Avoiding a new European divide

The financial crisis, which is now hitting the new member states severely, highlights the shortcomings of the existing institutional architecture in Europe. Current strains reflect a revaluation of risks but they also
result from policy mistakes. For many years, growth in the new member states has relied on massive inflows of foreign capital that are now being called into question. Some of the non euro-area new member states suffer from serious vulnerabilities, to which policy has been slow to respond.
Crisis management in the euro area has also had the unintended consequence of putting non euro-area new member states at a disadvantage. These are unhealthy developments and without decisive action, a new political and economic divide within Europe may emerge.