“The emergence of a new economic and political divide within Europe has become a distinct possibility,” argue Jean Pisani-Ferry, director of the Bruegel think tank, and Zsolt Darvas, research fellow at the Institute of Economics of the Hungarian Academy of Sciences, in a December 2008 paper for Bruegel.
The authors attribute this to the fact that when the European Central Bank (ECB) moved to boost liquidity in the euro area during the financial crisis, it “inadvertently put [non-euro] new member states’ banks without a parent bank’s liquidity at a disadvantage”.
As a result, the European Union’s management of the financial crisis has been “perceived in central and eastern Europe as biased towards the interests of the economies of the euro area,” the authors state.
However, Pisani-Ferry and Darvas say the non-euro new member states also bear some of the responsibility for their banks’ liquidity problems, given their failure to take fiscal action over “extremely large current-account deficits and property booms”.
To prevent the situation from mushrooming into a major economic and political divide in Europe, the authors say that “shortcomings in Europe’s existing institutional architecture” need to be addressed.
They recommend boosting EU surveillance “with a view to fostering early diagnosis of vulnerabilities and remedial action”.
National governments should also ensure that EU competition rules are enforced and “avoid subsidies or moral suasion, which may distort trade or discourage foreign investments in the new member states,” the authors argue.
On top of this, they assert that there is a “need for EU-wide supervision of banks with significant cross-border activities” and that a “permanent mechanism should be established to ensure coordination of bank deposit guarantees in the EU and to avoid an unfair advantage accruing to early movers”.
While Pisani-Ferry and Darvas believe no-one can be held solely responsible for allowing an economic and poltical divide to emerge in Europe, they admit that the “perception has developed in some new member states that solidarity is in short supply when crisis strikes”.
To change this, the authors claim that “individual governments and the EU need to discuss contentious issues openly and ensure that they draw common, rather than divergent, conclusions”.
“If they do this, we may avoid creating a new divide within Europe,” Pisani-Ferry and Darvas conclude.