FRANCE ON CENTRAL AND EASTERN EUROPE

UNCLAS PARIS 000414 SENSITIVE SIPDIS E.O. 12958: N/A TAGS: ECON EFIN EUN PREL FR SUBJECT: FRANCE ON CENTRAL AND EASTERN EUROPE REFS: STATE 23758 ¶1. (SBU) SUMMARY: The senior Economics Ministry official responsible for Economic Policy and Europe agrees that the financial situation in Central and Eastern Europe is serious. The EU and member states are taking actions to support central European member states. The main approach must be multilateral, she stressed, to which end the GOF supports increasing resources to international financial institutions. END SUMMARY. ¶2. (SBU) Assistant Secretary for Macroeconomics and European Affairs Claire Waysand said the GOF sees the situation in the region as serious. She agreed that care should be taken to avoid damage to other countries that might be caused by protectionist stimulus or bank recapitalization measures. (As an aside, not specifically limited to eastern Europe, she added that no country has an interest in seeing its currency revalued and we need to work together closely on exchange rates.) Acknowledging that few central European countries are in a position to undertake economic stimulus programs, Waysand said the GOF is conscious of the importance of western European stimulus measures as indirect support to those countries. In addition to the general macro effect, she noted that some specific measures, such as France's "used car rebate" for older cars traded in for new, more fuel-efficient models, specifically stimulated demand for goods produced in Central Europe. On the other hand, she cautioned that treating "Central and Eastern Europe" as an undifferentiated mass heightened political sensitivities, particularly in the better-off countries, such as the Czech Republic. It also risked sending counterproductive signals to markets and overlooked real diversity of situation and needs. Multilateral Approach Is Best -------------- ¶3. (SBU) In general, the GOF supports a multilateral approach to support for emerging economies. The EU's "solidarity fund," which has contributed 10 billion euros to restructuring in Hungary and Latvia in close coordination with the IMF, is driven by the special treaty relationships of the 27 members of the EU. The GOF had proposed a doubling of the EU fund, a matter that was being debated in the March 20 European Council meeting in Brussels. While the GOF wants other countries in the region to have access to support as well, the preferred mechanisms should be the IMF and World Bank, Waysand said. In that vein, the GOF fully supported the IMF's request for a doubling of the New Arrangements to Borrow. Current Tools Work, not Euro Acceleration -------------- ¶4. (SBU) As for the economic situation in these countries, Waysand said the economic downturn is having the "salutary" effect of reducing demand for imports and thereby helping to improve the trade deficits (down to 10% of GDP from 15% in some of the Baltic countries). Government budget problems are proving more difficult to resolve, short of IMF supervision. This might also become necessary in Bulgaria, with its currency pegged to the euro, a current account deficit and persistent budgeting shortcomings. She said she did not think that easing more Central European countries into the Eurozone at this point would help. The experience of other "catch-up" countries that had joined the euro demonstrated the difficulties of the adjustment (e.g., in Portugal) and the risks of overheating (Spain, Ireland)and she "hoped" that Slovakia would some how navigate these pitfalls once the current recession is over. PEKALA