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