others are likely to follow.

Start with the eurozone. To those that have it, the euro has been a source of stability and

strength in this storm. Aspirants to membership of the eurozone, like Poland, pray that

they were already members. Even in Britain, a discussion has revived about whether or

not we would be better off with the euro. Yet at the same time, the stresses between

different members of the eurozone are becoming acute. They go back to its original

design.

Asked for the first lesson he draws from Japan's decade of stagnation, a leading

Japanese analyst says: you need the closest possible co-ordination between your

monetary and your fiscal authority. The eurozone has one monetary authority but 16

different national fiscal authorities. They are, in practice, only loosely bound by a growth

and stability pact, while subject to intense domestic political pressures - for democratic

politics in Europe are still almost entirely national. This has consequences. So, for

example, because eurozone governments have behaved differently over the years, their

bonds have been valued somewhat differently in the markets. In times of crisis, these

tensions increase. Safety first, says the investor. So even if the Greek government offers

me a better return for lending it money, I may prefer to lend to the German government.

The more investors think that way, the greater the difference grows. In the end,

something has to give.

One way out of this, recently advocated by George Soros and others, is to create a single

eurozone government bond. Since that would include weaker and riskier governments,

Germany would have to pay slightly more to borrow the money it needs through such a

bond. Now imagine how that will play with German voters. What, as Germany plunges

into recession, we, the German taxpayers, must pay to save Greeks or Italians from the

consequences of their own fiscal irresponsibility? Unerhört! Unmöglich! So the

politicians who have to make this decision would pay the price in the European elections

this summer and the federal election this autumn. For them, there are no votes in Greek

or Italian gratitude. In short, because we have a monetary union but not a political one,

decisions that put the long-term European interest before the short-term national

interest are at once more needed and less rewarded.

Even more dramatic is the predicament of the east central European countries that

joined the EU over the last decade but are not yet (with the exception of Slovakia and

Slovenia) in the eurozone. In recent weeks, the tempest has hit them with a vengeance.

Far from finding safety through being aboard the good ship EU, their close financial

relationship with western Europe has become part of their problem.

Twenty years ago, after the velvet end of communism in 1989, they set out to build

capitalism without capital. Therefore they opened up liberally to western investment.

Most of their bigger banks now have western owners or majority shareholders. Hit by a

financial crisis whose origins did not lie in east central Europe, those western owners

pulled in their horns. Their core business and home markets came first, while east

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central Europe fell victim to a blanket warning against "risky emerging markets".

Western loans dried up. And as east central European currencies fell, these countries

were left struggling to pay the interest on existing loans denominated in western

currencies. This is not just a problem for governments and companies. Quite a few

middle-class Polish families, for example, have taken out new home loans denominated

in Swiss francs. When the value of the Polish zloty collapsed, their interest payments

almost doubled overnight.

Of course different countries have fared differently. Hungary and Latvia have already

had to go cap in hand to the IMF. The rating agency Standard & Poor's has just cut

Latvia's credit rating to junk status, where it joins Romania.

What they all have in common is a sense of desperation and injustice. At a panel

discussion in Vienna last weekend, I heard the leader of Hungary's main opposition

party, Viktor Orban, complain of "financial protectionism" on the part of the west. That

is mild language compared with the populist, anti-western and anti-liberal rhetoric that

will flow if this continues.

More dramatic still is the plight of countries not yet in the EU: the third circle, so to

speak, of Europe's current hell. Even before the financial crisis hit, the EU's magnetic

power was visibly fading in places like Turkey, Ukraine and Bosnia. Now even more so.

Ukraine is a mess. There are alarming reports that Bosnia is sliding backwards, with the

Bosnian Serb leader stirring the old devils of ethnic separation.

I do not say that the fissiparous tendencies will inevitably triumph in any of the three

circles. I do say that the future of the whole European project, as we have known it since

the late 1940s, and particularly since 1989, is now at issue. The forces of integration and

disintegration, of European solidarity and national egoism, the centripetal and the

centrifugal, are finely balanced. There are a few signs of Europe getting its act together,

such as last weekend's Berlin summit and yesterday's announcement of proposals for a

Europe-wide financial supervisory framework. Optimists will argue that crises have

been the catalysts of European integration throughout its history.

It is clear is that we cannot stay where we are. If we don't go forwards we will go

backwards. Forwards not, I emphasise, to some idealised United States of Europe, but to

a practical construction strong enough to weather the storm. Whether we achieve that

will depend on three things: global forces beyond our control, the quality of European

leaders, and the space and trust they are afforded by their national electorates.

Earlier this week I visited Jean Monnet's touchingly modest home in the countryside

south-west of Paris. It contains reminders of even more dramatic times, including a

copy of the 1940 proclamation of a Franco-British Union and an old typewriter on which

was drafted one of the original proposals for what became the Schuman declaration -

which led to the European Coal and Steel Community, which led to the European

Economic Community, which eventually became the European Union. Europe,

Schuman famously declared, "will not be made all at once or according to a single plan.

It will be built through concrete achievements which first create a de facto solidarity."

Monnet himself liked to quote a saying that there are two kinds of people: those who

want to be someone and those who want to do something. Yet even if today's European

leaders prove themselves to be of the latter sort, in democracies they can only do as

much as we, their national publics and voters, let them do. Whether I look at Britain or

Poland, France or Germany, Latvia or Austria, I do not, today, think we will let them do

enough.

timothygartonash.com

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CREDIT CRUNCH AND COMMUNITY RESPONSE: THE EUROPEAN

PROJECT ON THE ROPES

Concern: the word that best sums up the mood of the Spanish press

towards the Europe project these last two months. There is worry at the gap

between the gravity of the current economic and financial crisis (with the burden

it places on the social system, employment above all), and the ineptness of

community institutions in coming up with any convincing remedies. Problems

with Russia over energy supplies only heighten the sense of alarm (1). The

impression filtering through public opinion is of disquiet and protest at the

slowness, mounting delays, contradictions and sense of unravelling surrounding

the process of political integration.

For the first time in years – worse than when the Constitutional Treaty was

thrown out or the Lisbon Treaty brought to a halt – there are doubts whether we

really can break the deadlock and achieve our goal. For the first time the

strength and tenacity of the Euro-sceptical faction is being viewed as more than

a quaint hang-over: the stone-walling now seems capable of scuppering the

whole project. Attention has shifted to the initiative of the Eurosceptic phalanx,

its dynamism, the attempt at political organization shown by Irish magnate

Declan Ganley with the establishment of Libertas (2).

1. The Czech presidency

The Czech presidency’s opening moves have raised a chorus of protest and

caused an inversion of trend. President Vaclav Klaus’s unseemly mockery and

provocation have been unanimously stigmatized by the press (3). Some have

dug deeper into the more recondite historical reasons for Czechia distrusting the

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European project: roots have been traced back to Europe’s indifference to the

Czech fate before and after World War II: the moment of Nazi invasion, and then

the interminable years of enforced subordination to the Soviet empire (4). On a

more analytical note it has been pointed out that the EU president is not the

Head of State (Klaus) but prime minister Topolanek. There is a personal and

political gap between the two, and a subtler picture to be drawn of politics in the

Czech Republic. She is the only member country not to have pronounced on the

Lisbon Treaty; still unprepared to perform as presidents, they are riven by

discord even within the governing coalition which favours a frontier-less Europe

job-wise and service-wise, and admission of the former Yugoslav countries. A

Euro-sluggish rather than sceptical population, in short (5), to be encouraged

and humoured rather than tarred with the same brush as their tactless Head of

State. But the Spanish press are unable to conceal their misgivings at the EU’s

automatic voting mechanism whereby even a disbeliever can take charge

Meanwhile the months still ahead of the Czech presidency are a daunting

prospect.

2. Protectionism and resurgent nationalism

The Spanish press have given broad coverage to voices of concern from

many quarters bemoaning the lot of the European project. Political analyst Karel

Lannoo, from the Study Centre for European Politics, an organism independent of

Brussels, warns of the risks to integration if protectionism and nationalism

spread: “I fear we may be in for two or three years of European disintegration”

(6). Then there is Finland’s foreign minister Alexander Stubb who confesses to

alarm at the “institutional chaos”, claiming that “never in the history of the EU

has there been a period like this in which the only thing visible is the proliferation

of splinter groups” (7).

The loudest alarm bell is being rung against resurgent protectionism which

has sorely strained “the sacred principles of the European Union”: free

movement of goods and workers in a single frontier-less market. Such principles

have been challenged by British workers striking against Italians employed at the

Lindey refinery, by the French and Swedish governments both deciding to make

aid conditional on manufacturing staying in the homeland, by the swelling chorus

of appeals to “buy national”. Spain is one such country: inquiries have revealed

that 60% of those interviewed agreed with Minister for Industry Manuel

Sebastián when he urged people to buy Spanish products (8). This, despite the

words of Spain’s own head of government in presenting Spain’s targets for the

first semester of 2010 when she will be president of the Union. Zapatero warned

against “certain disquieting symptoms of anti-European nationalism” or

“xenophobia” rearing their head; there were signs, he added, of protectionist

hankerings. Though he did not say it in so many words, his remark clearly refers

to the UK strikes against foreign workers and France’s decision to subordinate

7.8 billion euros’ worth of aid for the car industry (Renault and Peugeot) to jobs

being kept within the country (9). A similar caution came from Commissioner for

Economic and Monetary affairs Joaquín Almunia and Secretary General of the

Organization for Cooperation and Economic Development Ángel Guerra.

3. Disruptive effects

The burgeoning economic protectionism has been blamed as the main

cause of a rift opening in relations between old and new Europe. In the wake of

the British strike against foreign workers, there have been more and more

measures in various countries to protect banks and industries, above all in the

car sector. This has raised a hornets’ nests inside the Union: accusations are

flying that national interest is being set before European interest. The French

plan to bail out their car industry has particularly irritated the Prague

government who, together with Slovakia and Romania, stand to lose out directly

from the Paris decision. Sweden, and not only France, is thinking of a similar

solution, whereas Italy gives incentives to Fiat which has some plant in Poland,

but without any such strings attached. The same goes for Germany whose

industries have factories all over East Europe: again, incentives have not been

subject to staying local. We can but note that the chief EU countries are taking

different lines.

The main concern of the moment is the spiralling economic situation of

Central and East European countries and the attendant risk to the Euro zone.

Plummeting exports and émigré remittances, plus withdrawal of western capital

ploughed in over recent years, are playing havoc with their ability to pay. This is

bouncing back on countries like Austria who financed these economies to the

tune of some 80% of her GDP (10).

As a follow-up to the extraordinary Brussels summit on 1st March,

Topolanek and Barroso have announced a new meeting in Prague scheduled for

May. Only then will unemployment relief mechanisms be proposed. By the end of

the year unemployment had grown throughout the Union, totalling 17.9 million,

1.6 million more than the year before (11). The EU stands divided, and the

community machine is shelving decisions, taking (and wasting) precious time,

creaking into action.

