Timothy Ash of RBS -

It isn't that surprising, nevertheless still hugely disappointing, that the weekend's EU summit meeting in Brussels failed to deliver anything of significance in terms of financial support for emerging Europe as it fights to fend off the rolling impact of the credit crunch, which is seeing de-globalisation and deleveraging on an unprecedented scale.

It wasn't enough for the heads of the World Bank and European Bank for Reconstruction and Development, the prime minister of Hungary, and the government and central bank of Austria, who all have been at the front end of the current crisis, to warn in the lead-up to the summit about the dangers faced by the region; the EBRD chief had suggested $150bn in bank recapitalisation costs, with $200bn in bank refinancing needed.

As is too often the case with the EU, individual country self interest came to the fore. Leaders of Poland and the Czech Republic, in particular, were eager that a pan-European support programme wasn't rolled out, for fear that this would tar the whole region with the same brush as "countries in crisis" which have had to resort to the IMF for financing, eg. Hungary, Latvia, Serbia, Ukraine and Belarus.

Western European leaders, who no doubt assumed that they would have to foot the bill for any bailout, were all too eager to buy into the above, as it got them off the hook from their own electorate's already reeling over the current and likely future costs of any bank bail-out programme. Leaders were quick to point out that the EBRD/WB/EIB had already pledged €25bn in support for banks and small businesses last week for the region, and EU President José Manuel Barroso, noted that the EU had already pledged €25bn for balance of payments support, which still had €15bn in un-disbursed funds. Frankly, and absolutely no criticism implied of those multilateral lenders who have actually pulled their fingers out, the €25bn is small change compared to the size of the problem. The EU's support thus far appears little more than window dressing.

Unknown knowns

EU leaders fail to comprehend that we simply do not know where the current crisis is going next, and indeed Romania, Lithuania and Croatia look likely to be next in the likely long list of countries set to go to the IMF for funding; Turkey is also waiting in the wings.

What we do know is that the crisis has been nothing if not unpredictable - don't believe the myriad of analysts now saying they told you so and that this whole crisis was inevitable. As someone who warned as recently as November 2007 (and back in 2006 about Iceland) over the impending risks of a credit crisis in emerging Europe, fear/loathing in markets mean that this crisis is very difficult to predict. Countries with what appeared to be sound credit matrices have been rolled over, along with those evidently more vulnerable (eg. Russia and Ukraine).

Countries, and indeed the EU, would be well advised to build their defences early to move the market attention elsewhere. Recent extreme foreign-exchange volatility in Poland and the Czech Republic - which most market analysts would argue are amongst the strongest in the region - would also suggest that no one is immune, especially given the shear extent at which exports and industrial output is falling off the cliff at present. And, what is clear is that with $1.5 trillion in total bank balance sheet exposure to the region (and actually far more in terms of external liabilities, given that BIS data only covers reporting banks balance sheet exposure, while the total external liabilities of the region are much higher than this), the downturn in emerging Europe will likely feed back to Western European economies via their banks, hedge funds/institutional investors and bank to banks which in turn gave many of these leverage.

EU leaders did warm to calls for early ERM-2 membership, albeit I struggle to see what benefits there would be for countries on the edge of the single currency to locking into another rigid exchange rate regime when existing countries on the periphery of the single currency (Ireland, Greece, Italy et al) are already struggling with an over-appreciated exchange rate (for them) and the lack of monetary policy flexibility.

Predictably, currencies in the CEE, Middle East and Africa region came under pressure on the morning after the March 1 summit, and likely more can be expected unless policymakers in Europe recognise and rise to the challenge they face.

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