EU's new members
SUDDENLY THE international economic and financial crisis is hitting many central and eastern European countries hard, as they feel the full effects of their opened economies and often profligate borrowing over recent years. After a period of buoyant growth they are now experiencing a severe contraction, with many negative consequences. Latvia, Poland, Romania, Bulgaria and Hungary have been hardest and most immediately hit, but this is a wider crisis which is likely to spread throughout the region.
Their position is putting strong pressure on the euro zone, since any defaults there would inevitably hurt the foreign banks which funded that borrowing, most of them based in western European member states. The figures show they have invested heavily in central and eastern Europe, with 90 per cent of banks in the Baltic states, the Czech republic and Slovakia foreign owned. Austrian banks have extended credit worth an estimated 70 per cent of the country’s GDP to these neighbouring states and is now highly vulnerable to potential defaults. By the same token such states fear they will be starved of the capital they need to recapitalise their financial systems because western banks want first call on whatever funds are available.
The weekend call by major European Union states for a doubling of the money available to the International Monetary Fund to $500 billion is but one indication of their rapidly growing concern. That call is part of their planning for the forthcoming EU and Group of 20 summits on the world financial crisis. In Berlin there was a remarkable convergence of policy among them, notably between Germany and the United Kingdom, on the desirability of much tighter regulation of hedge funds and tax havens. The British now see the folly of the light regulation they previously believed would suit London’s interests as a financial capital, while the Germans see they cannot avoid helping weaker economies they rely on for future export growth.
Another proposal fast gaining support is the idea that the EU should demonstrate its economic strength and solidarity by floating eurobonds for states especially exposed to currency and financial convulsions. If this was done collectively with euro zone backing such bonds would be more credible, cheaper and less prone to the credit default swap speculation which has seen real interest rates soar beyond those set by the European Central Bank. Ireland could benefit from such a system, but it would not come without stringent conditions.