A glumly realistic picture of the situation in East European countries was

painted by Claudi Pérez from El País on the morrow of the European G-20 in

Berlin, 22nd February. Bucharest and Warsaw are not in Asia, writes Pérez, but

the downturn in ex Soviet bloc economies is dangerously reminiscent of South

East Asia 1997, or Argentina 2001, or Mexico 1994. Always the same story:

economies that have gone through a spectacular boom causing huge imbalances

are unable to withstand a combination of world credit crunch and a tapering

global economy. There is one perilous difference, according to Daniel Gros,

director of the Brussels Study Centre for European Politics, cited in the article:

the eastern countries cannot count on exports bouncing swiftly back as they did

ten years ago in Asia; the demand has fallen all over the world. This prophecy of

doom is confirmed by Willem Buiter from the London School of Economics, who

maintains that the EU countries lack the resources to stave off collapse in East

Europe, even if they were so minded today. The article goes on to quote another

economist, Professor Jiri Pehe, director of the Universidad of New York in Prague.

Though Pehe emphasizes the debts incurred by families and companies in Euros

and Swiss francs, he thinks a general collapse unlikely, but does not rule it out

for some countries: those that have run up the biggest debts and deficits abroad,

those with the weakest banking systems like Hungary, Latvia and Romania. East

Europe, adds the article, has economic and not only political features in common.

This points to a general situation of crisis: the forecast for 2009 is a 10%+ drop

in Latvia’s GDP, Hungary’s debt reaching nigh on 100% of her wealth, the huge

Ukraine deficit and that of neighbouring currencies losing further ground to the

Euro and coming in for heavy speculation (12)

4. Dismay

Europe is wallowing in the doldrums at the failure to pass the Lisbon

Treaty. That would not only build up the EU’s international credibility, but give it

a mechanism for swifter decision-taking. The world credit crunch strikes just

when we could do with radically different leadership. Verbally harmonious

declarations of intent do not hide the disparate behaviour in economic policy

which is largely national, if not outright protectionist. Hardship is far flung and

plain to see. Groups hostile to integration are joining forces, seeking a common

front that bodes ill for the coming European elections. Enlargement fever has

given place to dismay at the East European slump, in the face of which the

community institutions are caught flat-footed.

Given the gloomy outlook, even a convinced and unitedly pro-European

press like Spain’s is wondering if the great European dream is going to be

fulfilled after all.

(1) R. Fernández, R.M. De Rituerto, La crisis del gas entre Rusia y Ucrania pone en

peligro el suministro a la UE, El País, 2-01-2009; E. Serbeto, La debilidad de la UE, ABC

12-01-2009; Gas sin escrúpulos, El País, 20-01-2009.

(2) E. Serbeto, Los grupos euroescépticos se movilizan para reclutar a los descontentos

por la crisis, ABC, 05-02-2009.

(3) R. M. De Rituerto, Praga asume la presidencia europea con escepticismo, El País, 02-

01-2009; R. Pérez-Maura, De Francia a Chequia, ABC, 11-01-2009; E. Serbeto, Una

presidencia típicamente checa, ABC, 15-01-2009;A. Missé, El presidente checo compara

la UE con un sistema totalitario, El País, 20-02-2009.

(4) M. Zgustova, Europeos de primera, europeos de segunda, El País, 19-01-2009.

(5) D. Esparza-Ruiz, ¿O Lisboa o Moscú? Retos de la Presidencia checa en la UE , ARI n.

28/2009, 10-02-2009, scaricabile dal sito:

http://www.realinstitutoelcano.org/wps/portal/rielcano/contenido?WCM_GLOBAL_CONTE

XT=/Elcano_es/Zonas_es/Europa/ARI28-2009

(6) R. M. De Rituerto, La crisis alienta el nacionalismo económico en la Unión Europea, El

País, 06-02-2009.

(7) E. Serbeto, La pesadilla europea, ABC, 25-02-2009.

(8) R.M. De Rituerto, La crisis alienta el nacionalismo económico en la Unión Europea, El

País, 06-02-2009; El Mercado común en peligro, Informe semanal de Política Exterior,

23-02-2009, p. 3.

(9) M.G. , Zapatero ve “síntomas inquietantes” en Europa, El País, 13-02-2009.

(10) Agenda para el G-20, El País, 23-02-2009.

(11) A. Missé, El nacionalismo económico reabre la división entre la vieja y la nueva UE,

El País, 12-02-2009.

(12) C. Pérez, El temporal que viene del Este, El País, 23-02-2009.

SPEECH/07/692

José Manuel Durão Barroso

President of the European Commission

"An Enlarged European Union in the Globalization Age" Ceremony of Awarding the Honoris Causa Doctorate Degree

Warsaw, 8 November 2007

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I wish, first of all, to say what an honour it is to receive this honorary degree from the Warsaw School of Economics. In particular, I wish to thank the Rector, Professor Adam Budnikowski, the Vice-Dean of College of Socio-Economics, professor Juliusz Gardawski, the Dean of College of World Economy, Professor Stanislaw Wodejko, and the supervisor of awarding procedure, Professor Elzbieta Kawecka-Wyrzykowska. It is a privilege to receive this Degree from a prestigious Institution like the Warsaw School of Economics: the oldest public school of economics in Poland and one of the leading economic universities in Europe.

The school has educated many Polish public figures of the twentieth century and the beginning of the twenty-fist century, including my dear colleague, Danuta Hubner. As such, the school has played a major role in building a truly 'European Poland': a country that is open to Europe and that wants to influence European integration through active and constructive engagement.

Let me take this opportunity to pay tribute to one of the most famous alumni of the Warsaw School of Economics, Stefan Starzynski, Mayor of Warsaw from 1934 to 1939. He was born in the nineteenth century, in Warsaw, then part of the Russian Empire. He fought during World War I for Polish Independence. Then, in 1939, as the Mayor of Warsaw, he was a leading figure in the resistance against the Nazi occupation. Starzynski was a fighter against a Europe of wars, empires and military violence; a Europe that we left behind during the 1990s and to which we shall not return. Through his example, he is also a symbol of a peaceful and free Europe. The Warsaw School of Economics can be proud of his legacy and of that of so many prestigious alumni.

[The Emergence of an Enlarged European Union]

Ladies and Gentlemen,

I would like to recall the words of one of the great Polish intellectuals, Adam Michnik, in his "Letters from Prison", on the eve of the Central and Eastern Europe's democratic transition:

"For now two roads lie open before my country and our newly freed neighbours: one road leads to nationalism and isolationism, the other to a return to our native Europe".

I want to tell you how successful this "return to Europe" has been not only for Poland but also for all your neighbours. It was, first and foremost, a matter of fundamental political justice to have the former communist states back in Europe after the long night of Soviet totalitarianism

The "return to Europe" was also, very clearly so, a story of success. I still remember many sceptical voices in the early 1990s, questioning the wisdom of the enlargement. Political transition in Central and Eastern Europe would lead to "economic chaos", to "social upheaval", to "authoritarian politics" or to "political anarchy". Today, the reality is considerably different. We have dynamic and vibrant economies, where the GDP has greatly increased since 1989. In Poland, for instance, it has increased 48%, since 1989, and the economic growth for this year is around 7%. I see also confident societies in social, in cultural and in intellectual terms. And I see pluralist democracies with lively political debates, people engaged in democratic life, and representative institutions consolidating a new way of solving political problems. There are indeed important challenges to overcome on both the political and economic fronts, like in all meaningful transition processes, but these challenges are being confronted head on with creativity and determination.

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Later, I also heard that enlargement would paralyse European institutions and water down the process of European integration. Of course, we need to adapt our institutions to an enlarged and more diverse Union, and that is why we negotiated with success the Reform Treaty, the Treaty of Lisbon. But I can assure you that the Union is not, and has not been, paralysed. On the contrary, enlargement gave it a new political and economic dynamism.

Ladies and Gentlemen

I suggest we reflect for a moment on the expression 'return to Europe'. After all, in geographical terms, Poland never left Europe. The expression demonstrates that 'Europe' is, first of all, a political notion, a political construction, always in progress. Secondly, it is a concept that expresses a particular set of values and principles, which seeks to maintain and to promote peace, freedom, justice and solidarity.

Returning to Europe means embracing freedom and democracy, the basic principles of open societies and open economies. In doing so, in their fight for these values, new Member States brought with them the lessons of their history to Europe.

Those who once lived under dictatorships know very well the value of liberty and democracy.

Those who were under foreign military occupation know very well the value of peace and cooperation.

Those who were condemned to poverty and economic exploitation know very well the value of economic development and growth and social justice.

The last enlargement was thus not only a "return to Europe" for a number of countries. It was also a European renewal with its defining values and its founding principles. The enlarged Europe is also a rejuvenated and a stronger Europe. And we need a strong Europe to tackle the global challenges of the twenty-first century world.

After the enlargement of 2004-2007, the European Union has acquired a continental dimension. In 2007, 27 countries and almost half a billion people are united in a common political project. The European economy is now the first one in the world. Our democracies are vibrant. In today's world, where the great powers have large territorial and demographic dimensions, size matters.

Europe is itself a laboratory of globalization, a successful case of setting transnational rules and standards. I believe that we are better prepared than any other power to propose, not to impose, the organizing principles of the world order that is emerging.

[The Interest of an Enlarged European Union in a 'G lobal World']

Ladies and Gentlemen,

Since the beginning of the 21st Century, we are witnessing a historical transformation of the European Union. During the first five decades of its history, European construction was basically an experience in regional integration. Through it, Europeans found ways to resolve their political, cultural and ideological differences in a peaceful way and to promote common values and economic and social prosperity. These goals are still most relevant and should continue to be a priority for an enlarged European Union.

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However, to preserve and to improve what we achieved during the last fifty years, we need to influence and to shape the world around us. The European Union cannot be only a regional experience. It has to act at the global level. I have no doubts: together, European states can achieve results that they could never dream of on their own, working in close cooperation with their main partners, namely the countries that share the common values of freedom and democracy. They are in a position that will allow them to decisively shape globalization.

United, Member States are stronger and in a much better condition to tackle the challenges of the globalised world: to create and to maintain a just world order, to address climate change and global poverty, to guarantee energy security, to fight terrorism and organised crime, to deal with mass migration, and to succeed in a more competitive economic environment. The challenge for the coming decades is how to use the power and the capacities we built during the last half century in order to promote our values and interests at the global level. This, I believe, is not only a European interest but a real global interest. The world needs the European method of putting together different national experiences, the European principles of open societies and open economies, the European way of linking the imperative of freedom to the idea of solidarity and justice, the European priority in tackling climate change and promoting sustainable development with respect for our planet.

If Member States share common challenges, it makes sense to say that the European level is the appropriate level to guarantee and to defend those values and interests. This is a central argument of this Commission. In the age of globalization, when global problems require global solutions, it is obvious that the European level is fundamental not only for our citizens to pursue their interests but also to contribute to a more decent, peaceful and just world order.

