EU membership has brought undoubted benefits for the central and eastern European (CEE) countries that joined in 2004 and 2007. Foreign direct investment and job creation surged, helping to make convergence a reality. Western European banks have bought subsidiaries in many CEE states, allowing households to monetise home ownership rapidly.
Perhaps too rapidly. The banking crisis arrived late in emerging Europe, but like a storm, it has gathered speed as it moved east. The EU has responded generously, including the unprecedented $8.1bn contribution to a bail-out package for Hungary. Austria's development bank, OeEB, has set up special funds for its eastern neighbours, despite the domestic outlook being clouded.
But the EU will be wasting its money if its response is poorly co-ordinated or incomplete. European ministers promised bank bail-outs would not involve cutting the capital of subsidiaries in emerging Europe. But refinancing capacity in the region is being shut down fast by those banks which had no presence on the ground but a massive presence in loan markets. It is hard to believe the long-term growth prospects for banks look better in Western than in converging European economies.
And the European Central Bank's refusal to accept non-euro EU government bonds as repo collateral has closed off an obvious channel to improve bank liquidity. It would be a grave policy failure if this stance fractured European unity. Not least because some countries in the class of 2004 that had been sceptical of eurozone membership have woken up to the extra stability it can provide. Now is the time for encouragement, not financial isolationism.
