EU faces credibility test as financial woes mount

Written by Reuters | Brusssels | Updated: Feb 28 2009, 06:12am hrs
EU leaders will aim to show voters and world markets on Sunday they can bridge differences hampering action on a financial crisis that has placed the euro under unprecedented strain and provoked social unrest.

The latest in a string of European gatherings before an April G20 summit in London, the three-hour meeting in Brussels is a bid to clear the acrimonious air within the 27-nation bloc, with no new major initiatives seen until later.

Core EU values such as a commitment to open markets and solidarity with poorer member states risk losing out to pressure on governments to protect national industries.

A system of subsidies and illegitimate loans will not bear the much-desired fruit, but rather grapes of wrath, Czech Prime Minister Mirek Topolanek, whose country holds the rotating European Union presidency, wrote in Fridays Financial Times.

He said misdirected state aid from national governments to domestic firms risked causing smaller or foreign competitors to bleed to death and inflicting lasting damage on the EUs internal market, based on free competition.

The crisis has shone a light on fundamental differences in the economies of those in the 10-year-old euro single currency zone, with countries like Spain and Ireland suffering acutely from the bursting of property bubbles.

It will be important to build confidence among citizens and in the business community that serious, well-coordinated measures are being taken, European Commission President Jose Manuel Barroso appealed in a letter to EU leaders this week.

PROTECTIONIST WORRIES

With President Barack Obama bracing the U.S. budget for more spending to halt the downturn, leaders such as Frances Nicolas Sarkozy have warned that Europe must be just as ready to support troubled companies.

If the United States defends its industry, as it does, they are right. Maybe in Europe we can do the same, he said this week. But his tone has raised fears of protectionism for example when he suggested that French car makers should move plants back home from the Czech Republic.

Central and eastern nations are equally determined to push the case on Sunday for more help to their region after the World Bank warned it would be a human tragedy to let the crisis re-divide Europe, united by the 1989 fall of the Berlin Wall.

The World Bank was due on Friday to join the European Bank for Reconstruction and Development and European Investment Bank in lending up to 25 billion euros ($31.8 billion) to shore up banks and businesses in badly-hit central and east Europe.

Latvias government collapsed last week after a wave of protests. Greece, Bulgaria and Lithuania have seen popular anger explode into riots, and Opel carworkers staged mass rallies in Germany this week against planned plant closures.

The Polish zloty, Hungarian forint and Czech crown have been hammered by markets. Within the euro zone, the widening interest rate premium that troubled economies like Ireland are forced to pay to raise debt, compared to the largest member Germany, has even led to speculation the currency could split apart.

While EU leaders last year committed to a recovery plan which if fully implemented could amount to 3 percent of the blocs output over two years, markets have been unimpressed and data this week showed economic morale at record lows.

POLICY TOOLBOX

Chancellor Angela Merkel insisted on Thursday that euro zone nations should maintain solidarity the strongest signal that Germany could help weaker members but stressed that budgetary discipline should not go out of the window.

We have shown solidarity and things will stay like that, but this must be on the basis of the commitments that form the foundation of our common currency, she said in Berlin.

Yet Germany and others reject the idea of a eurozone bond to raise funds for crisis-hit members, while discussions on how to help non-euro states are proving just as tough.Austria and Hungary are pushing an aid plan for emerging European economies and their mostly Western-owned banks, but the scheme which would propose a toolbox of policy options has met resistance from eastern states themselves.

We have to avoid the creation of an impression that central and eastern Europe is one big black hole... We have to be able to differentiate, Czech Deputy Prime Minister Alexandr Vondra told reporters in Prague this week.

Diplomats say Hungary and some other eastern Europeans might raise the idea of speeding up procedures for joining the euro zone, which would offer them more protection.

But the calls are expected to be rebuffed.Poland has called fellow eastern countries for a separate 45-minute meeting in Brussels just before the summit proper, but few see any substantial outcome. This is a Polish PR exercise, complained one reluctant participant.