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Letter From Berlin

As Financial Crisis Grows, EU Emerges Stronger

By Christopher Glazek in Berlin

The global financial crisis creates new losers each day. So far, though, the EU is looking like a winner. For many countries along the continent's northern edge, euro-skepticism is a luxury they can no longer afford.

Will 2008 be remembered as the year that killed the euro-skeptics? It certainly didn't begin that way.

Back in June, the people of Ireland stunned the world by voting down the Treaty of Lisbon, bringing the project of ever-closer European integration to a screeching halt. The failure of the Irish vote -- the only popular referendum on the treaty anywhere in Europe -- seemed to ratify the verdict delivered by French and Dutch voters in 2005 as they torpedoed the European Constitution: no more power for Brussels.

Then, in August, the EU got another jolt when war broke out between Russia and Georgia. As conflict raged in the Caucasus, European officials struggled to come up with a unified response, underscoring tensions between member-states. The old-guard, led by France and Germany, sought to balance their affection for the newly-democratic Georgia with their dependence on Russian natural gas imports. At the same time, newer member states like Poland, for whom the experience of Russian intimidation was all too familiar, clamored for solidarity with Georgia. The EU looked weak and riven by internal conflict.

These days, though, such bickering seems like ancient history. Between summer's turbulence and today's reality, the New York investment bank Lehman Brothers failed in mid-September, sending the world into a financial tailspin from which it might take years to recover. But instead of sounding the death knell for what was an already flailing EU, the financial crisis has had the effect of breathing new life into a bloc that just a couple months ago looked deflated and defeated.

Now, from Iceland to the Czech Republic, previously wary populations are warming to the EU, heaping praise on the very Brussels-based behemoth they had spent so many years deriding.

Denmark and the Euro Effect

The most obvious way the financial crisis has strengthened the image of the EU among the less-than-faithful is by making the euro look like a safehaven. Denmark, one of the few countries that deliberately opted out of the euro, may now be regretting its decision. As Danish prime minister Anders Fogh Rasmussen told fellow party members at an annual conference in October, "the current financial turmoil makes it evident that Denmark has to join the euro," which he called a source of "political and economical stability."

Like its Scandinavian neighbors, Denmark has long taken pride in maintaining a degree of independence from Brussels. But now it seems that many are coming around to the view of the Prime Minister who argues that "not being a euro member has its costs."

For small countries like Denmark, those costs often come in the form of higher interest rates. Because Denmark keeps its currency pegged to the euro, in times of economic turbulence its central bank is forced to take drastic measures to prevent its local currency from depreciating. Right now, Danish interest rates stand at 5 percent, putting the country at a considerable competitive disadvantage to its neighbors in the euro zone countries, whose interest rates recently dropped half a point to 3.25 percent. Further cuts are expected.

As the Danish economy joins the rest of the continent in the march toward recession, those high interest rates will feel increasingly punishing. According to a report from Deutsche Bank AG, the Danish economy is set to shrink 0.2 percent in 2008 and 1.4 percent in 2009. Unemployment is on track to double in the next two years. High interest rates, which discourage the easy lending that helps to fuel growth, are salt in the wound.

A recent poll compiled by Statistics Denmark shows that a narrow 50.1 percent majority of Danes now favor adopting the euro. In a referendum in 2000, Danish voters rejected the euro by a seven point margin.

Still, Johannes Andersen, a political scientist at Denmark's University of Aalborg, cautions that we shouldn't attribute too large a role to the financial crisis in shaping Danish opinion. Although he says the prospects for a new Danish referendum on the euro in the next year are "quite good," Andersen says the rising stock of the euro in Denmark is more the result of a long-term trend than a sudden response to financial shock. On the left, in particular, Andersen sees a steady movement in Denmark toward a more EU-friendly position, particularly regarding the euro. In part, he explains the shift as a positive reaction to the EU's east-ward expansion. Now that the 27-member bloc contains many poorer states from the East, it's easier for left-wing politicians to frame affection for the EU as a progressive gesture.

But Andersen acknowledges that the financial crisis has affected the debate on the euro. "It used to be possible to be pro-EU and anti-euro," he told SPIEGEL ONLINE. Now, since interest rates started nosing upward, those already predisposed to be friendly to EU are likely to be pro-euro as well.

Iceland 's New-Found Europhilia

Of all the countries on Europe's periphery, perhaps none has experienced as pronounced a shift in EU sentiment as Iceland, a nation which, not coincidentally, also serves as Ground Zero for the financial crisis. Since January, Iceland's currency has lost nearly half its value against the euro, plunging the country's economy into chaos.

At the same time, opinion polling has registered a large shift in public attitudes toward the EU. According to a poll published on Nov. 24 by the Icelandic newspaper Frettabladid, 68 percent of Icelanders now favor joining the euro. Somewhat fewer, 59.6 percent, think the country should join the European Union, but that's still an 11-point jump from September of 2007, when only 48.9 percent of Icelanders wanted EU membership.