This is why the Commission presented a Communication on "The European Interest: Succeeding in the Age of Globalization" to the October Informal European Council, where we propose the basis for a strategy to defend and promote the European interest in the globalization. 'Offensive openness' is the key idea to protect the European interest without falling into a protectionist agenda. Or, in other words, openness without naiveté, but with reciprocity.

As you may well know, for this Commission, the definition of a 'global and open European Union' has been at the heart of our policy agenda, and will continue to be a top priority.

However, political leaders have to be aware that globalization brings uncertainties and increases a feeling of insecurity for some European citizens. The perception that decisions are taken at a distant 'global level' may even create feelings of political powerlessness and alienation. This feeds populism and political radicalism and as such is a danger to our democracies. We must not only explain to our citizens how to make sense of globalization, but also show them that the political institutions that represent them are able to protect their interests effectively. European citizens need to know that their institutions have the power and the will to tackle and to shape globalization. This is the main rationale for the enlarged European Union of the 21st century.

The so-called 'new' Member States have to be at the heart of the global European Union. As countries that fought so hard for democracy, they have to be at the forefront of efforts to help others who are struggling for the same values. The world needs more than ever a confident European Union that can promote the values of freedom and solidarity.

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Ladies and Gentlemen

Let me conclude with a final appeal. It is in Poland's national interest to be a constructive and leading Member State in the European Union. Europe needs Polish involvement internally and Polish leadership externally. To be complete and fully fulfilled, Poland's 'return to Europe' demands active engagement in the European Union. By promoting the European interest, Poland reinforces its national interest. I am confident that Poland will not miss this historical opportunity.

Thank you very much

SPEECH/09/83 José Manuel Durão Barroso

President of the European Commission

EU Enlargement – 5 Years After Conference on Enlargement

Prague, 2 March 2009

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Prime Minister Topolánek,

Distinguished guests,

Ladies and gentlemen,

I'd like to start by saying thank you. To the Czech Presidency of course, for the privilege of speaking to you today - but just as importantly, to all the Member States of the European Union who joined in the enlargements of 2004 to 2007.

Thank you for your contribution in boosting the EU economy. Integration in the European Union has greatly improved living standards in your own countries. But by opening up new markets and investment opportunities, you have also stimulated growth and job creation in other Member States.

Thank you for strengthening the Single Market – the rock on which European integration is built. By dramatically increasing the size of that market, you have helped us all to reap greater benefits from it. You have enhanced the economic competitiveness and resilience of the EU as a whole.

Thank you for bolstering EU security, by extending Europe's zone of peace and stability, and taking the fight against organised crime and illegal immigration to the outer fringes of our continent. All Member States enjoy the benefits of your actions, while your experiences of reform provide an attractive model for many of our non-EU neighbours.

Thank you for increasing the EU's political and economic weight in the world. We are now in a much better position to take a leading role in the world economy and its governance, and in international negotiations in areas like trade, energy and climate change. Our improved geostrategic position also reinforces the transatlantic relationship and opens up new possibilities and perspectives in diplomatic relations with our neighbours and beyond.

Finally, thank you for bringing your ancient histories and cultures to the common European home we are building together. Your dynamism and diversity have made the EU immeasurably stronger and culturally richer.

All these benefits and more are highlighted in the European Commission's report "Five Years of an Enlarged EU". And Commissioner Almunía will present this report in more detail in a moment.

But I feel it is important today to highlight these facts up-front and clearly. Particularly as the consequences of the global financial and economic crisis work their way through our societies to devastating effect.

If we are to continue to realise the full potential of the European Union during these difficult times, a basic condition must be respected: that coherence and solidarity are not pushed to one side. On the contrary, they should be reinforced.

We need to help our citizens who are suffering the effects of this crisis. I know the Czech Presidency shares this concern. This is why Europe’s leaders met for an informal summit yesterday. We had an informal, yet comprehensive and open discussion that created a real meeting of minds, and a meeting of purpose. Prime Minister Topolánek and I have also called for an Employment Summit, to take place in May.

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Now is the time for concrete measures, at the European level, to help those most in need. And Europe is delivering:

• balance of payment support for Hungary and Latvia worth almost €10 billion, reflecting Member States' strong resolve to contain the effects of the crisis among fellow EU members;

• frontloading of cohesion and structural funds releasing €11 billion - €7 billion of which for the new Member States.

• a significant expansion in the European Investment Bank's activities, with an extra €15 billion per annum available in 2009 and 2010 – an increase of 30% above average lending. Convergence lending will increase by €2.5 billion per annum, with particular emphasis on the new Member States.

These are large sums of money, showing the EU is serious about solidarity. And the Commission will always be on the side of those who want to make solidarity a reality for our citizens.

More coherence is also necessary, if the EU is to project itself in the world effectively. We need a greater capacity to act together.

That is why the Lisbon Treaty – which was signed by all 27 Member States - is the treaty of enlargement. It will make the EU more efficient, and make further enlargements possible.

But institutions alone are not enough. As well as greater capacity to act, we also need a greater willingness to work together. We need to develop a real culture, a real mind-set, for European action.

The stakes are high, because as this crisis intensifies, our achievements together are increasingly coming under attack.

They are coming under attack from those who fear open societies and open markets.

And they are coming under attack from those who say widening the EU came at the expense of deepening.

Let me look at both of these briefly in turn.

There is no doubt that we are living through the greatest financial and economic crisis in living memory. The latest forecasts show that world trade and the world's GDP are both likely to contract this year – for the first time since 1947.

As businesses fail, and job losses mount, the siren voices of economic nationalism are making themselves heard again, as if we have learned nothing from the 1930s.

But there is one small problem for those hoping economic nationalism will protect them: it won't.

The Single Market on the other hand, with its free movement of goods, capital, people and services, has delivered plenty of growth and jobs. Steady integration into the Single Market through the accession process is estimated to have boosted growth in the new Member States by an additional 1.75% a year, for total growth of 5.5% a year from 2004 to 2008. A strong Single Market is the way out of this crisis.

Likewise labour mobility, far from 'stealing jobs', adds 0.3% to the EU's GDP in the medium term. Furthermore, this mobility has helped to meet labour market demands and reduce bottlenecks in the construction and services industry, for example. Perhaps those industries could spell out publicly what the consequences would be, if that labour mobility did not exist!

4

All this doesn't mean that no further improvements could be made, of course. In fact the crisis has exposed vulnerabilities, and underlined the fact that Member States from Central and Eastern Europe must make further efforts to safeguard their achievements.

In particular, it is crucial to continue with economic reforms. Only the right reforms can speed up entrance into the euro zone. And as the crisis is showing: the euro provides a safe harbour in stormy financial seas.

The EU's policy frameworks will help all Member States to face these challenges, and ensure a swift return to sustainable job creation and growth. Truly, this is a moment for reinforcing European unity. Together, we all win; divided, we all lose.

As for those who attack enlargement for preventing any deepening of European integration, I say: check your history books. Widening and deepening have always gone hand-in-hand.

• The accession of the UK, Ireland and Denmark was an essential prerequisite to the Single Market;

• Cohesion and regional policies are linked to the first two Mediterranean enlargements;

• The euro owes its existence to the 'silent enlargement' of German reunification, followed by the Nordic and Austrian accessions; and

• Since the 'Big Bang' enlargement, we have seen great strides in the field of justice and home affairs, and the creation of an integrated, European energy policy, that were unthinkable just 10 years ago.

The simple fact is, enlargement has always been a potent tool for spreading peace, democracy and prosperity to all corners of our continent. As a Portuguese, I know that. Many of you also know that, from more recent experience.

So enlargement should continue when appropriate, taking into consideration the lessons learned, and based on our renewed consensus on enlargement. In other words, the EU’s own capacity; the candidate countries ability to fulfil strict conditions; and better communication with our citizens.

Ladies and gentlemen,

We are in fact celebrating two anniversaries this year. Not just the 5th anniversary of the largest ever EU enlargement, but also the 20th anniversary of the fall of the Iron Curtain. And the two are inextricably linked.

Prior to 1989, the countries of Europe could not build a common home, despite our ancient, shared history. Prior to 1989, integration efforts were forced to accommodate artificial divides.

But thanks to the courage and perseverance of the peoples of Central and Eastern Europe, the shackles of Communist dictatorship were thrown off. And with that, the societies of those countries won a proud place in European history and a special role in healing Europe's fractured identity.

Five years after European reunification, the Czech Republic occupies the Presidency of the European Council – a challenging task which it is carrying out very effectively. This great responsibility is also a great privilege. In difficult times, Prime Minister Topolánek and I are working hand-in-hand (ruku v ruce ) to lead Europe in tackling the crisis.

5

So let me finish with a word of gratitude. I started my speech with a lot of thank yous, so it seems appropriate to finish with one as well:

Thank you for making the European Union truly European – and as great a Union as ever!

Thank you.

April/May 2009 - CER BULLETIN, ISSUE 65

In the name of EU solidarity

by Katinka Barysch

Is a new iron curtain threatening to divide the European Union? Hungary’s prime minister, Ferenc Gyurcsany, raised the spectre last month, when he warned that the eastern members were descending into economic mayhem while the richer EU countries were looking on unsympathetically. Gyurcsany then suggested that the EU should provide €180

billion in emergency aid for budget bail-outs and banking rescues in the East. His idea was swiftly rejected at an informal EU summit at the beginning of March. Does this rejection mean the end of EU solidarity – the glue that keeps the Union of 27 countries together?

No. First, not all new member-states are in as much trouble as Hungary. The governments of the Czech Republic, Poland and other Central and East European countries that are doing

better economically said there was no need for a region-wide bail-out package. Second, the EU has in fact shown a good deal of support for those new member-states that needed it. At the end of 2008, the European Commission doubled its emergency fund for countries that struggle to finance their external deficits to €25 billion. In March 2009, it doubled it again. It

has used some of that money to co-finance large loan packages for Hungary and Latvia, and now also Romania, under the auspices of the International Monetary Fund. National governments, for example in Sweden, have also contributed to such loans.

If more emergency lending is needed, the EU could raise even more money to co-finance IMF lending. But the EU should not seek to replace the IMF. The European Commission does not have much experience with imposing the kind of economic conditionality that usually

comes with large balance-of-payments loans. Conditions such as cutting budget deficits and streamlining the state administration are painful, especially at a time when economic output is plunging and unemployment is rising – which is why the IMF is now softening the austerity plans for some East European countries. Yet conditionality is considered necessary

to ensure that the money really addresses the problem and that the borrower can eventually repay the loan. The EU’s reputation for solidarity would hardly gain if eurocrats rather than IMF officials told these governments to sack more civil servants and cut

pensions. When EU governments recently agreed that the IMF’s resources should be at least doubled, they did so with Eastern Europe foremost on their minds. The EU countries are likely to contribute €75 billion to the extra $250 billion that the Fund is expected to get.

