Eastern Europe Needs EU Help to Overcome Crisis
Katinka Barysch | YaleGlobal | April 2009
While Western Europe is slowly beginning to view the future once again with optimism, the crisis still has a tight grip on the East. Multiple Eastern European countries are sinking deeper into recession, the export market with the West is broken, and banks are on the brink due to excessive indebtedness and falling exchange rates. The effects thereof are felt in Western Europe as well. It is therefore in the interest of Western European countries to take the East under their arm. However, any potential solutions must still overcome a variety of hurdles:
- Adopting the Euro: A quick adoption of the single currency could protect many countries from sharp, continuous inflation of their national currency. The Euro would be a safe haven, particularly for Baltic States. Export-driven states like Hungary and Poland, in contrast, could be negatively affected by the single currency, as their road to recovery runs parallel to competitive trade ability that is largely dependent on manipulating exchange rates. In any case, such a solution could not be enforced due to resistance among Euro zone members and the European Central Bank, who would fear for the stability of the currency.
- Recapitalizing of Central and Eastern European banks: The great economic success of Central and Eastern European countries after the fall of the Soviet Bloc is largely due to their integration into the European single market and the liberalization of the financial sector. A significant portion of Eastern banks were purchased by those in the West, based in Austria, Belgium, Germany, Italy or Sweden. Fear still remains that Western proprietors could allow their sister banks in the East to fail. EU-coordinated cross-border financing arrangements concerning bailouts for Eastern European banks require that Western banks trust their Eastern counterparts.
- Jump starting the export market: Western Europe is the most important export market for many Eastern countries. In some market sectors, Eastern countries have become an integral part of the supply chain for all of Europe, especially in the automotive industry. Therefore any indication of protectionism in the Western Europe will trigger alarms in the East. Above all, wealthy European states must resist the temptation of protectionism.
Without the strong support of the West, Eastern Europe's economy will not be able to get back on its feet. According to the IMF, Eastern Europe (including the Balkans and Turkey) will need 500 billion dollars (US) this year for refinancing. At least a quarter of this amount must be provided by international institutions such as the IMF or the EU. However, this investment is worth the price. Otherwise the risk increases that Eastern Europe, left on its own in the crisis and alienated by EU protectionism, will face increased challenges to liberalization and market integration and further political integration will be confronted with scepticism.
This summary was prepared by the Atlantic Community editorial team from "The EU Can Ignore Eastern Europe at Its Own Peril," published here by YaleGlobal, April 2009.
