Austria pleads with Europe for bail-out of east

To prevent the plug being pulled on the Austrian economy - until now fairly lightly hit by the economic crisis compared to other western states - Vienna wants the EU to raise the currently pledged €25 billion balance of payments assistance to central and eastern Europe to €100 billion.

Austria is also calling for an additional €50 billion in balance of payments assistance to be offered to countries beyond the EU - the so-called European Neighbourhood countries - in the Balkans and further east, notably Ukraine.

The monies would come from the European Investment Bank, the European Central Bank and the EU Cohesion Fund.

Such a move would aid the eastern countries to establish their own bank bail-out packages and economic recovery plans, most of which, whether in the EU or not, until now have not been able to afford them. Of the €200 billion recovery package Brussels announced in November, most of the money, coming from national coffers, remains in the west.

The presidents of the Austrian and Polish chambers of commerce were in Brussels on Tuesday (10 February) to promote a similar plan based on proposals from the IMF and the Austrian central bank. Although the precise details of what Vienna would like to see have yet to be published, the Austrian chamber, close to the governing coalition, says the plans are "not distinct", and have been echoed by a call by the IMF for an equal amount of EU cash to be offered to the east.

Austria opened discussion of the regional bail-out at Tuesday's meeting of European finance ministers in Brussels, but the response was lukewarm from other EU member states, according to Reinhold Lopatka, secretary of state for finance.

Last week, the Austrian chancellor and finance minister toured EU capitals in an unsuccessful attempt to drum up support. The finance minister is also to head to Croatia, Ukraine, Bulgaria and Romania on Wednesday to "forge an alliance in support of the package," said a figure close to the government.

Germany in particular, believing it will be stuck with the bill, is stiffly opposed, despite heavy eastern exposure itself.

"We do not want to get lost in any future rescue measures," said German finance minister Peer Steinbrueck speaking to reporters after the Brussels meeting. "Austrian banks are over-proportionally engaged in the east," he continued.

"It's a legitimate national interest," he concluded, meaning not an issue of wider concern.

Mr Lopatka hit back, saying that the problem had broader implications than losses for domestic banks. "Austria may well be more [extended] than others, but it is more of an EU question."

Without a regional bail-out, he warned, "eastern Europe will start to collapse."

Orgy of lending

The economic crisis has hit both new EU member states in the east and countries beyond the bloc sandwiched between the EU and Russia much harder than it has hit most western member states.

High growth rates fuelled by cheap and easy foreign credit have been replaced by a sharp decline in demand for exports, a decrease in investment and the near impossibility of accessing finance and loans for businesses.

Meanwhile, devaluation threatens businesses that have borrowed heavily in foreign currency. Unemployment is soaring and civil unrest, particularly by farmers and young people, has hit a number of capitals.

Latvia's economy contracted 10.5 percent in the last quarter of 2008, according to figures released on Monday, while analysts fear Ukraine is on the verge of bankruptcy. Hungary, Bulgaria and Romania have also been badly hit.

In recent years, western European banks went on an orgy of lending and buying up the local financial sector. As early as 1 December, a group of six western banks - Italy's UniCredit and Intesa, Austria's Erste and Raiffeisen, Belgium's KBC and France's Societe Generale - sent a letter to the European Commission requesting a regional financial aid package for the east, according to a Bloomberg report published last week.

Separately, the Institute of International Finance, the global association of financial institutions, is to lobby governments for the package ahead of April's G20 summit in London.

'One European family'

Warning of dangers to the European economy and "social stability", Christoph Leitl, president of the Austrian chamber of commerce, told reporters it was not simply about saving Austrian banks.

"We are one European family. The central and eastern European nations are the weaker children of that family," he said, "but we must take care of the weaker child. It is our common responsibility."

He also cautioned that if Brussels did not act in the east, Moscow would.

"Russia is helping in a very efficient way to pick these countries up and take them back into closer connection. There is a competition between the EU and Russia over which family the east belongs to."

Ukrainian Prime Minister Yulia Tymoshenko said on Monday that the country had approached Moscow requesting a €3.8 billion ($5bn) emergency loan.

According to Heinz Kogler, EU co-ordinator of the Austrian chamber of commerce, Germany's blocking of the bail-out "is actually quite consistent with what they have been saying since the beginning of the crisis. They have always opposed any pan-European initiatives."

"They want nothing more than efforts at the national level because they worry they will have to pay for such EU-level schemes."

He said the Austrian government had acted on the matter as a result of the galloping escalation of the crisis in the last couple of weeks and that if the EU did not move soon, "There will be a complete collapse of the region, taking Austria with it."