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10 December 2023

Co-ordinated EU action needed to stem collapse

By Paul Murphy

Apologies to those readers who feel that this column has become insufferably bearish. The unrelenting flow of bad news makes it difficult to be otherwise.

This month it's Europe – Eastern Europe in particular – watching confidence crumble in devastating fashion, to the point where commentators openly question the survival of economic structures which have taken years to build.

Take the observations of Matthew Vogel, an economist at Barclays Capital: "Financial stability in emerging Emea remains questionable for the foreseeable future, in our view. While the European Commission (EC) has continued to insist that it prefers to operate on a country-by-country basis regarding the EU's problems, both in the west and the east, the governments in Central and Eastern Europe (CEE) continue to request a coordinated approach. They are not alone, as the Austrian authorities and banks are also lobbying for a regional bailout."

The past week has seen the crisis intensify in those countries that were previously considered to be relatively strong in the region – namely Poland, which has suffered a debilitating run on its currency, the Zloty.

If its public statements are any guide, the European Commission is sticking to its position that a region-wide approach is not in its plans. The political obstacles to such are high and the very magnitude of the problem is truly daunting. Also, as Vogel pointed out to BarCap clients this weekend: "The sort of financing required for a region-wide bailout does not, in our opinion, easily fit into the EU structures for financial aid to member states."

"In addition, it may also prompt other western European member states of the EU to clamour for more direct assistance. Another key constraint is the simple fact that domestic problems are the predominant focus of each member state. Political leaders may also not grasp that the threats posed by the Eastern members' problems could ultimately affect all member states – the economic links are just as deep rooted as the financial links."

Austria is seen as the biggest supporter of a regional approach to East Europe's problems – a stance that is put down to the fact that its banks' exposure to these neighbouring emerging economies is equal to roughly half of the Austrian banking system's balance sheet.

But with larger member states, such as France and Germany, having limited exposures to the region – at least in terms of relative size to their own economies – they may well remain reluctant to sponsor a bailout. At least until things get worse.

I suspect EU policy-makers need to take the advice of George Soros, the speculator and philanthropist, who stated: "The euro suffers from certain structural deficiencies; it has a central bank but it does not have a central treasury and the supervision of the banking system is left to national authorities. These defects are increasingly making their influence felt, aggravating the financial crisis."

The point here is that even if there was a consensus across the Europe to bailout its most recent members, there are limited tools available with which to launch a rescue.

Soros reckons there is a need to create a new centralised eurozone bond market, through which rescue funds could be raised: "For one thing, it would lend credence to the rescue of the banking system and allow additional support to the newer and more vulnerable members of the EU. For another, it would serve as a financing mechanism for co-ordinated counter-cyclical fiscal policies. Properly structured, it would relieve Germany's anxiety about other countries picking its pocket."

It is hard to disagree. The big economies of central and Western Europe are rapidly becoming encircled by crisis. Co-ordinated action is required.

The writer is an Associate Editor with the Financial Times.