The Over Extended EU

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The expanded EU seemed such a good idea at the time. Ring fence Russia, grab its traditional markets and inherit a vast pool of cheap, slav labour.

A couple of years ago I arrived in Tallinn to find the main drag into town completely dug up, all the way from the airport. The new crazy paving was in honour of George Bush’s one visit to Tallinn for a NATO Power Lunch. It reminded me of the old British Empire days, when poor natives would be given pics of Queen Victoria and Union Jacks to wave at some passing British dignitary, while strewing his path with flowers.

The EU might have remembered that the colonies soon became a huge liability. Or in more recent history, the horrendous cost of German re-unification. The City of Berlin has been bankrupt to the tune of billions ever since. West German taxpayers footed much of the bill for re-unification. But will the Germans or the French be as happy to fork out for the rest of the East?

The Baltic Business News is refreshingly one voice against wholesale bail out, arguing that it subsidizes the kind of profligate Government spending and lax lending that caused the problem in the first place. In many Eastern European countries, an ID card was all you needed to get a loan. In the same way, the UK is rightly criticised for rewarding failed banks with billions of taxpayers’ money to try and restart the cycle. Of course. It’s an earthquake policy, where you simply build back houses on the volcano.

The snag, however, is that Eastern Europe’s problems are now everybody else’s problem. Austria has the biggest exposure to Eastern Europe: $289 billion or 70% of its GDP, of which there’s $44 billion to Romania, $37 billion to Hungary, $22.4 billion to Russia and $14.3 billion to Ukraine. Buying up the old Soviet Union didn’t come cheap. A worsening situation in any of these countries could easily take Austria down with it and tip over a few dominoes. It has happened before.

In the 1930s, the turmoil caused by the collapse of Austrian bank Creditanstalt was so intense that it lengthened the Great Depression in the United States by at least two years. In 1931, Austrian bank Creditanstalt, owned by Europe’s famous Rothschild banking family, went under, sparking a run on other Austrian financial institutions that soon spread disastrously across the globe. The ensuing panic decimated bank after bank and is considered the trigger of the Great Depression.

Well there’s a sobering thought, especially when you consider that the German Landesbank, France’s Societe Generale, Swedbank and Italy’s Unicredit also have billions on the line.

In this situation, it’s fairly clear that the IMF, EU central bank and so on will be effectively bailing the Western banks by proxy. The Eastern countries will simply be a conduit. A major chunk of the IMF’s recent loan to Iceland was earmarked for foreign debt repayment. And everyone will recall what happened in Russia after the rouble crash. Some of the IMF money didn’t even reach Russia, turning up variously in Switzerland, London and, infamously, in the Bank of New York. Meanwhile the conditions of the loan threw millions of ordinary Russians into poverty.

So, bailed or not, Eastern Europeans are looking at a long term future of being debt slaves to Western Europe. It’s not easy to see (understatement) how this will contribute to the harmony of the EU. The recent protests in Georgia and Moldova appeared to me to be as much economic unrest as political dissent. Or at the least, a tangible mood of failed expectations. Latvia has seen ‘econoriots’ already – most recently about teacher’s pay cuts. There’s unrest in Czech and Hungary too, where the IMF cure is already being experienced as worse than the disease.

Becoming Europe’s poor relations, in hock to Western loansharks, might be preferable to being under the Soviet jackboot. But you wonder whether some Eastern European countries may decide that it isn’t what they signed up for.


6 comments to The Over Extended EU

  • Aleks

    Two points spring to mind, one furthering the ‘we did it to ourselves’ argument that you make above and another about potential benefits.

    Firstly, the EU let both Bulgaria & Romania into the EU despite failing to fulfil the chapters on corruption, judicial reform etc. of the acquis communautaire. Now we see the flipside of this political decision, funding to both has been cut. It is not as if the big politicos in Brussels can say that they didn’t know. One of my sources tells me that the corruption files for both Bg & Ro are enormous – enough so that the enlaregment commissioner can effectively hide behind them whilst still seated at his desk.

    So much for all the bleating about the EEC/EU being a community based on laws!

    As for the Austrians blazing a trail to wards tits-up-ville, I wonder who would step in and pick up some of these assets at a bargain price? Who has ready cash to make strategic investments? The same question could be asked of all the other states including the Ukraine. Not mentioning any names(!), would such sales actually be banned under the guise of ‘national security’?

    What springs to mind is the attempted purchase of US port operators by Dubai(?) which was nixed. Of course that attempt has a clear strategic rationale which could not really be said of CEEC & Balkans distressed assets, but deep penetration of EU member states economic assets by non-EU states which are regarded with suspicion or even as enemies (ok, I give in, China & Russia) could be considered and effective means of influence.

    I know that if I had extra cash floating about, I would put it in to assets that could well give me extra political clout, especially in neighboring states. You don’t have to be evil to think of that! 😉

  • Who knows what happens next… All I know is:

    “A lie gets halfway around the world before the truth has a chance to get its pants on.” — Winston Churchill :)

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  • That?s more than sniseble! That?s a great post!

  • Sweedbank will be quite OK in Eastern Europe; Estonia in particular. They took over the Hansabank and are funded by so much money from Scandinavia and Russia that they wont be struggling any time soon. No toxic American debt is why,

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