EUROPEAN DIARY:2009 will be dreadful and 2010 at best disappointing for some new EU members, writes JAMIE SMYTH
CELEBRATIONS TO mark the fifth anniversary of the EU’s “big bang” enlargement in May 2004 when 10 new member states joined the union are already under way in Brussels.
“This was a huge historic step that put an end to the division of Europe, helped consolidate democracy and brought economic benefits for all EU countries,” said economic and monetary affairs commissioner Joaquín Almunia at the launch of a report highlighting the success of enlargement for new and old member states on Friday.
“Five years of an enlarged EU – economic achievements and challenges” shows that average incomes in the new member states have risen from 40 per cent of the old member states’ average in 1999 to 52 per cent in 2008, while economic growth has risen from an average of 3.5 per cent between 1999 and 2003 to 5.5 per cent between 2004 and 2008. This hasn’t been achieved at the expense of old EU states, which have seen steady growth and increased trade and investment opportunities in central and eastern Europe, it concludes.
But there is currently no mood of celebration in many new member states, which are experiencing growing political unrest as a result of the severe global economic and financial crisis. Just hours after the launch of the report, Latvia’s centre-right government collapsed under the strain of a slump that has cut economic output by up to 10 per cent.
Latvia, the second European state after Iceland to lose its government due to the crisis, has had to go cap in hand to the International Monetary Fund (IMF), World Bank and the EU for a €7.5 billion bailout. Hungary has also secured an IMF-led €25 billion loan to prevent it from defaulting on its government borrowings and analysts fear other new member states are teetering on the economic brink.
“There is little doubt that 2009 will be dreadful and 2010 at best disappointing for central and eastern European economies,” says Katinka Barysch of the Centre for European Reform in a new report that warns that Lithuania, Bulgaria and Romania may also need IMF help.
Ms Barysch highlights the growing tension between the new member states and the wider EU as the ingredients of past success – opening up to trade and investment and selling banks – have left their countries vulnerable. “The EU, which acted as an anchor for reforms in the past, has lost clout and credibility,” Ms Barysch writes.
A bitter row over protectionism between Czech prime minister Mirek Topolanek and Nicolas Sarkozy hasn’t helped relations between east and west. The French president’s comments that French car-makers should reconsider their investments in the Czech Republic was swiftly followed up by a €6 billion aid package that the commission believes could break state aid rules by favouring companies that keep jobs in France.
New member states, which are reliant on investment from the west to bolster economic growth, are particularly sensitive when it comes to protecting the single market, which guarantees free movement of goods, capital and people. They resent the barriers some old EU states have erected preventing their citizens from travelling abroad to work. They now fear their rich western neighbours will engage in a protectionist subsidy race that undermines the single market rules and damages their own indigenous companies.
Another major concern for policymakers in central and eastern Europe is the possibility of a banking crisis prompted by cash-strapped western banks sucking money from the institutions they have recently acquired in the region. Up to 90 per cent of the banks in the Baltics, Czech Republic and Slovakia are in foreign hands and many institutions need recapitalisation: the question is whether their parents have the cash or the will for this? The financial markets clearly have doubts. The Polish zloty has lost 28 per cent of its value against the euro since October. Other free-floating currencies in the region are suffering similar depreciation, which is causing problems for homeowners who took out mortgages denominated in foreign currencies such as the euro or Swiss franc.
To address these specific concerns Poland has invited the leaders of all central and eastern EU states from the 2004 accession to a breakfast meeting ahead of the EU’s emergency summit on the financial and economic crisis, to be held on Sunday. “The idea would be to ensure that the EU’s response to the crisis is an answer for the EU27, and not just for some member states,” said Poland’s European affairs minister, Mikolaj Dowgielewicz, last week.
By standing together, the new EU states feel they can make their voices heard, even if they all have different priorities. Polish finance minister Jacek Rostowski is pressing for fast-track entry to the euro zone, something that would require an easing of the rules for joining the monetary union. Romania and Lithuania want more EU emergency funding made available in loans to help prop up their economies.
Austria, an EU member since 1995, whose banks have invested up to 70 per cent of the country’s GDP in eastern Europe, wants specific bailout funds to help recapitalise financial institutions in the region. The one thing all new member states do agree on is that old EU member states should use the upcoming emergency summit to publicly reject all forms of protectionism.
With tensions rising last week Mr Almunia warned the EU that “divided we will achieve nothing”. But unless new member states feel they are benefiting from EU solidarity during the current crisis there is a real danger that this resentment will grow. Whether the old EU states can afford to bail out the east is an open question.