Economic crisis threatens the idea of one Europe

Posted in Europe | 02-Mar-09 | Author: Steven Erlanger and Stephen Ca| Source: International Herald Tribune

Chancellor Angela Merkel, of Germany, speaking to the press at the European Union emergency summit at EU headquarters in Brussels on Sunday.

The leaders of the European Union gathered Sunday in Brussels for an emergency summit meeting designed to tamp down the centrifugal forces unleashed by the global economic crisis that threaten to spin the bloc - and its single currency - apart.

In a statement afterward, the leaders tried to reassure their publics, promising to hold to the single market, promote growth and reject protectionism.

A call from Hungary for a large bailout for newer, eastern members of the union was rejected by Germany, the richest EU nation, and received little support from other countries.

Prime Minister Ferenc Gyurcsany of Hungary warned of "a new Iron Curtain" dividing Europe, even if the metal today was gold. He called for a special EU fund of up to ?190 billion, or $241 billion, to protect the bloc's weakest members.

Chancellor Angela Merkel of Germany, however, facing European elections this summer and national elections in September, said that countries must be dealt with on a case-by-case basis, but without explaining how. The Czech prime minister, Mirek Topolanek, meanwhile, insisted that no member would be left "in the lurch."

Europe may now be "whole and free" after the collapse of communism. But the European Union is not a country, and the deep global contraction is stimulating nationalism, not consensus.

With uncertain leadership and few powerful collective institutions, the union is struggling with the strains this economic crisis has inevitably produced among 27 different countries with different economic histories. The traditional concept of "solidarity," of one for all, is being undermined by protectionist pressures from political leaders with national constituencies and agendas.

It is a sharp contrast with the meltdown's effects on the U.S. government. President Barack Obama has just announced a radical budget that will send the United States more deeply into debt, but that also makes an effort to redistribute income and lay the foundations for significant changes in health care, education and the environment.

Whether Europe can reach across constituencies to create consensus has been an open, and suddenly urgent, question.

"The European Union will now have to prove whether it is just a fair-weather union or has a real joint political destiny," said Stefan Kornelius, the foreign news editor of Süddeutsche Zeitung in Germany. "The whole project of a joint currency is being tested for the first time. We always said you can't really have a currency union without a political union, and we don't have one. There is no joint fiscal policy, no joint tax policy, no joint policy on which industries to subsidize or not. And none of the leaders is strong enough to pull the others out of the mud."

Karel Lanoo, chief executive of the Center for European Policy Studies in Brussels, said that "the lack of leadership in Europe is becoming dramatic," while Thomas Klau, Paris director of the European Council on Foreign Relations, said: "This crisis affects the political union that backs the euro and of course the EU as a whole, and solidarity is at the heart of the debate."

The crisis has implications for Washington, too, which wants a European Union that can promote allied interests in places like Afghanistan and the Middle East with financial and, increasingly, military help. "All of that is in doubt if the cornerstone of the EU - its internal market, economic union and solidarity - is in question," said Ronald Asmus, a former State Department official who runs the Brussels office of the German Marshall Fund.

The problems are basically twofold, one within the euro zone, which itself has an economy roughly the size of the United States, and one within the larger European Union. The 16 nations that use the euro - introduced in 1999 and one of the most significant political accomplishments of the last decade - are trying to keep the severe economic troubles of some members, like Ireland, Spain, Italy and Greece, from turning into national defaults that could force them to abandon the currency.

While Germany vowed never to bail out weaker members in return for giving up its strong national currency, the Deutsche mark, German leaders, with elections on the horizon, are now faced with the unpalatable prospect of having to do precisely that: put German money at risk to bail out weaker, less responsible partners.

Within the larger European Union, fissures are growing between older members and newer ones, especially those that lived under the stifling yoke of Soviet socialism only 20 years ago. Some countries of Central Europe, like the Czech Republic and Poland, are doing relatively well. Others, like Hungary, Romania and the Baltic states, are in a state of near-meltdown. But only two newer members - tiny Slovenia and Slovakia - are protected by being inside the euro zone, and there was little support Sunday for changing the rules to allow more to join quickly.

The other new members - even those doing relatively well, and whose banks did not engage in the subprime mortgage frenzy or indulge in toxic derivatives - have seen their currencies plummet against the euro, causing enormous problems of debt repayment, while the recession in their partners to the west has meant a radical drop in orders for the factories set up in the lower-cost eastern countries to satisfy consumers to the west.

Some countries are asking for aid, both from their partners and in some cases from the International Monetary Fund, to prop up their currencies and banks. While Western European countries are reluctant, with their own problems at home and within the euro zone itself, there is a deep interconnectedness in any case. Much of the debt at risk in Eastern Europe is on the books of euro zone banks - especially in Austria and Italy. The same is true for the mess farther afield, in Ukraine, which talks of joining the union.

Having watched the Soviet model fail, the countries of Central and Eastern Europe embraced the liberal, capitalist model as the price of integration with the west. Now that model, too, seems to be faltering, and the newer members feel adrift. Before the larger summit meeting Sunday, the Poles called an unprecedented meeting of nine of the new member states.

Afterward, Topolanek, who has been bickering with an impatient France, said: "We do not want any dividing lines, we do not want a Europe divided along a north-south or east-west line, pursuing a beggar-thy-neighbor policy."

The Hungarian government circulated a paper Sunday suggesting that the refinancing needs of Central Europe needs this year - including the nonmembers Croatia and Ukraine - could total $380 billion. "Failure to act," the paper said, "could cause a second round of systemic meltdowns that would mainly hit the euro zone economies."

Merkel, however, put her foot down against an undifferentiated package, though she suggested last week that targeted help to specific countries might be on offer, mentioning Ireland.

EU governments have already spent $380 billion in bank recapitalizations and put up $3.17 trillion to guarantee loans of banks and to try to get credit moving again.

The European Bank of Reconstruction and Development, the European Investment Bank and the World Bank said Friday they would jointly provide $31.1 billion to support East European nations, but more will be needed.

Klau of the European Council on Foreign Relations sees a worrying loss of faith in a certain brand of capitalism. "It's politically dangerous there since they've just emerged from an ultra-regulated and stifling system, were confronted with shock therapy that created great hardship, and are just beginning to recover and stabilize," Klau said. "Now they're thrown back into an economic and political cauldron."

And they are finding that their European partners are putting their own national interests ahead of "collective and necessary solidarity," Klau said.

Charles Grant, director of the Center for European Reform, is more sanguine. "My expectation is that the euro zone countries, out of pure self interest, will bail each other out," he said. "For Central and Eastern Europe, it is too early to say there won't be solidarity. But non-EU countries in the east, particularly Ukraine, seem to be the No. 1 worry."