Global economic crisis threatens to spin the EU - and its single currency - apart.

[dkf]

EU chiefs attempt to cool bloc's crisis
By STEVEN ERLANGER and STEPHEN CASTLE
Published: March 1, 2009

The leaders of the European Union gathered Sunday in Brussels for an emergency summit meeting designed to tamp down the centrifugal forces unleashed by the global economic crisis that threaten to spin the bloc - and its single currency - apart.

In a statement afterward, the leaders tried to reassure their publics, promising to hold to the single market, promote growth and reject protectionism.

A call from Hungary for a large bailout for newer, eastern members of the union was rejected by Germany, the richest EU nation, and received little support from other countries.

Prime Minister Ferenc Gyurcsany of Hungary warned of "a new Iron Curtain" dividing Europe, even if the metal today was gold. He called for a special EU fund of up to €190 billion, or $241 billion, to protect the bloc's weakest members.

http://www.iht.com/articles/2009/03/01/europe/union.php

[Idealism]

1. Eastern Europe is about to descend into bankruptcy

This could be the start of a neo-Warsaw Pact. If commodity prices rebound, look for Russia to be the one propping up ex-Soviet satellites, if the EU won't.

[dkf]

2. Interesting theory.

But dependent on commodity prices? I wonder if that would happen fast enough for this rapidly deteriorating situation?

[Idealism]

3. Russia is dealing with high inflation, the credit crisis, and the bottoming out of oil prices

Their economy is around 75% oil and natural gas exports. The ruble has fallen in value so much ever since the 1998 ruble crisis, that even in 2007 (an amazing year for petro growth), Putin spent billions on shoring up the Ruble. Russia, as it currently stands, is running a budget deficit and their national debt is skyrocketing. Gazprom, the biggest Russian corporation and natural gas supplier in the world, had their corporate debt downgraded to "distressed" in the later part of 2008. The Ruble is being shorted, and it is starting to even affect the Euro according to the http://www.ft.com/cms/s/0/e7afc9b4-f75e-11dd-81f7-000077b07658.html">Financial Times.

The problem is this: Why should the rich western European countries have their taxpayers bail out Eastern Europe? You will have a hard time convincing German and French taxpayers that it is in their best interests. Prime Minister Merkel today http://www.google.com/hostednews/ap/article/ALeqM5h_fkxnBI3-FZ5aibVXlv01Dc9DPwD96LA78G2">rejected a bailout plan for eastern EU nations.

So that leaves essentially only two choices for these impoverished countries: The International Monetary Fund or Russia. The IMF will impose unpopular conditionalities with any money they dole out, and to the newly-democratically elected and capitalist governments of eastern Europe, it will spell trouble. The political turmoil that will ensue from privatizing off everything state owned in these countries all but ensures rioting at the very least. Russia does not have the excess capital to be bailout out these ex-Soviet satellites, and besides these countries have nothing to offer them other than some type of pseudo-fealty. People are angry. Mortgages in Poland, Ukraine, Latvia, Lithuania, et al for the most part have more than doubled due to the horrendous devaluation of the Lat, the złoty, the hryvnya, the litas, etc. and the fact that these mortgages originated from Swiss banks (due to the interest rate being lower). That helped fuel the crazy housing boom and subsequent exuberant economic growth of these basketcase economies, and that is what makes this so hard. The Swiss franc has lost very little value compared to the other currencies I noted. Some of the eastern European currencies have lost up to 50% of their value. Because of this, their mortgages have doubled. There is a lot of social unrest that will only lead to bad things if the world ignores their plight.

As Lord Keynes once said, "justice will not limp."

[dkf]

4. This is worse than I realized.

Yet another crisis on Obama's plate.

I can't imagine Russia being able to take on this extra burden soon. Won't the people of Russia riot if he starts propping up Eastern Europe at the expense of Russians?

[Idealism]

5. Russia is still an authortarian state

Dissent and protest is crushed, often through brutality. I am worried about the satellites though. The Latvian government has already defaulted on their obligations, even after receiving IMF loans. Their situation was one of the worst, but Poland is right there with them. If something isn't done soon, half of the European continent will fall into bankruptcy. If the richer countries in the EU won't help, and Russia doesn't have the capital to, and the IMF's fund probably doesn't have enough in it to prop these economies up, I don't see an answer to the problem. The rich banks of Western Europe hold the mortgages of the poor easterners, and when those losses are realized, there will be a wave of nationalizations. When that happens, you will see a breakdown in the EU "open market" philosophy, as the governments wonder "Why did UBS give 100,000 mortgages to people who couldn't afford them in Poland?"

The EU already has a tenuous relationship at best with some of their poorer members, this will do nothing but exacerbate that situation to the point of a possible new Warsaw pact. Russia gladly will drive a wedge between the EU and it could well start a new Cold War mentality if it gets bad enough.

Shit is about to hit the fan.

[leftstreet]

6. Looks like opportunistic politicians will stir up nationalism, too.

That's always scary. What a mess.

Thanks for posting the article.

[dkf]

7. I learned more from Idealism's posts above than the article.

I'm beginning to feel quite overwhelmed. I can't imagine how Obama must feel.