European leaders have also instructed their other institutions to help the new member-states. The European Bank for Reconstruction and Development, the European Investment Bank and the World Bank have made almost €25 billion available to help banks and

businesses in Central and Eastern Europe. The European Central Bank has given significant short-term euro loans to Hungary and Poland so that people there can continue servicing their foreign-currency denominated mortgages. Those countries, such as Austria and Sweden, that are heavily exposed to bank lending to Eastern Europe have injected new

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capital into their banks. It is in these countries’ own vital interest to do so since their financial stability would be at risk if large chunks of the East European loans went sour. If some East European subsidiaries have to be bailed out, the responsibility will have to be

shared. Austria, Belgium, Greece, Sweden and others did not prevent their banks from lending irresponsibly across borders while some East European countries foolishly allowed people and businesses to binge on foreign currency loans.

All the evidence so far suggests that the EU will not allow systemic banking failures or sovereign defaults in any of the new member-states. Nevertheless, there is more that the Union can and should do to help its newest members. More EU budget funds should go to

energy and infrastructure projects in the East. The EU needs to have a proper debate about whether the Maastricht criteria for eurozone entry make sense for the fast-changing new members. Most importantly, the old member-states must prevent a fragmentation of the single market. Exports make up 80 per cent of GDP in many of the Central and East

European countries, and most of these sales go to the eurozone. The new members’ economies depend on foreign investment. Both old and new member-states have benefited from the movement of workers around the Union. When West European governments tell their banks to lend only to local business, or suggest that their companies should build cars

at home, or mull restrictions on foreign workers – that is when EU solidarity threatens to break down.

Katinka Barysch is deputy director of the Centre for European Reform.

Centre for European Reform © CER 2009

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Banks' exposure to eastern Europe

Stand by me Jun 11th 2009

From The Economist print edition

Western banks have supported their eastern European subsidiaries—so far

WHEN it comes to banking crises, “Latvia on the brink” doesn’t really

cut the mustard. At worst Western banks and their subsidiaries in the

country could face losses of $10 billion—about the same amount as a

typical investment bank wrote off during a bad quarter in 2008. Yet the

tiny Baltic state’s continuing battle to defend its currency peg cannot

be dismissed: it is a reminder of the wall of bad debts faced by banks

across central and eastern Europe (CEE), many of which have western

European parents (see map).

Contagion is a risk. If Latvia’s peg goes, others in the Baltics and

beyond may come under pressure, making it harder for those who

have borrowed in hard currencies to avoid default. A Western bank

could even abandon a local subsidiary, although Mark Young of Fitch, a

credit-rating agency, thinks that is pretty unlikely as it would create

wider fears among depositors and counterparties about foreign parents’

resolve to stand by their CEE operations.

An obvious test-case is the three Swedish banks that dominate lending

in the Baltic states. Nordea, SEB and Swedbank own local lenders and,

because their loans exceed deposits by a factor of two or more, also

extend funding to them. They have prepared for rising losses by

issuing a combined €5 billion ($6.9 billion) through rights issues in the

past six months, adding almost a fifth to their tier-one capital.

Sweden’s central bank and banking supervisor have both recently

published the results of stress tests which judge that, in the words of the latter, the system can “withstand

extreme pressure”. The tests look fairly conservative, assuming loss rates on loans of up to a third in the

Baltics and 60% in Ukraine. Tier-one capital ratios in the worst case drop to 6%, about the same level as

permitted in America’s recent stress tests. For good measure Sweden has in place funding guarantees to help

big lenders borrow and has also said it will inject more capital into banks if necessary. On June 10th its central

bank borrowed a further €3 billion from the European Central Bank, in order to be able “to provide liquidity

assistance” to banks.

Beyond the Baltics, funding from foreign banks to subsidiaries also looks solid. Romania, Serbia and Hungary

have extracted commitments from lenders to maintain their exposure. This, along with help from the IMF, has

been “an incredibly stabilising factor” for the wider region, says Manfred Wimmer, chief financial officer of

Erste Group, an Austrian bank with big eastern European operations.

Experts have long warned against generalising about the region. So far this advice has proven right, with big

discrepancies in impairment levels between countries. In the first quarter UniCredit, an Italian bank,

recognised bad debts in Ukraine and Kazakhstan equivalent to an annualised rate of about 5% of loans. Yet

the number for Poland was just 0.5%, and for its CEE unit overall 1.7%. The same variety typifies the other

three Western banks that are most active in the region, KBC of Belgium, and Erste and RZB of Austria.

Bad debts everywhere will soar, however. There will be “serious pressure” on provisioning, says Federico

Ghizzoni, who is responsible for UniCredit’s CEE operations. Is there enough capital to absorb the losses?

Taking UniCredit, KBC, Erste and RZB together, and assuming a 40% loss rate in high-risk countries like the

Baltics and Ukraine and a 10% loss rate elsewhere in the CEE region, the hit would eat up about a third of

their combined tier-one capital—bad, but not terminal. Again, governments are standing by, having already

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injected funds into KBC and the Austrian banks. UniCredit is in negotiations to secure a combined €4 billion

capital injection from Italy and Austria. As for funding, these lenders look in a far better position overall than

their Swedish counterparts, with a combined loan-to-deposit ratio in CEE of about 115%. RZB has a bigger

funding gap but Austria has said it will guarantee up to €75 billion of its banks’ borrowings.

The response to the crisis so far, with the IMF providing credit to the neediest eastern European governments

and western governments offering support to their banks in the region, seems to have worked. That still

leaves banks to work through bad debts and build up their local funding levels. Mr Ghizzoni says there is now

“fierce competition for deposits”. The spivvy business model of borrowing euros and Swiss francs in the

wholesale markets and then ramming them down CEE customers’ throats is dead. But the commitment of

most western European banks to the region is, if a little grudging, still alive.

Copyright © 2009 The Economist Newspaper and The Economist Group. All rights reserved.

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EU stresses unity on rules and solidarity 01.03.2009 / 20:25 CET Potentially fractious meeting ends on quiet note of unity; Sarkozy rejects protectionist tag.

EU leaders ended an informal summit held in Brussels today with a joint rejection of protectionism, a reassertion of the need for improved regulation of the financial sector and a commitment to reassess the level of aid provided to the EU's newer member states in a bid to ensure financial stability throughout the EU.

The EU's presidency and the European Commission said that the summit, whose informal status precluded binding decisions, also saw movement toward initial decisions on regulation of financial markets in June and toward common positions ahead of a meeting of the G20 group of leading economies on 2 April.

Harmony does not exclude sincerity, but it doesn't always imply it

In addition to those developments, contained in a closing statement, EU leaders sought to convey that the summit brought unity on the idea that, as European Commission José Manuel Barroso put it, “to have a Europe without barriers, we need a Europe with rules” and that it reinforced an appreciation that there is no distinct ‘central and eastern European' region in economic terms.

Economic nationalism

The meeting, which was called after very public clashes between France and the Czech Republic over protectionism and under pressure from France and Germany, was also very much about clearing the air.

The signs were mixed about its success measured against that yardstick. The president of the European Commission, José Manuel Barroso, talked of “great convergence” at the end of a “very comprehensive” and “very good exchange of views”. Others suggested that one of the major points of contention in the weeks leading up to the summit – economic nationalism – had proved not to be a problem. German Chancellor Angela Merkel said “no country has in any way accused another member country of pursuing a protectionist policy”. Mirek Topolánek, the Czech prime minister and current chair of the EU presidency, went as far as to say that the EU has “not encountered any form of protectionism as yet that could threaten the internal market”, a statement that appeared to downplay his very public criticism in February of French President Nicolas Sarkozy's suggestion that French carmakers should give guarantees that they would preserve jobs in France rather than keep factories open in the Czech Republic.

Jean-Claude Juncker, Luxembourg's prime minister, described the meeting as “harmonious”, but asked whether the meeting was also sincere, he replied: “I repeat it was harmonious. Harmony does not exclude sincerity, but it doesn't always imply it.”

Sarkozy, who was both a moving force behind the summit and one of its main subjects, mounted a defence of his policy towards the car industry, denying that he was a protectionist. He said that leaders of central European countries were grateful to him for the financial support that the French government was offering to carmakers with factories on their territory.

“If the head office does not survive, what will happen to the factories in eastern Europe?” he asked. He pointed out that during the French presidency of the Council of Ministers, he had supported Poland's attempt to get Commission approval for state aid to Poland's shipyards.

He welcomed the Commission's decision to approve France's plan for aid to its car sector.

Topolánek said that there had been no indication from anyone that they wanted to “go beyond the framework of the plan outlined by the European Commission” for the car sector, which reiterated that no steps should be taken by any member state that undermine the single market.

Sarkozy said the aid to the car sector was not protectionist. It was natural that Germany would support Opel, Italy Fiat and Sweden Saab. He made comparisons between the banking and car sectors, saying that billions were being poured into banks without accusations of protectionism. The real protectionism, he said, was found in the US.

Solidarity

On several issues, the EU's leaders struck a more clear-cut note of unity. Merkel, Topolánek, Barroso and other leaders all stressed that that the central and eastern Europe should be viewed not as a unified unit, but as a region with economies in very distinct situations. Juncker said it was very “Soviet” to consider central and eastern Europe as a “bloc” and that since each country had different problems there would be no value in launching a plan for all the central and eastern European member states. “Their dignity asks that we consider their problems one by one and not like a bloc of satellites,” he said.

At the same time, Barroso and Merkel both sought to dispel any doubts about the EU's solidarity. Barroso pointed to the level of funding that is due to go to the eastern members of the EU when the European Economic Recovery Plan adopted in December is implemented. Merkel stressed that member states should maintain and improve solidarity to central and eastern European countries. Merkel added that it had been “crucial” that the meeting had involved the EU27 and not just the eurozone's 16 members in order to tackle the impression that “member states were no longer willing to show solidarity with each other”.

The result was that, as Barroso said, the idea of having “a single programme for a single region” had not found support.

That reduces the prospects for a proposal by Hungarian Prime Minister Ferenc Gyurcsány that a fund of up to €190 billion should be created to help post-communist countries struggling in the crisis. “We should not allow that a new Iron Curtain should be set up and divide Europe,” Gyurcsány told reporters shortly before the summit. Hungary has already received financial support from the European Commission and from the International Monetary Fund.

However, Donald Tusk, Poland's prime minister, said the idea had not been dismissed or even discussed. “The Hungarian plan was not discussed in the morning and not at the meeting this afternoon,” he said, referring to a meeting that central and eastern European leaders held in the morning. “That does not mean that it is rejected. We will study its proposals. This is a time to study all proposals.”

Topolánek, who repeated earlier criticism of the media for lumping the region's economies into one group and running down confidence in the region, said that the EU would not leave any country “in the lurch” but also emphasised the role of national governments. The summit had made plain member states “feel a great need for solidarity but also for national responsibility”, he said.

Tusk concluded that “this meeting showed that solidarity is not just an empty word”, but added: “I must underline that this is not a time for excessive enthusiasm.”

The summit also looked beyond the economic crisis by a commitment – as Merkel said – to return to the “principles of the stability and growth pact” once the “very extreme circumstances of the economic crisis are over”.

