COLUMN-EU just one big happy family? Paul Taylor

-- Paul Taylor is a Reuters columnist. The opinions expressed are his own --

By Paul Taylor

PARIS, Feb 26 (Reuters) - The global financial crisis poses the biggest threat to the cohesion of the European Union since the fall of the Berlin Wall in 1989.

The challenge for the 27 EU leaders meeting on Sunday is to convince citizens and financial markets that they will respond in a united, cohesive manner to this crisis and act to prevent Europe being re-divided. That will take more than rhetoric.

The credit crunch has highlighted the frailty of EU governance and the extent to which power and resources remain at national level. The big West European member states have adopted economic stimulus programmes and national rescue plans to shore up banks and the car sector using their taxpayers' money, with scant coordination and with perverse effects in eastern Europe. The EU's common budget is puny by comparison at just 1 percent of the bloc's GDP.

The east European newcomers are in financial turmoil because of sharp depreciation of floating currencies and a shrinking of credit from west European banks and export markets in the West. Most face an even deeper recession than the euro zone.

There is a big risk that a decade of economic convergence leading to euro membership, may give way to divergence that could fuel Eurosceptical populist movements in eastern Europe.

The 10 eastern new member states are meeting separately ahead of Sunday's crisis summit in a sign of their resentment at perceived western neglect or beggar-thy-neighbour policies.

EU leaders can begin to stop the rot on Sunday if they take the following steps:

- agree in principle to double to 50 billion euros the EU contingency fund that can be lent to non-euro zone countries with balance of payments problems. This would be a signal to markets and citizens that a safety net is in place if required;

- pledge that the EU and the International Monetary Fund will work on financial sustainability programmes for those countries, linked to a timetable for them to join the euro;

- commit to remove from national rescue programmes any conditions restricting the use of aid to banks or industry to home countries or discriminating against other EU states;

- pledge that the European Investment Bank and the European Bank for Reconstruction and Development will act to help restore the credit flow to the real economy in eastern Europe, taking equity stakes in banks if required;

- reverse the resumption of export subsidies for dairy products, the one major trade move the EU has made since the joint G20 pledge to avoid new trade barriers. This would show support for world trade negotiations and challenge the EU's trade partners to scrap new protectionist measures.

The collapse of communist rule across eastern Europe led to the creation of the euro single currency, now shared by 16 of the 27 EU countries, and eventually to the enlargement of the EU to embrace almost the whole continent.

This crisis must lead to a similar leap forward in economic and political integration if it is not to entrench a new division of Europe. (editing by David Evans)