CEPS European Neighbourhood Watch. Issue 46

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CEPS European Neighbourhood Watch. Issue 46
www.ceps.eu/files/NW/NWatch46.pdf

Editorial by Michael Emerson: «The crisis spreads to Eastern Europe»

This issue of the European Neighbourhood Watch appears on the eve of a double European Union summit. Initially there was to be just the ‘counter-protectionism summit’ convened by the Czech Presidency on 1 March. Now the Polish Prime Minister has invited the new member states of Central and Eastern Europe to a special summit the morning of that same day. So this meeting will see three Baltic states (Estonia, Latvia and Lithuania), the Visegrad four (Czech Republic, Hungary. Poland), and the three from South-East Europe (Slovenia, Bulgaria and Romania) meet together with the President of the European Commission.

This event points to at least three major issues.

Firstly it may be taken as a statement of protest against the deplorable protectionist discourse from some leaders of ‘old Europe’. Both Gordon Brown and Nicolas Sarkozy have deeply shocked and disappointed - with Brown's “British jobs for British workers”, and Sarkozy's invitation to French car manufacturers to relocate their investments back for Central Europe to France. Both statements strike at the core of modern European economic and political values, and at the vital interests of the new member states in particular. The summit at the invitation of the Polish Prime Minister may be entirely forward looking and diplomatic, but still for us these leaders of old Europe need to be ‘named and shamed'; and may they now turn their minds, discourse and influence to backing constructive ideas for Europe as a whole.

Second is how the EU should respond to the alarming financial and economic crisis now apparent in the new member states, with even graver prospects in some of the Eastern neighbour states, and in Ukraine in particular. The first stage of the crisis saw alarming tendencies for major European banks, which through their subsidiaries hold dominating positions in the banking sectors of much of central and eastern Europe, to be pulling back resources from these countries (the monetary equivalent of Sarkozy's talk for car manufacturers). This was an extraordinarily dangerous tendency, both economically and politically: these ‘world-class' banks were supposed to be delivering modernization of a sector that would lead the transformation of the economy at large. Instead they were becoming the instrument of crisis. At least there is now some action to reverse these tendencies. A consortium of the major European banks have, with the EBRD, put together a package to contribute to the recapitalisation of the banking sector of the region. But this seems to only for starters. The amplitude and design of broader measures, and their conditionalities, remains to be revealed. The least the EU can do without delay is to remove any legal restrictions on next moves that may become necessary, for example to raise the ceiling on possible authorisations of macro-financial assistance. For the new member states accession to the eurozone should be an open option, which could save huge costs by way of exchange rate crises. The EU should revise its harsh and obsolete Maastricht criteria – which set an inflation standard close to the ‘best' performing member states at a time when the ‘best' are risking deflation. The authors of the Maastricht criteria may be excused for not having forecast the present crisis, but the Commission and member states cannot be excused for not revising them now in line with new manifest priorities.

This leads on directly to the third issue, which arises from the fact that Russia, while greatly weakened financially itself, has nonetheless come forward rapidly with financial aid packages for several CIS states, and notably for Ukraine. At a recent conference at CEPS a Commission official was heard to say that this pointed to the case for coordination between the EU, Russia and the IMF, to which a Russian ambassador was heard to express his immediate agreement. This is both a quite sensible but also quite revolutionary idea. Clearly sensible, because multiple sources of financial aid call for coherence of conditions in order to get synergetic benefits, or contradictory conditions that would undermine all. It would be revolutionary because in the post-Soviet period so far there has been no such coordination. In the first stage Russia was entirely focused on its own problems, and was beneficiary of Western aid. In the second period of increasing oil based wealth its re-assertiveness was channeled into trying to rebuild the post-Soviet space as a sphere of influence. The relationship with the efforts of the EU and (more sharply the US) became more competitive than cooperative. Could we now be on the eve of a third phase, in which the pursuit of synergetic benefits from EU-Russian cooperation in projects and policies towards their common neighbourhood would become the name of the game? Already there is the very tangible case of the Ukraine transit gas pipeline that is being considered as a possible tri-partite (UKR-EU-RUS) project. However the need to address macroeconomic and financial crisis conditions in the region raises the issue of coordination to a higher level, which would be extremely demanding for both sides. Russia would have to make a credible shift of attitude and intention in its foreign policy, and the EU would have organize some strategic agility, neither of which will come easily. But crises bring opportunities as well as damage.