With reporting by Dana Spinant, Jim Brunsden, Rikard Jozwiak, Tim King and Andrew Gardner.

http://www.europeanvoice.com/current//article/2009/03/eu-stresses-unity-on-rules-and-solidarity-/64146.aspx

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Anniversary blues Published: May 3 2009 17:57 | Last updated: May 3 2009 17:57

The fifth anniversary of the European Union’s eastward enlargement merits a louder fanfare than it has enjoyed in these difficult times.

The accession of the ex-Communist states has healed cold war divisions and helped eastern European states advance their economic modernisation. The benefits of EU membership now reach 500m people. The fears of gainsayers have been confounded: the union has not ground to a halt with its enlargement to 27 countries; the west has not been swamped by welfare scroungers; east Europe’s farmers have not gone bust.

And yet, enlargement is not wildly popular. Eurobarometer polls show only 48 per cent of EU citizens consider the eastward enlargement strengthened the union. Some 36 per cent think it did not – including majorities in France and Germany.

If EU leaders fail urgently to address these concerns the union’s planned expansion to the western Balkans and Turkey will be jeopardised. First, they must show that a big union is better placed than a small one to respond to the economic crisis. Enlargement means larger markets and deeper pools of talent. Yes, it brings more competition, including competition for jobs. Workers in western Europe will sometimes lose their jobs to east European migrants or to east European factories. But without this internal competition, Europe cannot hope to compete successfully in global markets.

Next, EU leaders must resist responding to the economic crisis with me-first policies that disadvantage neighbours. Protectionism is no answer to the crisis. Not in the EU. Not anywhere.

Solidarity is also needed in energy. The latest Russian gas shut-off showed the EU’s vulnerability. The union must reinforce its internal energy links and present a united front to Moscow.

Meanwhile, EU leaders should convince voters the union remains responsive to their democratically-expressed wishes. The Lisbon Treaty reforms designed to make a bigger EU function better must be implemented. Voters in Ireland, where the treaty faces a referendum, ought to realise they gain from a strong EU, particularly during economic crisis.

Finally, there is no hiding the truth that potential new members face big challenges meeting EU standards – notably over crime and corruption. The 2007 accession of Romania and Bulgaria shows these issues must be tackled before entry. Reforms will take years of effort but there should be no short-cuts. If it is to retain the faith of its citizens, the EU must maintain its standards.

Copyright The Financial Times Limited 2009

Financial EDITORIALCOMMENT

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GAZETA WYBORCZA, 5 June 2002

Once, Poles went out to overturn their government with the rallying cry that "There is no

freedom without solidarity". Now, Poland has its freedom - and no rallying cries are needed.

The trade union Solidarity still exists, but it is no longer the basis of Poland's freedom.

Solidarity as an idea, however, will continue to influence politics, in Poland as in the rest of

Europe. We need a firmer idea of

SOLIDARITY IN EUROPE

write Heather Grabbe and Henning Tewes*

Soon the European Union will comprise 25 member states, and it might include 30 by 2010. It

will change its nature in the process. On what basis will this large community of states live

together? Today, European countries are more alike than they have been for 200 years, with

nearly all being democracies and market economies. But although the shared values of

freedom, democracy and market economics are necessary conditions for harmonious co-

existence in the EU, they are not sufficient. The Union needs solidarity as well.

The European Union needs to face up to three major challenges in the coming years, and all

will require solidarity. The first is economic disparities. The enlarged European Union will face

huge income differentials between both countries and regions. In the current EU, GDP per

capita averages more than 20,500 euros, but the Polish average is only a little over 8,000

euros. It is true that other countries have higher averages than Poland, and that Slovenia and

the Czech Republic have just overtaken Greece, the poorest EU member state. But the basic

problem persists, that a number of relatively poor countries will join not only the institutions,

but also the single market and the common policies of the comparatively wealthy EU.

In principle, the EU's common policies are meant to address precisely this problem of

disparities - the common budget provides aid to poor regions and farmers. However, more than

half of this budget is spent on agricultural subsidies that often go to the richer farmers, and

which distort fair competition. This policy is no longer justified, but in the budget battles

between the different member-states, the basic objectives of agricultural policy have receded

out of sight. Instead of a policy that fosters economic competitiveness, the EU has a cover-up

for social security to farmers. Many people in Europe find it difficult to understand why farmers

should be singled out as the one social group to receive direct aid from Brussels. Why does

taxpayers' solidarity to extend to farmers but not to steelworkers, coalminers or small shop-

owners?

The EU cannot put off major changes to its agriculture policy much longer, because of

enlargement and also world trade negotiations and consumer opposition to industrialised

faming. The next few years thus offer a good opportunity to rethink the common agricultural

policy, and how to achieve better its aims and objectives.

With income differentials growing after enlargement, Europeans will also have to re-think the

objectives of the structural and cohesion funds. Whom do we want to help? It would be easy to

argue that only states with less than say 70% of the EU's average GDP could receive structural

funds. Poland would then qualify. But regional disparities in some of the EU's new member

states will be vast and unemployment rates will vary tremendously. In some regions of Poland

- for example, Warsaw - the average GDP is high and it would be absurd to maintain that an

investment in Warsaw would be an investment in the poorest regions in Europe. If the

structural funds are an instrument for equalising income levels, some regions in the new

member states ought to be excluded. Overall, the EU needs to focus its regional aid on the

poorest regions of the enlarged Union, regardless of what country they lie in.

The second challenge facing Europe is changing conceptions of citizenship and identity. Many

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member states of the current EU contain significant immigrant populations. In Britain and in

the Netherlands, migrants have been integrated largely successfully; but even there, tensions

remain, as race riots in the north of England showed last summer. Moreover, immigration and

citizenship issues have risen up the political agenda this year as populist right-wing parties

have exploited them for political gain in France, Austria, Norway, Denmark and the

Netherlands. In Germany, the question of whether 'guest workers' should be given German

citizenship divided the political class in 1999, and the search for a new immigration law has still

not been concluded.

Europe is experiencing falling birth rates, so it will need substantial immigration in order to

have enough young workers to support the economy and to pay the pensions of the ageing

population. Similar processes are at work in the applicant countries which will soon join the EU.

Few realise it today, but Eastern Europe will soon turn into a region of net immigration. Today,

trade unions in Germany and Austria fear that labour migration in the wake of EU enlargement

will cost jobs in the current EU. In 5-8 years, these fears will be long gone.

Enlargement, combined with demographic and social changes, also calls into question who is

European - raising identity questions. After enlargement, the EU will have new neighbours,

countries which are poorer than the existing EU. People in Ukraine, Belarus and Russia regard

themselves as European, and soon they will be neighbours of the EU. But many EU citizens

have little sense of solidarity with their neighbours who need help to achieve stability and

greater prosperity. The danger is that a bigger Union might become a 'Fortress Europe', if the

EU's border policies increase the isolation of the countries left outside, without solidarity

policies to help integrate them into the rest of Europe.

The third challenge is finding a balance between economic competitiveness and social cohesion.

Since 1989, income gaps in all European countries have widened. The only way that European

countries can ensure their prosperity in the long run is if they work together to develop

economies that can cope with international competition. Good economic policy is good social

policy, and vice-versa. But the EU can help in this task by promoting better economic

governance in the member-states - by benchmarking their progress in achieving economic

reform - and by making sure that the single market maintains a level playing-field for all

member-states.

Solidarity refers to a sense of togetherness, as well as to the practice of helping one another.

Without a sense of common purpose, people are unwilling to come to one another's aid. The

wealthier European countries are not going to help the poorer ones only out idealism, but they

should do so through a recognition that their self-interest is best served by pursuing common

goals. The EU was created because the people living on this crowded continent have to work

together and their destinies are intertwined. Solidarity is about recognising that the world is a

big and complex place, and Europe a rather small part of it. This leads us to the following

conclusions:

1. In the negotiations for the EU's next budgetary period from 2007 onwards, the member-

states - including Poland - should think more objectively about what future policies the

enlarged EU will need. They should not focus on past precedents for spending, but instead

establish a set of policy goals to address the new challenges of economic and social cohesion

after enlargement.

2. Solidarity is not a one-way street. The poorer EU member states should not define solidarity

in Europe as just "the rich helping the poor". They need to ask themselves instead what they

can contribute too, and that means developing the capacity to use EU aid sensibly. Ireland and

Portugal have spent EU money wisely, and their economies have benefited, whereas Greece for

years failed to use EU funds to modernise its economy. Eastern Europe should learn from their

successes and failures to make good use of EU money.

3. Demographic change in Europe is already happening, and immigration will be needed to

ensure our economies can continue to grow. Europe's political leaders need to explain to their

publics that immigration is in their interests. Equally, they need to establish common EU

policies to ensure that there are legal routes of managed migration, to halt the growth in

people-trafficking and to ensure that immigrants who become residents are integrated into

society and not socially excluded.

4. Solidarity starts at home. All European countries are trying to find the right balance between

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economic competitiveness and social cohesion. They are facing similar policy challenges in

reforming pensions, welfare benefits and healthcare. These policies are best managed at

national level rather than through the EU's institutions, but the Union can help countries to

benefit from comparing their experiences and sharing best practice.

In the 1950s, the integration of Western Europe was spurred on by the experience of the war

and the Communist threat. Today, war is a distant memory to most Europeans and there is no

Communist threat. The peoples of Europe need a different reason to pull together. That reason

is our common destiny. During the Cold War, problems on one part of the continent could be

isolated from rest because border guards stopped people from moving, and economic contacts

were limited by trade barriers and mutual suspicion. But now the frontiers are more open and

the economies are more integrated. War, instability and poverty in one part of the continent

have an effect on all the rest. The only way each country can ensure the security and

prosperity of its citizens is to work with all its neighbours in a spirit of solidarity.

*Heather Grabbe is Research Director at the Centre for European Reform in London. Henning

Tewes is Director of the Konrad-Adenauer-Stiftung in Poland.

Copyright CER 2002

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Economic 'Iron Curtain' threatens to divide Europe

The European Union has been warned not to let a new economic "Iron Curtain" divide the continent during the global downturn.

Correspondents in Brussels Last Updated: 3:43PM GMT 01 Mar 2009

Hungary urged the 27 EU leaders meeting at an emergency summit in Brussels not to let the bloc's weakest members go under in the crisis.

Ferenc Gyurcsany, Hungary's prime minister, said the credit crunch was hitting poorer, eastern member states the hardest. The Hungarian leader called for a special EU fund of up to €190 billion (£168 billion) to help restore trust and solvency in eastern EU members' financial markets.

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"We should not allow that a new Iron Curtain should be set up and divide Europe," said Mr Gyurcsany. "In the beginning of the nineties we reunified Europe, now the challenge is whether we will be able to reunify Europe financially."

EU nations are all grappling with a worsening recession, compounded by a severe credit crunch that has left many EU countries looking ever more inward to protect jobs and companies from international competition. Those policies are now undermining the open market cornerstone on which the EU is founded.

