Europe faces new economic 'Iron Curtain', EU warned.

Published on Sunday 1 March 2009 12:37

Hungary's prime minister warned of a new economic "Iron Curtain" being drawn unless leaders at today's European Union summit acted to protect the bloc's weakest members from drowning in the global economic crisis.

Prime Minister Ferenc Gyurcsany said the credit crunch is hitting poorer, eastern member states the hardest. The Hungarian leader called for a special EU fund of up to 190 billion euro (168 billion) to help restore trust and solvency in eastern EU members' financial markets.

"We should not allow that a new Iron Curtain should be set up and divide Europe," Mr Gyurcsany told reporters ahead of the summit.

Hungary, along with other eastern EU nations like Poland, Latvia and Slovakia, are in dire economic straits and are pleading with richer countries in the 27-nation bloc to show solidarity. Hungary and Poland and the Baltic countries also want the EU to fast-track their bids to join the euro-currency, which could offer them a stable financial anchor.

EU nations are all grappling with a worsening recession, compounded by a severe credit crunch that has left many EU countries looking ever inward to protect jobs and companies from international competition.

Those are policies that undermine the cornerstone of the open market on which the EU is founded.

"This is the biggest challenge for Europe in the last 20 years. In the beginning of the nineties we reunified Europe, now the challenge is whether we will be able to reunify Europe financially," Mr Gyurcsany said.

Prime Minister Mirek Topolanek of the Czech Republic, which holds the EU presidency, called on his counterparts to act together.

"We do not want any new dividing lines, we do not want a Europe divided along a North-South or an East-West line, pursuing a beggar-thy-neighbour policy is unacceptable," he said in a pre-summit statement.

Solidarity among EU nations has slipped amid the worsening crisis and has led to bickering between EU capitals.

The Czech Republic has accused France of trying to protect its local car plants at the expense of foreign subsidiaries, while Germany, the EU's economic powerhouse, has rejected calls to help bail out economies in Ireland, Greece and Portugal.

Sunday's talks are meant to restore a sense of solidarity and help prepare for the April 2 Group of 20 nations summit in London.

Gyurcsany said eastern EU countries could need up to 300 billion euro (265 billion), or 30 % of the region's gross domestic production this year.

He warned, in a paper presented to the EU summit, that failure to offer bigger bailouts "could lead to massive contractions" in their economies and lead to "large-scale defaults" that would affect Europe as a whole.

Mr Gyurcsany added that failure to support fellow EU countries could trigger political unrest and immigration pressures as jobless rates soar.

Once booming east European economies have been hit hard by the economic downturn. As cheap credit dried up their export markets shrank, causing eastern currencies to slide and triggering more financial turmoil.

EU governments have already spent 300 billion euro (265 billion) in bank recapitalisations and put up 2.5 trillion euro (2.2 trillion) to guarantee loans of many banks in the EU and neighbouring states.

On Friday, the European Bank of Reconstruction and Development, the European Investment Bank and the World Bank said they will jointly provide 24.5 billion euro (21.6 billion) in emergency aid to shore up the battered finances of eastern European nations.

The EU has been reluctant to commit more cash so far, with officials saying it would be better to channel money to the International Monetary Fund.