A proposal, circulated by the Hungarian delegation at an extraordinary summit in Brussels on 1 March, calls for "a comprehensive multilateral European stabilisation and integration programme" (ESIP) to prevent the worsening crisis in Eastern Europe from speading to the West.
Eastern Europe is currently suffering from its worst economic recession since the Second World War, forcing EU countries such as Hungary and Latvia to request international assistance. Western investors have begun to flee the region to cover losses at home, pushing the Polish zloty down by 28% against the euro in the past six months. Hungary's forint has fallen by 20%, Romania's leu by 17% and the Czech koruna by 12% during the same period.
"Failure to act could cause a second round of systemic meltdowns that would mainly hit eurozone economies," warns the Hungarian paper, pointing out that Eastern Europe's refinancing needs for 2009 "could total €300 billion," or 30% of the region's gross domestic product (GDP).
However, the response of EU leaders at today's summit in Brussels is likely to remain vague. According to a draft press statement, EU leaders will merely recognise that work needs to be done "in order to restore appropriate and efficient financing conditions in the economy," stressing that "unblocking the credit channel is crucial for the effectiveness" of economic recovery programmes launched by individual countries.
However, this could fall short of what is needed to restore confidence in Eastern Europe's economies. The Hungarian paper refers to the "veritable tidal wave of money" that has fuelled investment in Eastern European countries since the fall of communism, resulting in outstanding international loans of €700 billion.
A major crisis there "would have global systemic effects," the paper warns, saying "emergency liquidity of approximately €50-60 billion" would be needed to prevent the crisis from spilling over to banks in Western Europe.
The paper further notes that banking groups in Austria, Italy and Greece are more exposed than others, because they have accumulated most of the region's foreign debt exposure.
Over time, the paper also recommends a "clear, aggressive timeframe for euro adoption" in East European member states to boost the confidence of international investors. "Because CEE countries are structurally tightly linked to the eurozone economy, failing to anchor them quickly to the euro would perpetuate the current systemic instability," the paper notes.
