Wednesday, March 18, 2009

Aid boost for EU’s eastern states

By Tony Barber in Brussels Published: March 18 2009
Financial Times

European Union leaders will declare at a summit opening on Thursday that they stand ready to increase the size of a €25bn ($32bn) emergency fund for central and eastern European member states that face balance of payments crises.According to a draft summit communiqué, obtained by the Financial Times, the 27 leaders will instruct the European Commission and EU finance ministers to “rapidly examine the possibility of increasing the ceiling for the EU’s support facility for balance of payments assistance”.

The size of a possible funding increase is not specified.

The statement underlines the belief of EU leaders that they can help central and eastern European countries overcome the global economic crisis on a carefully targeted, case-by-case basis, without adopting a comprehensive regional aid programme.Hungary last month suggested a €180bn ($234bn, £167bn) scheme for central and eastern Europe, but other EU countries made short shrift of the proposal.

Even some of Hungary’s regional partners, such as the Czech Republic and Poland, dismissed the idea, saying their economies were in far better shape than Hungary’s and did not need bail-outs.The EU’s emergency fund was doubled in size last year to €25bn after Hungary and Latvia secured €6.5bn and €3.1bn respectively, as part of two financial aid packages organised by the International Monetary Fund.

This month Romania, affected by a large current account deficit and an inability to attract fresh credit from foreign lenders, became the third EU country to apply for help from the emergency fund. Some economists forecast Lithuania may be next.According to EU officials, the fund’s resources are easily large enough to accommodate Romania’s needs, and could deal with requests from two more governments if necessary, but it would make sense to act pre-emptively now and to increase the amount available for possible future crises.

Countries belonging to the 16-nation eurozone are not eligible to tap the fund, which does not draw on the EU’s budget but consists of loans raised on financial markets through EU bonds.At their two-day summit in Brussels, EU leaders will also stress their commitment to bringing their public finances back to health as soon as economic recovery starts to take hold.That was underlined in a letter made public on Tuesday by Angela Merkel, Germany’s chancellor, and Nicolas Sarkozy, France’s president, to Mirek Topolánek, the Czech premier, whose country holds the EU’s rotating presidency.

According to diplomats in Brussels, there will be no discussion at the summit of extra deficit spending to conquer the recession, because EU leaders take the view they have deflected US calls for such action. The EU leaders will, however, underline their desire to double IMF resources to enable countries with balance of payments difficulties to receive timely assistance.According to the communiqué, they will reaffirm their commitment to IMF reform “so that it reflects more adequately relative economic weights in the world economy”. No details are offered of how countries intend to scale down voting weights at the IMF.

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