The EU's solidarity test

BERLIN, March 2 (UPI) -- The financial crash is becoming a defining moment for the European Union, an economic shock that is testing the system's political solidarity to the limit. Europe's banks and governments have inched painfully over the last week toward recognizing the need to rescue the fallen.

If they do so successfully, the EU will become a different and altogether more coherent body. If they fail, it may end up rather like the League of Nations in the late 1930s, a sad and toothless crone muttering memories of might-have-beens.

So far, the verdict is mixed. German Chancellor Angela Merkel rejected the idea of a grand bailout at an EU summit Sunday, rightly arguing that a "one size fits all" plan would make little sense, but that she was open to support in specific cases.

"The situation is very different in Europe's economies. We cannot compare Slovakia nor Slovenia with Hungary," she said. "We have shown in particular with Hungary that we help countries in need. And we will do so further, particularly through the international institutions."

The question is whether this cautious response will be enough to hold the EU together in its time of trial.

There are three separate forces currently tugging the EU apart. The first is geography and its inevitable consequences. Spain, France and Italy tend to focus heavily on the Mediterranean and the challenges that neighborhood brings, while the Germans, Poles and other Eastern Europeans are far more concerned with Russia. So when French President Nicolas Sarkozy tried last year to launch a Mediterranean Union, the Germans countered with a plan for a special Eastern association.

The second fissionary force is energy, after the new EU members from Eastern Europe found themselves shivering and their factories closing during this winter's row between Russia and Ukraine over gas supplies. The Eastern Europeans are deeply suspicious of the way Germany is currently increasing its dependence on Russian gas by backing the Nord Stream pipeline under the Baltic Sea. This deliberately and expensively bypasses the pipelines that run through Poland and Ukraine.

The third is the bond markets, which are demanding much higher interest rate payments for euro bonds from Greece or Italy or Ireland than for those from Germany, even though they are part of the same single currency. This means investors think there is a higher risk of these non-German members of the eurozone being unable to pay.

That launches a very large question mark into the heart of the eurozone: whether the weight of the German economy will support the weaker members. At root, it raises the question of whether the EU is a real union or simply a convenient assembly of nation-states that do not expect to hang together in a crisis.

Article 103, Section 1 of the EU's Maastricht Treaty, as German officials have been reminding everybody, specifically says there should be no such guarantee: "A member state shall not be liable for or assume the commitments of central governments, regional, local or other public authorities."

But that clause, known as "the no-bailout rule," is not the end of the matter, because of Article 100, Section 3, which says: "Where a Member State is in difficulties or is seriously threatened with severe difficulties caused by natural disasters or exceptional occurrences beyond its control, the Council, acting by a qualified majority on a proposal from the Commission, may grant, under certain conditions, Community financial assistance to the Member State concerned."

There is a difference between those members of the EU that are in the single currency zone, and those that are like Britain, Sweden, Denmark and the new member states from Eastern Europe. But they are all still member states, to which Article 100 applies.

So two crucial meetings took place in Brussels Sunday. There was an emergency summit of the leaders of the EU's 27 nations, at which Germany's Merkel had to stand by her pledge to Ireland that "We have shown solidarity and that will remain so." Facing an election in September with German voters feeling too poor and resentful to bail out Germany's partners, Merkel chooses her words with great care.

But just before the summit the Poles convened a separate meeting, at their Brussels embassy, of the other Eastern Europeans not in the eurozone, symbolizing their importance as a bloc. The Hungarians said what they collectively needed was a bailout of $230 billion, but doubted they would get it.

Their mood was aptly summed up by Vessela Tcherneva of the European Council on Foreign Relations think tank. She commented: "The new EU member states believed that they were finally sitting in the same boat with their neighbors to the West. But right now, from the point of view of the new members, the EU states of long standing are comfortably aboard a luxury cruise ship heading for the horizon while they themselves bob behind on a leaky dinghy in troubled waters."

The Germans and other traditional members dispute the bit about the luxury cruise ship. France's unemployment is rising at a rate of more than 1 million a year. Germany's industrial output shrank by 12 percent in the fourth quarter of last year, and its GDP declined at an annual rate of 8.2 percent. Others are more understanding. Austria, whose banks have lent to Eastern European clients sums worth almost the whole of Austria's GDP, has been pleading for them to be given an EU bailout.

The Greeks, Irish and Italians are calling for the creation of a new common euro bond, under which all eurozone countries would offer the same interest rate. This would cut their bills, but probably raise Germany's, and the Eastern Europeans fear this would cut them off even further and raise their own lending costs.

Some relief is at hand, starting with a $25 billion support fund from the World Bank, the European Bank for Reconstruction and Development and the European Investment Bank. The International Monetary Fund, which already is supporting Hungary, is doubling its funding capacity to $500 billion.

But that is just the beginning. The real test of the EU is upon it. Polish Prime Minister Donald Tusk says, "The EU must pass this test of solidarity, or there is no future for the EU." Or as White House Chief of Staff Rahm Emanuel puts it, "A crisis is a terrible thing to waste."