Ahead of the summit, the leaders of nine countries – Poland, Hungary, Slovakia, the Czech Republic, Bulgaria, Romania and the three Baltic states – forged a common stand to pressure richer members to back

Website of

Hungarian prime minister Ferenc Gyurcsany warns of econmic division in Europe Photo: AP

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up vague pledges of support with action.

Donald Tusk, the Polish prime minister, said the nine leaders called for "a spirit against protectionism and egoism."

Hungary, Poland and the Baltic countries of Estonia, Latvia and Lithuania also want the EU to fast-track their bids to join the euro-currency, which could offer them a stable financial anchor. Latvia's government has already collapsed amid the economic fallout.

Other EU members, like Sweden, want to co-ordinate a Europe-wide bail-out plan for car producers.

Mirek Topolanek, prime minister of the Czech Republic, which holds the EU presidency, has called on his counterparts to act together.

A draft summit conclusion centred on the need to reconfirm their commitment to "make the maximum possible use" of the EU's cherished free market "as the engine for recovery."

Topolanek said the EU does "not want any new dividing lines. We do not want a Europe divided along a North-South or an East-West line, pursuing a beggar-thy-neighbour policy is unacceptable."

The crisis has sorely tested solidarity among EU nations.

The Czech Republic has accused France of trying to protect its local car plants at the expense of foreign subsidiaries, while Germany, the EU's economic powerhouse, has rejected calls to help bail out economies in Ireland, Greece and Portugal.

Sunday's talks are meant to restore a unified purpose and help prepare for the April 2 Group of 20 nations summit in London.

Once-booming east European economies have been hit hard by the economic downturn. As cheap credit dried up their export markets shrank, causing eastern currencies to sink and triggering more financial turmoil.

Gyurcsany said eastern EU countries could need up to €300 billion (£266 billion), or 30 per cent of the region's gross domestic production this year.

He warned that failure to offer bigger bailouts "could lead to massive contractions" in their economies and lead to "large-scale defaults" that would affect Europe as a whole. It could also trigger political unrest and immigration pressures as jobless rates soar, he said.

EU governments have already spent €300 billion in bank recapitalisations and put up €2.5 trillion (£2.2 trillion) to guarantee loans of many banks in the EU and neighbouring states.

On Friday, the European Bank of Reconstruction and Development, the European Investment Bank and the World Bank said they will jointly provide €24.5 billion (£21.7 billion) in emergency aid to shore up the battered finances of eastern European nations.

© Copyright of Telegraph Media Group Limited 2009

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The global credit crunch arrives in eastern Europe By Joshua Livestro 30.10.2008 / 00:00 CET A new threat to Europe's financial system is emerging in the east.

As the International Monetary Fund's dramatic intervention to support the Ukrainian hryvna and the Hungarian forint shows, the next stage of the credit crunch is about to hit eastern Europe. From the Baltic to the Black Sea, the global credit crunch is causing tremors that could lead to financial aftershocks almost as dramatic as the earthquake itself.

The problem, in a nutshell, is eastern Europe's reliance on western European credit. There is first of all the near-total western European dominance of the banking sector in most eastern European countries. Some of these countries, notably the Baltic states and Romania, also operate large current-account deficits. Credit expansion is largely financed with foreign capital.

Eastern Europe faces a number of threats. The first and most obvious is the possible collapse of one of the western banks on which they rely for day-to-day banking operations. Sources of foreign capital are limited to just a few western European banks, Erste Bank and Raiffeisen from Austria being the most active, together with Italian bank Unicredito and, in the Baltic states, Swedish banks Swedbank and SEB. The failure of one of these banks would be a minor tragedy in western European eyes. In eastern Europe it could cause a major catastrophe.

Even without this immediate threat, western banks could still decide to change the way they operate in western Europe. They could decide to shrink all or part of their balance sheets at their eastern European subsidiaries, or to decrease the flow of additional capital into eastern Europe.

Any of these scenarios would essentially trigger a repeat of the Asian crisis of the late 1990s. Back then, a number of ‘Asian Tiger' countries went from an average 5% current-account deficit to a 10% current-account surplus in just two years – a downward adjustment of 15% of their combined gross domestic product.

As with the Asian crisis, a financial crisis in eastern Europe would probably have serious consequences for global economic stability. The Asian crisis of 1997 led to the rouble crisis of 1998 and the subsequent collapse of Long-Term Capital Management, a Wall Street-based hedge fund.

Eastern European governments are fully aware of the need to reduce their current-account deficits. They accept the risk of a recession. But that would be considered a soft landing compared to a sudden and complete withdrawal of western credit.

The European Central Bank's decision to lend the Hungarian Central Bank €5 billion to stave off a further fall of the forint suggests that western European policymakers are willing to do whatever is necessary to give eastern European governments time to engineer a relatively soft landing. Much more will be required of them before this crisis is finally over.

Joshua Livestro is a foreign-affairs columnist at the Dutch daily De Telegraaf.

http://www.europeanvoice.com/article/imported/the-global-credit-crunch-arrives-in-eastern-europe/62864.aspx

SPEECH/09/210 Olli Rehn

EU Commissioner for Enlargement

EU Enlargement five years on Prague International Conference

Prague, 1 May 2009

2

Excellencies,

Ladies and Gentlemen,

Thank you for this opportunity to celebrate a historic double anniversary here in Prague today with you. Twenty years ago we saw the Iron Curtain crumble and peaceful democratic change begun to transform Central and Eastern Europe. Today we can celebrate the 5th anniversary of the eastern enlargement of the EU as well, which brought in a total of 12 new Member States.

What better place to commemorate these historic events than here in Prague. Time and again, from the Prague spring of 1968 to the velvet revolution of 1989 and the joyous celebrations of EU membership in 2004, Prague has been a beacon of hope. In 1968, our hopes were dashed. In 1989, they triumphed, and brought us to where we are today.

President Havel, who unfortunately cannot be with us today, embodies this message of hope and civic courage. It was he who - together with the other democratic visionaries of Central and Eastern Europe – spoke to and won the hearts and minds of all Europeans and took his country into the EU in 2004.

Consider also Václav Havel's words from more than 40 years ago, as relevant today as they were back then:

"The original and most important sphere of activity, one that predetermines all the others, is simply an attempt to create and support the independent life of society as an articulated expression of living within the truth. In other words, serving truth consistently, purposefully, and articulately…"

It is a very noble and demanding mission, maybe never perfectly reached. Nevertheless I am sincerely moved that so many people in Europe can now live in pursuit of this kind of a society of truth.

Ladies and Gentlemen,

Today's conference provides us with an opportunity to draw up a fair and factual balance sheet of the latest round of enlargement. So what can we say of the Eastern enlargement, five years after?

First of all, EU enlargement has served as an anchor of stability and democracy and as a driver of personal freedom and economic dynamism. It has advanced the rule of law and protection of human rights. It helped to bring about peaceful democratic change and extended the area of freedom and prosperity to almost 500 million people. For the citizens in this part of Europe, this marked a return to their historical European home.

Enlargement has also increased the EU's weight in the world – be it in international trade negotiations or when addressing other issues of global nature, such as climate change or development. It has substantially increased our crisis management capacity, especially for peace-keeping missions.

In economic terms, the eastern enlargement has been a win-win process, beneficial for the people both in new and not-so-new Member States. To give but one example, trade between the new and the not so new Member States grew almost threefold in less that ten years. Even more illustrative is the fivefold growth of the trade among the new Members themselves. This is a key factor that explains why, from 2004 until the outbreak of the current financial crisis, there was robust growth in employment in both new and older Member States.

3

Hence, the EU's enlargement to Central and Eastern Europe was not only a historic mission, it was also a matter of enlightened self-interest – to enhance our own security and stability, freedom and prosperity.

But, you may ask, shouldn't enlargement take a back seat now, when the economic crisis threatens European jobs and welfare? It is not time to look inward for a while?

It is perfectly clear to me that the economy and jobs are the first and foremost concerns of our citizens today. It is therefore right that employment and economic issues should dominate the EU's agenda today.

That is why we have launched the European economic recovery plan which has been endorsed by recent European Summits. This is what we are doing with our reform initiatives, which have set the agenda of the G20 Summit in early April. And this is what we want to do with the Social partners in the Jobs Summit in May to break the negative cycle that threatens to deepen the economic crisis.

However, while combating the economic recession, we must not make EU enlargement a scapegoat for a problem it did not create. Questioning our commitments in EU enlargement will not help us at all to tackle the economic downturn.

Europe's economic troubles were not created by Czech autoworkers or Serbian civil servants. They stem from system errors of international financial capitalism – and originate from Wall Street, not the main streets of Prague or Belgrade. We must tackle myths with facts, and address our citizens' concerns with smart and effective economic policies.

What about our common institutions then? Fears that a Union of the 27 members would face a deadlock of decision-making have proven unfounded. However, greater heterogeneity requires a greater effort to achieve common positions and policies.

Jacques Delors once said that to grow from 12 to 15 to 25 we would need time, family spirit and understanding of each others psychology and traditions. In other words, the contract of marriage between 27 countries has to be consolidated and further reinforced. I agree.

To achieve this we need to continue our institutional and internal reforms so that the EU can deliver the results its citizens expect. This is what the Lisbon Treaty is about and why we need it now. Reconciling further deepening of European integration and gradual widening of our Union is a tested and the best recipe for building a stronger and united Europe.

Ladies and Gentlemen,

As in Central and Eastern Europe before, the European perspective is once again exercising its magnetic pull in South East Europe today.

I recall my Parliamentary hearings in 2004 when I was asked what my programme as the Enlargement Commissioner for the next five years would be. I said I wanted to do my part to deliver on six goals to be achieved during the present five-year term by the end of 2009. These were:

In 2009, there would be an EU of 27 Member States

The accession process with Croatia would reach its final stage

4

The other Western Balkan countries would be firmly anchored into a European orientation through Association Agreements

Turkey would be firmly on the European track

Kosovo's status would be settled

And Cyprus would be reunified

Looking back over the past years, we have achieved five out of these six goals set in 2004. We have done so by working together with the candidate countries and potential candidates themselves, in partnership with the European Parliament and the Council. And, I might add, there is now serious talks on reunification underway in Cyprus - which certainly is one of our key priorities this year.

Compared to many other regions in the world, South Eastern Europe benefits from relative political stability at the moment – not least thanks to its European perspective.

But if the 20th century taught us anything, it is the folly of complacency when it comes to the Western Balkans. There is no end of history in sight, nor irreversible stability, at least not quite yet.

All these arguments – the gains from enlargement and the risks of wavering – underline why we must maintain the European perspective in South East Europe, with the ultimate goal of EU membership once the conditions have been met by each country on its own merits.

We cannot take a sabbatical from our invaluable work for peace and progress that serves the fundamental interest of all Europeans.

We don't have to move at speed of a bullet train, but we must keep moving. The journey itself is at least as important as its destination.

