How is the recession affecting Europe? Even Germany, the powerhouse of Europe, saw its GDP fall 2.1% in the last quarter of 2008, worse than the Euro-wide figure of 1.5%, and unemployment rise for the first time in three years. Despite being the world’s biggest exporter, with a current account surplus second only to China, and no housing bubble to pop, ‘prudent’ Germany is suffering along with the ‘reckless’ US and UK. So how will the EU and its member states deal with the crisis, and what effect has the expansion of Europe to the East had?

The prospects for central and eastern Europe look particularly grave, with currencies under threat, bad debts multiplying, and GDP plunging 2.5 per cent this year, despite a 4.25 per cent growth forecast last autumn. The IMF has suggested crisis-hit states consider scrapping their currencies in favour of the Euro, even without formally joining the Eurozone, warning that a rapid switch from credit-fuelled growth to credit-starved recession is creating huge pressures. The IMF, World Bank and European Bank for Reconstruction and Development have tried to persuade the EU and eastern European states to back a region-wide anti-crisis strategy, including a regional rescue fund, but there is widespread opposition. The World Bank has urged the EU’s Western states not to shut their ex-communist neighbours out of their markets, saying ‘it could set back two decades of economic progress’. But rumours that French President Nicolas Sarkozy allegedly banned French automakers producing cars in the Czech Republic, highlight tensions between the older and newer EU members.

Is there a fault line through Europe? Who should bail out failing economies such as those of Latvia and Finland? Do the Euro and the EU help or hinder a collective European response to the crisis?

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