East Europe leaders plead for Brussels aid

Bloomberg

Eastern European leaders pleaded with richer western European countries to boost financial aid and keep trade flowing, warning that the recession risks splitting the European Union.

The worst slump since World War II is devastating the economies in the EU’s east, sinking their currencies and driving two countries - Hungary and Latvia - to tap international aid to avert default.

"They are in a deep crisis and they need our solidarity," Swedish Prime Minister Fredrik Reinfeldt told reporters before a meeting of EU leaders in Brussels yesterday.

The EU’s $17 trillion economy will contract 1.8 percent in 2009, the European Commission predicts. Latvia, the bloc’s star performer only three years ago, will shrink 6.9 percent. Growth in Poland, the biggest eastern economy, will tumble to 2 percent, the slackest pace since 2002.

Called by Czech Prime Minister Mirek Topolanek to show the EU’s unity in the face of economic turmoil, the summit has turned into a crisis session over how to bolster the floundering eastern economies.



Summit of the east

Nine eastern leaders held a pre-summit meeting early yesterday to warn the West against putting up new walls in Europe, five years after the EU admitted its first eastern members. "We all wish that Europe avoids the temptation of protectionism," Polish Prime Minister Donald Tusk said after the gathering.

French President Nicolas Sarkozy triggered the east-west clash over protectionism by saying on Feb. 5 that it "isn’t justified" for recession-hit French carmakers to build plants in places like the Czech Republic instead of creating jobs at home.

European regulators on Saturday forced Sarkozy to guarantee that 6 billion euros ($7.6 billion) in loans to Renault and Peugeot Citroen, won’t put foreign rivals at a disadvantage.

The carmakers won’t be required to maintain French jobs or sign preferential deals with French suppliers. Competition Commissioner Neelie Kroes hailed the concession, saying "Europe must avoid a return to protectionism and its negative consequences for employment."

Investors fleeing eastern Europe to cover losses at home have pushed down Poland’s zloty by 28 percent against the euro in the past six months, Hungary’s forint by 21 percent, Romania’s leu by 18 percent and the Czech koruna by 12 percent.

Hungarian Prime Minister Ferenc Gyurcsany last week called for an EU aid package of as much as 180 billion euros for eastern European economies and banks, including funds for non-EU members Croatia and Ukraine.

Gyurcsany also called on the EU to extend the euro currency more quickly into eastern Europe by shortening the 24-month waiting period during which countries must peg their currency to the euro.

There is a precedent for bending the rules. When Italy won approval in May 1998 to become one of the 11 founding members of the euro, it had spent just over 17 months in the exchange-rate grid.

Estonian Prime Minister Andrus Ansip said the east deserves the same help as any other region and shouldn’t be treated as a special case.

"I’m strongly against creating small blocs inside the European Union," Ansip said. "We have to keep together and act together."

As the EU confronts multiple crises, the World Bank, the European Bank for Reconstruction and Development and the European Investment Bank on Feb. 27 announced loans of up to 24.5 billion euros for eastern European banks.

The Luxembourg-based EIB is run as a project-financing bank by EU governments. The bank’s head, Philippe Maystadt, warned against taking a one-size-fits-all approach to eastern Europe’s economic woes.

"Some countries are in a better position than others," Maystadt said yesterday. "That’s the reason why we think we must keep a country-by-country approach."

Banks in the euro region have lent $1.25 trillion to eastern Europe. The most heavily exposed banks in Austria and Sweden may face credit-rating downgrades as the economy deteriorates, Moody’s Investors Service warned.

The spillover of the economic crisis to eastern Europe has overshadowed other summit business, including discussions of EU guidelines on recapitalizing banks and a proposal for new agencies to coordinate bank supervision.

The leaders’ reactions to the call for tighter regulation will feed into proposals to be sketched out next week by the Brussels-based commission, the EU’s executive arm. Work on the new structures would get under way later this year. EU leaders are also at odds over how to finance and where to spend a proposed 5 billion euros for energy and infrastructure projects as part of a bloc-wide stimulus package.