Ladies and Gentlemen,

Today Europe is reunited and free. Let's keep it that way. And let us complete our work also in South East Europe and reach out to our neighbours and partners in the East, on the basis of the Union's founding principles of liberty, democracy, respect for human rights, and fundamental freedoms, and the rule of law.

I wish you a successful conference, and thank you for you attention.

Article by Enlargement Commissioner Olli Rehn, 15 April 2009 FINAL

Ideal length +/- 700 words (current: 776)

Europe United – a Balance Sheet Five Years After

The year 2009 marks a historic double anniversary. Twenty years ago,

we saw the Iron Curtain crumble and peaceful democratic change

transform Central and Eastern Europe. In May this year, we celebrate

the 5th anniversary of the Eastern enlargement that brought into our

European Union altogether 12 new Member States.

What is the balance sheet of the Eastern enlargement, five years after?

First of all, the goal of EU membership served as the anchor of stability

and democracy during the politically sensitive years of transformation.

The reforms that were required for EU accession enhanced personal

freedom and economic dynamism in Central and Eastern Europe and

extended our area of peace and prosperity to almost 500 million people.

Second, enlargement has increased Europe's joint weight in the world,

both in international trade negotiations and in tackling global challenges

such as climate change and development. It has substantially increased

our crisis management capacity, notably for peace-keeping missions.

Third, in economic terms, the Eastern enlargement has brought benefits

to people both in old and new member states. Trade figures and job

creation provide very convincing evidence of this.

2

Trade between the so-called old and new member states grew almost

threefold in less than 10 years, from €175 billion in 1999 to €500 billion

in 2007. Even more illustrative is the fivefold growth of trade among the

new members, from less than €15 to €77 billion in the same period.

This is a key reason why since 2004 until the current financial crisis hit

the EU there was a robust 1.5% annual growth in employment in the

new member states. This went alongside a solid growth of job creation

in the old member states, about 1% per year. Thus, no significant job

relocation from the older member states to the new ones has taken

place, despite such fears expressed before enlargement.

These results demonstrate that – even during the present economic

recession – enlargement is not a part of the problem, but can be part of

the solution as a source of economic dynamism. And a recession in

new member states does not mean growth in old member states, on the

contrary. That’s why the EU supports economic stability now in the new

member states and candidate countries. This makes sense both for the

sake of solidarity and for the sake of the EU's enlightened self-interest.

Finally, the fears that a union of 27 Members would face an institutional

gridlock of decision-making have proved unfounded. The EU is getting

on with business and taking decisions on major policy issues, such as

tackling the economic recession and combating climate change.

We have also learnt a number of lessons along the way. Following the

2004/07 accessions, we consolidated our future enlargement policy to

cover South-East Europe, that is, the Western Balkans and Turkey. The

European model is still very appealing for the nations in that region. It is

wise for us in the EU to make the best use of this appeal.

3

The former Commission President Jacques Delors once said that to

grow to 27 members we would need time, family spirit and an

understanding of each others’ psychology and traditions. That is, the

contract of marriage between the 27 countries should be consolidated.

To achieve this, we need to continue internal reforms to make the EU

deliver such results that its citizens expect. The Lisbon Treaty will make

our Union more effective and democratic and better able to pursue our

common values and interests in the world.

At the same time, we pursue our successful policy of stabilisation of

South-Eastern Europe – sometimes also referred to as enlargement.

We should not take any sabbatical from our invaluable work for peace

and societal progress in that region, work that serves the fundamental

interest of Europe and the Europeans. The peoples in that region are

already tied to Europe in terms of history, culture and economy. The EU

is helping them to make their democratically legitimate dream come true

and to become Europeans also in terms of political integration.

Even the fastest scenario for the next accession of a new member

state, likely to be Croatia, is clearly slower than the slowest envisaged

scenario for the ratification of the Lisbon Treaty. Time is on our side: we

can pursue deepening and widening in parallel. This has always been

and remains the best recipe to build a strong and united Europe.

Let's keep this recipe in mind when we are reflecting about European

integration on the occasion of this year’s historic anniversaries.

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EU Rejects a Rescue of Faltering East Europe

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.

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.

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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.

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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.

—Peppi Kiviniemi, Leos Rousek, Gabriele Parussini and Leila Abboud contributed to this article.

Write to Charles Forelle at [email protected]

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A FALTERING SOLIDARITY?

EU Resists Eastern Bailout Pleas

There will be no EU regional bailout for struggling Eastern European economies, leaders decided

at a Sunday summit. But neither will the 27-member-bloc succumb to protectionist instincts.

Still, fears persist that Western Europe is putting local economic interests ahead of EU unity.

As European Union member states struggle to deal with the impact of the global economic crisis, cracks in

the 27-member bloc are beginning to appear. Increasingly that division seems to be between the old

Western European nations and the former communist states to the east.

On Sunday the leaders of the EU countries gathered in Brussels for an emergency meeting to address ways

to tackle the crisis as Eastern European states voiced fears that moves towards protectionism in the bloc's

richer countries would leave poorer countries to struggle on their own.

The crisis has hit Eastern and Central European countries particularly hard because many of their

economies are highly reliant on credit from Western sources, and like elsewhere that credit has all but

dried up. Hungary and the Baltic States have been particularly badly affected by the downturn and ahead

of Sunday's summit the Hungarian Prime Minister Ferenc Gyurcsany had called for a massive bailout for the

Eastern European region, recommending a fund of up to €190 billion euros ($240 billion.) He warned that

the EU should not allow the recession to cause new divisions in Europe. "We should not allow a new 'Iron

Curtain' to ... divide Europe into two parts."

The call, though, fell on deaf ears in Brussels with German Chancellor Angela Merkel leading the rejection

of any regional bailout. "I see a very different situation here," she said on her way into the meeting. "You

cannot compare Slovenia or Slovakia with Hungary."

There are indeed huge disparities in how the crisis is affecting European countries. While Budapest has

been forced to ask for a loan from the International Monetary Fund to prevent a complete collapse of the

Hungarian economy, countries like Poland and Slovakia are on a much sounder footing and even expect to

see modest growth this year. In contrast, older EU states like Greece, Spain and Ireland are seeing their

economies contract considerably. Meanwhile, Germany, the biggest contributor to the EU coffers, is also in

recession and Chancellor Merkel is unwillingly to throw an expensive lifeline to all of Eastern Europe in a

difficult election year.

Fighting Protectionism

Furthermore there is far from a united front even from Eastern European leaders on the issue. After

Sunday's meeting, Czech Prime Minister Mirek Topolanek, whose country currently holds the rotating EU

presidency, said "the idea of dividing up into old member state countries, eurozone countries, non-

03/02/2009 01:49 PM

REUTERS

German Chancellor Merkel in Brussels.

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eurozone countries, north against south, or east against west, that is clearly an approach we rejected." He

added that the EU was not going to leave any country "in the lurch."

European Commission President Jose Manuel Barroso said that it had been the Eastern European countries

themselves that rejected a "program just for them," adding that there was a great diversity of situations in

the region. He pointed out that some Eastern European states were already getting billions in emergency

rescue funds from the EU, the World Bank and other financial instutitions.

Still, Eastern Europe is concerned that economically powerful Western European states are more interested

in protecting their own economies than working together to tackle the crisis on an EU-wide basis. In

particular moves by French President Nicolas Sarkozy to prop up the domestic auto industry in France have

greatly irritated leaders in the east. Paris had originally planned to loan €7 billion to French carmakers

Renault and Peugeot Citroen PSA only on the condition that production would not be shifted abroad. Many

interpreted that to mean that plants owned by the companies in Eastern Europe were endangered. On

Sunday, though, the EU approved the French auto bailout only after Paris ensured Brussels that such

protectionists clauses had been removed from the agreement.

It is not clear if this will do much to allay fears that Eastern European plants would be the first to fall victim

to any restructuring at the French firms. Polish Prime Minister Donald Tusk told journalists "always we must

resist the temptations of protectionism," after chairing a pre-summit meeting of nine leaders from Eastern

European countries. "All participants of the meeting agree that in the time of crisis, maintaining solidarity

in Europe is of paramount importance," he said.

The point was reiterated by British Prime Minister Gordon Brown. "Protectionism will mean less trade, less

business and less jobs in the long run," he said after the summit, adding that the battle against

protectionism should be at the heart of the global response to tackling the economic crisis. Brown pledged

to discuss the idea of a "global grand bargain" to save the world economy with US President Barack Obama

during a trip to Washington which starts Monday.

Another bone of contention in the bloc are the requirements necessary to join Europe's common currency,

the euro. Currently used by 16 European countires, the euro has proved a stable anchor in the turbulent

currency markets, and many of the euro zone countries are loathe to allow weaker economies to join

prematurely. While Hungary and the Baltic states called on the EU to make it easier to join the currency

ahead of Sunday's meeting, Poland is not in favor of changing the current criteria. Polish Prime Minister

Tusk, though, said he thought that shortening the current two years that countries are required to stay in

the pre-euro exchange rate mechanism would be a good idea.

'Unproductive Political Showpiece'

Yet most Western European countries, once again led by Merkel, firmly rejected any changes. Dutch Prime

Minister Jan Peter Balkende said that if a nation wants to join "it must meet the minimum economic

criteria." While Luxembourg Prime Minister Jean-Claude Juncker, who chairs the group of euro zone

countries, said "I don't think we can change the accession criteria to the euro overnight. This is not

feasible."

In the end, despite all the talk of unity and solidarity, the EU leaders did little to overcome the impression

that the crisis is causing deep divisions within the union. The leaders now have just over two weeks to

come up with more concrete solutions ahead of their official summit on March 19 when they are hoping to

seal a unified EU line ahead of the G-20 meeting in London on April 2.

Eurochambres, a business association that represents 19 million companies across the EU, was far from

impressed with the performance in Brussels. "This summit was yet another rather unproductive political

showpiece bringing no concrete solutions to the dramatic economic situation," said Arnaldo Abruzzini, head

of Eurochambres. He added that there had been a "worrying lack of economic coordination among member

states."

smd -- with wire reports

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Print This Page

Bridging Europe's solidarity gap

By Vessela Tcherneva - 27 Feb 09

This piece originally appeared in EU OBSERVER

COMMENT - The Wall that represented the geographical and political division of Europe was taken down 20 years ago, bringing euphoric hopes of unity. Yet today there is a new division in Europe - a solidarity gap.

After the accessions of 2004 and 2007, the new EU member states believed that they were finally sitting in the same boat with their neighbors to the West.

But right now, from the point of view of the new members, the EU states of long standing are comfortably aboard a luxury cruise ship heading for the horizon while they themselves bob behind on a leaky dinghy in troubled waters.

How the EU will succeed to bridge this solidarity gap perception will be crucial to its own survival.

The January gas crisis left hundreds of thousands of East Europeans without heating and forced many businesses to suspend operations - and many were right to say that those mainly to blame were the respective governments that had failed to take pre-emptive steps to ensure gas supplies.

