Support Urged for Eastern Europe
World Bank Warns Protectionist Stance May Worsen Crisis

By Annys Shin
Washington Post Staff Writer
Saturday, February 21, 2009

The World Bank warned yesterday that wealthier nations in Europe need to do more to help faltering Eastern European economies avoid a dangerous financial crisis.

If European leaders do not pull back from protectionist policies that have been cropping up in bailout and stimulus plans, they run the risk of erasing economic and political gains made in Eastern Europe over the past 20 years, bank officials said in a report released yesterday in Poland.

The World Bank weighed in as some of the largest economies in Europe have moved to protect jobs within their borders as a means of getting through the global downturn. French President Nicolas Sarkozy earlier this month suggested that French automakers seeking government aid pull factories out of places such as the Czech Republic. Other countries have offered incentives to keep investment at home.

Economists warn that such policies threaten prospects for economic recovery in Eastern Europe, which has been especially hard hit by the global drop in demand for exports. Ukraine, for example, was dependent on steel exports and has suffered as the price for steel has plummeted. Several countries in the region also entered the recession with high levels of public debt and low levels of savings, leaving them with little cushion to weather the downturn. Rising unemployment and falling currency values have further increased the risk that governments and financial institutions could default on loans made in better times. In recent months, the International Monetary Fund has lent billions to Hungary, Ukraine, Latvia, Serbia and Belarus. Deteriorating economic conditions already have sparked riots in Latvia, Lithuania and Bulgaria.

European Union leaders plan to meet in Brussels March 1 to discuss protectionism.

Protectionist policies could easily backfire for Western European governments, analysts said. A financial meltdown in Eastern Europe could drag down banks in Austria, Sweden and Switzerland, which lent heavily to financial institutions and businesses in Eastern Europe and for years enjoyed healthy returns.

The IMF said last month that bank losses could mount as "shocks are transmitted between mature and emerging-market banking systems."

"This is not a Western European problem," said Indermit Gill, the World Bank's chief economist for Europe and Central Asia and an author of the report. "Because of these global linkages, you find problems in one part of the world are problems of people in other parts of the world."

Trouble at European banks, in turn, could exacerbate the global credit crunch and extend the recession.

"A crisis in the Western European banking system will undermine U.S. efforts to stabilize its economy and will make the global recession worse," said Marco Annunziata, chief economist for UniCredit Group.

While most analysts cast Eastern Europe's woes as a problem for the European Union and the IMF to handle, some said the United States has a role to play.

"It's a European issue but the U.S. can show leadership," said Simon Johnson, a former chief economist at the International Monetary Fund and now a professor at the Massachusetts Institute of Technology. "Where is the Obama administration on this?" He said the Treasury Department is still without an undersecretary of international affairs, who would normally handle such matters.

Other analysts said European leaders need to come up with a collective response to Eastern Europe's economic crisis. Officials with the International Finance Corp., the World Bank's private sector lending arm, took a step toward that yesterday, saying they were working with the European Investment Bank, the lending arm of the European Union, and the European Bank for Reconstruction and Development to develop a coordinated strategy.

The EBRD said it plans to invest a record $8.8 billion in Central and Eastern Europe this year with close to half going to help the banking industry.

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