The Russian-Ukrainian dispute became the opening act of the East-West drama that called into question the EU's credibility among its new members. The lack of long-term support on the part of the European Commission for the integration of Europe's gas transmission systems and the initial reluctance of key European leaders such as Sarkozy, Merkel or Berlusconi to enter the fray resulted in a 14-day stalemate for a number of recently-admitted EU members.

One immediate result was that previously high levels of support for the union fell by nearly 20% in Bulgaria during the weeks of the crisis. Last week, fresh news of Ukraine firm Naftagoz' inability to pay Gazprom has conjured the spectre of a new gas crisis, raising new fears in EU's East.

The recent call by German Chancellor Merkel to the European Commission for support for the Nord Stream project, which would diversify the gas route to Europe but would not ameloriate dependence on Russia, worsens concerns that there will be no common European policy vis-a-vis Moscow.

Europe cannot seem to accept the argument that the recent crisis has highlighted the uselessness of bilateral agreements with Russia.

Meanwhile, the protectionist statements by French President Nicolas Sarkozy amid the growing financial difficulties of the new member states became an alarming signal for the prospects for their economies. With their banks owned mostly by West European banking institutions and their financial balances highly dependent on foreign direct investment from the established industrial countries, the new member states face the risk of financial turmoil in the months to come.

The recipes for their transitions that the West preached and that were adopted by the domestic elites - that Central and Eastern Europe (CEE) economies should be opened to foreign investment and trade - seem to be at the heart of their current economic difficulties.

Moody's Investors Service warned in a report last week that Western owners of East European banks are coming under pressure to withdraw capital from countries already reeling from budget deficits and foreign borrowing.

For Central and Eastern Europe, which enjoyed breakneck growth spurred by a splurge of credit from these banks, the squeeze could not have come at a worse time. Already bruised by the global downturn, they are on the verge of a downward spiral as credit dries up. Average growth among countries in the region slid to 3.2 percent last year, from 5.4 percent in 2007. This year, it is forecast to contract further, economists say.

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French, Italian and Spanish plans to support their car industries by pumping billions in exchange for "staying domestic" cause further concern in the eastern part of the EU. President Sarkozy's announcement that he would like PSA Peugeot Citroen and Renault SA to shift production from low-wage nations back to France in return for €7 billion in soft loans provoked fierce reaction by the Czech presidency of the EU Council. Growing unemployment, along with declining currencies that are making imports and foreign debt payments more expensive, are forcing governments to cut back on spending and public services, leading to a wave of increasingly violent protests across the region.

Last Friday, the coalition government in Latvia - where the economy contracted more than 10 percent on an annualised basis last month - became the second European government, after that of Iceland, to collapse.

The East Europeans will hold a mini-summit this Sunday, preparing for the EU summit in Brussels. The Hungarian and Polish governments will seek support for a "European Stabilization and Integration Program" that they hold would help them find a way out of the crisis. Along with short-term financial injections, the package will suggest faster financial integration of Europe.

Apart from Slovenia and Slovakia, the Eastern European EU members are not part of the Eurozone. The predicted "hard landing" of their economies may imperil the currency boards in Lithuania, Estonia and Bulgaria and will make it more expensive to rescue them than the countries that have already introduced the euro. Including all of them in the ERM II mechanism, which would allow many of the EU's eastern members to adopt the euro in the next two to three years, could be a reasonable political measure to bridge the solidarity gap between East and West.

But as Philip Stephens said in a recent commentary in the Financial Times, some of the old members "would like to undo the enlargement." And as perceptions matter most in politics, the solidarity gap has become a political fact in the EU today.

It will be up to the old member states to send the right signal: not only that solidarity means more that re-distributing structural and cohesion funds, but that the pains of transition were still the right path to take - for we all want to sit in the same boat. And that the political influence of Russia in Europe - the one East Europeans have been trying to diminish by accessing the euro-Atlantic club and now comes back through the gas pipes - should not be a major factor in European politics.

Vessela Tcherneva is senior policy fellow and head of the European Council on Foreign Relations Sofia office

Tags: Institutions, Money and Power, Russia and Wider Europe

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Return of the East-West divide: European Union in chaos as global recession deepens

The European Union is falling victim to disputes and backbiting, with warnings that its future is in jeopardy because of divisions over global economic crisis.

By Bruno Waterfield in Brussels

Published: 8:00AM GMT 15 Mar 2009

It took the Esperanto-speaking Finnish foreign minister, Alexander Stubb, to sum up the danger that is

alarming governments across the European Union.

"I'm extremely worried about the EU's institutional chaos," he told his startled audience at a recent meeting of

fellow foreign ministers. "Never in the EU's history has there been a period like this, with so many cliques."

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The warning by the bookish former civil servant, a self-confessed "EU nerd" who believes EU policy "should

be fun", was powerfully echoed by the normally mild-mannered Carl Bildt, foreign minister of Sweden.

"This confusion is not only undermining small EU member states and the European commission, but the

council (of all EU members) itself," he told colleagues in the stuffy, windowless room of the grey Justus

Lipsius building where ministers meet in Brussels. In rapid succession, the foreign ministers of Poland,

Belgium and Luxembourg expressed similar fears.

Just when its inhabitants most need the European Union to speak with a clear voice and to adopt a concerted

strategy, to counter the effects of the world economic crisis, its members are falling out in a cacophony of

backbiting, disputes and disagreements. The global financial meltdown has tested banks and giant

corporations, in some cases to destruction. Now the fear in Brussels and Strasbourg is that it may similarly

challenge the institutions of the EU itself.

"This is the worst economic crisis in 60 years and it is the greatest ever challenge for the European Union,"

said one European diplomat.

Arguments over how to respond to the world economic crisis will come to a head in Brussels this week when

EU national leaders meet in a session of the European Council.

With their number swollen over recent years to 27, and with yet more would-be members waiting in the wings,

EU governments cannot agree on whether to further boost spending or to add instead to financial regulation.

They differ on how far to prop up economies of eastern Europe that are outside the single currency

"eurozone"; Germany has made clear that it will only help bail out countries that use the euro, while those

Website of

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which are not yet members of the single currency - including all the eastern European economies - must look

elsewhere for help.

And the growing sense of an east-west divide in Europe, along the lines of the iron curtain which once

separated communist from capitalist states, is exacerbated by the desire of richer western countries to protect

their own industries - car-making, engineering, even banking - by whatever means is still permitted.

Nicolas Sarkozy's comment last month that his £5.4 billion rescue package for car makers would be linked to

French jobs for French workers rang alarm bells. Paris later backtracked, but the French president had sown

the seeds of mistrust. "There are some big bullies in the playground. There are some huge fights going on,"

said one senior EU source.

Now there is bad feeling and suspicion over the forthcoming G20 summit, to be chaired by Gordon Brown in

London in three weeks' time. Only four EU countries - Britain, France, Italy and Germany - are officially

members of the G20, with the Czech Republic invited along as the current holder of the rotating EU

presidency. Spain and the Netherlands have also been invited to attend. But that leaves 20 EU states out in

the cold for what is being portrayed as a crucial meeting, and in the current distrustful atmosphere some are

distinctly unhappy.

Resentment was heightened by the "arbitrary" decision to invite the two extra EU countries, a move that

particularly angered Poland. "The G20 don't seem to be able to count," said one east European diplomat.

"When did it become the G22, and since when was Holland bigger than Poland?"

The EU's smaller members fear that the larger countries are out to improve their prospects with scant regard

for the fortunes of the other states.

Jean-Claude Juncker, Luxemburg's Prime Minister and chairman of the 16-strong Eurogroup of countries

which have adopted the single currency, exploded with frustration last week. "The G20 shouldn't be a

replacement for the EU," he said.

He expressed the fear that the summit will be used to stitch up a deal that will bind the EU without most of its

members being present at the table.

"Will Gordon Brown, Nicolas Sarkozy or Angela Merkel be bound by decisions they are part of at the EU

level?" asked one European official. "Or will they just be pursuing their own interests?"

Earlier this month nine Central and Eastern European countries - Poland, Hungary, the Czech Republic,

Slovakia, Latvia, Lithuania, Estonia, Bulgaria and Romania – retaliated by holding an unprecedented

breakaway summit in Brussels. Most have seen rapid rises in unemployment and sharp falls in the value of

their own currencies against the euro, and feel isolated from their wealthier western neighbours.

Latvia and Hungary have already been forced to turn to the International Monetary Fund help bail out their

economies, with all the restrictions on government action that the fund always insists on. Riots in January

over the spending cuts which the IMF immediately demanded led to Latvia's government falling. A plea, two

weeks ago, from Hungary for a £169 billion bailout of Eastern Europe fell on deaf ears.

Meanwhile, Europe's single market is an article of faith for many central and east European countries that

joined the EU in 2004. But Mirek Topolanek, the Czech prime minister and current holder of the EU's rotating

presidency, is worried that the economic crisis is undoing its achievements.

"Economic problems of the current global world and the EU should in no way damage our long-term

objectives and the values of the European Community. If this happens, it could jeopardise the whole project,"

he warned.

Mr Topolanek and other East European leaders are furious over recent decisions by Germany and the

Netherlands to block further EU expansion - and at a plan by Germany, Austria and Belgium to extend the

ban on workers from central and eastern European countries, a full five years after they joined the EU.

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Altogether 11 countries have decided to keep in place until at least 2012 the restrictions on workers from

Bulgaria and Romania, introduced as a "temporary" measure when they joined the EU in 2007.

Mr Topolanek said: "Reservations of some to further EU enlargement are in fact an insult to me, since the

Czech Republic has also joined the EU only five years ago."

In Brussels this week, heads of the 27 EU governments will meet for two days as the European Council to try

again to thrash out a common position on the global crisis, with Mr Brown expected to lobby hard for an

agreement on a fiscal stimulus - more government spending - along the lines already adopted by the US and

Britain.

In traditional EU fashion, however, Angela Merkel, the German chancellor, has struck a private deal with Mr

Sarkozy to present a united Franco-German front, whcih is certain to be at odds with the British position.

France and Germany want a tough, new global regime of regulation of financial markets, prompted by their

conviction that deregulated "Anglo-Saxon" capitalism of the kind espoused - at least until now - by Britain and

the US is responsible for the crisis.

After the two leaders met privately last week, Mr Sarkozy declared that he and Mrs Merkel would, in the

coming days, "take a common initiative before the G20 that we will communicate in due time".

"Fiscal stimuli are important – and Europe has made its contribution in this regard – but they cannot replace

the necessary regulation," said Mrs Merkel.

The French president was blunter. "In Europe, we have invested a lot into growth. The priority now is not to

spend more but to put in place a system of regulation that will stop such a catastrophe from happening again.

We do not want to spend more money," he said.

With so many disagreements over so many subjects, and with the fate of Europe's economy for years to come

at stake, it is little wonder that the EU's leaders are worried for its future.

As Mr Topolanet, the Czech prime minister, put it recently: "This is the greatest crisis in the history of

European integration."

© Copyright of Telegraph Media Group Limited 2009

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